<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
MONTEREY RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 76-0511993
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
<TABLE>
<S> <C>
5201 TRUXTUN AVENUE R. GRAHAM WHALING
SUITE NO. 100 5201 TRUXTUN AVENUE
BAKERSFIELD, CALIFORNIA 93309 SUITE NO. 100
(805) 322-3992 BAKERSFIELD, CALIFORNIA 93309
(Address, including zip code, and telephone number, (805) 322-3992
including area code, of registrant's (Name, address, including zip code, and telephone
principal executive offices) number,
including area code, of agent for service)
</TABLE>
Copies to:
<TABLE>
<S> <C>
G. MICHAEL O'LEARY, ESQ. MARC S. ROSENBERG, ESQ.
ANDREWS & KURTH L.L.P. TIMOTHY G. MASSAD, ESQ.
4200 TEXAS COMMERCE TOWER CRAVATH, SWAINE & MOORE
HOUSTON, TEXAS 77002 825 EIGHTH AVENUE
(713) 220-4200 NEW YORK, NEW YORK 10019
(212) 474-1000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=====================================================================================================
PROPOSED
TITLE OF EACH CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.01 per share................... $136,275,000 $46,991
=====================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act. Includes Common Stock
subject to over-allotment options.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MONTEREY RESOURCES, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS IN PART I OF FORM S-1
AND THE PROSPECTUS
<TABLE>
<CAPTION>
S-1 ITEM NUMBER AND CAPTION PROSPECTUS CAPTION OR LOCATION
- ------------------------------------------------------------ ---------------------------------
<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
Prospectus......................................... Inside Front and Outside Back
Cover Pages; Additional
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page;
Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover Page;
Underwriting
9. Description of the Securities to be Registered....... Outside Front Cover Page;
Prospectus Summary;
Capitalization; Description of
Capital Stock; Underwriting
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information With Respect to the Registrant........... Outside Front Cover Page;
Prospectus Summary; Risk
Factors; Dividend Policy;
Dilution; Capitalization;
Selected Historical and Pro
Forma Financial Information and
Operating Data; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business;
Management; Security Ownership
of Management; Relationship
Between the Company and SFR;
Description of Capital Stock;
Shares Eligible for Future
Sale; Financial Statements; Pro
Forma Financial Information
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
</TABLE>
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED SEPTEMBER 18, 1996
7,900,000 SHARES
MONTEREY RESOURCES, INC.
[MONTEREY RESOURCES, INC. COMMON STOCK
LOGO] (PAR VALUE $.01 PER SHARE)
---------------------
Of the 7,900,000 shares of Common Stock offered, are being
offered hereby in the United States and are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share will be
identical for both offerings. See "Underwriting".
All of the 7,900,000 shares of Common Stock offered hereby are being sold
by the Company, which is a wholly owned subsidiary of Santa Fe Energy Resources,
Inc. Upon completion of the offerings, Santa Fe Energy Resources, Inc. will own
approximately 85% (83% if the Underwriters' over-allotment options are exercised
in full) of the outstanding Common Stock of the Company.
Prior to the offerings, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price per share will be between $ and $ . For factors to be
considered in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" ON PAGE 14 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
Application will be made to list the Common Stock on the
under the symbol " ".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
=================================================================================================
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.............................. $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
=================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional shares of Common Stock at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments. Additionally, the Company has granted the
International Underwriters a similar option with respect to an additional
shares as part of the concurrent international offering. If such
options are exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $ ,
$ , and $ , respectively. See "Underwriting".
The shares offered hereby are offered severally by the U.S. Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York, on
or about , 1996, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO.
INCORPORATED
PETRIE PARKMAN & CO.
---------------------
The date of this Prospectus is , 1996.
<PAGE> 4
[MAP OF MAJOR PROPERTIES]
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
ADDITIONAL INFORMATION
The Company has not previously been subject to the informational
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). The
Company has filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of common stock, par value $0.01 per share, of the Company offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain items of which are contained in exhibits and schedules to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement, including
the exhibits and schedules thereto. Statements made in this Prospectus
concerning the contents of any contract, agreement or other document 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 is qualified in its entirety by such reference. The Registration
Statement and the exhibits and schedules thereto filed with the Commission by
the Company may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 or on the Internet at
http://www.sec.gov. Copies of such material can also be obtained upon written
request from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
CERTAIN DEFINITIONS
As used herein, the following terms have the specific meanings set out:
"Common Stock" means the common stock, par value $0.01 per share, of Monterey
Resources, Inc. (the "Company"). "Bbl" means barrel, "MBbl" means thousand
barrels, "MMBbl" means million barrels, "Mcf" means thousand cubic feet, "MMcf"
means million cubic feet, "Bcf" means billion cubic feet, "BOE" means barrel of
oil equivalent, "MBOE" means thousand barrels of oil equivalent, and "MMBOE"
means million barrels of oil equivalent. Natural gas volumes are converted to
barrels of oil equivalent using the ratio of 6.0 Mcf of natural gas to 1.0
barrel of crude oil. Unless otherwise indicated in this Prospectus, natural gas
volumes are stated at the legal pressure base of the state or area in which the
reserves are located and at 60(o) Fahrenheit. "Finding costs" refers to costs
incurred for development, exploration and acquisition activities which add to
the Company's oil and gas reserves. "Finding costs per BOE" refers to the
finding costs divided by net proved reserve additions from acquisitions,
extensions, discoveries, improved recovery and revisions, on a BOE basis.
"Improved recovery", "enhanced oil recovery" and "EOR" include all methods of
supplementing natural reservoir forces and energy, or otherwise increasing
ultimate recovery from a reservoir, and include waterfloods, thermal techniques
(including cyclic steam, steam flood and in situ combustion operations) and
CO(2) (carbon dioxide) injection. "Heavy oil" or "heavy crude" is low gravity,
high viscosity crude oil. "Working interest" means an operating interest which
gives the owner the right to drill, produce and conduct operating activities on
a property and to a share of production and requires the owner to bear a
proportionate share of related expenses. "Net revenue interest" means the
percentage of production to which the owner of a working interest is entitled.
"Net acres" and "net wells" refer to the sum of the fractional working interests
owned in gross acres and gross wells, respectively. Unless otherwise indicated,
references to "reserves" means net proved reserves and references to "wells"
means gross wells.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined by an independent public
accounting firm for each fiscal year.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and historical and pro forma financial statements appearing
elsewhere in this Prospectus. Unless otherwise indicated, references to the
assets, operations and performance of the "Company" prior to the closing of the
Offerings refer to the assets, operations and performance of the Western
Division (the "Western Division") of Santa Fe Energy Resources, Inc. ("SFR").
Unless otherwise indicated, all data in this Prospectus assume the Underwriters'
over-allotment options are not exercised. Certain terms used herein are defined
under "Certain Definitions".
THE COMPANY
Monterey Resources, Inc., a wholly owned subsidiary of SFR (the "Company"),
is an independent oil and gas company engaged in the production, development and
acquisition of oil and natural gas in the State of California. As of September
1, 1996 the Company had net proved reserves of approximately 214 MMBOE with a
pre-tax net present value, discounted at 10%, of approximately $750 million,
according to estimates prepared by Ryder Scott Company, independent petroleum
engineers ("Ryder Scott"). In 1995 the Company's operations generated total
revenues of approximately $211 million and net income of approximately $36
million. During the eight months ended August 31, 1996, the Company's average
production was approximately 46 MBOE per day, resulting in a
reserve-to-production ratio of 12.7 years.
The Company was formed in August 1996 to own the properties and conduct the
business of the Western Division of SFR following a determination by SFR's board
of directors to separate SFR's operations into two independent companies. The
SFR board made this determination because SFR's oil and gas operations have
developed, over time, into separate businesses that operate independently and
have diverging capital requirements and risk profiles. In addition, the board
believes that separating SFR's operations into two independent companies will
allow each to more efficiently develop its distinct resource base and pursue
separate business opportunities while providing each with improved access to
capital markets. While the Company will focus its efforts on its California
properties, SFR has advised the Company that SFR intends to focus on developing
and exploiting its existing properties outside of California and pursuing
acquisition and exploration opportunities in other areas of the United States
and abroad. The Offerings and the other transactions to be effected at or prior
to the closing of the Offerings are the initial phase of the separation of these
two businesses. Immediately after the Offerings are consummated, SFR will own
approximately 85% of the outstanding Common Stock. The second phase of the
separation would involve the distribution by SFR to its common stockholders of
the shares of Common Stock owned by SFR following the Offerings. See
"-- Transactions at Closing" and "-- Relationship Between the Company and
SFR -- Intended Spin Off by SFR".
The Company owns and operates properties in four major oil producing fields
located in the San Joaquin Valley of California: Midway-Sunset, Kern River,
South Belridge and Coalinga. These fields are among the most prolific oil fields
in the United States, particularly the Midway-Sunset, Kern River, and South
Belridge fields, which are the three largest producing oil fields in the lower
48 states. The Midway-Sunset field accounted for approximately 78% of the
Company's total proved reserves at September 1, 1996 and 74% of its average
daily production for the first eight months of 1996. As of September 1, 1996, an
additional 18% of the Company's total proved reserves and 21% of its average
daily production were attributable to the Kern River, South Belridge and
Coalinga fields. The Company initiated production from the San Joaquin Valley
fields in 1905 and nearly all of the reserves in these fields are characterized
by low gravity and high viscosity or "heavy" oil, the production of which
depends primarily on thermally enhanced recovery techniques. The Company holds
an interest in approximately 16,000 gross acres in these fields with an average
working interest in these properties of approximately 99%.
The Company seeks to accelerate its growth in both production and reserves
through an active development program which concentrates on the use of heat
(typically in the form of steam) to reduce the viscosity and increase the
producibility of its reserve base. During the five years ended December 31,
4
<PAGE> 7
1995, the Company spent a total of $176 million (an average of $35 million per
year) on development activities on its properties. Cumulative production from
the Company's properties during the same five year period exceeded 78 MMBOE
while additions to proved reserves exceeded 97 MMBOE (yielding 19 MMBOE net
additions after production). The table set forth below demonstrates the growth
in the Company's proved reserve base, as estimated by Ryder Scott:
<TABLE>
<CAPTION>
PROVED RESERVES
-------------------------------------------------------
DECEMBER 31,
--------------------------------------- SEPTEMBER 1,
1991 1992 1993(1) 1994 1995 1996
---- ---- ------- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Crude oil (MMBbls).................. 183 190 184 191 200 212
Natural gas (BCF)................... 22 19 12 13 12 12
Total (MMBOE)..................... 187 193 186 193 202 214
</TABLE>
- ---------------
(1) The reduction in proved reserves in 1993 primarily reflects the sale of the
Western Division's interests in certain properties containing estimated
proved reserves of approximately 5.7 MMBOE.
Based on reservoir engineering studies prepared by Ryder Scott, the Company
believes that it can continue to make significant additions to proved reserves
on its properties through additional EOR and development projects, and the
Company has developed a large inventory of such projects. The Company
anticipates spending approximately $51 million during 1996 (of which $34 million
has been expended through August 31, 1996) and $68 million during 1997 on
additional development projects on its properties. Because the actual amounts
expended in the future and the results therefrom will be influenced by numerous
factors, including many beyond the Company's control, and due to the inherent
uncertainty of reservoir engineering studies, no assurances can be given as to
the amounts that will be expended or, if expended, that the results therefrom
will be consistent with the Company's prior experience or expectations. See
"Business -- Development Activities".
STRATEGY
The Company's strategy is to efficiently and consistently increase its
production rates and proved reserves while maximizing total return to
stockholders. The Company intends to achieve its objectives by developing its
existing fields through the deployment of advanced production techniques, by
pursuing reserve acquisition opportunities which are consistent with its
geographic and operational strengths, and by maintaining a dividend policy that
will provide a significant current return to stockholders. Key elements of the
Company's strategy include:
ACCELERATED EXPLOITATION PROGRAM. The Company plans to increase its
investment in relatively low-risk development and infill drilling opportunities
in its existing fields in order to maximize production and reserves over the
long-term. During the five years ended December 31, 1995, the Company completed
1,064 well operations (which include development and injection wells, workovers
and recompletions), of which 1,062 were successful. These operations contributed
to proved reserve additions of approximately 97 MMBOE at an average finding cost
of $2.32 per BOE. Reserve additions in 1995 totaled approximately 24 MMBOE, more
than 150% of production in 1995. The Company expects to complete more than 300
well operations in each of 1996 and 1997 with budgeted capital expenditures
during such years of approximately $51 million and $68 million, respectively.
The Company believes that its sizable project inventory will allow it to
continue to increase its production and reserves over the next several years.
INCREASED HORIZONTAL DRILLING. The Company has recently begun to utilize
horizontal drilling techniques, which have increased production and ultimate
reserve recovery on its existing properties. The Company drilled six horizontal
wells in the Midway-Sunset field during the first eight months of 1996 which are
currently producing at rates ranging from 80 to 400 Bbls per day (an average of
180 Bbls per day) per well compared to an average of 20 Bbls per day from the
Company's conventional vertical wells, although there can be no assurance that
such rates can be sustained in the future. The Company expects to complete 45
additional horizontal wells by the end of 1997 at an expected capital cost of
5
<PAGE> 8
approximately $20 million, although the actual number of horizontal wells
drilled could be increased or decreased based upon the results realized from the
horizontal wells completed. While horizontal drilling has only recently been
employed in the Company's operations, the Company believes that this technology
represents a significant opportunity for more cost effective development,
increased reserves and increased production and total recovery rates from its
properties.
LOW COST PRODUCER. The Company believes that its finding costs and
producing costs are among the lowest for heavy crude producers in the United
States. Due to the reservoir characteristics of the Company's producing
properties and the extensive development activities conducted to date thereon,
such properties are well suited to low cost development and exploitation
drilling. For example, the Company's average finding cost for the three years
ended December 31, 1995 was $1.97 per BOE. In addition, continuing cost control
efforts have contributed to the reduction of its production and operating costs
from $6.52 per BOE in 1991 to $5.45 per BOE for the first six months of 1996.
The Company plans to continue to pursue operational efficiencies, including
facilities upgrades and process consolidations with adjoining producers, to
further reduce both finding and producing costs.
FINANCIAL AND OPERATIONAL FLEXIBILITY. The Company believes that the
consummation of the Offerings and the related transactions will give the Company
significantly more operational and financial flexibility, including the ability
to (i) maintain an appropriate capital structure, (ii) focus its available
financial resources on the development of its producing properties in California
and (iii) pursue selective acquisition opportunities as they arise. On a pro
forma basis, after giving effect to the consummation of the Offerings and the
related transactions, the Company had total indebtedness of $205 million as of
June 30, 1996 and a pro forma ratio of EBITDA to interest expense for the first
six months of 1996 of 6.6 to 1.0.
SIGNIFICANT DIVIDEND PAYOUT. Following the Offerings, the Company intends
to maintain a dividend policy that will provide a significant return to
stockholders. The Company currently intends to pay dividends at a rate of $0.60
per share per annum to the holders of Common Stock (representing a yield
of % assuming an initial public offering price of $ per share).
However, the actual amount of future dividends declared and paid, if any, will
depend upon the declaration of same by the Company's board of directors and upon
the Company's financial condition, earnings and funds from operations, the level
of its capital and exploration expenditures, dividend restrictions contained in
its financing agreements, its future business prospects and such other matters
as the directors of the Company may deem relevant.
APPLICATION OF ADVANCED TECHNOLOGIES. The Company will continue to utilize
its growing technology base, including increasing use of 3-D seismic surveys,
water floods, thermal EOR techniques, new fracturing techniques and reservoir
modeling. The Company believes that 3-D seismic techniques may identify
significant additional reserves and is currently negotiating a joint venture
with Chevron U.S.A., Inc. to conduct a 3-D seismic survey of certain properties
in the Midway-Sunset field. The Company has extensive experience with EOR
techniques and has conducted steamflood operations on its properties since the
1960s. The Company has improved its thermal EOR techniques over time and is
currently focusing on efficient reservoir heat management techniques which are
intended to optimize recoveries and minimize fuel costs. The Company believes
that its expertise in utilizing these techniques will allow it to identify and
recover additional reserves in its existing properties.
EXPLOITATION OF FAVORABLE MARKET CONDITIONS. Market conditions for
producers of California heavy crude have improved significantly in recent years.
Based upon statistics developed by the California Energy Commission and the U.S.
Census Bureau, California consumes more energy than any other state in the
United States and its energy consumption is expected to grow through at least
the year 2000 as its population expands. While California's energy consumption
continues to increase, California's aggregate crude supply has decreased
primarily as the result of three factors: (i) declining California crude
production; (ii) reduced oil supplies to California from the Alaskan North Slope
(which provided 40% of the crude oil consumed by refiners in California during
1995) resulting from a decline in production and the initiation of sales to
foreign markets; and (iii) the availability of new transportation systems, which
6
<PAGE> 9
enable San Joaquin producers to sell crude oil outside California. The Company
believes that California's growing energy demand and declining crude oil supply,
together with other market factors, have contributed to the increase in average
posted prices for the Midway-Sunset field (for heavy crude) from $12.08 per Bbl
in 1991 to $15.16 per Bbl for the first eight months of 1996. In addition, the
spread between the West Texas Intermediate ("WTI") posted price (for light
crudes) and the Midway-Sunset field posted price (for heavy crude) has declined
from $8.12 per Bbl in 1991 to $4.13 per Bbl for the first eight months of 1996.
For the 20-month period ended August 31, 1996, this spread averaged $3.64 per
Bbl. There can be no assurances, however, with respect to future Midway-Sunset
field posted prices for crude oil or the future spread between WTI and
Midway-Sunset posted prices.
REGIONAL EXPERTISE. The Company is one of the largest independent oil and
gas producers in California and intends to continue to focus on this region in
order to capitalize on its geologic, engineering and production expertise
developed through continuous operations in the area since 1905. The Company
believes that such expertise gives it the ability to efficiently develop
additions to proved reserves in the Company's existing portfolio of properties
as well as to identify potential acquisitions.
TRANSACTIONS AT CLOSING
Prior to or concurrently with the consummation of the Offerings, the
following transactions will occur: (a) the Company and SFR will enter into a
contribution and conveyance agreement (the "Contribution Agreement"), pursuant
to which, among other things: (i) SFR will contribute to the Company
substantially all of the assets and properties of the Western Division, subject
to the retention by SFR of the Production Payment (as defined below) and certain
other assets (see "Relationship Between the Company and SFR -- Contractual
Arrangements"); (ii) SFR will retain a production payment (the "Production
Payment") in an aggregate amount not to exceed $30 million, with respect to
certain properties in the Midway-Sunset field, which Production Payment will be
prepayable in whole without penalty by the Company at any time; and (iii) the
Company will assume all obligations and liabilities of SFR associated with or
allocated to the assets and properties of the Western Division, including $245
million of indebtedness in respect of SFR's 10.23% Series E Notes due 1997,
10.27% Series F Notes due 1998 and 10.61% Series G Notes due 2005 (the "Series E
Notes", "Series F Notes" and "Series G Notes", respectively, and the "SFR Senior
Notes", collectively); (b) the Company will (i) use a portion of the net
proceeds of the Offerings to repay in full the $70 million aggregate principal
amount of the Series E Notes and Series F Notes, and pay a prepayment penalty of
approximately $2 million thereon and (ii) issue $175 million in aggregate
principal amount of its 10.61% Senior Notes due 2005 (the "Company Senior
Notes") to holders of the Series G Notes in exchange for the cancellation of
such notes, and pay a $1.3 million consent fee in connection therewith; (c) (i)
SFR and the Company will enter into a new $75 million revolving credit facility
with a group of banks (the "New Credit Facility") and SFR is expected to borrow
approximately $13 million thereunder, and (ii) upon consummation of the
Offerings, the Company will repay all such indebtedness outstanding under the
New Credit Facility with a portion of the net proceeds of the Offerings; and (d)
SFR and the Company will enter into certain intercompany agreements regarding
corporate services, taxes, indemnification and certain other matters as more
fully described under "-- Relationship Between the Company and SFR". The
transactions described above, excluding the Offerings, are referred to herein
collectively as the "Transactions".
As of June 30, 1996, and after giving pro forma effect to consummation of
the Offerings and the Transactions, the Company would have had cash of $15
million, total assets of $425 million, total debt outstanding of $205 million
and shareholders' equity of $139 million. See the Pro Forma Financial Statements
of the Company included elsewhere in this Prospectus.
In addition to the Transactions described above, prior to the consummation
of the Offerings, SFR intends to commence: (a) an offer to purchase for cash
(the "SFR Tender Offer") outstanding shares of its Convertible Preferred Stock,
7% Series (the "Convertible Preferred Stock"); and (b) a consent solicitation
from the holders of its 11% Senior Subordinated Debentures due 2004 (the "SFR
Debentures") with respect to certain amendments to the SFR Debentures (the "SFR
Debenture Amend-
7
<PAGE> 10
ments"). The Offerings and the Transactions will not be consummated unless and
until the SFR Debenture Amendments become effective. The closing of the SFR
Tender Offer is not a condition to the consummation of the Offerings.
Promptly following the consummation of the Offerings, the Company intends
to prepay the Production Payment in full with cash on hand and funds available
under the New Credit Facility.
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered (1)(2):
U.S. Offering........................ shares
International Offering............... shares
Total........................ 7,900,000 shares
Common Stock to be outstanding
after the Offerings(2)(3)............ 53,250,000 shares
Use of Proceeds........................ The net proceeds of the Offerings will be used to
repay certain outstanding indebtedness of the
Company (including indebtedness assumed from SFR
pursuant to the Contribution Agreement) and the
balance, if any, will be used for working capital
purposes. See "Use of Proceeds".
Dividend Policy........................ The Company currently intends to pay to its
stockholders a dividend of $0.15 per quarter ($0.60
annually) per share of Common Stock. The first
dividend (which is anticipated to be approximately
$ per share of Common Stock) is anticipated
to be paid in April 1997 in respect of the Company's
first partial quarter ending December 31, 1996 and
its first full quarter of operations ending March
31, 1997. The determination of the amount of cash
dividends (including the initial quarterly dividend
referred to above), if any, to be declared and paid
will depend upon declaration by the Company's board
of directors and upon the Company's financial
condition, earnings and funds from operations, the
level of its capital and exploration expenditures,
dividend restrictions contained in the New Credit
Facility and the Company Senior Notes, its future
business prospects and such other matters as the
Company's directors deem relevant. See "Dividend
Policy".
Listing................................ Application will be made to list the Common Stock
for trading on the .
Proposed Stock Symbol.................. " "
</TABLE>
- ---------------
(1) The offering of shares of Common Stock initially being offered in the
United States (the "U.S. Offering") and the offering of shares of
Common Stock initially being offered outside of the United States (the
"International Offering") are collectively referred to herein as the
"Offerings".
(2) Assumes the Underwriters' over-allotment options are not exercised. See
"Underwriting".
(3) Does not include 3,500,000 shares reserved for issuance pursuant to the
Company's incentive compensation plans. See "Management".
8
<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, summary
historical financial data for SFR's Western Division and summary pro forma
financial data for the Company. The summary historical balance sheet data as of
December 31, 1995 and 1994 and the summary historical income statement and cash
flow data for each of the three years in the period ended December 31, 1995 are
derived from the financial statements of the Western Division of SFR, which have
been audited by Price Waterhouse LLP. The summary historical financial data for
the six-month periods ended June 30, 1995 and June 30, 1996 are derived from the
unaudited financial statements of the Western Division of SFR and include, in
the opinion of management, adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial data for such periods.
The summary historical balance sheet data as of December 31, 1991, 1992 and 1993
and the summary historical income statement and cash flow data for each of the
two years in the period ended December 31, 1992 have been derived from the
unaudited accounting records of the Western Division of SFR. The summary pro
forma financial data for the Company set forth below are based on numerous
assumptions and include adjustments as explained in the unaudited pro forma
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus. All such summary historical and pro forma financial data set
forth below should be read in conjunction with such financial statements and
notes thereto appearing elsewhere herein. The following information should not
be deemed indicative of future operating results for the Company. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<TABLE>
<CAPTION>
WESTERN
WESTERN DIVISION HISTORICAL MONTEREY DIVISION MONTEREY
-------------------------------- RESOURCES, INC. HISTORICAL RESOURCES, INC.
PRO FORMA(1) ------------ PRO FORMA(1)
YEAR --------------- SIX MONTHS ---------------
ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30, ENDED
-------------------------------- DECEMBER 31, ------------ JUNE 30,
1991 1992 1993 1994 1995 1995 1995 1996 1996
---- ---- ---- ---- ---- --------------- ---- ---- ---------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................... $240 $215 $187 $179 $211 $ 211 $105 $126 $ 126
---- ---- ---- ---- ---- ----- ---- ---- ----
Costs and expenses:
Production and
operating.............. 103 105 100 86 85 85 43 49(2) 49(2)
Exploration, including
dry hole costs......... 3 3 2 1 2 2 2 1 1
Depletion, depreciation
and amortization....... 40 44 41 32 33 33 15 18 18
Impairment of oil and gas
properties(3).......... -- -- 49 -- -- -- -- -- --
General and
administrative......... 6 9 9 8 7 9 3 4 4
Taxes (other than
income)................ 13 9 9 9 8 8 5 4 4
Restructuring
charges(4)............. -- -- 12 1 -- -- -- -- --
---- ---- ---- ---- ---- ----- ---- ---- ----
165 170 222 137 135 137 68 76 76
---- ---- ---- ---- ---- ----- ---- ---- ----
Income (loss) from
operations............... 75 45 (35) 42 76 74 37 50 50
Interest, net(5)......... (27) (27) (27) (26) (25) (20) (12) (12) (10)
Other income (expense)... 5 1 -- -- (1) (1) -- -- --
---- ---- ---- ---- ---- ----- ---- ---- ----
Income (loss) before income
taxes.................... 53 19 (62) 16 50 53 25 38 40
Income taxes............. (19) (6) 27 (4) (16) (17) (8) (14) (15)
---- ---- ---- ---- ---- ----- ---- ---- ----
Net income (loss).......... $ 34 $ 13 $(35) $ 12 $ 34 $ 36 $ 17 $ 24 $ 25
==== ==== ==== ==== ==== ===== ==== ==== ====
Earnings (loss) per common
share (in dollars)....... N/A N/A N/A N/A N/A $0.68 N/A N/A $0.48
===== ====
CASH FLOW DATA:
Net cash provided by
operating activities..... $ 86 $ 59 $ 33 $ 54 $ 76 N/A $ 36 $ 48 N/A
Capital expenditures,
including acquisitions of
producing properties..... 70 20 47 27 54 N/A 29 30 N/A
BALANCE SHEET DATA (at end of
period):
Cash and cash
equivalents.............. $ -- $ -- $ -- $ -- $ -- N/A $ -- $ -- $ 15
Total assets............... 503 476 387 376 391 N/A 386 410 425
Total debt................. 265 263 258 245 245 N/A 245 245 205
Shareholders' equity....... 121 94 35 32 45 N/A 42 51 139
OTHER FINANCIAL DATA:
EBITDA(6).................. $122 $ 92 $ 57 $ 75 $110 $ 108 $ 53 $ 70 $ 69
Ratio of EBITDA to interest
expense.................. 4.4 3.3 2.1 2.9 4.3 5.2 4.1 5.4 6.6
</TABLE>
9
<PAGE> 12
- ---------------
(1) Pro forma for the consummation of the Offerings and the Transactions as if
the Offerings and the Transactions had occurred on January 1, 1995, except
for the balance sheet data which assumes the Offerings and the Transactions
had occurred on June 30, 1996. See the Pro Forma Condensed Financial
Statements included herein.
(2) Includes $3 million attributable to losses incurred under the Company's
hedging arrangements in respect of natural gas purchased by the Company as
fuel for thermal EOR operations. All such arrangements terminated on or
prior to June 30, 1996.
(3) Reflects a non-cash charge for the impairment of oil and gas properties. For
a further description of the impairments recorded in 1993, see Note 2 of the
Notes to the Financial Statements included elsewhere in this Prospectus.
(4) Reflects non-recurring charges in 1993 relating to implementation of SFR's
restructuring program comprised of (i) losses on property dispositions of
$11 million and (ii) accruals for certain personnel benefits and related
costs of $1 million. Reflects non-recurring charges in 1994 relating to
SFR's restructuring program of $1 million comprised of severance, benefits
and relocation expenses.
(5) Net of capitalized interest of $0.3 million, $0.1 million, $0.3 million,
$0.6 million and $0.7 million in the years 1991, 1992, 1993, 1994 and 1995,
respectively, and $0.3 million and $0.4 million in the six months ended June
30, 1995 and 1996, respectively. Includes interest income of $0.2 million,
$0.2 million and $0.1 million in 1991, 1992 and 1993, respectively.
(6) EBITDA as presented herein is defined as the sum of income before provision
for income taxes, interest, depreciation, depletion, amortization,
impairments, exploration expenses and non-cash charges in respect of gains
or losses realized on the disposition of properties. EBITDA is included as
supplemental disclosure to provide useful information regarding a company's
ability to service and incur debt. EBITDA, however, should not be considered
in isolation or as a substitute for net income, cash flow provided by
operating activities or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity.
10
<PAGE> 13
The following table sets forth certain summary operating data for the
Company for the periods indicated.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
WESTERN
DIVISION
WESTERN DIVISION HISTORICAL MONTEREY HISTORICAL MONTEREY
---------------------------------------- RESOURCES, INC. ------------- RESOURCES, INC.
PRO FORMA(1) PRO FORMA(1)
YEAR --------------- SIX MONTHS ---------------
ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30, ENDED
---------------------------------------- DECEMBER 31, ------------- JUNE 30,
1991 1992 1993 1994 1995 1995 1995 1996 1996
----- ----- ----- ------ ------ --------------- ------ ----- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Average daily production
Crude oil and liquids (MBbls/d).... 42 42 43(2) 41 42 42 41 45 45
Natural gas (MMcf/d)............... 9 7 6(2) 4 5 5 6 4 4
Total production (MBOE/d).......... 43 43 44(2) 42 43 43 42 46 46
Average realized sales prices, net of
hedges(3)
Crude oil and liquids ($/Bbl)...... 15.19 13.67 11.63 11.53 13.50 13.50 13.77 15.15 15.15
Natural gas ($/Mcf)................ 1.72 1.57 1.59 1.14 0.98 0.98 1.17 1.05 1.05
Average costs and expenses per BOE
(in dollars)(4)
Production and operating:
Steam generation................. 1.95 2.41 2.26 2.16 1.98 1.98 2.01 2.01(6) 2.01(6)
Lease operating.................. 4.57 4.24 4.05 3.47 3.50 3.50 3.69 3.44 3.44
----- ----- ----- ----- ----- ----- ----- ----- -----
Total.......................... 6.52 6.65 6.31 5.63 5.48 5.48 5.70 5.45 5.45
----- ----- ----- ----- ----- ----- ----- ----- -----
Exploration, including dry holes... 0.17 0.17 0.11 0.09 0.15 0.15 0.22 0.11 0.11
Depletion, depreciation and
amortization..................... 2.55 2.79 2.59 2.09 2.08 2.08 1.97 2.18 2.18
General and administrative......... 0.42 0.56 0.58 0.51 0.47 0.58 0.48 0.47 0.54
Taxes (other than income).......... 0.83 0.56 0.53 0.56 0.51 0.51 0.61 0.52 0.52
Interest expense, net.............. 1.73 1.74 1.69 1.68 1.61 1.30 1.66 1.50 1.21
Average finding cost per BOE
(in dollars) (5)................... 6.05 0.89 3.18 1.04 2.17 2.17 N/A N/A N/A
Gross wells drilled.................. 137 31 171 79 225 225 147 168 168
</TABLE>
- ---------------
(1) Pro forma for the consummation of the Offerings and the Transactions as if
the Offerings and the Transactions had occurred on January 1, 1995. See the
Pro Forma Condensed Financial Statements included herein.
(2) Includes production attributable to properties sold in 1993 of 3 MBbls/d of
crude oil and liquids and 2 MMcf/d of natural gas (3 MBOE/d).
(3) From time to time SFR hedges a portion of its oil sales. The Company has
been allocated a portion of SFR's hedging gains and losses based on its
hedged light and heavy oil production. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General".
(4) Excludes impairments of oil and gas properties of $49 million ($3.09 per
BOE) incurred in 1993 and restructuring charges of $12 million ($0.75 per
BOE) and $1 million ($0.07 per BOE) incurred in 1993 and 1994, respectively.
Depletion, depreciation and amortization in the subsequent periods declined
primarily due to the effect of the 1993 impairments.
(5) Average finding cost per BOE is calculated by dividing (i) costs incurred in
development, exploration and acquisition of oil and gas reserves, by (ii)
net proved reserve additions from acquisitions, extensions, discoveries,
improved recovery and revisions, on a BOE basis.
(6) Excludes $0.38 per BOE loss on hedging in respect of natural gas purchased
for thermal EOR operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General".
11
<PAGE> 14
SUMMARY OIL AND GAS RESERVE INFORMATION
The following table sets forth summary information with respect to the
Company's estimated proved oil and gas reserves as of each of the dates
indicated. The estimates of proved reserves and present value of estimated
future net cash flows have been prepared by Ryder Scott. See "Risk Factors --
Uncertainties in Estimates of Proved Reserves" and "Business -- Reserves".
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------- SEPTEMBER 1,
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Crude oil and liquids (MMBbls)..... 183 190 184 191 200 212
Natural gas (Bcf).................. 22 19 12 13 12 12
Total (MMBOE)...................... 187 193 186 193 202 214
Proved developed reserves (MMBOE).... 149 157 142 142 159 169
Present value of estimated future net
cash flows (millions of dollars):
Before income taxes................ 274 383 167 554 654 750
After income taxes................. 218 275 143 366 426 N/A
Average sales prices at period end:
Oil ($/Bbl)........................ 10.87 12.21 8.44 12.62 13.78 14.82
Natural gas ($/ Mcf)............... 2.21 2.32 1.64 1.07 0.98 1.22
Reserve replacement ratio(1)......... 90% 141% 87% 152% 153% 210%
Reserve-to-production ratio
(in years)(2)...................... 12 12 12 13 13 13
</TABLE>
- ---------------
(1) The reserve replacement ratio is a percentage determined on a BOE basis by
dividing the estimated reserves added during a period from exploitation,
development and exploration activities, acquisitions of proved reserves and
revisions of previous estimates, excluding property sales, by the oil and
gas produced during that period.
(2) Reserve-to-production ratio is calculated on a BOE basis by dividing the
total estimated proved reserves at period-end by the total production during
the year, annualizing production for periods of less than a full year.
RELATIONSHIP BETWEEN THE COMPANY AND SFR
GENERAL
The Company was incorporated in Delaware in August 1996 and is currently a
wholly owned subsidiary of SFR. Immediately after the closing of the Offerings,
SFR will own 45,350,000 shares of Common Stock, which will represent 85% of the
Company's outstanding Common Stock after the Offerings. As the owner of such
shares, SFR will be in a position to control all matters affecting the Company.
INTENDED SPIN OFF BY SFR
SFR has announced that after the Offerings it intends to distribute pro
rata to its common stockholders all of the shares of Common Stock that it owns
by means of a tax-free distribution (the "Spin Off"). SFR's final determination
to proceed with the Spin Off will require a declaration of the Spin Off by SFR's
board of directors. Such a declaration is not expected to be made until certain
conditions, many of which are beyond the control of SFR, are satisfied,
including: (i) receipt by SFR of a favorable ruling from the Internal Revenue
Service as to the tax-free nature of the Spin Off; (ii) approval of the Spin Off
by SFR's stockholders; (iii) the redemption or conversion of all or a
substantial portion of the shares of each outstanding series of SFR preferred
stock; and (iv) the absence of any future change in market or economic
conditions (including developments in the capital markets) or SFR's or the
Company's
12
<PAGE> 15
business or financial condition that causes SFR's board to conclude that the
Spin Off is not in the best interests of SFR's stockholders. The Company has
been advised by SFR that it does not expect the Spin Off to occur prior to May
1997. If SFR consummates the Spin Off, the increased number of shares of Common
Stock available in the market may have an adverse effect on the market price of
the Common Stock. The Company has been advised by SFR that as of ,
1996, SFR had registered stockholders of record. See "Relationship
Between the Company and SFR".
To protect SFR from Federal and state income taxes that would be incurred
by it if the Spin Off were determined to be a taxable event, the Company and SFR
have entered into an agreement (the "Spin Off Tax Indemnity Agreement") pursuant
to which the Company has agreed to indemnify SFR with respect to tax liabilities
resulting primarily from actions taken by the Company at any time during the
one-year period commencing upon the Spin Off. The Company believes that if it is
required to make payments pursuant to such agreement, the amount of such
payments would have a material adverse effect on the Company's financial
condition. Substantially all of the actions for which the Company is required to
indemnify SFR pursuant to such agreement are within the Company's control, and
the Company has no intention to take any such actions during such one-year
period. See "Relationship Between the Company and SFR -- Contractual
Arrangements -- Spin Off Tax Indemnity Agreement".
CERTAIN AGREEMENTS BETWEEN THE COMPANY AND SFR
In anticipation of the Offerings, and in view of SFR's intention to
undertake the Spin Off, the Company and SFR intend to enter into the following
agreements: (a) the Contribution Agreement, pursuant to which SFR will convey to
the Company and the Company will assume and succeed to substantially all of the
assets, liabilities and obligations of SFR associated with its Western Division,
including $245 million of indebtedness in respect of the SFR Senior Notes; (b)
the Agreement for the Allocation of Consolidated Federal Income Tax Liability
and State and Local Taxes Among the Members of the Santa Fe Energy Resources,
Inc. Affiliated Group (the "Tax Allocation Agreement"), which provides for the
allocation of taxes for periods during which the Company and SFR are included in
the same consolidated group for Federal or state tax purposes, the allocation of
responsibility for the filing of tax returns and certain other related matters;
(c) the Services Agreement, which provides for the continued provision of
certain corporate and administrative services by SFR to the Company; (d) the
Spin Off Tax Indemnity Agreement, which, in addition to providing the
indemnification by the Company of SFR described above, provides that SFR shall
prepare and file all consolidated Federal, combined state and local income or
franchise tax returns required to be filed while the Company is a member of
SFR's consolidated group and specifies that the Company will not be compensated
for the carryback to SFR's affiliated group of any Company tax items realized
after the Company ceases to be a member of SFR's affiliated group; and (e) the
Registration Rights and Indemnification Agreement, pursuant to which (i) SFR may
request, subject to certain limitations, that the Company register for sale
under the Securities Act and applicable state securities laws the Common Stock
owned by SFR and (ii) the Company and SFR agree to indemnify each other and
their respective subsidiaries and as well as their respective directors,
officers, employees, agents and representatives for certain costs and
liabilities relating to violations of Federal and state securities laws in
connection with the Offerings, the Spin Off and any registration of shares of
Common Stock owned by SFR. For a more detailed summary of the terms of these
agreements, see "Relationship Between the Company and SFR -- Contractual
Arrangements".
The Company's principal executive offices are located at 5201 Truxtun
Avenue, Suite No. 100, Bakersfield, California 93309 and its telephone number is
(805) 322-3992.
13
<PAGE> 16
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating the Company and its
business before purchasing the Common Stock offered by this Prospectus.
EFFECTS OF CHANGING OIL AND GAS PRICES
The Company's profitability is determined in large part by the difference
between the prices received for the oil and natural gas that it produces and the
costs of finding, developing and producing such resources. Prices for oil and
natural gas have been subject to wide fluctuations, which continue to reflect
imbalances in supply and demand as well as other market conditions and the world
political situation as it affects OPEC, the Middle East, the former Soviet Union
and other producing countries. Moreover, the price of oil and natural gas may be
affected by the price and availability of alternative sources of energy, weather
conditions and the general state of the economy. Even relatively modest changes
in oil and natural gas prices may significantly change the Company's revenues,
results of operations, cash flows and proved reserves. Based on operating
results for the first half of 1996, the Company estimates that on an annualized
basis a $1.00 per barrel increase (or decrease) in its average crude oil sales
prices would result in a corresponding $16 million increase (or decrease) in
income from operations, a $10 million increase (or decrease) in net income and a
$10 million increase (or decrease) in cash flows from operating activities.
Because the Company is a relatively small producer of natural gas, it consumes
more gas in its EOR operations than it produces. As a result, an increase in
natural gas prices adversely affects the Company's results of operations. Based
on operating results for the first half of 1996, the Company estimates that a
$0.10 per Mcf increase (or decrease) in the average domestic natural gas sales
price would result in a $2 million decrease (or increase) in income from
operations, a $1 million decrease (or increase) in net income and a $1 million
decrease (or increase) in cash flows from operating activities. The foregoing
estimates do not give effect to changes in any other factors, such as the effect
of the Company's hedging program or depreciation and depletion, that would
result from a change in oil and natural gas prices.
For the 20 months ended August 31, 1996, approximately 93% of the Company's
oil production consisted of heavy oil. The market for heavy oil differs
substantially from the market for medium and light crude oil due principally to
the higher transportation and refining costs associated with heavy crude. As a
result, the price received for heavy crude oil is generally lower than the price
received for medium and light crudes. Although the average price of heavy crude
has increased, and the average price of lighter grades has fallen, from 1991
levels, no assurance can be given that the narrowing of the price differential
between heavy and light crudes will continue in the future. In addition, there
is not currently an effective measure by which to hedge the spread (or basis
differential) between the prices paid for lighter grades of crude oil and prices
paid for California heavy crude oil. See "Business -- Current Markets for Oil
and Gas".
NEED TO REPLACE RESERVES
Crude oil and natural gas are depleting assets. Therefore, unless the
Company replaces over the long term the oil and natural gas produced from the
Company's properties, the Company's assets will be depleted over time and its
ability to service and incur debt at constant or declining prices will be
reduced. The Company seeks to replace reserves through exploitation,
development, exploration and acquisition. However, no assurance can be given
that the Company will continue to replace reserves from such activities at
acceptable costs. In addition, exploitation, development and exploration involve
numerous risks, including geological uncertainties or other conditions that may
result in dry holes, the failure to produce oil and gas in commercial quantities
or the inability to fully produce discovered reserves. Therefore, there can be
no assurance that the Company will be able to find and develop or acquire
additional reserves to replace its current and future production.
14
<PAGE> 17
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The Company's activities are subject to various Federal, state and local
laws and regulations covering the discharge of materials into the environment or
otherwise relating to protection of the environment. In particular, the
Company's oil and gas exploration, development, production and EOR operations,
its activities in connection with storage and transportation of liquid
hydrocarbons and its use of facilities for treating, processing, recovering or
otherwise handling hydrocarbons and waste therefrom are subject to stringent
environmental regulation by governmental authorities. Such regulations have
increased the costs of planning, designing, drilling, installing, operating and
abandoning the Company's oil and gas wells and other facilities.
The Company has expended significant resources, both financial and
managerial, to comply with environmental regulations and permitting requirements
and anticipates that it will continue to do so in the future. Such compliance
costs in 1995 were $1 million and are expected to be approximately $1 million in
1996. Although the Company believes that its operations and facilities are in
general compliance with applicable environmental regulations, risks of
substantial costs and liabilities are inherent in oil and gas operations, and
there can be no assurance that significant costs and liabilities will not be
incurred by the Company in the future. Furthermore, there can be no assurance
that other developments, such as increasingly strict environmental laws,
regulations and enforcement policies thereunder, and claims for damages to
property, employees, other persons and the environment resulting from the
Company's operations, will not result in substantial costs and liabilities in
the future and adversely affect the Company's business, financial condition and
results of operations. For a further description of the environmental
regulations to which the Company is subject as well as a description of certain
sites with respect to which the Company will succeed as a potentially
responsible party (as therein defined), see "Business -- Other Business
Matters -- Environmental Regulation".
UNCERTAINTIES IN ESTIMATES OF PROVED RESERVES
There are numerous uncertainties inherent in estimating proved reserves,
including many factors beyond the control of the Company. The reserve data set
forth in the Prospectus represent estimates only. Estimating quantities of
proved reserves is inherently imprecise. Such estimates are based upon certain
assumptions about future production levels, future natural gas and crude oil
prices, the timing and amount of development expenditures and future operating
costs made using currently available geologic, engineering and economic data,
some or all of which may prove to be incorrect over time. As a result of changes
in these assumptions that will occur in the future, and based upon further
production history, results of future exploration and development activities,
future natural gas and crude oil prices and other factors, the quantity of
proved reserves may be subject to upward or downward revisions. The reserve
estimates included in this Prospectus were prepared by Ryder Scott. See
"Business -- Reserves".
Actual future net cash flows from production of the Company's reserves will
be affected by factors such as actual production, supply and demand for oil and
natural gas, curtailments or increases in consumption by oil and gas purchasers,
changes in governmental regulations or taxation and the impact of inflation on
costs. The timing of actual future net revenue from proved reserves, and thus
their actual present value, can be affected by the timing of the incurrence of
expenditures in connection with development of oil and gas properties. The 10%
discount factor, which is required by the Commission to be used to calculate
present value for reporting purposes, is not necessarily the most appropriate
discount factor based on interest rates in effect from time to time and risks
associated with the oil and gas industry. Discounted present value, no matter
what discount rate is used, is materially affected by assumptions as to the
amount and timing of future production, which may and often do prove to be
inaccurate.
LEVERAGE
Upon completion of the Offerings and the application of the net proceeds
therefrom, the Company expects to have total outstanding debt of approximately
$205 million (including the Production
15
<PAGE> 18
Payment). In addition, the Company will have $75 million of additional borrowing
capacity under the New Credit Facility (of which approximately $4 million will
be utilized upon the consummation of the Offerings in respect of letters of
credit and approximately $13 million is expected to be drawn to provide a
portion of the funds required to prepay in full the Production Payment promptly
following the consummation of the Offerings), which the Company can draw upon to
finance development and exploratory drilling and acquisition costs and
prepayment of the Production Payment. The Company's level of indebtedness has
several important effects on its operations, including (i) a portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest incurred under the Company Senior Notes and, to the
extent drawn upon, the New Credit Facility and will not be available for other
purposes, (ii) the covenants contained in the Company Senior Notes and the New
Credit Facility require the Company to meet certain financial tests, and other
restrictions limit its ability to borrow additional funds or to dispose of
assets and may affect the Company's flexibility in planning for, and reacting
to, changes in business conditions and (iii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired. The
Company's ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon the Company's future performance, which will
be subject to general economic conditions and to financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control. There can be no assurance that the Company's future performance will
not be adversely affected by such economic conditions and financial, business
and other factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and Note
1 to the Company's Financial Statements.
COMPETITION
The oil and gas industry is highly competitive. The Company encounters
competition from other oil and gas companies in all areas of its operations. The
Company's competitors include major integrated oil and natural gas companies and
numerous independent oil and natural gas companies and drilling and income
programs, as well as state-owned energy companies. Many of these competitors
have financial and other resources substantially in excess of those available to
the Company. See "Business -- Other Business Matters -- Competition".
RISKS OF OIL AND GAS OPERATIONS
The oil and gas business involves certain operating hazards such as well
blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pollution, releases of
toxic gas and other environmental hazards and risks, any of which could result
in loss of human life, significant damage to property, environmental pollution,
impairment of the Company's operations and substantial losses to the Company.
The availability of a ready market for the Company's oil and natural gas
production also depends on the proximity of reserves to, and the capacity of,
oil and gas gathering systems, pipelines and trucking or terminal facilities. In
addition, the Company may be liable for environmental damages caused by previous
owners of property purchased and leased by the Company. As a result, substantial
liabilities to third parties or governmental entities may be incurred, the
payment of which could reduce or eliminate the funds available for development,
acquisitions or exploration, or result in the loss of the Company's properties.
In accordance with customary industry practices, the Company maintains insurance
against some, but not all, of such risks. The occurrence of an event not fully
covered by insurance could have a material adverse effect on the financial
condition and results of operations of the Company. See "Business -- Other
Business Matters".
LACK OF INDEPENDENT OPERATING HISTORY
Prior to the consummation of the Offerings, the business of the Company was
operated as the Western Division of SFR. Accordingly, no financial or operating
history of the Company as an independent entity is available for a potential
investor to evaluate. Following the consummation of the Transactions, the
Company will operate as a stand-alone entity and will no longer benefit from the
direct operational,
16
<PAGE> 19
financial and other support previously provided by SFR to the Western Division,
although the Company and SFR will enter into a services agreement (terminable by
either party on 90 days' notice without cause) pursuant to which SFR will
provide certain corporate and administrative services to the Company. Upon
termination of such services agreement or the elimination of any services to be
provided thereunder, the Company will be responsible for obtaining such services
on its own. If the Company is unable to perform such services or obtain them on
acceptable terms, the Company's business, financial condition and results of
operations could be adversely affected. See "Relationship Between the Company
and SFR -- Contractual Arrangements".
CONTROL BY SFR
The Company is currently a wholly owned subsidiary of SFR. Following the
Offerings, SFR will own approximately 85% of the outstanding Common Stock. After
the Offerings, through its ability to elect all directors of the Company, SFR
will control all matters affecting the Company, including any determination with
respect to acquisition or disposition of Company assets, future issuance of
Common Stock or other securities of the Company, the Company's incurrence of
debt and any dividend payable on Common Stock. For a description of SFR's
current intentions with respect to the shares of Common Stock that it owns, see
"-- Intended Spin Off by SFR". The Company has granted SFR certain demand and
piggyback registration rights with respect to the Common Stock owned by SFR. See
"Relationship Between the Company and SFR -- Contractual Arrangements". Although
SFR has announced its intention to distribute its remaining shares to its
stockholders, subject to certain conditions, to the extent SFR maintains a
substantial investment in the Company, SFR will be in a position to control the
policies and affairs of the Company and to determine the outcome of corporate
actions requiring stockholder approval. Conflicts of interest may arise in the
future between the Company and SFR in a number of areas relating to their past
and ongoing relationship, including allocation of capital, dividends, incurrence
of indebtedness, tax matters, financial commitments, registration rights,
administration of benefit plans, service arrangements, potential acquisitions of
businesses or oil and gas properties and other corporate opportunities, the
issuance and sale of capital stock of the Company and the election of directors.
Three of the Company's seven directors are executive officers of SFR and
four of such directors are directors of SFR. Upon consummation of the Offerings,
none of the Company's executive officers will be officers of SFR; however, one
of the Company's seven directors will be a director of SFR and two of the
Company's directors will be executive officers of SFR. It is anticipated that
additional changes to the Company's board of directors will be made following
the Spin Off. See "Risk Factors -- Intended Spin Off by SFR" and
"Management -- Directors and Executive Officers". The Company and SFR have
entered into a number of agreements for the purpose of defining the ongoing
relationship between them. As a result of SFR's ownership interest in the
Company, the terms of such agreements were not, and the terms of any future
amendments to those agreements may not be, the result of arm's length
negotiations. Although SFR has advised the Company that it does not currently
intend to engage in the exploration for natural gas, natural gas liquids and
crude oil or in the hard minerals business in California except through its
ownership of Common Stock of the Company, there are no restrictions, contractual
or otherwise, on SFR's engaging in such activities. Accordingly, if SFR changes
its current strategy, or makes an acquisition, it may compete with the Company.
See "Relationship Between the Company and SFR".
SHARES ELIGIBLE FOR FUTURE SALE
SFR and each director and executive officer of the Company have agreed not
to dispose of any shares of Common Stock for a period of 180 days from the date
of this Prospectus without the consent of the representatives of the
Underwriters. The lockup provisions in these agreements are subject to waiver by
the parties to these agreements. After expiration of the lockup period, the
45,350,000 currently outstanding shares of Common Stock, all of which are held
by SFR, will be eligible for resale, subject to the two-year holding requirement
of Rule 144 under the Securities Act, or pursuant to the exercise of demand
registration rights. It is SFR's current intent to distribute the shares to its
stockholders as described in "-- Intended Spin Off by SFR" below. In addition,
upon consummation of the Offerings a
17
<PAGE> 20
total of 3,500,000 shares of Common Stock will be reserved for issuance pursuant
to the Company's incentive compensation plans, of which a total of 74,166 shares
of restricted Common Stock and options to purchase a total of 268,500 shares of
Common Stock, the exercise price of which will be equal to the initial public
offering price per share in the Offerings, will be issued to certain executive
officers, key employees and non-employee directors of the Company. None of such
options or restricted shares to be so issued upon consummation of the Offerings
will be exercisable or transferable prior to the first anniversary of the Spin
Off, except under certain limited circumstances. See "Management -- Executive
Compensation".
Prior to the Offerings, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that the future
sales of shares or the availability of shares for sale will have on the market
price for Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock in the public market, or the perception of the
availability of shares for sale, could adversely affect the prevailing market
price of the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities. See "Relationship Between the
Company and SFR -- Ownership of Common Stock" and "Shares Eligible for Future
Sale".
INTENDED SPIN OFF BY SFR
SFR has announced that after the Offerings it intends to distribute pro
rata to its common stockholders all of the shares of Common Stock that it owns
by means of a tax-free distribution. SFR's final determination to proceed with
the Spin Off will require a declaration of the Spin Off by SFR's board of
directors. Such a declaration is not expected to be made until certain
conditions, many of which are beyond the control of SFR, are satisfied,
including: (i) receipt by SFR of a favorable ruling from the Internal Revenue
Service as to the tax-free nature of the Spin Off; (ii) approval of the Spin Off
by SFR's stockholders; (iii) the redemption or conversion of all or a
substantial portion of the shares of each outstanding series of SFR preferred
stock; and (iv) the absence of any future change in market or economic
conditions (including developments in the capital markets) or SFR's or the
Company's business or financial condition that causes SFR's board to conclude
that the Spin Off is not in the best interests of SFR's stockholders. The
Company has been advised by SFR that it does not expect the Spin Off to occur
prior to May 1997. If SFR consummates the Spin Off, the increased number of
shares of Common Stock available in the market may have an adverse effect on the
market price of the Common Stock. The Company has been advised by SFR that as of
, 1996, SFR had registered stockholders of record. See
"Relationship Between the Company and SFR". No assurance can be given that the
conditions to the Spin Off will be satisfied or that, in any event, SFR's board
of directors will determine to declare the Spin Off or that SFR will not sell
its shares of Common Stock.
To protect SFR from Federal and state income taxes that would be incurred
by it if the Spin Off were determined to be a taxable event, the Company and SFR
have entered into the Spin Off Tax Indemnity Agreement pursuant to which the
Company has agreed to indemnify SFR with respect to tax liabilities resulting
primarily from actions taken by the Company at any time during the one-year
period commencing upon the Spin Off. The Company believes that if it is required
to make payments pursuant to such agreement, the amount of such payments would
have a material adverse effect on the Company's financial condition.
Substantially all of the actions for which the Company is required to indemnify
SFR pursuant to such agreement are within the Company's control, and the Company
has no intention to take any actions during such one-year period that would have
such an effect. See "Relationship Between the Company and SFR -- Contractual
Arrangements -- Spin Off Tax Indemnity Agreement".
It is anticipated that after the Spin Off one director of the Company will
resign and two additional directors who are unaffiliated with the Company and
SFR will be appointed to the Company's board of directors. Such additions, when
completed, will increase the Company's board to eight members, of which only one
will be affiliated with SFR.
18
<PAGE> 21
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law contain provisions that may have the effect of
discouraging unsolicited takeover proposals for the Company that a stockholder
might consider to be in that stockholder's best interest. These provisions,
among other things, restrict the ability of stockholders to take action by
written consent, authorize the board of directors to designate the terms of and
issue new series of preferred stock, limit the personal liability of directors,
require the Company to indemnify directors and officers to the fullest extent
permitted by applicable law and impose restrictions on business combinations
with certain interested parties. See "Description of Capital Stock -- Certain
Provisions of the Company's Charter and Bylaws and Delaware Law".
ABSENCE OF A PREVIOUS MARKET FOR COMMON STOCK
There has been no public market for the Common Stock prior to the
Offerings. Although the Company intends to file an application to list the
Common Stock on the , no assurance can be given that an active trading
market will develop or be sustained after the Offerings, or that purchasers of
the Common Stock will be able to resell their Common Stock at prices equal to or
greater than the initial public offering price. The initial public offering
price will be determined by negotiations between the Company and the
Underwriters and may not be indicative of the prices that may prevail in the
public market. See "Underwriting" for a description of the factors to be
considered in determining the initial public offering price for the Common
Stock.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of R. Graham Whaling,
David Kilpatrick and certain other senior management personnel. The loss of the
services of Messrs. Whaling, Kilpatrick or other senior management personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. Although the Company will enter into a
three-year employment agreement with Mr. Whaling and a two-year employment
agreement with Mr. Kilpatrick and certain other senior management personnel,
there can be no assurance that the Company can retain key management personnel.
The Company's success is also dependent upon its ability to continue to employ
and retain skilled technical personnel, and there can be no assurance that the
Company will be able to attract and retain such personnel. See
"Management -- Employment Agreements".
POSSIBLE IMPAIRMENT OF OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for its oil
and gas exploration and production activities. Under this method, costs (both
tangible and intangible) of development wells, as well as the costs of
prospective acreage, are capitalized. The costs of drilling and equipping
exploratory wells which do not result in proved reserves are expensed upon the
determination that the well does not justify commercial development. Other
exploratory costs, including geological and geophysical costs, are expensed as
incurred.
The Company periodically reviews individual proved properties to determine
if the carrying value of such properties as reflected in its accounting records
exceeds the estimated undiscounted future net revenues from proved oil and gas
reserves attributable to such properties. Based on this review and the
continuing evaluation of development plans, economics and other factors, if
appropriate, the Company records impairments (additional depletion and
depreciation) pursuant to Statement of Financial Accounting Standards No. 121
("SFAS No. 121") to the extent that the net book values of its properties exceed
the expected discounted future net revenues. Such impairments constitute a
charge to earnings which does not impact the Company's cash flow from operating
activities. However, such writedowns impact the amount of the Company's
stockholders' equity and, therefore, the ratio of debt to equity. The risk that
the Company will be required to write down the carrying value of its oil and
natural gas properties increases when oil and natural gas prices are depressed.
Although the Company recorded an impairment
19
<PAGE> 22
of $49.1 million in 1993, the Company has not recorded any impairments
associated with SFAS No. 121, which became effective in the fourth quarter of
1995; however, no assurance can be given that the Company will not experience
impairments in the future.
USE OF PROCEEDS
The net proceeds of the Offerings are estimated to be $ , assuming
an initial public offering price of $ per share and after deducting
estimated expenses. Such net proceeds will be used for the following purposes:
(i) approximately $72 million will be used to repay in full the $70 million
principal amount of the Series E Notes and Series F Notes and to pay the
prepayment penalty associated therewith, (ii) approximately $13 million will be
used to repay outstanding indebtedness under the New Credit Facility and (iii)
the balance, if any, will be used for working capital purposes. If the
Underwriters' over-allotment options are exercised, the Company intends to use
the net proceeds therefrom to repay any balance then outstanding under the New
Credit Facility and any remaining proceeds will be used for working capital
purposes. For a description of the interest rate and maturity of the
indebtedness to be repaid with the net proceeds of the Offerings, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
Promptly following the consummation of the Offerings, the Company intends
to prepay the Production Payment in full with cash on hand (which may include
net proceeds of the Offering) and funds available under the New Credit Facility.
DIVIDEND POLICY
The Company currently intends to pay to its stockholders a dividend of
$0.15 per quarter ($0.60 annually) per share of Common Stock. The first dividend
(which is anticipated to be approximately $ per share of Common Stock)
is anticipated to be paid in April of 1997 and will consist of a dividend for
the Company's first partial quarter ended December 31, 1996 and for its first
full quarter of operations ending March 31, 1997.
The determination of the amount of cash dividends (including the initial
quarterly dividend referred to above), if any, to be declared and paid will
depend upon declaration by the Company's board of directors and upon the
Company's financial condition, earnings and funds from operations, the level of
its capital and exploration expenditures, dividend restrictions contained in the
New Credit Facility and the Company Senior Notes, its future business prospects
and such other matters that the Company's directors deem relevant. For a
description of certain restrictions on the Company's ability to pay dividends,
see "Description of Capital Stock -- Restrictions on Dividends".
20
<PAGE> 23
DILUTION
As of June 30, 1996, the pro forma net tangible book value (total tangible
assets less total liabilities) of the Company, after giving effect to the
consummation of the Transactions as if they had occurred on June 30, 1996, was
approximately $38.8 million, or $0.86 per share of Common Stock. After giving
effect to the receipt of $ million of estimated net proceeds from the Offerings
(net of estimated underwriting discounts and commissions and offering expenses)
at an assumed initial public offering price of $ per share, the pro
forma net tangible book value of the Common Stock outstanding at June 30, 1996
would have been $ per share of Common Stock, representing an immediate
increase in net tangible book value of $ per share to SFR (the
Company's existing stockholder) and an immediate dilution of $ per
share to persons purchasing Common Stock at the assumed initial public offering
price. Dilution is determined by subtracting net tangible book value per share
of Common Stock after giving effect to the Offerings from the amount of cash
paid by a new investor for a share of Common Stock. The following table
illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share before the
Offerings................................................... $ 0.86
Increase in net tangible book value per share attributable to
the sale of Common Stock in the Offerings................... $
Pro forma net tangible book value per share after giving effect
to the Offerings............................................... $
Dilution in net tangible book value to the purchasers of Common
Stock offered hereby........................................... $
</TABLE>
The following table sets forth, as of June 30, 1996, the number of shares
of Common Stock owned by SFR and purchased by new investors in the Offerings,
the total consideration paid therefor and the average price per share paid by
SFR and by new investors:
<TABLE>
<CAPTION>
SHARES OWNED TOTAL CONSIDERATION AVERAGE
---------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
SFR....................... 45,350,000 % $ % %
New Investors.............
---------- ------- ---------- ------- ---------
Total(1)........
========== ====== ========== ====== =======
</TABLE>
- ---------------
* Less than 1%.
(1) The foregoing computations do not include a total of 74,166 restricted
shares of Common Stock and 268,500 shares of Common Stock reserved for
issuance pursuant to options that will be granted to management and other
employees upon completion of the Offerings, at an exercise price per share
equal to the initial public offering price. See "Management -- Benefit
Plans". If the foregoing calculations include such restricted shares and
assume exercise of all such employee options (assuming an initial public
offering price of $ per share), the pro forma net tangible book
value per share before the Offerings would be $ , the pro forma
net tangible book value per share after the Offerings would be $
and the dilution per share to new investors would be $ .
21
<PAGE> 24
CAPITALIZATION
The following table sets forth the historical capitalization of the Western
Division as of June 30, 1996, the adjustments thereto to give effect to the
consummation of the Transactions, including the application by the Company of
the net proceeds of the Offerings (assuming an initial public offering price of
$ per share) as described in "Use of Proceeds", and the pro forma
capitalization of the Company. This table should be read in conjunction with the
Financial Statements and the Pro Forma Financial Statements of the Company and
the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------------------------
MONTEREY
WESTERN RESOURCES,
DIVISION PRO FORMA INC. PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS................................ $ -- $ 15(1) $ 15
======= ========== =========
SHORT-TERM DEBT
Current portion of SFR Senior Notes.................... $ 35(2) (35)(3) --
Production payment payable............................. -- 30(4) 30
---------- ----------- ----------
35 (5) 30
---------- ----------- ----------
LONG-TERM DEBT
SFR Senior Notes....................................... 210(2) (210)(3) --
Company Senior Notes................................... -- 175(3) 175
New Credit Facility.................................... -- --(5) --
---------- ----------- ----------
210 (35) 175
---------- ----------- ----------
SHAREHOLDERS' EQUITY
Western Division equity................................ 51 (51)(6) --
Shareholders' equity................................... -- 139(6) 139
---------- ----------- ----------
51 88 139
---------- ----------- ----------
TOTAL CAPITALIZATION........................... $296 $ 48 $344
======= ========== =========
</TABLE>
- ---------------
(1) Includes the net proceeds from the Offerings reduced by application of a
portion of such proceeds as described in notes (3), (5) and (6) below.
(2) Represents a portion of the $245 million of indebtedness of SFR attributable
to the SFR Senior Notes that is allocated to the Western Division, which is
to be assumed by the Company at or prior to consummation of the Offerings.
(3) Gives effect to the retirement of $70 million of aggregate principal amount
of the Series E and Series F Notes to be assumed by the Company at or prior
to consummation of the Offerings and the exchange (the "Exchange") by the
Company of the Company Senior Notes for cancellation of the $175 million
Series G Notes.
(4) Reflects the $30 million Production Payment, which is to be retained by SFR
pursuant to the Contribution Agreement. Promptly following the consummation
of the Offerings, the Company intends to use available cash and funds
borrowed under the New Credit Facility to prepay the Production Payment in
full.
(5) Prior to consummation of the Offerings, SFR and the Company will enter into
the New Credit Facility, and SFR is expected to borrow $13 million under the
New Credit Facility. Concurrently with the closing of the Offerings, SFR
will be released as an obligor under the New Credit Facility and the Company
is expected to use $13 million of the net proceeds from the Offerings to
repay such borrowing in full.
(6) Gives effect to (a) the contribution by SFR of the net assets of the Western
Division pursuant to the Contribution Agreement (approximately $84 million
after giving effect to liabilities assumed by SFR and deferred income tax
effects), (b) the retention by SFR of the $30 million Production Payment
pursuant to the Contribution Agreement, (c) the assumption by the Company of
the $13 million liability for amounts outstanding under the New Credit
Facility as described in note (5) above, (d) the receipt by the Company of
$100 million in net proceeds from the Offerings (consisting of the assumed
sale of 7.9 million shares at $ per share, net of underwriting discounts
and $3 million of estimated expenses of the Offerings), (e) the payment by
the Company of a $2 million prepayment penalty ($1 million, net of related
taxes) related to the prepayment of the Series E and F Notes referred to in
note (3) above and (f) the payment by the Company of a $1 million consent
fee ($1 million, net of related taxes) in connection with the Exchange. See
the Pro Forma Condensed Financial Statements included elsewhere herein.
22
<PAGE> 25
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, selected
historical financial data for SFR's Western Division and selected pro forma
financial data for the Company. The selected historical balance sheet data as of
December 31, 1995 and 1994 and the selected historical income statement and cash
flow data for each of the three years in the period ended December 31, 1995 are
derived from the financial statements of the Western Division of SFR, which have
been audited by Price Waterhouse LLP. The selected historical financial data for
the six-month periods ended June 30, 1995 and June 30, 1996 are derived from the
unaudited financial statements of the Western Division of SFR and include, in
the opinion of management, adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial data for such periods.
The selected historical balance sheet data as of December 31, 1991, 1992 and
1993 and the selected historical income statement and cash flow data for each of
the two years in the period ended December 31, 1992 have been derived from the
unaudited accounting records of the Western Division of SFR. The selected pro
forma financial data for the Company set forth below are based on numerous
assumptions and include adjustments as explained in the unaudited pro forma
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus. All such selected historical and pro forma financial data set
forth below should be read in conjunction with such financial statements and
notes thereto appearing elsewhere herein. The following information should not
be deemed indicative of future operating results for the Company. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<TABLE>
<CAPTION>
MONTEREY WESTERN
WESTERN DIVISION HISTORICAL RESOURCES, DIVISION MONTEREY
-------------------------------- INC. HISTORICAL RESOURCES, INC.
PRO FORMA(1) ----------- PRO FORMA(1)
YEAR -------------- SIX MONTHS ---------------
ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30, ENDED
-------------------------------- DECEMBER 31, ----------- JUNE 30,
1991 1992 1993 1994 1995 1995 1995 1996 1996
---- ---- ---- ---- ---- -------------- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues........................ $240 $215 $187 $179 $211 $ 211 $105 $126 $ 126
---- ---- ---- ---- ---- ------ ---- ---- ------
Costs and expenses:
Production and operating...... 103 105 100 86 85 85 43 49(2) 49(2)
Exploration, including dry
hole costs.................. 3 3 2 1 2 2 2 1 1
Depletion, depreciation and
amortization................ 40 44 41 32 33 33 15 18 18
Impairment of oil and gas
properties(3)............... -- -- 49 -- -- -- -- -- --
General and administrative.... 6 9 9 8 7 9 3 4 4
Taxes (other than income)..... 13 9 9 9 8 8 5 4 4
Restructuring charges(4)...... -- -- 12 1 -- -- -- -- --
---- ---- ---- ---- ---- ------ ---- ---- ------
165 170 222 137 135 137 68 76 76
---- ---- ---- ---- ---- ------ ---- ---- ------
Income (loss) from operations... 75 45 (35) 42 76 74 37 50 50
Interest, net(5).............. (27) (27) (27) (26) (25) (20) (12) (12) (10)
Other income (expense)........ 5 1 -- -- (1) (1) -- -- --
---- ---- ---- ---- ---- ------ ---- ---- ------
Income (loss) before income
taxes......................... 53 19 (62) 16 50 53 25 38 40
Income taxes.................. (19) (6) 27 (4) (16) (17) (8) (14) (15)
---- ---- ---- ---- ---- ------ ---- ---- ------
Net income (loss)............... $ 34 $ 13 $(35) $ 12 $ 34 $ 36 $ 17 $ 24 $ 25
===== ===== ===== ===== ===== ====== ===== ===== ======
Earnings (loss) per common share
(in dollars).................. N/A N/A N/A N/A N/A $ 0.68 N/A N/A $0.48
====== ======
CASH FLOW DATA:
Net cash provided by operating
activities.................... $ 86 $ 59 $ 33 $ 54 $ 76 N/A $ 36 $ 48 N/A
Capital expenditures, including
acquisitions of producing
properties.................... 70 20 47 27 54 N/A 29 30 N/A
BALANCE SHEET DATA (at end of
period):
Cash and cash equivalents....... $ -- $ -- $ -- $ -- $ -- N/A $ -- $ -- $ 15
Total assets.................... 503 476 387 376 391 N/A 386 410 425
Total debt...................... 265 263 258 245 245 N/A 245 245 205
Shareholders' equity............ 121 94 35 32 45 N/A 42 51 139
OTHER FINANCIAL DATA:
EBITDA(6)....................... $122 $ 72 $ 57 $ 75 $110 $ 108 $ 53 $ 70 $ 69
Ratio of EBITDA to interest
expense....................... 4.4 3.3 2.1 2.9 4.3 5.2 4.1 5.4 6.6
</TABLE>
23
<PAGE> 26
- ---------------
(1) Pro forma for the consummation of the Offerings and the Transactions as if
the Offerings and the Transactions had occurred on January 1, 1995, except
for the balance sheet data which assumes that the Offerings and the
Transactions had on June 30, 1996. See the Pro Forma Condensed Financial
Statements included herein.
(2) Includes $3 million attributable to losses incurred under the Company's
hedging arrangements in respect of natural gas purchased by the Company as
fuel for thermal EOR operations. All such arrangements terminated on or
prior to June 30, 1996.
(3) Reflects a non-cash charge for the impairment of oil and gas properties. For
a further description of the impairments recorded in 1993, see Note 2 of the
Notes to the Financial Statements included elsewhere in this Prospectus.
(4) Reflects non-recurring charges in 1993 relating to implementation of SFR's
restructuring program comprised of (i) losses on property dispositions of
$11 million and (ii) accruals for certain personnel benefits and related
costs of $1 million. Reflects non-recurring charges in 1994 relating to
SFR's restructuring program of $1 million comprised of severance, benefits
and relocation expenses.
(5) Net of capitalized interest of $0.3 million, $0.1 million, $0.3 million,
$0.6 million and $0.7 million in the years 1991, 1992, 1993, 1994 and 1995,
respectively, and $0.3 million and $0.4 million in the six months ended June
30, 1995 and 1996, respectively. Includes interest income of $0.2 million,
$0.2 million and $0.1 million in 1991, 1992 and 1993, respectively.
(6) EBITDA as presented herein is defined as the sum of income before provision
for income taxes, interest, depreciation, depletion, amortization,
impairments, exploration expenses and non-cash charges in respect of gains
or losses realized on the disposition of properties. EBITDA is included to
provide useful information regarding a company's ability to service and
incur debt. EBITDA, however, should not be considered in isolation or as a
substitute for net income, cash flow provided by operating activities or
other income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's profitability
or liquidity.
24
<PAGE> 27
The following table sets forth certain selected operating data for the
Company for the periods indicated.
SELECTED OPERATING DATA
<TABLE>
<CAPTION>
WESTERN
DIVISION
WESTERN DIVISION HISTORICAL MONTEREY HISTORICAL MONTEREY
-------------------------------------- RESOURCES, INC. --------------- RESOURCES, INC.
PRO FORMA(1) PRO FORMA(1)
YEAR --------------- SIX MONTHS ---------------
ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30, ENDED
-------------------------------------- DECEMBER 31, --------------- JUNE 30,
1991 1992 1993 1994 1995 1995 1995 1996 1996
------ ------ ----- ------ ------ --------------- ------ ----- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Average daily production
Crude oil and liquids
(MBbls/d).................. 42 42 43(2) 41 42 42 41 45 45
Natural gas (MMcf/d)......... 9 7 6(2) 4 5 5 6 4 4
Total production (MBOE/d).... 43 43 44(2) 42 43 43 42 46 46
Average realized sales prices,
net of hedges(3)
Crude oil and liquids
($/Bbl).................... 15.19 13.67 11.63 11.53 13.50 13.50 13.77 15.15 15.15
Natural gas ($/Mcf).......... 1.72 1.57 1.59 1.14 0.98 0.98 1.17 1.05 1.05
Average costs and expenses per
BOE(in dollars)(4)
Production and operating:
Steam generation........... 1.95 2.41 2.26 2.16 1.98 1.98 2.01 2.01(6) 2.01(6)
Lease operating............ 4.57 4.24 4.05 3.47 3.50 3.50 3.69 3.44 3.44
----- ----- ----- ----- ----- ----- ----- ----- -----
Total.................. 6.52 6.65 6.31 5.63 5.48 5.48 5.70 5.45 5.45
----- ----- ----- ----- ----- ----- ----- ----- -----
Exploration, including dry
holes...................... 0.17 0.17 0.11 0.09 0.15 0.15 0.22 0.11 0.11
Depletion, depreciation and
amortization............... 2.55 2.79 2.59 2.09 2.08 2.08 1.97 2.18 2.18
General and administrative... 0.42 0.56 0.58 0.51 0.47 0.58 0.48 0.47 0.54
Taxes (other than income).... 0.83 0.56 0.53 0.56 0.51 0.51 0.61 0.52 0.52
Interest expense, net........ 1.73 1.74 1.69 1.68 1.61 1.30 1.66 1.50 1.21
Average production costs
(including related
production, severance and
ad valorem taxes) per BOE
(in dollars)............... 7.28 7.13 6.76 6.12 5.92 5.92 6.23 5.90(6) 5.90(6)
Average finding cost per BOE
(in dollars)(5).............. 6.05 0.89 3.18 1.04 2.17 2.17 N/A N/A N/A
Gross wells drilled............ 137 31 171 79 225 225 147 168 168
</TABLE>
- ---------------
(1) Pro forma for the consummation of the Offerings and the Transactions as if
the Offerings and Transactions had occurred on January 1, 1995. See the Pro
Forma Condensed Financial Statements included herein.
(2) Includes production attributable to properties sold in 1993 of 3 MBbls/d of
crude oil and liquids and 2 MMcf/d of natural gas (3 MBOE/d).
(3) From time to time SFR hedges a portion of its oil sales. The Company has
been allocated a portion of SFR's hedging gains and losses based on its
hedged light and heavy oil production. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General".
(4) Excludes impairments of oil and gas properties of $49 million incurred in
1993 ($3.09 per BOE) and restructuring charges of $12 million ($0.75 per
BOE) and $1 million ($0.07 per BOE) incurred in 1993 and 1994, respectively.
Depletion, depreciation and amortization in the subsequent periods declined
primarily due to the effect of the 1993 impairments.
(5) Average finding cost per BOE is calculated by dividing (i) costs incurred in
development, exploration and acquisition of oil and gas reserves, by (ii)
net proved reserve additions from acquisitions, extensions, discoveries,
improved recovery and revisions, on a BOE basis.
(6) Excludes $0.38 per BOE loss on hedging in respect of natural gas purchased
for thermal EOR operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General".
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The discussion presented herein relates to the Western Division of SFR. Due
to the fact that the Company will be an independent entity after the Offerings,
certain items may differ from those presented below and the results of the
Western Division may not necessarily be indicative of future results of the
Company. See also the discussion below under "-- Intercompany Agreements."
As an independent oil and gas producer, the Company's results of operations
are dependent upon the difference between the prices received for oil and gas
and the costs of finding and producing such resources. The Company produces most
of its oil and gas from long-lived fields in the San Joaquin Valley of
California utilizing various EOR methods. The market price of heavy (i.e., low
gravity, high viscosity) and sour (i.e., high sulfur content) crude oils
produced in these fields is lower than sweeter, light (i.e., low sulfur and low
viscosity) crude oils, reflecting higher transportation and refining costs. In
addition, the lifting costs of heavy crude oils are generally higher than the
lifting costs of light crude oils. As a result, even relatively modest changes
in crude oil prices may significantly affect the Company's revenues, results of
operations, cash flows and proved reserves. In addition, prolonged periods of
high or low oil prices may have a material effect on the Company's financial
condition and results of operations.
The average sales price of the Company's crude oil and liquids (unhedged)
for 1995 was $13.50 per barrel, or approximately 81% of the average posted price
of $16.76 per barrel for WTI crude oil (an industry posted price generally
indicative of prices for sweeter light crude oil). During the six months ended
June 30, 1996, the Company's average sales price for the Company's crude oil was
$15.45 per barrel, approximately 81% of the average posted price for WTI during
such period. For the period from January 1, 1991 to June 30, 1996, the average
sales price for the Company's crude oil was approximately 71% of the average
posted price for WTI during such period.
Crude oil prices are subject to significant changes in response to
fluctuations in the domestic and world supply and demand and other market
conditions, as well as the world political situation as it relates to OPEC, the
Middle East and various producing countries. Since the beginning of 1994, the
average sales price (unhedged) received by the Company ranged from a low of
$8.80 per barrel for the first quarter of 1994 to a high of $15.79 per barrel in
the second quarter of 1996. Based on operating results for the first half of
1996, the Company estimates that on an annualized basis a $1.00 per barrel
increase or decrease in its average crude oil sales price would result in a
corresponding $16 million change in income from operations and a $10 million
change in cash flow from operating activities. The foregoing estimates do not
give effect to changes in any other factors, such as the effect of hedging or
depreciation and depletion, that would result from a change in oil prices.
The price of natural gas fluctuates due to supply and demand, which may be
affected by weather conditions, the level of natural gas in storage and other
economic factors. Increases in the price of natural gas adversely impact the
Company's results of operations because the natural gas consumed in the
Company's EOR operations exceeds the amount of natural gas produced by the
Company. Based on operating results for the first half of 1996, the Company
estimates that on an annualized basis a $0.10 per Mcf increase (or decrease) in
the average domestic natural gas sales price would result in a $2 million
decrease (or increase) in income from operations and a $1 million decrease (or
increase) in cash flow from operating activities. The foregoing estimates do not
give effect to changes in any other factors, such as depletion and depreciation,
that would result from a change in natural gas prices.
In February 1996 the Bureau of Land Management ("BLM") of the United States
Department of the Interior (which oversees the Company's leases of Federal
lands) agreed, effective as of June 1, 1996, to reduce the royalties payable on
any Federal lease that produces crude oil with a weighted average gravity of
less than 20 degrees API. The reduced royalty rates are based upon the weighted
average API gravity of the heavy oil produced from the subject Federal leases
and are as low as 3.9%, compared to 12.5% before the reduction. The reduced
royalty rates continue in effect for 12-month periods, after which the
26
<PAGE> 29
operator can establish a new reduced rate for continued heavy oil production by
submitting an application. As a result of this program, the Company's royalty
rate on its Federal leases has been reduced from 12.5% to an average of 4.8%,
resulting in a net increase in the production attributable to the Company's net
revenue interests in such leases of approximately 1.6 MBbls per day. During the
period that such royalty reduction is in effect, the Company (and other working
interests owners, if any) will bear all of the thermal EOR costs to produce the
heavy oil from such properties. The royalty reduction will be terminated upon
the first to occur of (i) the determination by the BLM that the WTI average oil
price (as adjusted for inflation) has remained above $24 per barrel for six
consecutive months and (ii) such time after September 10, 1999, as the Secretary
of the Interior determines that the heavy oil royalty rate reduction has not
produced the intended results (i.e., to reduce the loss of otherwise recoverable
reserves).
From time to time SFR hedges a portion of its oil sales to provide a
certain minimum level of cash flow from its sales of oil. While the hedges are
generally intended to reduce SFR's exposure to declines in market price, SFR's
gain from increases in market price may be limited. SFR uses various financial
instruments whereby monthly settlements are based on differences between the
prices specified in the instruments and the settlement prices of certain futures
contracts quoted on the New York Mercantile Exchange ("NYMEX") or certain other
indices. Generally, in instances where the applicable settlement price is less
than the price specified in the contract, SFR receives a settlement based on the
difference; in instances where the applicable settlement price is higher than
the specified price, SFR pays an amount based on the difference. The instruments
utilized by SFR differ from futures contracts in that there is no contractual
obligation which requires or allows for the future delivery of the product.
Gains or losses on hedging activities are recognized in oil and gas revenues in
the period in which the hedged production is sold. SFR's hedging program in 1995
and 1996 has been to hedge the price of its light oil production. In certain
months when a favorable price could be obtained, heavy oil quantities (i.e.,
quantities in excess of light oil production) were hedged. The allocation of
hedging gains and losses to the Western Division during this period has been
calculated on the basis of its light oil production and its heavy oil hedges as
determined above. During the first six months of 1996, the Company's share of
SFR's net loss on crude oil hedges was $3 million. The Company does not expect
to hedge a substantial portion of its oil production.
In addition to crude oil sales hedges, during the first six months of 1996
SFR hedged 20 MMcf per day of the natural gas purchased for use in the Company's
steam generation operations. Such hedges, which terminated at the end of the
second quarter, resulted in a $3 million increase in the Company's production
and operating costs in the first six months of 1996.
27
<PAGE> 30
RESULTS OF OPERATIONS
The following table reflects certain components of the Company's revenues
(expressed in millions of dollars) and expenses (expressed in dollars per BOE)
for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
REVENUE DATA:
Crude oil and liquids:
Average realized sales prices ($/Bbl)
Unhedged................................... 11.63 11.53 13.50 13.76 15.45
Hedged..................................... 11.63 11.53 13.50 13.77 15.15
Sales volumes (MBbls/d)....................... 43 41 42 41 45
Revenues ($ Millions)
Sales...................................... 180 173 206 102 127
Hedging.................................... -- -- -- -- (3)
Net profits payments....................... -- -- (1) -- --
----- ----- ----- ----- -----
Total................................. 180 173 205 102 124
===== ===== ===== ===== =====
Natural Gas:
Average realized sales prices ($/Mcf)......... 1.59 1.14 0.98 1.17 1.05
Sales volumes (MMcf/d)........................ 6 4 5 6 4
Revenues ($ Millions)......................... 4 2 2 1 1
EXPENSE DATA ($/BOE)(1):
Production and operating expenses:
Steam generation.............................. 2.26 2.16 1.98 2.01 2.01(2)
Lease operating............................... 4.05 3.47 3.50 3.69 3.44
Exploration, including dry holes................ 0.11 0.09 0.15 0.22 0.11
Depletion, depreciation and amortization........ 2.59 2.09 2.08 1.97 2.18
General and administrative...................... 0.58 0.51 0.47 0.48 0.47
Taxes (other than income)....................... 0.53 0.56 0.51 0.61 0.52
Interest, net................................... 1.69 1.68 1.61 1.66 1.50
</TABLE>
- ---------------
(1) Excludes impairments of oil and gas properties of $49 million ($3.09 per
BOE) and restructuring charges of $12 million ($0.75 per BOE) and $1 million
($0.07 per BOE) incurred in 1993 and 1994, respectively.
(2) Excludes $0.38 per BOE loss on hedging, see "-- General". The hedging
transactions which generated these losses expired on June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
OPERATING REVENUES. Revenues for the first six months of 1996 of $126
million were 21% higher than the $105 reported in the first six months of 1995.
The increase primarily reflects the effects of increased sales prices ($13
million) and increased sales volumes ($13 million). The increase in crude and
liquids volumes in 1996 primarily reflects the success of the Company's well
operations in the Midway-Sunset field and the drilling of new wells in the Kern
River field. Crude oil and liquids revenues for the first six months of 1996
include a $3 million loss on hedging. Effective June 1, 1996, the Department of
the Interior instituted a royalty reduction program for heavy crude producers,
which reduces from 12.5% to an average 4.8% the royalties the Company is
required to pay on production from its Federal leases. See "-- General".
OPERATING COSTS AND EXPENSES. Costs and expenses totaled $76 million in the
first six months of 1996, an increase of 12% compared to $68 million in the
first six months of 1995. Production and
28
<PAGE> 31
operating costs for the first six months of 1996 were $5 million higher than in
the same period in 1995 primarily because steam generation costs include $3
million in expenses related to hedges of natural gas purchased. See
"-- General". The increase in DD&A in the first six months of 1996 primarily
reflects higher capital expenditures in recent periods which have resulted in a
higher rate per BOE produced.
INCOME TAX. Income taxes in the first six months of 1996 were $14 million,
an increase of 83% compared to $8 million in the same period of 1995 and
primarily reflect higher pre-tax income. The Company's effective tax rate in the
first six months of 1996 of 36% is up from 31% in the same period in 1995,
primarily reflecting the amount of EOR credits generated relative to the level
of pre-tax income.
YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994
OPERATING REVENUES. Revenues for 1995 of $211 million were 18% higher than
the $179 million reported in 1994. The increase primarily reflects the effects
of increased sales prices ($30 million) and increased sales volumes ($2
million).
OPERATING COSTS AND EXPENSES. Costs and expenses totaled $135 million in
1995, a decrease of 1% compared to $137 million in 1994. Exploration costs for
1995 include $1 million related to the drilling of two dry exploratory wells.
Costs and expenses for 1994 included $1 million in restructuring costs related
to SFR's 1993 corporate restructuring program. Although other 1995 costs showed
no significant change from the 1994 levels, steam generation costs and general
and administrative costs declined $0.18 per BOE and $0.03 per BOE, respectively.
INCOME TAX. Income taxes in 1995 were $16 million, an increase of 240%
compared to $5 million in 1994 and primarily reflect higher pre-tax income. The
Company's effective tax rate in 1995 of 32% was up from 29% in 1994, primarily
reflecting the amount of EOR credits generated relative to the level of pre-tax
income.
YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1993
OPERATING REVENUES. Revenues for 1994 of $179 million were 4% lower than
the $187 million reported in 1993. Revenues for 1993 included crude oil and
liquids revenues of $13 million (2.5 MBbls per day) and natural gas revenues of
$2 million (2.3 MMcf per day) attributable to certain producing properties which
were sold to Vintage Petroleum, Inc. ("Vintage") in the fourth quarter of 1993.
Crude oil and liquids revenues from other properties increased $6 million
reflecting the effects of increased sales volumes ($6 million) and increased
sales prices ($1 million).
OPERATING COSTS AND EXPENSES. Costs and expenses totaled $137 million in
1994, a decrease of 38% compared to $222 million in 1993. Costs and expenses in
1993 included impairments of oil and gas properties of $49 million and
restructuring charges of $12 million. Also, costs and expenses in 1993 included
$9 million of production and operating costs, $4 million in DD&A and $0.4
million of taxes (other than income) related to certain producing properties
sold to Vintage in the fourth quarter of 1993. The remainder of the decrease in
DD&A was primarily attributable to the effect of the impairments taken in 1993.
General and administrative expense was lower in 1994, primarily reflecting the
effect of the 1993 corporate restructuring program.
INCOME TAX. Income taxes in 1994 were $5 million, compared to a $27 million
benefit in 1993 attributable to the net loss of $62 million incurred in that
year. The Company's effective tax rate in 1994 was 29%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities is a function of the
volumes of oil and gas produced from the Company's properties and the sales
prices received therefor. Since crude oil and natural gas are depleting assets,
unless the Company replaces the oil and gas produced from its properties, the
Company's assets will be depleted over time and its ability to incur debt at
constant or declining prices will be reduced. The Company increased its proved
reserves (net of production and
29
<PAGE> 32
sales) by approximately 12% from December 31, 1991 to September 1, 1996;
however, no assurances can be given that similar increases will occur in the
future. Historically, the Company has generally funded development and
exploration expenditures and working capital requirements from cash provided by
operating activities; however, the future levels of operating cash flows, which
are significantly affected by oil and gas prices, may limit the cash available
for future exploration, development and acquisition activities. Net cash
provided by operating activities and net proceeds from sales of properties
totaled $48 million in the first half of 1996; net cash used for capital
expenditures and producing property acquisitions in such period totaled $30
million.
The Company expects to increase its capital expenditures from an average of
$35 million per year over the five year period ended December 31, 1995 to
approximately $51 million and $68 million in 1996 and 1997, respectively.
However, the actual amount expended by the Company in 1996 and 1997 will be
based upon numerous factors, the majority of which are outside its control,
including, without limitation, prevailing oil and natural gas prices and the
outlook therefor and the availability of funds. Through August 31, 1996, the
Company had expended approximately $34 million of its 1996 budgeted amount.
As described in this Prospectus under the caption "Prospectus
Summary -- Transactions at Closing", concurrently with the consummation of the
Offerings the Company will issue the Company Senior Notes in exchange for
cancellation of certain SFR Senior Notes. The Company Senior Notes will be in
the original principal amount of $175 million, bear interest at 10.61% per
annum, will be due and payable in full in 2005 and will require that the Company
prepay, without premium, $25 million of the principal amount each year from 1999
through 2004. The Note Agreement pursuant to which the Company Senior Notes will
be issued contains covenants which, among other things, restrict the Company's
ability to incur or maintain additional indebtedness and to pay cash dividends
unless certain conditions are satisfied. The restriction on indebtedness will
permit the Company to maintain indebtedness only to the extent that the
Company's total debt outstanding at such time does not exceed 300% of the
Company's EBITDA less Restricted Payments (as defined in the Note Agreement) for
the most recent four consecutive quarters then ended. On a pro forma basis,
after giving effect to the Offerings and the Transactions, as of June 30, 1996,
the Company would have had additional debt capacity of approximately $165
million under such restriction. In addition, the Note Agreement requires that
the Company maintain net worth through December 31, 1998 of not less than $115
million, increasing each year thereafter by 20% of net income generated
thereafter. At June 30, 1996 on a pro forma basis after giving effect to the
Offerings and the Transactions, the Company's net worth would have been
approximately $139 million.
At or prior to the closing of the Offerings the Company will also enter
into the New Credit Facility with the lenders party thereto (the "Lenders") and
The Chase Manhattan Bank ("Chase"), as agent (the "Agent") for the Lenders. The
credit agreement for the New Credit Facility (the "Credit Agreement") will
permit the Company to obtain revolving credit loans (the "Loans") and the
issuance of letters of credit ("Letters of Credit") in an aggregate amount not
to exceed $75 million (with a sublimit of $15 million for Letters of Credit) at
any time outstanding (the "Commitment"). The obligations of the Company under
the Credit Agreement will be unsecured. All outstanding Loans are due and
payable on the date that is four years from the date the Credit Agreement
becomes effective. At the Company's option, each Loan will bear interest at (i)
the higher of the federal funds effective rate plus one-half of 1% or Chase's
prime rate or (ii) the rate at which eurodollar deposits for one, two, three or
six months (as selected by the Company) are offered by the Agent in the
interbank eurodollar market in the amount of such Loan (the "Eurodollar Rate").
An additional margin ranging from one-half of 1% to 1% shall be added to the
Eurodollar Rate depending upon the ratio of (i) total indebtedness of the
Company to (ii) EBITDA of the Company for the four consecutive fiscal quarters
most recently ended minus dividends paid during such four fiscal quarters (the
"Debt to Adjusted EBITDA Ratio"). The Company will also pay to the Lenders a fee
on the unused portion of the Commitment ranging from 0.20% to 0.35% and a fee
for the issuance of Letters of Credit ranging from 0.50% to 1.00%, in each case
based on the Debt to Adjusted EBITDA Ratio. In addition, Chase, as the issuer of
each Letter of Credit, will receive an additional issuance fee equal to the
greater of 1/8 of 1% of the face amount of each Letter of Credit or $800.00. The
30
<PAGE> 33
Credit Agreement will contain covenants similar to those contained in the Note
Agreement, which, among other things, restrict the Company's ability to incur
additional indebtedness and to pay cash dividends unless certain conditions are
satisfied. The restriction on indebtedness will permit the Company to incur
additional debt only if the Company's total debt outstanding at such time would
not exceed 300% of the Company's EBITDA (as defined in the Credit Agreement) for
the most recent four consecutive quarters most recently ended. In addition, the
Credit Agreement will require that the Company maintain a ratio of EBITDA (as
defined in the Credit Agreement) to interest expense of at least 3.0 times. At
June 30, 1996, on a pro forma basis after giving effect to the Offerings and the
Transactions, the Company's ratio of EBITDA (as defined in the Credit Agreement)
to interest expense was approximately 5.9.
To the extent that the Company is restricted from incurring additional
indebtedness under the Note Agreement or the New Credit Facility, the cash
available for use in its operations may be reduced.
DIVIDENDS
The Company currently intends to pay to its stockholders a quarterly
dividend of $0.15 per share of Common Stock ($0.60 annually). The first dividend
is anticipated to be paid in April 1997 and will consist of a prorated dividend
(estimated to be $ ) in respect of the Company's first partial quarter
ending December 31, 1996 and for its first full quarter of operations ending
March 31, 1997. Although the Company currently intends to pay quarterly
dividends, the determination of the amount of future cash dividends, if any, to
be declared and paid will depend upon declaration by the Company's board of
directors and upon the Company's financial condition, earnings and funds from
operations, the level of its capital and exploration expenditures, dividend
restrictions contained in the New Credit Facility and the Company Senior Notes,
future business prospects and such other matters as the Company's directors deem
relevant. For a description of certain restrictions on the Company's ability to
pay dividends, see "Description of Capital Stock -- Common Stock -- Dividends".
ENVIRONMENTAL MATTERS
Almost all phases of the Company's oil and gas operations are subject to
stringent environmental regulation by governmental authorities. Such regulation
has increased the costs of planning, designing, drilling, installing, operating
and abandoning oil and gas wells and other facilities. The Company has expended
significant financial and managerial resources to comply with such regulations.
The Company's cost of compliance with such regulations was $1.1 million in 1993,
$0.6 million in 1994, $0.9 million in 1995 and $0.6 million for the first six
months of 1996. Although the Company believes its operations and facilities are
in general compliance with applicable environmental regulations, risks of
substantial costs and liabilities are inherent in oil and gas operations. It is
possible that other developments, such as increasingly strict environmental
laws, regulations and enforcement policies or claims for damages to property,
employees, other persons and the environment resulting from the Company's
operations, could result in significant costs and liabilities in the future. As
it has done in the past, the Company intends to fund its cost of environmental
compliance from operating cash flows.
INTERCOMPANY AGREEMENTS
As an operating division of SFR, the Western Division has been able to
utilize the administrative services and personnel of SFR's corporate offices,
including the services and personnel of SFR's data processing, accounting, tax
and legal departments. Prior to the closing of the Offerings, the Company and
SFR intend to enter into the Services Agreement pursuant to which SFR will, upon
the Company's request, continue to perform such administrative services in
return for reimbursement by the Company of SFR's costs incurred therefor.
Payments to SFR under the Services Agreement are expected to diminish as the
Company assumes full responsibility during 1997 for each of the services covered
by the Services Agreement. The Company anticipates that its general and
administrative costs will increase over 1995 levels to approximately $9 million
in 1997 as it assumes full responsibility for each of these services and
functions. Such increase is expected to include costs related to additional
salaries and benefits, investor
31
<PAGE> 34
reporting and communications, annual costs of computer hardware and
telecommunications systems, annual computer software licenses and maintenance,
separate insurance and other costs.
The net income generated by the Western Division has historically been
included in SFR's consolidated Federal and state returns. Although SFR's Federal
and state income tax liability has typically been substantially lower than the
Western Division's liability would have been had it not been included in SFR's
consolidated returns, the amounts reflected in the Company's Financial
Statements have been prepared as if the Western Division had been an independent
taxpayer. Pursuant to the Tax Allocation Agreement, the Company will agree with
SFR that from and after the closing of the Offerings and continuing for so long
as the Company is included in SFR's consolidated group, the Company will pay to
SFR an amount approximating the Federal, state and local tax liability it would
have paid if the Company were not included in SFR's consolidated group. If the
Spin Off is effected or the Company otherwise ceases to be a member of SFR's
affiliated group, the Company will file separate Federal and state tax returns.
During 1995, SFR elected for Federal income tax purposes to capitalize,
rather than expense, the intangible drilling costs attributable to the Western
Division's operations (which aggregated $22 million during 1995), which costs
are deductable ratably over the next 60 months. As a result of that election,
the net taxable income attributable to the operations of the Western Division is
higher than it would have been had such costs been expensed. SFR has advised the
Company that, so long as the Company remains a member of SFR's affiliated group,
SFR intends to continue to elect to capitalize intangible drilling costs
attributable to the Company's operations. That election will result in higher
net taxable income generated by the Company's operations and, therefore, a
larger payment to SFR under the Tax Allocation Agreement than would have been
generated and paid had such costs been expensed, although the Company's net
taxable income and payments for future periods will be reduced by a similar
amount to the extent that capitalized costs are deducted during such periods.
After the Company ceases to be a member of SFR's affiliated group, the Company
intends to elect to expense similar costs thereafter incurred.
In addition to the Services Agreement and Tax Allocation Agreement, at or
prior to the closing of the Offerings, the Company will enter into the
Registration Rights Agreement (pursuant to which SFR will have the right to
require that its shares of Common Stock be registered for sale), the
Contribution Agreement (pursuant to which the assets of the Western Division
will be contributed to the Company) and the Spin Off Tax Indemnity Agreement
(pursuant to which the Company will agree to indemnify SFR for costs incurred in
the event that actions taken by the Company result in the Spin Off being
taxable). Although the Company has no intention to take any actions that would
result in an indemnity payment becoming due under the Spin Off Tax Indemnity
Agreement, as described under "Risk Factors -- Intended Spin Off by SFR", the
Company believes that if it is required to make a payment pursuant to such
Agreement, the amount of such payment would have a material adverse effect on
the Company's financial condition. For a description of such contractual
arrangements see "Relationship Between the Company and SFR".
32
<PAGE> 35
BUSINESS
GENERAL
The Company is an independent oil and gas company engaged in the
production, development and acquisition of oil and natural gas in the State of
California. As of September 1, 1996 the Company had net proved reserves of
approximately 214 MMBOE with a pre-tax net present value, discounted at 10%, of
approximately $750 million, according to estimates prepared by Ryder Scott. In
1995, (pro forma for the Offerings and related transactions) the Company's
operations generated total revenues of approximately $211 million and net income
of approximately $36 million. During the eight months ended August 31, 1996, the
Company's average production was approximately 46 MBOE per day, resulting in a
reserve-to-production ratio of 12.7 years.
The Company was formed in August 1996 to own the properties and conduct the
business of the Western Division of SFR following a determination by SFR's board
of directors to separate SFR's operations into two independent companies. The
SFR board made this determination because SFR's oil and gas operations have
developed, over time, into separate businesses that operate independently and
have diverging capital requirements and risk profiles. In addition, the board
believes that separating SFR's operations into two independent companies will
allow each to more efficiently develop its distinct resource base and pursue
separate business opportunities while providing each with improved access to
capital markets. While the Company will focus its efforts on exploitation
opportunities on its California properties, SFR has advised the Company that SFR
intends to focus on developing and exploiting its existing properties outside of
California and pursuing acquisition and exploration opportunities in other areas
of the United States and abroad. The Offerings and the other transactions to be
effected at or prior to the closing of the Offerings are the initial phase of
the separation of these two businesses. Immediately after the Offerings are
consummated, SFR will own approximately 85% of the outstanding Common Stock. The
second phase of the separation would involve the distribution by SFR to its
common stockholders of the shares of Common Stock owned by SFR following the
Offerings. See "-- Transactions at Closing" and "-- Relationship Between the
Company and SFR -- Intended Spin Off by SFR".
The Company owns and operates properties in four major oil producing fields
located in the San Joaquin Valley of California: Midway-Sunset, Kern River,
South Belridge and Coalinga. These fields are among the most prolific oil fields
in the United States, particularly the Midway-Sunset, Kern River, and South
Belridge fields which are the three largest producing oil fields in the lower 48
states. The Midway-Sunset field accounted for approximately 78% of the Company's
total proved reserves at September 1, 1996 and 74% of its average daily
production for the first eight months of 1996. As of September 1, 1996, an
additional 18% of the Company's total proved reserves and 21% of its average
daily production were attributable to the Kern River, South Belridge and
Coalinga fields. The Company initiated production from the San Joaquin Valley
fields in 1905 and nearly all of the reserves in these fields are characterized
by low gravity and high viscosity or "heavy" oil, the production of which
depends primarily on thermally enhanced recovery techniques. The Company holds
an interest in approximately 16,000 gross acres in these fields with an average
working interest in these properties of approximately 99%.
33
<PAGE> 36
The Company seeks to accelerate its growth in both production and reserves
through an active development program which concentrates on the use of heat
(typically in the form of steam) to reduce the viscosity and increase the
producibility of its reserve base. During the five years ended December 31,
1995, the Company spent a total of $176 million (an average of $35 million per
year) on development activities on its properties. Cumulative production from
the Company's properties during the same five year period exceeded 78 MMBOE
while additions to proved reserves exceeded 97 MMBOE (yielding 19 MMBOE net
additions after production). The table set forth below demonstrates the growth
in the Company's proved reserve base, as estimated by Ryder Scott:
<TABLE>
<CAPTION>
PROVED RESERVES
---------------------------------------------------------
DECEMBER 31,
---------------------------------------- SEPTEMBER 1,
1991 1992 1993(1) 1994 1995 1996
---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Crude oil (MMBbls)................ 183 190 184 191 200 212
Natural gas (BCF)................. 22 19 12 13 12 12
Total (MMBOE)........... 187 193 186 193 202 214
</TABLE>
- ---------------
(1) The reduction in proved reserves in 1993 primarily reflects the sale of the
Western Division's interests in certain properties containing estimated
proved reserves of approximately 5.7 MMBOE.
Based on reservoir engineering studies prepared by Ryder Scott, the Company
believes that it can continue to make significant additions to proved reserves
on its properties through additional EOR and development projects, and the
Company has developed a large inventory of such projects from which it expects
to make such additions. The Company anticipates spending approximately $51
million during 1996 (of which $34 million has been expended through August 31,
1996) and $68 million during 1997 on additional development projects on its
properties. Because the actual amounts expended in the future and the results
therefrom will be influenced by numerous factors, including many beyond the
Company's control, and due to the inherent uncertainty of reservoir engineering
studies, no assurances can be given as to the amounts that will be expended or,
if expended, that the results therefrom will be consistent with the Company's
prior experience or expectations. See "Business -- Development Activities".
STRATEGY
The Company's strategy is to efficiently and consistently increase its
production rates and proved reserves while maximizing total return to
stockholders. The Company intends to achieve its objectives by developing its
existing fields through the deployment of advanced production techniques, by
pursuing reserve acquisition opportunities which are consistent with its
geographic and operational strengths, by maintaining a dividend policy that will
provide a significant current return to stockholders. Key elements of the
Company's strategy include:
ACCELERATED EXPLOITATION PROGRAM. The Company plans to increase its
investment in relatively low-risk development and infill drilling opportunities
in its existing fields in order to maximize production and reserves over the
long-term. During the five years ended December 31, 1995, the Company completed
1,064 well operations (which include development and injection wells, workovers
and recompletions), of which 1,062 were successful. These operations contributed
to proved reserve additions of approximately 97 MMBOE at an average finding cost
of $2.32 per BOE. Reserve additions in 1995 totaled approximately 24 MMBOE, more
than 150% of production in 1995. The Company expects to complete more than 300
well operations in each of 1996 and 1997 with budgeted capital expenditures
during such years of approximately $51 million and $68 million, respectively.
The Company believes that its sizable project inventory will allow it to
continue to increase its production and reserves over the next several years.
INCREASED HORIZONTAL DRILLING. The Company has recently begun to utilize
horizontal drilling techniques, which have increased production and ultimate
reserve recovery on its existing properties. The Company drilled six horizontal
wells in the Midway-Sunset field during the first eight months of 1996 which are
currently producing at rates ranging from 80 to 400 Bbls per day (an average of
180 Bbls per day) per well compared to an average of 20 Bbls per day from the
Company's conventional vertical wells,
34
<PAGE> 37
although there can be no assurance that such rates can be sustained in the
future. The Company expects to complete 45 additional horizontal wells by the
end of 1997 at an expected capital cost of approximately $20 million, although
the actual number of horizontal wells drilled could be increased or decreased
based upon the results realized from the horizontal wells completed. While
horizontal drilling has only recently been employed in the Company's operations,
the Company believes that this technology represents a significant opportunity
for more cost effective development, increased reserves and increased production
and total recovery rates from its properties.
LOW COST PRODUCER. The Company believes that its finding costs and
producing costs are among the lowest for heavy crude producers in the United
States. Due to the reservoir characteristics of the Company's producing
properties and the extensive development activities conducted to date thereon,
such properties are well suited to low cost development and exploitation
drilling. For example, the Company's average finding cost for the three years
ended December 31, 1995 was $1.97 per BOE. In addition, continuing cost control
efforts have contributed to the reduction of its production and operating costs
from $6.52 per BOE in 1991 to $5.45 per BOE for the first six months of 1996.
The Company plans to continue to pursue operational efficiencies, including
facilities upgrades and process consolidations with adjoining producers, to
further reduce both finding and producing costs.
FINANCIAL AND OPERATIONAL FLEXIBILITY. The company believes that the
consummation of the Offerings and the related transactions will give the Company
significantly more operational and financial flexibility, including the ability
to (i) maintain an appropriate capital structure, (ii) focus its available
financial resources on the development of its producing properties in California
and (iii) pursue selective acquisition opportunities as they arise. On a pro
forma basis, after giving effect to the consummation of the Offerings and the
related transactions, the Company had total indebtedness of $205 million as of
June 30, 1996 and a pro forma ratio of EBITDA to interest expense for the first
six months of 1996 of 6.6 to 1.0.
SIGNIFICANT DIVIDEND PAYOUT. Following the Offerings, the Company intends
to maintain a dividend policy that will provide a significant return to
stockholders. The Company currently intends to pay dividends at a rate of $0.60
per share per annum to the holders of Common Stock (representing a yield
of % assuming an initial public offering price of $ per share).
However, the actual amount of future dividends declared and paid, if any, will
depend upon the declaration of same by the Company's board of directors and upon
the Company's financial condition, earnings and funds from operations, the level
of its capital and exploration expenditures, dividend restrictions contained in
its financing agreements, its future business prospects and such other matters
as the directors of the Company may deem relevant.
APPLICATION OF ADVANCED TECHNOLOGIES. The Company will continue to utilize
its growing technology base, including increasing use of 3-D seismic surveys,
water floods, thermal EOR techniques, new fracturing techniques and reservoir
modeling. The Company believes that 3-D seismic techniques may identify
significant additional reserves and is currently negotiating a joint venture
with Chevron U.S.A., Inc. to conduct a 3-D seismic survey of certain properties
in the Midway-Sunset field. The Company has extensive experience with EOR
techniques and has conducted steamflood operations on its properties since the
1960s. The Company has improved its thermal EOR techniques over time and is
currently focusing on efficient reservoir heat management techniques which are
intended to optimize recoveries and minimize fuel costs. The Company believes
that its expertise in utilizing these techniques will allow it to identify and
recover additional reserves in its existing properties.
EXPLOITATION OF FAVORABLE MARKET CONDITIONS. Market conditions for
producers of California heavy crude have improved significantly in recent years.
Based upon statistics developed by the California Energy Commission and the U.S.
Census Bureau, California consumes more energy than any other state in the
United States and its energy consumption is expected to grow through at least
the year 2000 as its population expands. While California's energy consumption
continues to increase, California's aggregate crude oil supplies have decreased
primarily as the result of three factors: (i) declining California crude
production; (ii) reduced oil supplies to California from the Alaskan North Slope
(which provided 40% of
35
<PAGE> 38
the crude oil consumed by refiners in California during 1995) resulting from a
decline in production and the initiation of sales to foreign markets; and (iii)
the availability of new transportation systems which enable San Joaquin
producers to sell crude oil outside California. The Company believes that
California's growing energy demand and declining crude oil supply, together with
other market factors, have contributed to the increase in average posted prices
for the Midway-Sunset field (for heavy crude) from $12.08 per Bbl in 1991 to
$15.16 per Bbl for the first eight months of 1996. In addition, the spread
between the West Texas Intermediate ("WTI") posted price (for light crudes) and
the Midway-Sunset field posted price (for heavy crude) has declined from $8.12
per Bbl in 1991 to $4.13 per Bbl for the first eight months of 1996. For the
20-month period ended August 31, 1996, this spread averaged $3.64 per Bbl. There
can be no assurances, however, with respect to future Midway-Sunset field posted
prices for crude oil or the future spread between WTI and Midway-Sunset posted
prices.
REGIONAL EXPERTISE. The Company is one of the largest independent oil and
gas producers in California and intends to continue to focus on this region in
order to capitalize on its geologic, engineering and production expertise
developed through continuous operations in the area since 1905. The Company
believes that such expertise gives it the ability to efficiently develop
additions to proved reserves in the Company's existing portfolio of properties
as well as to identify potential acquisitions.
DEVELOPMENT ACTIVITIES
The Company is engaged in development activities primarily through the
application of thermal EOR techniques on its heavy oil properties in the San
Joaquin Valley. Thermal EOR operations involve the injection of steam into a
reservoir to raise the temperature and reduce the viscosity of heavy oil,
facilitating the flow of the oil into producing wellbores. The Company has
conducted thermal EOR projects in the San Joaquin Valley since the mid-1960s and
employs two principal techniques: cyclic steam stimulation, which involves the
injection of steam through a wellbore for a period of days or weeks after which
the same wellbore is used to produce oil, typically for a period of weeks or
months; and steam flooding, a process by which steam is injected into the center
of a well pattern and oil is produced from surrounding producing wells. The
Company has also employed a third technique, referred to as insitu combustion,
in which air is injected into a dedicated wellbore, a combustion zone is
established within a reservoir to heat the oil and reduce its viscosity and oil
is produced from surrounding wellbores. In addition to these thermal techniques,
the Company has extensive experience in the use of waterfloods, which involves
the injection of water into a reservoir to drive hydrocarbons into producing
wellbores.
In addition to the thermal and waterflood development techniques described
above, the Company has recently begun to utilize horizontal drilling and 3-D
seismic surveys. The Company has drilled six horizontal wells in the
Midway-Sunset field during the first eight months of 1996, which are producing
at rates ranging from 80 to 400 Bbls per day (an average of 180 Bbls per day)
per well, compared to an average of 20 Bbls per day from the Company's vertical
wells, although there can be no assurance that such rates can be sustained in
the future. The Company plans to drill 45 additional horizontal wells by the end
of 1997 at an expected cost of approximately $20 million, although the actual
number of horizontal wells drilled could be increased or decreased based on the
results realized from the horizontal wells completed. While horizontal wells are
more expensive to drill than vertical wells, the Company believes that its
experience to date demonstrates both that horizontal wells are capable of
producing in excess of the 20 Bbl per day levels typical of vertical wells in
the area and that horizontal wells will enable the Company to find and produce
reserves which would not have been recovered using conventional vertical well
techniques. Accordingly, the Company believes that horizontal drilling
represents an opportunity to significantly reduce the cost and improve the
efficiency of its development efforts. In addition to undertaking its horizontal
drilling program, the Company is currently negotiating a joint venture with
Chevron USA, Inc. to develop a 3-D seismic survey of certain properties in the
Midway-Sunset field. The Company believes that 3-D seismic techniques may
identify significant additional reserves.
36
<PAGE> 39
SIGNIFICANT PRODUCING PROPERTIES
The following table sets forth information with respect to the most
significant producing properties of the Company at and for the eight months
ended September 1, 1996, which are described in more detail following such
table. Each of the Midway-Sunset, Kern River, South Belridge and Coalinga fields
is commonly referred to as a "giant" field because of the presence of ultimate
producible reserves in excess of 100 MMBOE.
<TABLE>
<CAPTION>
NET PROVED
PRODUCTION(1) RESERVES(2)
-------------------------------------------- ---------------------------------------
OIL GAS TOTAL PERCENTAGE OIL GAS TOTAL PERCENTAGE
FIELD OR OPERATIONS AREA (MBBLS/D) (MMCF/D) (MBOE/D) OF TOTAL (MMBBLS) (BCF) (MMBOE) OF TOTAL
- ------------------------------------------ -------- -------- ---------- -------- ----- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Midway-Sunset.................... 34 2 34 74 166 8 167 78
Kern River....................... 5 -- 5 10 19 -- 19 9
South Belridge................... 3 1 3 6 14 4 15 7
Coalinga......................... 2 -- 2 5 4 -- 4 2
Other (primarily LA Basin)....... 2 -- 2 5 9 -- 9 4
-- -- -- --
--- --- --- ---
Total producing properties... 46 3 46 100 212 12 214 100
== == == === === == === ===
</TABLE>
- ---------------
(1) Average daily production rates during the first eight months of 1996.
(2) As of September 1, 1996.
MIDWAY-SUNSET. The Company owns and operates a 100% working interest (98%
average net revenue interest) in over 13,000 gross acres and 2,300 producing
wells in the Midway-Sunset field. The Company is currently the largest producer
in the field and has operated there continuously since 1905. With field-wide
production rates of approximately 166 MBbls per day, the Midway-Sunset field is
the largest producing oil field in the lower 48 states and has produced in
excess of 2 billion barrels of oil. Substantially all of the oil produced from
the Midway-Sunset field is heavy crude oil located in the Pleistocene and
Miocene reservoirs at depths of less than 2,000 feet. Producing formations
include (in order of increasing depth) the Tulare and Etchegoin formations as
well as the Potter, Spellacy and Diatomite horizons of the Monterey formation.
During the first eight months of 1996, the Midway-Sunset field accounted for
approximately 74% of the Company's crude production. As of September 1, 1996,
the Company's total proved reserves in the Midway-Sunset field were
approximately 167 MMBOE, or approximately 78% of its total proved reserves.
Despite being in continuous production since 1905, the Company's
Midway-Sunset properties have produced at record levels in the first eight
months of 1996. These production rates are the result of development activities
using cyclic steam injection, steamflood, in situ combustion and horizontal
drilling operations, which have increased net daily production from
approximately 24 MBbls per day in early 1990 to in excess of 34 MBbls per day by
August 1996. The Company has focused most of its development efforts and
technology on the Potter horizon which has demonstrated approximately 8%
compounded annual growth in production rates from 1990 through 1995. Capital
expenditures for development in the Midway-Sunset field have averaged $20
million over the six-year period from 1990 through 1995. Since May 1995, the
Company has drilled seven horizontal wells in the Midway-Sunset field, which are
currently producing at rates ranging from 80 to 400 Bbls per day (an average of
180 Bbls per day) per well. The Company plans to drill 40 additional horizontal
wells in this field by the end of 1997.
Despite record levels of production, the Company believes, based on
reservoir engineering studies prepared by Ryder Scott, that it can continue to
make significant additions to its proved reserves in this field through
additional EOR and development projects. While most of the Company's EOR efforts
in this field have concentrated on the Potter horizon, the Company believes that
these techniques may generate similar production and reserve additions in each
of the Spellacy, Tulare and Diatomite horizons. The Company has identified in
excess of 1,300 well operations that could be undertaken in the field and
anticipates completing 250 of these operations in 1996 and 300 in 1997 at an
estimated capital cost of $35 million and $51 million, respectively.
37
<PAGE> 40
KERN RIVER. The Company owns and operates a 100% working interest (91%
average net revenue interest) in four properties in the Kern River field,
located near Bakersfield, California. The Company acquired its interest in the
Kern River field in 1905. With field-wide production rates of approximately 138
MBbls per day, the Kern River field is the second largest producing oil field in
the lower 48 states and has produced in excess of 1.5 billion barrels of oil.
Most of the oil produced from the Kern River field is heavy crude oil produced
from Plio-Pleistocene reservoirs at depths of less than 1,000 feet. During the
first eight months of 1996, the Kern River field accounted for approximately 10%
of the Company's total crude production. As of September 1, 1996, the Company's
total proved reserves in the Kern River field were approximately 19 MMBOE, or
approximately 9% of its total proved reserves.
The Company's production from the Kern River field has increased from
approximately 2 MBbls per day in 1990 to approximately 5 MBbls per day in the
first eight months of 1996. Capital expenditures over the same period of time
have increased from $2 million in 1991 to a projected $5 million in 1996.
As with the Midway-Sunset field, management believes, based on engineering
studies prepared by Ryder Scott, that the Company can continue to make
significant additions to its proved reserves in the Kern River field through
additional thermal development projects. The Company has identified 128 well
operations (including two horizontal wells) that could be undertaken in the
field and anticipates completing 49 of these operations in 1996, and 20 in 1997,
at an estimated capital cost of $5 million and $2 million, respectively.
SOUTH BELRIDGE. The Company has a 46% average working interest (40% average
net revenue interest) in its properties in the South Belridge field, which is
located 15 miles north of the Midway-Sunset field. The Company acquired
interests in the South Belridge field in 1987 and expanded its holdings in 1991.
With production of approximately 110 MBbls per day, the South Belridge field is
the third highest producing oil field in the lower 48 states and has produced in
excess of one billion barrels of oil. The oil in the South Belridge field is
heavy and intermediate crude that is produced from Tulare, Etchegoin and
Diatomite formations equivalent to those found in the Midway-Sunset field,
generally at depths of less than 2,000 feet. During the first eight months of
1996, the South Belridge field accounted for approximately 6% of the Company's
total crude production. As of September 1, 1996, the Company's total proved
reserves in the South Belridge field were approximately 15 MMBOE, or
approximately 7% of its total proved reserves.
The Company has identified 83 additional drilling and remediation projects
(including one horizontal well) in the South Belridge field and anticipates
completing 40 of the projects by the end of 1997 at an estimated cost of
approximately $3 million.
COALINGA. The Company has a 100% average working interest (84% average net
revenue interest) in its properties in the Coalinga field which is located 55
miles southwest of Fresno, California. Total field-wide production from Coalinga
has exceeded 800 million barrels with total current production of approximately
26 MBbls per day. During the first eight months of 1996, the Coalinga field
accounted for approximately 5% of the Company's crude production. As of
September 1, 1996, the Company's total proved reserves in the Coalinga field
were approximately 4 MMBOE, or approximately 2% of its total proved reserves.
The Company acquired its interest in the Coalinga field in 1977. The
Company has identified 104 additional drilling and remediation projects
(including two horizontal wells) in the Coalinga field and anticipates
completing 48 of the projects by the end of 1997 at an estimated cost of
approximately $4 million.
LA BASIN. The Company has an average 30% working interest (24% average net
revenue interest) in four producing properties in Los Angeles and Orange
Counties in California (the "LA Basin"). During the first eight months of 1996,
the Company's LA Basin properties accounted for approximately 4% of the
Company's total crude production. As of September 1, 1996, the Company's total
proved reserves in the LA Basin were approximately 8 MMBOE, or approximately 4%
of its total proved reserves. The Company's LA Basin properties include a 69%
working interest (51% net revenue interest) in the Santa
38
<PAGE> 41
Fe Springs field which was acquired in May 1996. As of September 1, 1996,
production from this interest was 2,100 Bbls per day (1,100 Bbls per day net).
RESERVES
The following table sets forth information regarding changes in Ryder
Scott's estimates of proved net reserves from January 1, 1992 to September 1,
1996.
<TABLE>
<CAPTION>
NET
PURCHASES CHANGES IN
BALANCE AT REVISIONS (SALES) OF OWNERSHIP BALANCE
BEGINNING OF PREVIOUS IMPROVED MINERALS IN AT END
OF PERIOD ESTIMATES RECOVERY IN PLACE PARTNERSHIP PRODUCTION OF PERIOD
---------- ----------- -------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Proved reserves, for year
ended:
December 31, 1992
Oil and condensate
(MMBbls)................ 183 9 13 -- -- (15) 190
Natural gas (Bcf)......... 22 (1) -- -- -- (3) 19
Oil equivalent (MMBOE).... 187 9 13 -- -- (16) 193
December 31, 1993
Oil and condensate
(MMBbls)................ 190 (14) 27 (4) 1 (16) 184
Natural gas (Bcf)......... 19 -- -- (5) -- (2) 12
Oil equivalent (MMBOE).... 193 (14) 27 (5) 1 (16) 186
December 31, 1994
Oil and condensate
(MMBbls)................ 184 10 12 -- -- (15) 191
Natural gas (Bcf)......... 12 2 -- -- -- (1) 13
Oil equivalent (MMBOE).... 186 10 12 -- -- (15) 193
December 31, 1995
Oil and condensate
(MMBbls)................ 191 10 14 -- -- (15) 200
Natural gas (Bcf)......... 13 1 -- -- -- (2) 12
Oil equivalent (MMBOE).... 193 10 14 -- -- (15) 202
September 1, 1996(1)
Oil and condensate
(MMBbls)................ 200 8 13 2 -- (11) 212
Natural gas (Bcf)......... 12 1 -- -- -- (1) 12
Oil equivalent (MMBOE).... 202 8 13 2 -- (11) 214
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
------------------------------------ 1,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Proved developed reserves (MMBOE)................. 149 157 142 142 159 169
</TABLE>
- ---------------
(1) For the eight-month period beginning January 1, 1996.
Historically, the Company has utilized active development and exploration
programs as well as selected acquisitions to replace its reserves depleted by
production. The Company has increased its proved reserves (net of production and
sales) by approximately 6% over the five years ended December 31, 1995.
Substantially all of such increases are attributable to proved reserve additions
from the Company's producing oil properties in the San Joaquin Valley of
California and acquisitions of oil and gas reserves.
Ryder Scott, a firm of independent petroleum engineers, prepared the above
estimates of the Company's total proved reserves as of December 31, 1992 through
1995 and as of September 1, 1996.
39
<PAGE> 42
As of September 1, 1996, approximately 21% of the Company's total proved
reserves was classified as proved undeveloped reserves.
The standardized measure of discounted future net cash flows (after income
taxes) relating to proved reserves for the Company as of December 31, 1995 was
$426 million ($654 million before income taxes). The discounted future net cash
flows (before income taxes) relating to proved reserves for the Company as of
September 1, 1996 was $750 million.
In accordance with the Commission's guidelines, Ryder Scott's estimate of
standardized measure of discounted future net cash flows from the Company's
properties has been made using oil and natural gas sales prices in effect as of
the date of such estimate and have been held constant throughout the life of the
properties except where such guidelines permit alternate treatment, including
the use of fixed and determinable contractual price escalations. Prices for
natural gas, natural gas liquids and crude oil are subject to substantial
fluctuations as a result of numerous other factors. The standardized measure of
discounted future net cash flows relating to proved reserves should not be
construed as the current market value of estimated natural gas, natural gas
liquids and crude oil reserves. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data set forth herein represent estimates only. Reserve
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas that cannot be measured in an exact manner, and the
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. See "Risk
Factors -- Uncertainties in Estimates of Proved Reserves".
During 1995 the Company filed Energy Information Administration Form 23
which reported natural gas and oil reserves for the year 1994. The reserve
estimates reported on Form 23 are not comparable with the reserve estimates
reported herein because Form 23 required that reserves be reported on a gross
operated basis rather than on a net interest basis. On an equivalent barrel
basis, the reserve estimates for the year 1994 contained in such report and
those reported herein for the year 1994 do not differ by more than five percent.
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table shows the Company's total oil and gas development,
exploration and acquisition expenditures since the beginning of 1991 through
December 31, 1995 and budgeted development and exploration expenditures for
1996. Actual exploration and development expenditures in 1996 may vary
materially from the budgeted amounts set out below because such expenditures are
based upon factors beyond the Company's control, such as the success or failure
of drilling activities and industry and market conditions.
<TABLE>
<CAPTION>
BUDGETED
HISTORICAL YEAR ENDED DECEMBER 31, YEAR ENDING
-------------------------------------------- DECEMBER 31,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Development costs(1)........... $54 $17 $38 $23 $48 $ 46
Exploration costs.............. 3 3 2 1 3 2
Acquisition costs:
Unproved leasehold........... -- -- -- -- -- --
Proved properties............ 29 -- 4 -- 1 3
--- --- --- --- --- ---
Total costs.......... $86 $20 $44 $24 $52 $ 51
=== === === === === ===
</TABLE>
- ---------------
(1) Development expenditures include costs of EOR projects, infill drilling and
primary development drilling of offset wells.
40
<PAGE> 43
The foregoing table reflects all acquisition, exploration and development
expenditures (including capitalized interest and allocated exploratory support
costs), whether capitalized or charged to expense. Capitalized interest for the
years ended December 31, 1991, 1992, 1993, 1994 and 1995 was $0.3 million, $0.1
million, $0.3 million, $0.6 million and $0.7 million, respectively. Through June
30, 1996, the Company has spent $27 million on all such expenditures.
Capitalized interest for the same period is estimated to be $0.4 million.
ACQUISITION ACTIVITIES
The Company continually evaluates acquisitions of producing and
non-producing oil and gas properties that would add to its reserve base and
present additional development opportunities at attractive prices. From 1994
through mid-1996, the Company spent approximately $4 million in 3 transactions
to purchase an estimated 4.4 MMBOE of proved oil and gas reserves in California.
Although the Company may pursue opportunities in other areas, the Company plans
to focus primarily on areas contiguous with, or in close proximity to, its
existing operations. Future acquisitions will depend upon, among other things,
the availability of opportunities to purchase reserves that would complement the
Company's existing properties and that would meet or exceed the Company's
economic criteria with respect to, among other things, cost of reserve
additions, the availability of funding on acceptable terms and other projects to
which the Company may be committed that would compete with the personal or
capital resources required to be dedicated to a particular acquisition
opportunity.
DRILLING ACTIVITIES
The table below sets forth, for the periods indicated, the number of wells
drilled in which the Company had an economic interest. As of June 30, 1996, the
Company was in the process of drilling or completing 1 gross (1 net) development
well.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------- SIX MONTHS
ENDED
1993 1994 1995 JUNE 30, 1996
------------- ------------- ------------- -------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Development wells:
Completed............. 170 152 78 70 222 207 165 160
Dry holes............. 1 1 1 1 -- -- 2 2
-- --
--- --- --- --- --- ---
Total......... 171 153 79 71 222 207 167 162
Exploration wells:
Completed............. -- -- -- -- -- -- -- --
Dry holes............. -- -- -- -- 3 3 1 --
-- --
--- --- --- --- --- ---
Total......... 171 153 79 71 225 210 168 162
=== === == == === === === ===
</TABLE>
The number of wells drilled may not be a valid measure or indicator of the
relative success or value of a drilling program because the significance of the
reserves and their economic potential may vary widely for each property and
well.
PRODUCING WELLS
The following table sets forth the Company's ownership in producing wells
at June 30, 1996:
<TABLE>
<CAPTION>
TOTAL PRODUCING
WELLS
-----------------
GROSS NET
----- -----
<S> <C> <C>
Oil............................................................... 5,744 5,151
Natural gas....................................................... 2 --
----- -----
Total................................................... 5,746 5,151
===== =====
</TABLE>
41
<PAGE> 44
PRODUCTION AND PRICES
The following table sets forth certain information regarding the Company's
volumes of production and sales prices during the years 1993, 1994 and 1995 and
the six months ended June 30, 1995 and June 30, 1996:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Average daily production:
Crude oil and liquids production (MBbls/d)........ 43 41 42 41 45
Natural gas production (MMcf/d)................... 6 4 5 6 4
Total production (MBOE)........................... 44 42 43 42 46
Crude oil and liquids average sales price ($/Bbl)
Unhedged....................................... 11.63 11.53 13.50 13.76 15.45
Hedged......................................... 11.63 11.53 13.50 13.77 15.15
Natural gas average sales price ($/Mcf)............. 1.59 1.14 0.98 1.17 1.05
</TABLE>
For the eight-month period ended August 31, 1996, see the table and accompanying
discussion included under "--Significant Producing Properties" above.
ACREAGE
The following table summarizes the Company's developed and undeveloped fee
and leasehold acreage at June 30, 1996. Excluded from such information is
acreage in which the Company's interest is limited to royalty, overriding
royalty and other similar interests.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
---------------- -------------- ----------------
FIELD GROSS NET GROSS NET GROSS NET
-------------------------------- ------ ------ ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Midway-Sunset................... 12,795 12,787 320 320 13,115 13,107
Kern River...................... 595 595 -- -- 595 595
South Belridge.................. 919 710 -- -- 919 710
Coalinga........................ 1,474 1,474 -- -- 1,474 1,474
LA Basin........................ 1,342 1,342 234 234 1,576 1,576
Other........................... 19,816 4,610 6,053 6,053 25,869 10,663
------ ------ ----- ----- ------ ------
Total................. 36,941 21,518 6,607 6,607 43,548 28,125
====== ====== ===== ===== ====== ======
</TABLE>
CURRENT MARKETS FOR OIL AND GAS
The Company's profitability is determined in large part by the difference
between the prices received for the oil and natural gas that it produces and the
costs of finding, developing and producing such reserves. Prices for oil and
natural gas have been subject to wide fluctuations, which continue to reflect
imbalances in supply and demand as well as other market conditions and the world
political situation as it affects OPEC, the Middle East, the former Soviet Union
and other producing countries. Moreover, the price of oil and natural gas may be
affected by the price and availability of alternative sources of energy, weather
conditions and the general state of the economy. Even relatively modest changes
in oil and natural gas prices may significantly change the Company's revenues,
results of operations, cash flows and proved reserves. Based on operating
results for the first half of 1996, the Company estimates that on an annualized
basis a $1.00 per barrel increase (or decrease) in its average crude oil sales
price would result in a $16 million increase (or decrease) in income from
operations, a $10 million increase (or decrease) in net income and a $10 million
increase (or decrease) in cash flow from operating activities. Because the
Company is a relatively small producer of natural gas, it consumes more gas in
its EOR operations than it produces. As a result, an increase in natural gas
prices adversely affects the Company's results of operations. Based on operating
results for the first half of 1996, the Company
42
<PAGE> 45
estimates that on an annualized basis a $0.10 per Mcf increase (or decrease) in
the average domestic natural gas sales price would result in a $2 million
decrease (or increase) in income from operations, a $1 million decrease (or
increase) in net income and a $1 million decrease (or increase) in cash flow
from operating activities. The foregoing estimates do not give effect to changes
in any other factors, such as the effect of the Company's hedging program or
depreciation and depletion, that would result from a change in oil and natural
gas prices. See "Risk Factors -- Effects of Changing Oil and Gas Prices".
The market for heavy crude oil produced in California differs substantially
from the remainder of the domestic crude oil market, due principally to the
transportation and refining requirements associated with heavy crude. Although
the prices realized for heavy crude oil are generally lower than those realized
from the sale of light crude oil, several economic trends have favorably
affected the market for the Company's production in recent years. See
"--Strategy". In addition to the current favorable economic trends in California
heavy crude prices, the Company has facilities in place that it believes will
allow it to adapt to changes in pricing trends to a greater extent than many of
its competitors. For example, the Company owns and operates a large gathering,
blending and transportation system on its properties in the San Joaquin Valley.
At this terminal up to 30 MBbls of heavy oil per day can be mixed or blended
with lighter grades, a capability which enables the Company to upgrade the
majority of its heavy oil into a lighter crude which can be sold at a higher
price. The terminal also directly connects the Company's production with five
major pipelines serving refineries throughout California and gives the Company
the ability to meet the product specifications of multiple pipelines and inter-
and intra-state markets.
From time to time the Company has hedged a portion of its oil and natural
gas production to manage its exposure to volatility in prices of oil and natural
gas. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General" for a discussion of the Company's hedging
activities.
CUSTOMERS
For the first six months of 1996, affiliates of Shell Oil Company and
Celeron Corporation accounted for approximately 43% and 30%, respectively, of
the Company's crude oil and liquids sales (which with respect to certain
properties includes royalty and working interest owners' share of production).
No other individual customer accounted for more than 10% of the Company's crude
oil and liquids revenues during 1995. Substantially all of the Company's oil
production is currently sold at market prices that approximate spot prices.
Availability of a ready market for the Company's oil production depends on
numerous factors, including the level of consumer demand, the level of worldwide
oil production, the cost and availability of alternative fuels, the availability
of refining capacity, the cost of and proximity of pipelines and other
transportation facilities, regulation by state and federal authorities and the
cost of complying with applicable environmental regulations.
OTHER BUSINESS MATTERS
COMPETITION
The Company faces competition in all aspects of its business, including,
but not limited to, acquiring reserves, leases, licenses and concessions;
obtaining goods, services and labor needed to conduct its operations and manage
the Company; and marketing its oil and gas. The Company's competitors include
multinational energy companies, other independent producers, oil and gas
syndication programs and individual producers and operators. Many competitors
have greater financial and other resources than the Company, more favorable
exploration prospects and ready access to more favorable markets for their
production. The Company believes that the well-defined nature of the reservoirs
in its long-lived oil fields, its expertise in EOR methods, its extensive fee
and leasehold acreage position, its regional focus, its active development
position and its experienced management may give it a competitive advantage over
some other producers, and management believes that the Company effectively
competes in its markets. Availability of a ready market for the Company's oil
and gas production depends on numerous factors, including the level of consumer
demand, the extent of worldwide oil production, the cost and availability
43
<PAGE> 46
of alternative fuels, the cost of and proximity of pipelines and other
transportation facilities, regulation by state and federal authorities and the
cost of complying with applicable environmental regulations.
REGULATION OF CRUDE OIL AND NATURAL GAS PRODUCTION
The petroleum industry is subject to various types of regulation, including
regulation by state and Federal agencies. State and federal legislation
affecting the oil and gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Also, numerous
departments and agencies, both Federal and state, are authorized by statute to
issue and have issued rules and regulations binding on the oil and gas industry
and its individual members, compliance with which is often difficult and costly
and which may carry substantial penalties for non-compliance. State statutes and
regulations require permits for drilling operations, drilling bonds and reports
concerning operations. The states in which the Company operates also have
statutes and regulations governing conservation matters, including the
unitization or pooling of oil and gas properties and rates of production from
oil and gas wells. The Company does not appear to be affected by these burdens
to any greater or lesser extent than other companies in the industry with
similar types and amounts of production. Set forth below is a general
description of certain Federal and state regulations which have an effect on the
Company's operations.
A portion of the Company's oil and gas leases are granted by the federal
government and administered by the Bureau of Land Management ("BLM") and the
Minerals Management Service ("MMS"), both of which are Federal agencies. Such
leases are issued through competitive bidding, contain relatively standardized
terms and require compliance with detailed BLM and MMS regulations and orders
(which are subject to change by the BLM and the MMS).
Federal legislation and regulatory controls in the United States have
historically affected the price of the natural gas produced and consumed by the
Company. The transportation and sale for resale of natural gas in interstate
commerce are regulated pursuant to the Natural Gas Act of 1938 (the "NGA") the
Natural Gas Policy Act of 1978 (the "NGPA") and the Federal Energy Regulatory
Commission (the "FERC"). Although maximum selling prices of natural gas were
formerly regulated, on July 26, 1989, the Natural Gas Wellhead Decontrol Act of
1989 ("Decontrol Act") was enacted, which terminated wellhead price controls on
all domestic natural gas on January 1, 1993, amended the NGPA to remove
completely by January 1, 1993 price and nonprice controls for all "first sales"
of natural gas, which will include all sales by the Company of its own
production; consequently, sales of the Company's natural gas currently may be
made at market prices, subject to applicable contract provisions. The FERC's
jurisdiction over natural gas transportation was unaffected by the Decontrol
Act.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the price of natural gas consumed by the
Company, as well as the revenues received by the Company for sales of natural
gas it produces. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to gas buyers and sellers
on an open and nondiscriminatory basis. The FERC's efforts have significantly
altered the marketing and pricing of natural gas. Commencing in April 1992, the
FERC issued Order Nos. 636, 636-A and 636-B (collectively, "Order No. 636"),
which, among other things, require interstate pipelines to "restructure" to
provide transportation separate or "unbundled" from the pipelines' sales of gas.
Although Order No. 636 does not regulate natural gas producers such as the
Company, the FERC has stated that Order No. 636 is intended to foster increased
competition within all phases of the natural gas industry. It is unclear what
impact, if any, increased competition within the natural gas industry under
Order No. 636 will have on the Company.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any such
proposals might become effective, or their effect, if any, on the Company's
financial condition or results of operations. The natural gas industry
historically has been very heavily
44
<PAGE> 47
regulated; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.
The Mineral Leasing Act of 1920 (the "Mineral Act") prohibits direct or
indirect ownership of any interest in Federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges" to
citizens of the United States. Such restrictions on citizens of a
"non-reciprocal" country applies ownership of controlling stock in a corporation
that holds a Federal onshore oil and gas lease. If this restriction is violated,
the corporation's lease can be canceled in a proceeding instituted by the United
States Attorney General. Although the regulations of the BLM (which administers
the Mineral Act) provide for agency designations of non-reciprocal countries,
there are presently no such designations in effect. The Company owns interests
in numerous Federal onshore oil and gas leases, and a portion of the Common
Stock will be offered to citizens of foreign countries, which at some time in
the future might be determined to be nonreciprocal under the Mineral Act.
Sales of crude oil, condensate and gas liquids by the Company are not
regulated and are made at market prices. The price the Company receives from the
sale of these products is affected by the cost of transporting the products to
market. Effective as of January 1, 1995, the FERC implemented regulations
establishing an indexing system for transportation rates for oil pipelines,
which would generally index such rates to inflation, subject to certain
conditions and limitations. These regulations could increase the cost of
transporting crude oil, liquids and condensate by pipeline. These regulations
are subject to pending petitions for judicial review. The Company is not able to
predict what effect, if any, these regulations will have on its business, but
other factors being equal, the Company believes that such regulations are likely
to increase transportation costs, effectively reducing wellhead prices for such
commodities.
The Company's gathering operations are subject to safety and operational
regulations relating to the design, installation, testing, construction,
operation, replacement and management of such facilities. The Company believes
that its operations, to the extent they may be subject to current pipeline
safety requirements, comply in all material respects with such requirements. The
Company cannot predict what effect, if any, the adoption of additional pipeline
safety legislation might have on its operations, but the Company could be
required to incur additional capital expenditures and increased costs as a
result of such future legislative and regulatory changes.
ENVIRONMENTAL REGULATION
GENERAL. The Company's operations are subject to Federal, state and local
laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. Environmental laws and
regulations carry substantial penalties for failure to comply. These laws and
regulations may require the acquisition of a permit before drilling commences,
restrict the types, quantities and concentration of various substances that can
be released into the environment in connection with drilling and production
activities, limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas, and impose substantial
liabilities for pollution resulting from the Company's operations. State laws
often require some form of remedial action to prevent pollution from former
operations, such as pit closure and plugging abandoned wells. In addition, these
laws and regulations may restrict the rate of oil and natural gas production
below the rate that would otherwise exist.
These laws and regulations increase the Company's cost of doing business
and consequently affect its profitability. The Company anticipates that it will
expend significant resources, both financial and managerial, to comply with
environmental regulations and permitting requirements in order to comply with
stricter industry and regulatory environmental and health and safety standards
such as those described below. The Company estimates that capital expenditures
necessary for foreseeable environmental control facilities are within normal
provisions for maintenance capital expenditures. Although the Company believes
that its operations and facilities are in compliance in all material respects
with applicable
45
<PAGE> 48
environmental regulations, risks of substantial costs and liabilities are
inherent in oil and gas operations and there can be no assurance that
significant cost and liabilities will not be incurred in the future.
Other developments, such as increasingly strict environmental laws and
regulations and enforcement policies thereunder, and claims for damages to
property, employees, other persons and the environment resulting from the
Company's operations, could result in substantial costs and liabilities in the
future. Currently, the Company does not believe that such costs will have a
material adverse effect on its financial condition or results of operations.
SOLID AND HAZARDOUS WASTE. The Company currently owns or leases numerous
properties that have been used for production of oil and gas for many years.
Although the Company has utilized operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other wastes may have been
disposed or released on or under these properties. The Company could be required
to remove or remediate previously disposed wastes and any related contamination
or to perform remedial plugging operations to prevent future contamination.
SUPERFUND. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons that contributed to the release of a "hazardous substance"
into the environment. These persons include the owner or operator of a site and
companies that disposed or arranged for the disposal of the hazardous substance
found at a site. CERCLA also authorizes the Environmental Protection Agency (the
"EPA") and, in some cases, third parties to take actions in response to threats
to the public health or the environment and to seek to recover from the
responsible classes of persons the costs they incur. In the course of its
operations, the Company has generated and will generate wastes that may fall
within CERCLA's definition of "hazardous substances". The Company may be
responsible under CERCLA for all or part of the costs to clean up sites at which
such wastes have been disposed. Certain properties owned or used by the Company
or its predecessors have been investigated under state and Federal Superfund
statutes, and the Company has been and could be named a potentially responsible
party ("PRP") for the cleanup of some of these sites.
The Company's facilities in California are also subject to California
Proposition 65, which was adopted in 1986 to address discharges and releases of,
or exposures to, toxic chemicals in the environment. Proposition 65 makes it
illegal to knowingly discharge a listed chemical if the chemical will pass (or
probably will pass) into any source of drinking water. It also prohibits
companies from knowingly and intentionally exposing any individual to such
chemicals through ingestion, inhalation or other exposure pathways without first
giving a clear and reasonable warning.
The Company has been identified as one of over 250 PRPs at a Superfund site
in Los Angeles County, California (the "OII Site"). The OII Site was operated by
a third party as a waste disposal facility from 1948 until 1983. The EPA is
requiring the PRPs to undertake remediation of the OII Site in several phases,
which include site monitoring and leachate control, gas control and final
remediation. In November 1989 the EPA and a group of PRPs that includes the
Company entered into a consent decree covering the site monitoring and leachate
control phases of remediation. The Company was a member of the group Coalition
Undertaking Remediation Efforts ("CURE") which was responsible for constructing
and operating the leachate treatment plant. This phase is now complete and the
Company's share of costs with respect to this phase was $0.9 million. Another
consent decree provides for the predesign, design and construction of a gas
plant to harness and market methane gas emissions. The Company is a member of
the New CURE group which is responsible for the gas plant construction and
operation and landfill cover. Currently, New CURE is in the design stage of the
gas plant. The Company's share of costs of this phase is expected to be $1.7
million and such costs have been provided for in the Company's financial
statements. The EPA and the PRPs are currently negotiating the final closure
requirements. The Company cannot currently estimate the cost of any subsequent
phases of work or final remediation which may be required by the EPA. Pursuant
to consent decrees settling lawsuits against the municipalities and transporters
involved with the OII site but not named by the EPA as PRPs, such parties are
required to pay approximately $84 million, of which approximately $76 million
will be credited against future
46
<PAGE> 49
remediation expenses. The final phase of the remedy is currently being
negotiated in another consent decree. The Company does not believe that its
share of the cost of implementing the final phase will be material after taking
into consideration the credits from the municipalities and transporters. The
Company has entered into a Joint Defense Agreement with the other PRPs to defend
against a lawsuit filed September 7, 1994 by 95 homeowners alleging, among other
things, nuisance, trespass, strict liability and infliction of emotional
distress. A second lawsuit has been filed by 33 additional homeowners against
the Company and the other PRPs alleging similar damages and wrongful death. The
Company intends to enter into a Joint Defense Agreement with the other PRPs and
is not able to estimate costs or potential liability.
On April 4, 1994 the Company received a request from the EPA for
information pursuant to Section 104(e) of CERCLA and a letter ordering the
Company and seven other PRPs to negotiate with the EPA regarding implementation
of a remedial plan for a site located in Santa Fe Springs, California (the
"Santa Fe Springs Site"). The Company owned the property on which the Santa Fe
Springs Site is located from 1921 to 1932. During that time the property was
leased to another company and in 1932 the property was sold to that company.
During the time the other company leased or owned the property, hazardous wastes
were allegedly disposed at the Santa Fe Springs Site. The EPA estimates that the
total past and future costs for remediation will approximate $8 million. The
Company filed its response to the Section 104(e) order setting forth its
position and defenses based on the fact that the other company was the lessee
and operator of the site during the time the Company was the owner of the
property. However, the Company has also given its Notice of Intent to comply
with the EPA's order to prepare a remediation design plan. Six of the other PRPs
have also notified the EPA of their intent to comply. The cost to prepare the
remediation design plan is estimated to be $1 million. To date there has been no
agreement on how to allocate costs among the PRPs. The Company has provided for
such costs in its financial statements, assuming that the costs will be equally
divided among the PRPs.
In March 1995 the Company and 12 other companies received notice that they
have been identified as PRPs by the California Department of Toxic Substances
Control (the "DTSC") as having generated and/or transported hazardous waste to
the Environmental Protection Corporation ("EPC") Eastside Landfill during its
fourteen-year operation from 1971 to 1985 (the "Eastside Site"). EPC has since
liquidated all assets and placed the proceeds in trust for closure and
post-closure activities. However, these monies will not be sufficient to close
the site. The PRPs have entered into an agreement with the DTSC to characterize
the contamination at the site and prepare a focused remedial investigation and
feasibility study. The DTSC has agreed to implement reasonable measures to bring
new PRPs into the agreement. The DTSC will address subsequent phases of the
cleanup, including remedial design and implementation in a separate order
agreement. The cost of the remedial investigation and feasibility study for the
Eastside Site is estimated to be $1 million, and the Company has provided for
$80,000 in its financial statements as its estimated share of such costs. The
costs of subsequent phases cannot be estimated until the remedial investigation
and feasibility study is completed.
Pursuant to the Contribution Agreement, the Company will agree to indemnify
and hold harmless SFR from and against any costs incurred in the future relating
to environmental liabilities of the Western Division assets (other than the
assets retained by SFR), including any costs or expenses incurred at any of the
OII Site, the Santa Fe Springs Site and the Eastside Site, and any costs or
liabilities that may arise in the future that are attributable to laws, rules or
regulations in respect of any property or interest therein located in California
and formerly owned or operated by the Western Division or its predecessors. SFR
will agree to indemnify the Company from and against any costs relating to
environmental liabilities of any assets or operations of SFR (whether or not
currently owned or operated by SFR) to the extent not attributable to the
Western Division (other than the assets retained by SFR).
AIR EMISSIONS. The operations of the Company are subject to Federal, state
and local regulations for the control of emissions from sources of air
pollution. The Company's properties have been and may in the future be the
subject of administrative enforcement actions for failure to comply with air
regulations or permits. These administrative actions are generally resolved by
payment of a monetary penalty and correction of any identified deficiencies.
Alternatively, regulatory agencies may require the Company to
47
<PAGE> 50
forego construction or operation of certain air emission sources, although the
Company believes that in the latter cases it would have enough permitted or
permitable capacity to continue its operations without a material adverse effect
on any particular producing field.
After acquisition of the South Belridge Field in 1987, the Company's
predecessor entered into discussions with the Kern County Air Pollution Control
District to resolve certain permit compliance issues that had been identified
prior to the acquisition. These county permit issues have been satisfactorily
resolved. During this process, the Company discovered that the steam generators
at the field were being operated in violation of Federal air emission permits.
The Company has negotiated a consent decree with the EPA regarding the Federal
permit violations requiring the payment of a $201,000 civil penalty and use of
continuous emission monitoring systems on each operating steam generator at
South Belridge.
OIL POLLUTION ACT. Under the Oil Pollution Act of 1990 ("OPA"), owners and
operators of onshore facilities and pipelines and lessees or permittees of an
area in which an offshore facility is located ("Responsible Parties") are
strictly liable on a joint and several basis for removal costs and damages that
result from a discharge of oil into United States waters. These damages include,
for example, natural resource damages, real and personal property damages and
economic losses. OPA limits the strict liability of Responsible Parties for
removal costs and damages that result from a discharge of oil to $350 million in
the case of onshore facilities, except that these limits do not apply if the
discharge was caused by gross negligence or wilful misconduct, or by the
violation of an applicable Federal safety, construction or operating regulation
by the Responsible Party, its agent or subcontractor.
OSHA. The Company is subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes. The
OSHA hazard communication standard, the EPA community right-to-know regulations
under Title III of the Federal Superfund Amendment and Reauthorization Act and
similar state statutes require the Company to organize information about
hazardous materials used or produced in its operations. Certain of this
information must be provided to employees, Federal, state and local governmental
authorities and local citizens.
OTHER. Kern County, California is proposing to adopt a comprehensive Kern
Valley Floor Habitat Conservation Plan (the "HCP") for the San Joaquin Valley.
The HCP, if adopted, will obviate the need for consultations with the U.S. Fish
and Wildlife Service under certain provisions of the Endangered Species Act.
Although intended to allow projects on both Federal and private lands to be
completed with a minimum of uncertainty, no assurance can be given that this
plan will not delay or prevent the issuance of permits necessary for expanded
operations or exploration, and such plan could impact the costs of operations in
the area covered by the HCP. The Kern County Planning Department anticipates
adoption of the HCP before December 31, 1996. The Company does not believe that
adoption of the HCP in its current form would have a material adverse effect on
the Company's current or proposed operations in Kern County, California.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, only a cursory title
examination is conducted when leases are acquired, except leases covering proved
reserves. Prior to drilling a well, a more thorough title examination of the
drill site tract is conducted and curative work is performed with respect to
significant title defects, if any, before proceeding with operations. Such
examinations have been performed with respect to substantially all of the
Company's leasehold properties in the process of drilling. The Company believes
that the title to its oil and gas properties is good and defensible in
accordance with standards generally accepted in the oil and gas industry,
subject to such exceptions as, in the opinion of the Company, are not so
material as to detract substantially from the use or value of such properties.
The Company's properties are typically subject, in one degree or another, to one
or more of the following: (i) royalties and other burdens and obligations,
express and implied, under oil and gas leases; (ii) overriding royalties and
other burdens created by the Company or its predecessors in title; (iii) a
variety of contractual obligations (including, in some cases, development
obligations) arising under operating agreements, farmout agreements, production
sales contracts and other agreements that may
48
<PAGE> 51
affect the properties or their titles; (iv) liens that arise in the normal
course of operations, such as those for unpaid taxes, statutory liens securing
unpaid suppliers and contractors and contractual liens under operating
agreements; (v) pooling, unitization and communitization agreements,
declarations and orders; and (vi) easements, restrictions, right-of-way and
other matters that commonly affect property. To the extent that such burdens and
obligations affect the Company's rights to production and production revenues,
they have been taken into account in calculating the Company's net revenue
interests and in estimating the Company's net reserves. The Company believes
that the burdens and obligations affecting its properties are customary in the
industry for properties of the kind owned by the Company and do not, in the
aggregate, materially interfere with the use of the properties or materially
reduce the value of the properties.
Pursuant to the Contribution Agreement, SFR is retaining the Production
Payment (which will be cancelled upon the satisfaction thereof), the surface
rights to approximately 116 acres in Orange County, California (the "Olinda
Property") and SFR's royalty interests that are held by a royalty trust formed
by SFR in 1992. Pursuant to the Contribution Agreement, the Company has agreed
to indemnify SFR from any cost or liability including costs of compliance with
environmental and related laws, that may arise in the future, attributable to
its (i) assets or future operations and (ii) assets in California formerly owned
or operated by the Western Division or its predecessor (whether or not so owned
or operated) on the date of the closing of the Offerings.
EMPLOYEES
It is anticipated that the Company will have approximately 342 employees at
or soon after the closing of the Offerings, 192 of whom are covered by a
collective bargaining agreement that expires on January 31, 1999. The Company
believes that its relations with its employees are satisfactory. The Company's
hourly employees are represented by the Oil, Chemical and Atomic Workers Union.
LITIGATION
The Company and other related companies are defendants in several lawsuits
and named parties in certain governmental proceedings arising in the ordinary
course of business. In addition, in 1996 the MMS announced that it would seek to
recover additional royalties for past production from producers on certain
Federal leases. Because the Company's operations include Federal lease sites in
California, the Company may be required to pay such "back royalties" but does
not believe that any amounts so paid would have a material impact on its
financial condition or results of operations. For a description of certain
proceedings in which the Company is involved, see "-- Regulation of Crude Oil
and Natural Gas Production" and "-- Environmental Regulation". While the outcome
of lawsuits or other proceedings against the Company cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the business, financial condition or results of operations of the
Company.
49
<PAGE> 52
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors, executive officers and key employees of the Company
and their ages and positions are listed below. Directors are elected at the
Company's annual meeting of shareholders and serve a term of three years.
Officers are elected annually by the board of directors and serve at its
discretion. Of the Company's seven directors, three are currently executive
officers of SFR (Whaling, Boyt and Payne), four are directors of SFR (Huff,
Morphy, Payne and Vagt), and one is neither an employee nor a director of SFR
(Wasielewski). Upon consummation of the Offerings, none of the Company's
executive officers will be officers of SFR, one of the Company's seven directors
(Payne) will serve as a director and the principal executive officer of SFR and
another of the Company's directors (Boyt) will serve as an executive officer of
SFR. It is anticipated that following the Spin Off one of the Company's
directors (Boyt) will resign and two additional directors who are unaffiliated
with the Company or SFR will be appointed to the Company's board of directors,
which additions, when completed, will increase the Company's board to eight
members, of which only one will be affiliated with SFR (Payne). In addition, the
Company intends to hire an additional executive to serve as Chief Financial
Officer following consummation of the Offerings.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- ----- -----------------------------------------------------
<S> <C> <C>
R. Graham Whaling(1) 42 Chairman of the Board, Chief Executive Officer,
Chief Financial Officer and Director (Class III)
David B. Kilpatrick 46 President and Chief Operating Officer
C. Ed Hall 54 Vice President -- Public Affairs
Jeffrey B. Williams 51 Vice President -- Development
Lou E. Shuflin 42 Director -- Administration
Terry L. Anderson 49 General Counsel and Secretary
Hugh L. Boyt(2) 51 Director (Class I)
Craig A. Huff(3) 32 Director (Class II)
Michael A. Morphy(3) 64 Director (Class I)
James L. Payne(4) 58 Director (Class III)
Robert F. Vagt(3) 49 Director (Class I)
Robert J. Wasielewski 33 Director (Class II)
</TABLE>
- ---------------
(1) Mr. Whaling is currently Chief Financial Officer of SFR and is expected to
resign that position prior to consummation of the Offerings.
(2) Mr. Boyt is currently an executive officer of SFR. Mr. Boyt has advised the
Company that he intends to resign as a director of the Company prior to
consummation of the Spin Off.
(3) Messrs. Huff, Morphy and Vagt are currently directors of SFR and have
advised the Company that they intend to resign as directors of SFR prior to
consummation of the Offerings.
(4) Mr. Payne is Chairman of the Board, President and Chief Executive Officer of
SFR.
R. Graham Whaling has been Senior Vice President and Chief Financial
Officer of SFR since January 1995. Prior to that time he was with CS First
Boston Corporation, an investment banking firm. While with First Boston, Mr.
Whaling served as Vice President, Corporate Finance from 1991 to 1994 and
Director, Corporate Finance from 1994 to 1995. Prior to joining First Boston,
Mr. Whaling served as a petroleum engineer for Sun Oil Company and petroleum
reservoir consulting engineer for Ryder Scott. Mr. Whaling has been an officer
and director of the Company since September 1996.
David B. Kilpatrick has been Division Manager -- Production for SFR's
Western Division since January 1990. Mr. Kilpatrick also served as Regional and
District Manager -- Production for various SFR
50
<PAGE> 53
Districts from 1986 through 1990. Mr. Kilpatrick served as President of the
California Independent Petroleum Association from 1992 through 1994.
C. Ed Hall has been Vice President -- Public Affairs of SFR since March
1991. Mr. Hall had previously held the position of Director -- Public Affairs of
SFR since 1984.
Jeffrey B. Williams has been Corporate Production Manager of SFR since July
1996. Prior to that time, Mr. Williams was employed by SFR as Regional,
Corporate or Division Production Manager, a position he assumed in 1983.
Lou E. Shuflin has been Manager -- Strategic Analysis of SFR since
September 1994. Mr. Shuflin has also served as SFR's Corporate
Manager -- Production from May 1993 to August 1993 and District
Manager -- Production beginning in 1987.
Terry L. Anderson has been Manager -- Business Development of SFR since
December 1994. Prior to that time and beginning in 1988, Mr. Anderson was Senior
Counsel of SFR.
Hugh L. Boyt has been Senior Vice President -- Production of SFR since
March 1, 1990. From 1989 until March 1990, Mr. Boyt served as Corporate
Production Manager of SFR. Mr. Boyt has been a director of the Company since its
formation in August 1996.
Craig A. Huff has been a principal in Ziff Brothers Investments since July
of 1993 and is currently a director of SFR. Prior to joining Ziff Brothers, Mr.
Huff received a degree from the Harvard Business School in 1993. Ziff Brothers
currently holds approximately 3.7% of SFR's outstanding common stock.
Michael A. Morphy for the past five years has been the retired Chairman and
Chief Executive Officer of California Portland Cement Company. Mr. Morphy is
also a director of Cyprus Amax Minerals Co., Santa Fe Pacific Pipelines, Inc.
and SFR.
James L. Payne has been Chairman of the Board, President and Chief
Executive Officer of SFR since June 1990. Mr. Payne was President of Santa Fe
Energy Company, a predecessor of SFR from January 1986 to January 1990, when he
became President of SFR. From 1982 to 1986, Mr. Payne was Senior Vice
President -- Exploration and Land of Santa Fe Energy Company. Mr. Payne is also
a director of Pool Energy Services Co., an oil field services company.
Robert F. Vagt has been Chairman of the Board, President and Chief
Executive Officer and director of Global Natural Resources, Inc. since May 1992.
Prior to that time, Mr. Vagt was President and Chief Operating Officer of Adobe
Resources Corporation ("Adobe") from November 1990 to May 1992, Executive Vice
President of Adobe from August 1987 to October 1990 and Senior Vice President of
Adobe from October 1985 to August 1987. Mr. Vagt is also a director of SFR.
Robert Wasielewski has been employed by GKH Partners, L.P. ("GKH") since
October 1991. GKH is an investment partnership whose general partners include
entities controlled by Jay and Tom Pritzker, Dan W. Lufkin and Melvyn N. Klein.
From July 1996 to the present Mr. Wasielewski has held the position of Managing
Director of GKH and from December 1994 to May 1996 had served as a Director of
GKH. He was employed by Citicorp in the Leveraged Capital Division from
September 1987 to October 1991, serving as an Assistant Vice-President from
December 1990 until joining GKH. Mr. Wasielewski serves as a director and
officer of various privately-held affiliates of GKH. GKH currently holds
approximately 5.6% of SFR's outstanding common stock.
The Company's Certificate of Incorporation (the "Charter") and Bylaws (the
"Bylaws") provide for indemnification of directors to the full extent permitted
by the Delaware General Corporation Law and, to the extent permitted by such
law, eliminate or limit the personal liability of directors to the Company and
its stockholders for monetary damages for certain breaches of fiduciary duty. In
addition, concurrently with or prior to the Offerings the Company intends to
enter into an indemnification agreement with each of its directors and executive
officers, pursuant to which such persons will be entitled to indemnification by
the Company for matters not covered by the indemnification provisions in the
Company's Charter and Bylaws or the Company's officers and directors insurance
policy.
51
<PAGE> 54
The Company's board of directors is divided into three classes, of which
two classes (Class II and Class III) consist of two members and one class (Class
I) consists of three members. The initial terms for Class I, Class II and Class
III will expire at the annual meetings of stockholders to be held in 1997, 1998
and 1999, respectively.
COMMITTEES
The Company's board of directors has established Audit and Compensation
Committees. The Audit Committee consists of three directors, at least two of
whom will be non-employee directors of the Company. The Audit Committee will
meet separately with representatives of the Company's independent auditors and
with representatives of senior management in performing its functions. The Audit
Committee will review the general scope of audit coverages, the fees charged by
the independent auditors, matters relating to the Company's internal control
system and other matters related to audit functions.
The Compensation Committee consists of three directors, at least two of
whom will be non-employee directors of the Company. The Compensation Committee
will administer the Company's benefit plans, and in this capacity will make all
option grants or awards to Company employees, including executive officers,
under such plans. In addition, the Compensation Committee will be responsible
for making recommendations to the board of directors with respect to the
compensation of the Company's Chief Executive Officer and its other executive
officers, and will be responsible for the establishment of policies dealing with
various compensation and employee benefit matters for the Company.
DIRECTOR COMPENSATION
Each director who is not also an officer of the Company or SFR (a
"Nonemployee Director") will receive an initial grant of 10,000 non-qualified
stock options pursuant to the Company's Incentive Stock Compensation Plan, an
annual retainer composed of a cash payment of $10,000, 1,000 shares of
restricted Common Stock and 5,000 non-qualified stock options as well as a fee
of $1,000 for each meeting of the board or committee of the board attended. Each
committee chairman will receive an additional annual fee of $2,000. Following
the Spin Off, each Nonemployee Director will receive an initial grant of 10,000
non-qualified stock options, if such director did not receive such a grant upon
consummation of the Offerings, and thereafter will receive the above described
annual retainer. All directors receive reimbursement for their out-of-pocket
expenses in attending meetings of the board or committees of the board.
EMPLOYMENT AGREEMENTS
The Company will enter into employment agreements ("Employment Agreements")
covering each of the individuals named in the Summary Compensation Table. The
initial term of each Employment Agreement, with the exception of Mr. Whaling's,
expires on December 31, 1998; however, beginning January 1, 1998 and on each
January 1 thereafter the term of the Employment Agreements will automatically be
extended for additional one-year periods, unless by September 30 of the
preceding year the Company gives notice that the Employment Agreement will not
be so extended. The term of each Employment Agreement, with the exception of Mr.
Whaling's, is automatically extended for a period of two years following a
Change in Control (as defined herein). Mr. Whaling's Employment Agreement has an
initial term which expires on December 31, 1999, is automatically extended for
one-year periods beginning January 1, 1999 and is automatically extended for a
three-year period following a Change in Control.
In the event that following a Change in Control employment is terminated by
the employee for "Good Reason" or the employee is involuntarily terminated by
the Company other than for "Cause" (as those terms are defined in the Employment
Agreements), or if during the six months preceding a Change in Control, the
employee's employment is terminated by the employee for Good Reason or by the
Company other than for Cause, and such termination is demonstrated to be
connected with the Change in Control, the Employment Agreements provide for
payment of certain amounts to the employee based on the
52
<PAGE> 55
employee's salary and bonus under the Company's Incentive Compensation Plan;
payout of nonvested restricted stock, phantom units, stock options, if any, and
continuation of certain insurance benefits for a period of up to 24 months (36
months in the case of Mr. Whaling). The payments and benefits are payable
pursuant to the Employment Agreements only to the extent they are not paid out
under the terms of any other plan of the Company. The payments and benefits
provided by the Employment Agreements for all individuals except Mr. Whaling may
be further limited by the Parachute Payment Limit described in the discussion of
the Company Stock Plans below. In the event Mr. Whaling's payments would exceed
the Parachute Payment Limit, he will be made "whole" on a net after-tax basis
for any excise tax incurred. Without giving effect to such limitation, the
estimated value of the payments and benefits that Messrs. Whaling, Kilpatrick,
Williams, Hall, Shuflin and Anderson and all executive officers as a group would
be entitled to receive if a qualifying termination occurred on January 1, 1997
(assuming salaries and ICP levels in effect on November 1, 1996 and a SFR common
stock price of $12 per share) are $1,219,375, $519,624, $385,000, $303,503,
$344,503 and $295,378, respectively.
EXECUTIVE COMPENSATION
The following table reflects cash compensation paid by SFR for the year
ended December 31, 1995 to each of the six most highly compensated executive
officers and key employees of the Company, and to all executive officers and key
employees as a group.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
-------------------------------------- -------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND COMPEN- UNDERLYING COMPEN-
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) SATION(2) OPTIONS(#)(3) SATION($)(4)
- ---------------------------------- ---- --------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
R. Graham Whaling................. 1995(5) 225,000 109,766 -- 250,000 6,000
Chairman of the Board, 1994 -- -- -- -- --
Chief Executive Officer and 1993 -- -- -- -- --
Chief Financial Officer
David B. Kilpatrick............... 1995 143,680 62,000 -- -- 8,069
President and 1994 138,240 60,000 -- 19,000 7,066
Chief Operating Officer 1993 126,000 38,430 -- -- 7,559
Jeffrey B. Williams............... 1995 139,300 57,255 -- -- 7,880
Vice President -- Development 1994 137,400 57,708 -- 15,000 7,033
1993 126,000 38,430 -- -- 7,559
C. Ed Hall........................ 1995 107,500 44,185 -- -- 6,064
Vice President -- Public Affairs 1994 105,000 43,100 -- 10,000 5,420
1993 100,001 30,500 -- -- 6,000
Lou E. Shuflin.................... 1995 128,250 40,000 -- -- 7,246
Director -- Administration 1994 126,000 40,000 -- 13,000 6,503
1993 120,002 29,280 -- -- 7,049
Terry L. Anderson................. 1995 109,750 34,300 -- -- 6,204
General Counsel 1994 108,000 36,288 -- 13,000 5,579
and Secretary 1993 103,201 25,181 -- -- 6,191
Executive Officers and key 1995 853,480 347,506 -- 250,000 41,463
employees as a group 1994 614,640 237,096 -- 70,000 31,601
(6 individuals)................. 1993 575,204 161,821 -- -- 34,358
</TABLE>
- ---------------
(1) The bonus amounts shown, while determined on a cash basis, were actually
paid partially in shares of SFR common stock pursuant to the SFR Stock
Plans. For 1993, Messrs. Kilpatrick, Williams, Hall, Shuflin and Anderson
received 2,092, 2,092, 1,660, 1,594, 1,371 shares, respectively, and 8,809
as a group. For 1994, Messrs. Kilpatrick, Williams, Hall, Shuflin and
Anderson received 3,583, 3,446, 2,574, 2,389 and 2,167 shares, respectively,
and 14,159 shares as a group. For 1995, Messrs, Whaling, Kilpatrick,
Williams, Hall, Shuflin and Anderson received 1,818, 3,242, 2,994, 2,310,
2,092 and 1,793 shares of SFR common stock, respectively, and 14,249 as a
group.
(2) Does not include perquisites and other personal benefits because the value
of these items did not exceed the lesser of $50,000 or 10% of reported
salary and bonus of any of the named executive officers and key employees.
53
<PAGE> 56
(3) Effective upon his date of employment by SFR (January 4, 1995), Mr. Whaling
was granted 250,000 Non-Qualified Stock Options ("NQSOs") to purchase shares
of SFR common stock pursuant to the SFR Stock Plans. The NQSOs were granted
at Fair Market Value as defined in the SFR Stock Plans ($8.00 per share) and
vested immediately as to one-half of the grant, an additional one-quarter
after one year and the final one-quarter after two years.
(4) Amounts shown reflect matches made by SFR for employee contributions to the
Santa Fe Energy Resources, Inc. Savings Investment Plan, as well as the
performance match. (See "Benefit Plans -- Compensation Pursuant to SFR
Plans -- Savings Plan" for a description of the Savings Investment Plan and
the performance match). The performance match is contributed in the year
following the performance and therefore total amounts shown for 1993, 1994
and 1995 include the match made for 1992, 1993 and 1994 results,
respectively. SFR made a performance match in March 1996 for 1995 results
for each of Messrs. Whaling, Kilpatrick, Williams, Hall, Shuflin and
Anderson in the amount of $2,460, $2,356, $2,284, $1,763, $2,103 and $1,799,
respectively.
(5) Mr. Whaling was first employed by SFR on January 4, 1995.
STOCK OPTION GRANTS DURING 1995
The following table provides details regarding SFR stock options granted by
SFR in 1995 to the executive officers of the Company.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
% OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED APPRECIATION FOR
UNDERLYING TO EXERCISE OR OPTION TERM
OPTIONS EMPLOYEES BASE PRICE -------------------
NAME GRANTED(#) IN 1995 ($/SH) EXPIRATION DATE 5%($) 10%($)
- -------------------------------------- --------- ----------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
R. Graham Whaling(1)........ 250,000 100% 8.00 January 3, 2005
</TABLE>
- ---------------
(1) Mr. Whaling was the only executive officer of the Company to be granted
options in 1995.
1995 OPTION EXERCISES AND OUTSTANDING STOCK OPTION VALUES AS OF DECEMBER 31,
1995
The following table shows the number of SFR shares acquired by the
executive officers upon their exercise of stock options during 1995, the value
realized by such executive officers and key employees upon such exercises, the
number of shares of SFR common stock covered by both exercisable and non-
exercisable stock options as of December 31, 1995 and their values at such date.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON DECEMBER 31, 1995 (#) DECEMBER 31, 1995 ($)
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. Graham Whaling.... --0-- --0-- 125,000 125,000 195,312 195,312
David B.
Kilpatrick......... --0-- --0-- 61,578 12,667 10,687 21,376
Jeffrey B.
Williams........... --0-- --0-- 60,245 10,000 8,438 16,875
C. Ed Hall........... --0-- --0-- 47,529 6,667 5,624 11,251
Lou E. Shuflin....... --0-- --0-- 51,578 8,667 7,312 14,626
Terry L. Anderson.... --0-- --0-- 35,004 8,667 7,312 14,626
</TABLE>
The average sales price of SFR common stock at December 29, 1995 was
$9.5625.
On July 2, 1996, SFR granted NQSOs to Messrs. Whaling, Kilpatrick,
Williams, Hall, Shuflin and Anderson in the amount of 35,000, 20,000, 5,000,
6,000, 7,000, and 4,000, respectively. These options have an exercise price of
$11.625, vest one-third per year over a three-year period and expire ten years
from the date of grant.
54
<PAGE> 57
LONG-TERM INCENTIVE PLAN AWARDS DURING 1995
The following table provides details regarding awards granted by SFR under
its Long-Term Incentive Plans in 1995 to the executive officers of the Company:
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
SHARES, UNITS OTHER PERIOD NON-STOCK PRICE-BASED PLANS
OR OTHER UNTIL MATURATION -------------------------------------
NAME RIGHTS(#) OR PAYOUT THRESHOLD(#) TARGET(#) MAXIMUM(#)
- ----------------------------------------- ---------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
R. Graham Whaling........... 9,375 1/1/96-12/31/98 2,812 9,375 14,062
David B. Kilpatrick......... 5,833 1/1/96-12/31/98 1,750 5,833 8,750
</TABLE>
In December 1995, the individuals described above received grants of
Phantom Units pursuant to the SFR Stock Plans in the amounts indicated. The
grant was effective January 1, 1996 with the Phantom Units being earned over a
three-year period. Ultimate payout if any, is to be made in an equivalent number
of shares of SFR common stock. Four equally weighted goals have been established
which must be attained over the three-year performance periods. Full payout at
target level will result if discretionary cash flow and production volumes equal
the three-year projected levels established by the 1996 profit plan, SFR's
common stock price performance equals the S&P 500 Index over the three-year
period and SFR's common stock price at the end of the three years equals an
established target. If the above goals are substantially exceeded, possible
payouts may increase to the maximum shown. Failure to meet a threshold level
shown above as the combined threshold level of all four goals will result in a
reduction or total elimination of a payout. It is anticipated that the SFR
Compensation and Benefits Committee will take steps to accelerate the payout of
these awards at the target level upon the closing of the Offerings.
COMPANY BENEFIT PLANS
The Company has adopted a cash incentive compensation plan and two stock
incentive compensation plans for its employees in order to tie compensation to
the Company's performance. The Company has also entered into employment
agreements with certain officers and key employees, adopted a severance program
for all full-time salaried employees and adopted a 401(k) savings plan and an
ESOP, both of which will become effective at or prior to Spin Off. These plans
and agreements are described above under "-- Employment Agreements" and below
under "-- Compensation Pursuant to Company Plans".
Following the consummation of the Offerings, the officers and salaried
employees of the Company will continue to be eligible to participate in certain
employee benefit plans of SFR. Those SFR plans pursuant to which officers of the
Company received compensation during 1995 or will receive compensation with
respect to 1996 and subsequent to the Offerings are briefly described below
under "-- Compensation Pursuant to SFR Plans".
COMPENSATION PURSUANT TO COMPANY PLANS
Incentive Compensation Plan. The Company has adopted an Incentive
Compensation Plan (the "ICP"), which provides for the establishment of a variety
of annual performance goals, which, if achieved, result in the payment of
additional cash compensation to participants for that year that can be paid in
cash or, in the discretion of the Compensation Committee of the board (the
"Committee"), stock awards under the Company Stock Plans (as defined below).
Goals under the ICP include general Company and business unit performance
objectives, and may include individual productivity objectives based on a
participant's responsibilities. The amount of a participant's compensation
depends on the goals achieved, with the maximum possible award being an amount
between 20% and 100% of the participant's regular salary, depending upon his
position. The establishment of performance goals with respect to a particular
year (both Company and, if applicable, individual goals), the weighting of such
goals and the determination of the extent to which such goals are achieved are
matters determined by the Committee each year at its discretion. The Committee
has retained the right, at its discretion, to increase or decrease ultimate
payments by up to 25%. All executive officers of the Company participate
55
<PAGE> 58
in the ICP. All executive officers of the Company received awards in 1995 under
the SFR 1990 Incentive Compensation Plan as amended (the "SFR ICP"). Such awards
are included in the table set forth above under "Executive Compensation". The
SFR ICP is substantially the same as the ICP. Effective January 1, 1997, all of
the officers will become participants in the Company's ICP in lieu of the SFR
ICP.
The ICP provides, as long as SFR owns 35% or more of the outstanding voting
securities of the Company, that in the event of a Change in Control of SFR, the
performance objectives of the ICP will be deemed to have been met in full at the
maximum performance level established, and each participant shall be entitled to
receive a bonus for the year in which the Change in Control occurs; if a
participant's employment is terminated prior to December 31 of such year, the
participant shall receive a prorated bonus as set forth in the ICP. A "Change in
Control" is generally defined to occur if: (a) any "person" becomes the
beneficial owner of securities representing 25% or more of the voting power of
SFR's outstanding securities, or (b) during any period of two consecutive years,
individuals who at the beginning of such period constitute the board of
directors of SFR cease to constitute at least a majority of such board; or (c)
SFR's stockholders approve a merger or consolidation of SFR with another
corporation and the voting securities of SFR do not represent 80% of the voting
power of the combined entity; or (d) SFR's stockholders approve a plan of
complete liquidation or an agreement for the sale or disposition by SFR of all
or substantially all of its assets. If SFR no longer owns 80% or more of the
outstanding voting securities of the Company, the term "Company" shall be
inserted in lieu of "SFR" for purposes of this provision, and the provision will
continue in effect with such alternate definitions for as long as SFR owns 15%
or more of the Company's outstanding Common Stock. The proposed Spin Off by SFR
shall not constitute a Change in Control under any circumstances.
1996 INCENTIVE STOCK COMPENSATION PLANS. The Company has adopted the 1996
Incentive Stock Compensation Plan for Key Employees (the "Key Employee Plan")
and the 1996 Incentive Stock Compensation Plan for Nonexecutive Employees (the
"Nonexecutive Plan" and, together with the Key Employee Plan, the "Company Stock
Plans"). The Company Stock Plans will also permit the Committee to grant (i)
options to purchase shares of Common Stock, which may be, under the Key Employee
Plan, either Incentive Stock Options, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or NQSOs, and, which may be,
under the Nonexecutive Plan, NQSOs only, (ii) shares of Restricted Stock, (iii)
Stock Appreciation Rights ("SARs"), (iv) Phantom Units and (v) Bonus Stock. In
addition, replacement or substitution options may be granted to employees in
conjunction with a spinoff, acquisition or other similar corporate transaction
involving the Company or a subsidiary. Options and awards with respect to no
more than 3,000,000 shares of Common Stock may be issued under the Key Employee
Plan. The Nonexecutive Plan allows for the grant of up to 500,000 shares
annually. The Committee, in its discretion, will select those employees to whom
awards will be granted, the form and amount of awards, and the terms and
conditions of awards. All nonexecutive employees of the Company who are
responsible for the Company's growth and profitability will be eligible to
receive awards under the Nonexecutive Plan.
Incentive Stock Options must have an exercise price of not less than the
fair market value of the underlying stock at the time the option was granted.
Non-Qualified Stock Options will not be subject to that requirement but may not
be issued at less than 100% of the fair market value at the date of grant.
Substitution options shall be granted on such terms as the Committee deems
equitable. All options must be exercised within 10 years of the date granted.
The Committee will determine the period during which SARs may be exercised,
which period may not begin until six months after the date of the grant. Upon
the exercise of an SAR, the Company may pay the amount by which the fair market
value of a share of Common Stock on the exercise date exceeds the exercise price
of a share of such stock on the date the SAR was granted in cash, Common Stock
or a combination of both.
During the restricted period for Restricted Stock, participants will be
entitled to receive all dividends paid on Restricted Stock and to vote the
shares, but they may not sell, transfer or encumber the shares during this
period.
56
<PAGE> 59
Bonus Stock consists of shares of Common Stock which are granted to
participants and which are not subject to any of the restrictions associated
with Restricted Stock.
A Phantom Unit is the right to receive a payment in an amount equal to the
average trading price of the shares of Common Stock at the time the award
becomes payable. Payment may be made in cash, stock or any combination thereof.
A Phantom Unit shall generally become payable if the employee remains in the
employment of the Company and certain specified business goals of the Company
established by the Committee in its discretion are met.
Termination of the employee for Cause (as defined in the Company Stock
Plans) shall result in forfeiture of all awards. In the event of an involuntary
termination other than for Cause, or in the event of termination by reason of
disability or retirement, a participant will be entitled to a pro rata share of
any outstanding option, SAR, Restricted Stock and Phantom Unit award based on
the vesting period of the grant which has elapsed; provided, however, that
Phantom Units and Restricted Stock shall be payable at the end of the restricted
period to the extent payable under an award. In the event of death, the
restricted period shall lapse on all of a participant's outstanding awards. The
Company Stock Plans further provide that all restrictions shall lapse upon a
"Change in Control" to the extent that any shares of Restricted Stock or Phantom
Units remain subject to restrictions, all defined goals shall be deemed to be
met, and the full value of the Phantom Units shall be paid in cash.
The payments and benefits provided by the Company Stock Plans as a result
of a Change in Control, when aggregated with certain other payments or benefits,
will be limited to 2.99 times the "base amount" as defined in Section 280G of
the Code (the "base amount" approximating the average of five years'
compensation preceding a Change in Control) if the employee would receive a
greater net after-tax benefit by reason of such limitation (the "Parachute
Payment Limit").
During 1996, Messrs. Whaling, Kilpatrick, Williams, Hall, Shuflin, and
Anderson and all executive officers as a group received options pursuant to the
SFR Stock Plans with respect to 35,000, 20,000, 5,000, 6,000, 7,000, 4,000, and
77,000 shares of SFR common stock, respectively. See "-- Compensation Pursuant
to SFR Plans -- Incentive Stock Compensation Plans". In the event SFR
consummates the Spin Off, it is anticipated that any unexercised options for SFR
stock which are surrendered by the participant will be replaced by awards under
the Company Stock Plans with similar vesting and exercise terms; provided,
however, that no award under the Company Stock Plans will be exercisable or
payable for a period of one year from the Spin Off date except upon a Change in
Control or a termination due to death or disability. The number of shares and
exercise prices of all NQSOs awarded will be adjusted so that the participant
retains the full unrealized potential value of the corresponding SFR option. The
number of shares of Common Stock subject to the NQSO will be a fraction, the
numerator of which is the product of the number of shares of SFR common stock
subject to the option times the SFR market price (based on the trading price for
a period of time prior to the record date for the Spin Off), and the denominator
of which is the Company's market price (based on the trading price for a period
of time following the spin off); the exercise price will be a fraction, the
numerator of which is the product of the SFR option price times the number of
SFR option shares and the denominator of which is the number of Company option
shares.
Effective with the closing of the Offerings, Messrs. Whaling, Kilpatrick,
Williams, Hall, Shuflin, and Anderson will receive NQSOs under the Company Stock
Plans in the amount of 112,500, 50,000, 20,000, 12,000, 12,000, and 12,000
shares, respectively, and restricted stock grants of 37,500, 15,000, 6,667,
3,333, 3,333, and 3,333 shares, respectively.
SEVERANCE PROGRAM. The Company has adopted a Severance Program for all
full-time (non-union) employees who are terminated by the Company or terminated
or constructively terminated by an acquiring company, other than for Cause (as
defined in the Severance Program). However, following a Change in Control
(defined substantially the same as in the ICP), an executive officer or key
employee who has entered into an Employment Agreement is not eligible to receive
duplicate benefits under the Employment Agreement and the Severance Program. A
participant in the Severance Program is generally entitled to an amount based
upon the participant's length of service and current salary, but not to exceed
57
<PAGE> 60
one year's pay. In addition, a participant is entitled to continuation of health
and life insurance benefits for two years.
The payments and benefits provided by the Severance Program may be limited
in the same manner as the Parachute Payment Limit described in the description
of the Company Stock Plans above.
SAVINGS PLAN. The Company has adopted the Monterey Resources, Inc. Savings
Investment Plan (the "Savings Plan"), which, when it becomes effective, will
offer eligible employees an opportunity to make long-term investments on a
regular basis through salary contributions, which are supplemented by matching
employer contributions. Substantially all non-union employees are eligible to
participate in the Savings Plan on the first day of the month after their date
of hire. The Company will match up to 4% of an employee's compensation and the
employee's contribution may not exceed limits imposed by federal regulations.
During 1996 such limit was $9,500. In addition to the regular employer matching
program, at the end of each fiscal year, the Company's performance will be
evaluated using the same performance measures used in the ICP. If the Company's
performance meets or exceeds the goals for that year, participants will receive
up to another fifty cents on each regular matching dollar contributed by the
Company. The regular employer matching contributions as well as the performance
match are made in Common Stock.
The Savings Plan is intended to qualify as a Section 401(k) cash or
deferred compensation arrangement whereby a portion of all of an employee's
elective contributions and the employer's matching contributions are not subject
to Federal income taxes at the time of contribution to the plan, and the plan is
subject to the restrictions imposed by the Code. Investment alternatives to
which contributions may be allocated by the participants will include a variety
of investment options including a fund which will be invested in Common Stock.
It is anticipated that the Savings Plan will not become effective until the
Spin Off, at which time it is intended that the account balances of the
employees currently in the SFR Savings Plan will be transferred to the Company's
plan.
DEFERRED COMPENSATION PLAN. The Company also maintains a supplemental
deferred compensation plan ("Supplemental Plan") whereby employees earning in
excess of $95,000 per year are allowed to defer all or a portion of their salary
until a future year or until retirement. These amounts are not matched by the
Company. Employees earning in excess of $150,000 per year may also defer up to
4% of such excess amount, which amount will be matched by the Company, including
the performance match described above in "-- Savings Plans". All amounts are
credited to a notional account with the Company and credited with interest at
the rate paid on the fixed income fund of the Company Savings Plan.
It is anticipated that the Supplemental Plan will not become effective
until the Spin Off.
HOURLY RETIREMENT PLANS. The Company sponsors two retirement plans covering
union employees (the "Hourly Plans"). One Hourly Plan provides benefits that are
based on a stated amount for each year of service. The Company annually
contributes amounts which are actuarially determined to provide the plan with
sufficient assets to meet future benefit payment requirements. The second Hourly
Plan is a defined contribution plan whereby the Company matches employee
contributions up to $.60 per hour worked. Employees may make unmatched
supplemental contributions of up to an additional $1.50 per hour worked.
ESOP AND SUPPLEMENTAL ESOP. The Company has adopted the Monterey Resources,
Inc. Employee Stock Ownership Plan (the "ESOP"), which, when it becomes
effective, will provide for Company contributions on behalf of eligible
employees. The ESOP is intended to invest in Common Stock. Contributions may be
in cash and/or Common Stock. In addition, the Company has adopted the Monterey
Resources, Inc. Supplemental ESOP Plan, which provides that if a participant's
allocation under the ESOP is limited in any year due to the limitations of
Sections 401(a)(17) or 415 of the Code, the participant will be credited, in a
notional account, with shares of phantom stock equal to the "lost" allocation.
The notional account will also be credited with phantom dividends and paid to
the participant
58
<PAGE> 61
in cash on the termination of employment, to the extent vested. It is
anticipated that these plans will not become effective until the Spin Off.
COMPENSATION PURSUANT TO SFR PLANS
INCENTIVE COMPENSATION PLAN. As discussed above under "-- Compensation
Pursuant to Company Plans -- Incentive Compensation Plan", SFR maintains the SFR
ICP which provides for the establishment of a variety of performance goals
which, if achieved, result in the payment of additional cash compensation to
participants for that year. The terms and conditions of the SFR ICP are
substantially similar to those described above for the Company's ICP. All
executive officers of the Company have participated in the SFR ICP, and they
received a cash bonus pursuant thereto which has been reflected in the table set
forth under "-- Executive Compensation" above. Effective with calendar year
1997, all of these officers will become participants in the Company's ICP in
lieu of the SFR ICP.
INCENTIVE STOCK COMPENSATION PLANS. SFR presently maintains the 1990
Incentive Stock Compensation Plan, as amended, and the 1995 Incentive Stock
Compensation Plan for Non-executive Employees, as amended (collectively, the
"SFR Stock Plans"). These plans are substantially the same as the stock and
stock option portions of the Company Stock Plans described above. With the
exception of certain grants in conjunction with the 1996 bonus awarded in early
1997, following the consummation of the Offerings, employees of the Company will
no longer receive grants or awards under the SFR Stock Plans. Certain executive
officers and other employees of the Company hold options previously granted
subject to, and which will remain outstanding under, the terms and conditions of
these plans and the agreements evidencing such options. These grants are subject
to conversion as described in "-- Compensation Pursuant to Company Plans" above.
As of September 1, 1996, executive officers of the Company had options awards
under the SFR Stock Plans as shown in "-- Executive Compensation" above.
SAVINGS PLANS. The Company is, and will continue to be until implementation
of the Company's Savings Plan described above, a participating subsidiary in the
Santa Fe Energy Resources, Inc. Savings Investment Plan (the "SFR Savings
Plan"). Substantially all non-union employees are eligible to participate on the
first day of the month after their date of hire. SFR will match up to 4% of an
employee's compensation. In 1996 the employee's contribution could not exceed
$9,500. In addition to such regular employer matching program, at the end of
each fiscal year, SFR's performance is evaluated using the same performance
measures used in the SFR ICP. If SFR's performance meets or exceeds the goals
for that year, participants will receive up to another fifty cents on each
regular matching dollar contributed by SFR. The regular employer matching
contributions as well as the performance match are made in SFR common stock.
The SFR Savings Plan is intended to qualify as a Section 401(k) cash or
deferred compensation arrangement whereby an employee's contributions and the
employer's matching contributions are not subject to Federal income taxes at the
time of the contribution to the Plan and the Plan is subject to the restrictions
imposed by the Code. Investment alternatives to which contributions may be
allocated by the participants include an aggressive growth fund, an
international equity fund, a growth equity fund, an equity index fund, a growth
and income fund, a balanced fund, a stable value fund and a fund which invests
in SFR common stock.
DEFERRED COMPENSATION PLAN. SFR also maintains a supplemental deferred
compensation arrangement (the "SFR Deferred Compensation Plan") whereby
employees earning in excess of $95,000 per year are allowed to defer all or a
portion of their salary until a future year or until retirement. These amounts
are not matched by SFR. Employees earning in excess of $150,000 per year may
also defer up to 4% of such excess amount, which amount will be matched by SFR,
including the performance match described above in "-- Savings Plans". All
amounts are contributed in cash and earn interest at the rate paid on the fixed
income fund of the SFR Savings Plan.
59
<PAGE> 62
RETIREMENT PLANS. The Company is, and following completion of the Offerings
will continue to be until Spin Off, a participating subsidiary in the Santa Fe
Energy Resources Retirement Plan (the "SFR Retirement Plan"), a qualified
defined benefit plan maintained for substantially all salaried employees not
covered by a collective bargaining agreement, and the nonqualified Santa Fe
Energy Resources Supplemental Retirement Plan (the "SFR Supplemental Plan"). The
SFR Supplemental Plan will pay benefits to participants in the various SFR plans
in those instances where the SFR Retirement Plan formula produces a benefit in
excess of limits established by ERISA and applicable government regulations. The
SFR Retirement Plan also includes amounts deferred under the SFR Deferred
Compensation Plan as pensionable compensation. Total approximate benefits under
both the SFR Retirement Plan and SFR Supplemental Plan are shown below for
selected compensation levels and years of service. As of December 31, 1995,
Messrs. Whaling, Kilpatrick, Williams, Hall, Shuflin and Anderson were credited
with 1.0, 19.3, 25.6, 11.6, 14.8 and 14.7 years of service under the plans,
respectively.
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------------------
AVERAGE YEARLY COMPENSATION 15 20 25 30 35
- ------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000............................ $ 22,000 $ 29,000 $ 36,000 $ 54,000 $ 64,000
$150,000............................ $ 26,000 $ 35,000 $ 44,000 $ 66,000 $ 77,000
$175,000............................ $ 31,000 $ 41,000 $ 52,000 $ 78,000 $ 91,000
$200,000............................ $ 36,000 $ 48,000 $ 60,000 $ 89,000 $104,000
$225,000............................ $ 40,000 $ 54,000 $ 67,000 $101,000 $118,000
$250,000............................ $ 45,000 $ 60,000 $ 75,000 $113,000 $131,000
$300,000............................ $ 54,000 $ 72,000 $ 91,000 $136,000 $158,000
$400,000............................ $ 73,000 $ 97,000 $122,000 $182,000 $213,000
$450,000............................ $ 82,000 $110,000 $137,000 $206,000 $240,000
$500,000............................ $ 92,000 $122,000 $153,000 $229,000 $267,000
$600,000............................ $110,000 $147,000 $184,000 $275,000 $321,000
$650,000............................ $119,000 $159,000 $199,000 $299,000 $348,000
</TABLE>
Benefit figures shown are amounts payable based on a straight-life annuity
assuming retirement by the participant at age 62 in 1995 without a joint
survivorship provision. The benefits listed in the above table are not subject
to any deduction for social security or other offset amounts.
Benefits under the plans are computed based on a participant's total
compensation for the 60 consecutive months during the ten-year period
immediately prior to the termination of his covered employment for which his
total compensation is the highest, divided by 60. If a participant has not
received compensation for 60 consecutive months during such ten-year period, his
compensation shall equal the total of his compensation for the longest period of
consecutive months during such ten-year period divided by the total number of
months of compensation so considered.
Compensation recognized under the plans is the total basic compensation,
including any elective salary deferral amounts excluded from income pursuant to
Section 125 or 402 of the code, plus overtime, shift differentials and bonuses
(whether cash or stock) paid pursuant to recurring bonus programs, including
compensation deferred under the Santa Fe Energy Resources, Inc. Deferred
Compensation Plan, but excluding any special or extraordinary bonuses and any
other items of compensation. A participant's basic compensation is the regular
rate of pay specified for his position and does not include automobile
allowances, imputed income under any group term life insurance program, moving
expense or other reimbursements, fringe benefits, or similar items.
The pension compensation therefore differs from the compensation listed in
the Summary Compensation Table in several respects. Pension compensation is
based on average compensation as explained above. It does not include restricted
stock awards, stock options, and other compensation in the "All Other
Compensation" column of the Summary Compensation Table (i.e., employer matching
contributions to the SFR Savings Plan and the performance match). It also does
not include special or extraordinary bonuses.
60
<PAGE> 63
The pension compensation of officers whose pension compensation differs
from the compensation contained in the Summary Compensation Table is listed
below:
<TABLE>
<CAPTION>
PENSION COMPENSATION
NAME (FINAL AVERAGE PAY)
---------------------------------------------------------------- --------------------
<S> <C>
R. Graham Whaling............................................... $334,767
David B. Kilpatrick............................................. 180,713
Jeffrey B. Williams............................................. 181,264
C. Ed Hall...................................................... 140,791
Lou E. Shuflin.................................................. 161,211
Terry L. Anderson............................................... 135,497
</TABLE>
It is anticipated that the Company will terminate participation in the SFR
Retirement Plan upon the consummation of the Spin Off.
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates (i) the number of shares of Common Stock
expected to be granted to each director, executive officer and key employee of
the Company as of the closing of the Offerings pursuant to the Company Stock
Plans (see "Management -- Compensation Pursuant to Company Plans") and (ii) the
number of shares of common stock of SFR beneficially owned as of September 1,
1996 by such persons. In the event the Spin Off occurs and the individuals
listed below retain the SFR common stock set forth below and exercise the SFR
options described in the footnotes, such individuals will receive shares of
Company Common Stock on the same basis as all other SFR shareholders.
<TABLE>
<CAPTION>
SHARES OF COMPANY SHARES OF SFR
COMMON STOCK COMMON STOCK
TO BE BENEFICIALLY OWNED
BENEFICIALLY AS OF
NAME OF BENEFICIAL OWNER OWNED(1) SEPTEMBER 1, 1996
------------------------------------------------ ----------------- ------------------
<S> <C> <C>
R. Graham Whaling(2)............................ 37,500 201,948
David P. Kilpatrick(3).......................... 15,000 76,191
C. Ed Hall(4)................................... 3,333 70,261
Lou E. Shuflin(5)............................... 3,333 62,319
Jeffrey B. Williams(6).......................... 6,667 63,093
Terry L. Anderson(7)............................ 3,333 40,995
Hugh L. Boyt(8)................................. -0- 173,479
Craig A. Huff(9)................................ 1,000 3,339,600
Michael A. Morphy(10)........................... 1,000 10,786
James L. Payne(11).............................. 1,000 621,834
Robert F. Vagt(12).............................. 1,000 14,069
Robert J. Wasielewski(13)....................... 1,000 5,047,083
All directors and officers as a group
(12 persons).................................. 74,166 9,721,658
</TABLE>
- ---------------
(1) In addition to the Common Stock ownership presented it is anticipated that
unexercised SFR stock options held by Company employees at Spin Off
(including those held by executive officers and key employees listed above)
will be exchanged for options for Common Stock granted pursuant to the
Company Stock Plans. See "Management -- Compensation Pursuant to Company
Plans" for a description of the anticipated method of adjustment of share
amounts and strike prices.
(2) Mr. Whaling's SFR common stock ownership includes 1,238 shares arising from
participation in the SFR Savings Plan as of July 31, 1996 and 187,500
shares which could be received upon the exercise of options exercisable
within 60 days of September 1, 1996. The exercise price of such options is
$8.00. Mr. Whaling's Common Stock ownership includes 37,500 shares of
Restricted Stock anticipated to be granted upon the closing of the
Offerings.
61
<PAGE> 64
(3) Mr. Kilpatrick's SFR common stock ownership includes 5,650 shares arising
from participation in the SFR Savings Plan as of July 31, 1996 and 61,578
shares which could be received upon the exercise of options exercisable
within 60 days of September 1, 1996. The weighted average exercise price of
such options is $13.0143. Mr. Kilpatrick's Common Stock ownership includes
15,000 shares of Restricted Stock anticipated to be granted upon the
closing of the Offerings.
(4) Mr. Hall's SFR common stock ownership includes 7,768 shares arising from
participation in the SFR Saving Plan as of July 31, 1996 and 47,529 share
which could be received upon the exercise of options exercisable within 60
days of September 1, 1996. The weighted average exercise price of such
options is $12.7915. Mr. Hall's Common Stock ownership includes 3,333
shares of Restricted Stock anticipated to be granted upon closing of the
Offerings.
(5) Mr. Shuflin's SFR common stock ownership includes 10,741 shares arising
from participation in the SFR Savings Plan as of July 31, 1996 and 51,578
shares which could be received upon the exercise of options exercisable
within 60 days of September 1, 1996. The weighted average exercise price of
such options is $12.9928. Mr. Shuflin's Common Stock ownership includes
3,333 shares of Restricted Stock anticipated to be granted upon closing of
the Offerings.
(6) Mr. William's SFR common stock ownership includes 7,848 shares arising from
participation in the SFR Savings Plan as of July 31, 1996 and 55,245 shares
which could be received upon exercise of options exercisable within 60 days
of September 1, 1996. The weighted average exercise price of such options
if $13.6034. Mr. William's Common Stock ownership includes 6,667 shares of
Restricted Stock anticipated to be granted upon closing of the Offerings.
(7) Mr. Anderson's SFR common stock ownership includes 3,332 shares arising
from participation in the SFR Savings Plan as of July 31, 1996 and 35,004
shares which could be received upon exercise of options exercisable within
60 days of September 1, 1996. The weighted average exercise price of such
options is $12.9821. Mr. Anderson's Common Stock ownership includes 3,333
shares of Restricted Stock anticipated to be granted upon closing of the
Offerings.
(8) Mr. Boyt's SFR common stock ownership includes 6,234 shares arising from
participation in the SFR Savings Plan as of July 31, 1996 and 125,245
shares which could be received upon exercise of options exercisable within
60 days of September 1, 1996. The weighted average exercise price of such
options is $13.0965. It is anticipated Mr. Boyt will resign as a director
of the Company upon Spin Off and therefore he would not receive a grant of
Restricted Stock pursuant to the Company's Stock Plans.
(9) Mr. Huff's Common Stock ownership includes 1,000 shares of Restricted Stock
anticipated to be granted upon closing of the Offerings. Mr. Huff's SFR
common stock ownership includes 3,338,600 shares owned by clients of Ziff
Brothers Investments ("ZBI"). Mr. Huff, who is a Principal of ZBI,
disclaims beneficial ownership of these shares.
(10) Mr. Morphy's Common Stock ownership includes 1,000 shares of Restricted
Stock anticipated to be granted upon closing of the Offerings.
(11) Mr. Payne's SFR common stock ownership includes 47,686 shares arising from
participation in the SFR Savings Plan as of July 31, 1996 and 422,890
shares which could be received upon exercise of options exercisable within
60 days of September 1, 1996. The weighted average exercise price of such
options is $14.9846. Mr. Payne will not be eligible for a Restricted Stock
grant pursuant to the Company's Stock Plans until Spin Off when he will
receive the 1,000 shares of Common Stock presented.
(12) Mr. Vagt's Common Stock ownership includes 1,000 shares of Restricted Stock
anticipated to be granted upon closing of the Offerings.
(13) Mr. Wasielewski's SFR common stock includes 5,047,083 shares which may be
deemed to be owned by GKH Partners, L.P. ("GKH") primarily through its
participation in HC Associates. Mr. Wasielewski is a Managing Director of
GKH, the general partner of GKH Investment, L.P. and the nominee for GKH
Private, Ltd. and disclaims beneficial ownership of the shares held by HC
Associates. Mr. Wasielewski's Common Stock ownership includes 1,000 shares
of Restricted Stock anticipated to be granted upon closing of the
Offerings.
62
<PAGE> 65
RELATIONSHIP BETWEEN THE COMPANY AND SFR
OWNERSHIP OF COMMON STOCK
SFR, whose address is 1616 South Voss, Suite 1000, Houston, Texas, 77057,
owns all of the Company's currently outstanding Common Stock and after the
Offerings will own approximately 85% of the Company's outstanding shares of
Common Stock (or 83% if the Underwriters' over-allotment options are exercised
in full). Through its ability to elect all directors of the Company, SFR will
control all matters affecting the Company, including any determination with
respect to acquisition or disposition of Company assets, future issuance of
Common Stock or other securities of the Company and any dividends payable on the
Common Stock. SFR will also control the Company's exploration, development,
capital, operating and acquisition budgets.
Pursuant to Rule 144 promulgated under the Securities Act, SFR may not,
prior to the expiration in August 1998 of the two year holding period required
by Rule 144, sell any of the shares of Common Stock it owns without registration
under the Securities Act. See "Shares Eligible for Future Sale". The Company has
agreed that upon the request of SFR, the Company will register under the
Securities Act and applicable state securities laws the sale of the shares of
Common Stock owned by SFR which SFR requests to be registered. See
"-- Contractual Arrangements -- Registration Rights and Indemnification
Agreement".
INTENDED SPIN OFF
SFR has announced that after the Offerings it intends to distribute pro
rata to its common stockholders all of the shares of Common Stock that it owns
by means of a tax-free distribution. SFR's final determination to proceed will
require a declaration of the Spin Off by SFR's board of directors. Such a
declaration is not expected to be made until certain conditions, many of which
are beyond the control of SFR, are satisfied, including: (i) receipt by SFR of a
ruling from the Internal Revenue Service as to the tax-free nature of the Spin
Off; (ii) approval of the Spin Off by SFR's stockholders; (iii) the redemption
or conversion of all or a substantial portion of the shares of each outstanding
series of SFR preferred stock; and (iv) the absence of any future change in
future market or economic conditions (including developments in the capital
markets) or SFR's or the Company's business and financial condition that causes
SFR's board to conclude that the Spin Off is not in the best interests of SFR's
stockholders. The Company has been advised by SFR that it does not expect the
Spin Off to occur prior to May 1997. If SFR consummates the Spin Off, the
increased shares available in the market may have an adverse effect on the
market price of the Common Stock. The Company has been advised by SFR that as of
, 1996, SFR had registered stockholders of record. See
"Risk Factors -- Intended Spin Off by SFR".
The Company has agreed to indemnify SFR if at any time during the one-year
period after the Spin Off the Company takes certain actions the effects of which
result in the Spin Off being taxable to SFR. See "-- Contractual
Arrangements -- Spin Off Tax Indemnity Agreement".
CONTRACTUAL ARRANGEMENTS
SPIN OFF TAX INDEMNITY AGREEMENT. To protect SFR from Federal and state income
taxes, penalties, interest and additions to tax that would be incurred by it if
the Spin Off by SFR were determined to be a taxable event, the Company and SFR
have entered into an agreement under which the Company has agreed to indemnify
SFR with respect to tax liabilities resulting primarily from actions taken by
the Company at any time during the one-year period commencing upon the Spin Off.
The Company has also agreed that, unless it obtains an opinion of counsel or a
supplemental ruling from the Internal Revenue Service that such action will not
adversely affect the qualification of the Spin Off as tax-free, the Company will
not merge or consolidate with another corporation, liquidate or partially
liquidate, sell or transfer all or substantially all of its assets or redeem or
otherwise repurchase any of its stock or issue additional shares of the
Company's capital stock (except pursuant to employee benefit or compensation
plans) during such one-year period. The Company's obligations under this
agreement could possibly deter offers or
63
<PAGE> 66
other efforts by third parties to obtain control of the Company during such
one-year period, which could deprive the Company's stockholders of opportunities
to sell their shares of Common Stock at prices higher than prevailing market
prices.
The Company has retained the right to contest, at its expense, any
determination by taxing authorities that the Spin Off has failed to qualify as
tax-free by reason of an action by the Company; provided, however, that if SFR
reasonably perceives, either at the commencement or during the course of any
proceeding challenging the tax-free nature of the Spin Off, that the Company
could not pay the indemnified amounts if the taxing authorities were successful,
SFR may assume the defense of any such challenge, at the Company's expense, and
may compromise, concede or settle the taxing authorities' claim. SFR's
assumption of the conduct of such defense would not relieve the Company of its
financial responsibility to SFR under this agreement. The indemnity agreement
will apply if the Spin Off occurs prior to December 31, 1997.
The Company believes that if the Company is required to make payments
pursuant to such agreement, the amount that the Company would pay to SFR would
have a material adverse effect on the Company's financial condition.
Substantially all of the actions for which the Company is required to indemnify
SFR pursuant to this agreement are within the Company's control, and the Company
has no intention of taking any actions during such one-year period that would
have such an effect.
The Spin Off Tax Indemnity Agreement also contains provisions covering
certain other tax matters between SFR and the Company, including, without
limitation, the following: (a) with respect to certain tax sharing agreements
and arrangements between SFR and Santa Fe Pacific Corporation (the former parent
company of SFR) the Company shall be responsible, and agrees to reimburse SFR,
for all liabilities, and will be entitled to receive all benefits, directly
attributable to California franchise tax liabilities for taxable years 1984
through and including December 4, 1990, except that any such benefit accruing to
or received by the Company as a result of Federal audit adjustments with respect
to SFR's affiliated group shall be paid by the Company to SFR; and (b) SFR shall
prepare and file all consolidated Federal, combined state and local income and
franchise tax returns required to be filed while the Company is a member of
SFR's affiliated group and the Company will not be compensated for the carryback
after Spin Off to SFR's affiliated group of any Company tax items realized after
the Company ceases to be a member of SFR's affiliated group.
CONTRIBUTION AGREEMENT. Pursuant to the Contribution Agreement, SFR will
contribute to the Company substantially all of the assets and properties of the
Western Division, subject to retention by SFR of (i) the Production Payment and
(ii) the surface rights to 116 acres of the Olinda Property and SFR's interests
in various properties (the "Excluded Assets") that are burdened by an overriding
royalty interest held by a royalty trust formed by SFR in 1992. The effective
date of the asset contribution pursuant to the Contribution Agreement is
expected to be November 1, 1996. Except as expressly set forth in the
Contribution Agreement, SFR is not making any representation or warranty
(including any representation or warranty as to title or merchantability or
fitness for a particular purpose) to the Company as to the assets, business or
liabilities contributed or assumed by the Company pursuant to the Contribution
Agreement; all such assets to be contributed to the Company will be contributed
in their present condition. SFR is not making any representation or warranty to
the Company as to consents or approvals required in connection with the
Contribution Agreement or as to the legal sufficiency of any assignment,
document or instrument delivered or filed to convey title to any properties
contributed to the Company. In addition, the Company will assume the liabilities
and obligations associated with the Western Division as of November 1, 1996,
including the $245 million of indebtedness in respect of the SFR Senior Notes
(although SFR will be obligated to pay interest on such indebtedness until the
consummation of the Offerings), and the Company will agree to release SFR from
any liability or contribution obligation in respect of the New Credit Facility.
Pursuant to the Contribution Agreement, (a) the Company will assume, and agree
to indemnify and hold harmless SFR from and against all liabilities and
obligations of SFR relating to the contributed assets and properties, including
(i) any litigation pending or threatened as of the consummation of the Offerings
or that arises in the future and involves any costs incurred after the
consummation of the Offerings, (ii) environmental liabilities of
64
<PAGE> 67
contributed assets and properties, including any costs or expenses incurred at
any of the OII Site, the Santa Fe Springs Site and the Eastside Site, and (iii)
any costs or liabilities that may arise after the consummation of the Offerings
that are attributable to violations of or failure to comply with laws, rules or
regulations in respect of any property or interest therein located in California
and formerly owned or operated by the Western Division or its predecessors
(other than the Excluded Assets); and (b) SFR will agree to indemnify and hold
the Company harmless from and against any costs or liabilities relating to
assets or operations of SFR (whether or not currently owned or operated by SFR)
to the extent not attributable to the Western Division (other than the Excluded
Assets). Upon the execution and delivery of the Contribution Agreement, the
Company and SFR intend to file deeds, bills of sale and specific conveyances in
the appropriate real property records of California to reflect the contribution
and conveyance to the Company of the real property interests effected pursuant
to the Contribution Agreement.
SERVICES AGREEMENT. SFR provides various administrative and financial
services to the Company, including administration of certain employee benefit
plans, access to telecommunications, corporate legal assistance and certain
other corporate staff and support services. Concurrently with the closing of the
Offerings, the Company and SFR intend to enter into a Services Agreement to
formalize this existing arrangement. The agreement is intended to be flexible
(for example, on short notice the Company may take responsibility for some or
all of the services currently being provided by SFR) and may be easily
terminated by either party. As a result, no assurance is given that this service
arrangement will be maintained for any specific period in the future. Whether
SFR continues to provide some or all of these services will depend on many
factors, including the continuing agreement of the parties on the appropriate
amounts of compensation and reimbursement, the ability of the Company to provide
the services for itself and the continued willingness of SFR to provide the
services. The agreement provides that the Company will pay SFR a monthly fee for
certain listed services at specified rates. The total monthly fee for all listed
services is $120,000. The Company believes that the cost of obtaining the agreed
upon services from SFR under this agreement will be competitive with the cost of
obtaining the same services from third parties or performing the same services
for itself. Payments to SFR under the Services Agreement are expected to decline
as the Company assumes full responsibility during 1997 for each of the services
covered by such agreement.
TAX ALLOCATION AGREEMENT. After consummation of the Offerings, the Company
will continue to be included in the consolidated Federal income tax return filed
by SFR as the common parent for itself and its subsidiaries. Consistent
therewith and pursuant to the Tax Allocation Agreement, the Company has agreed
to pay to SFR an amount approximating the Federal tax liability and state and
local tax liability it would have paid if it and its subsidiaries were a
separate consolidated group. This amount will be payable regardless of whether
the SFR consolidated group, as a whole, has any current Federal, state or local
tax liability. In determining amounts payable to SFR in accordance with the
foregoing formula, the Company and its subsidiaries may only take into account
their carryforwards of losses and credits to reduce amounts they would owe if
they were a separate consolidated group. Accordingly, there are circumstances in
which the Company and its subsidiaries may receive no compensation for the
current use of their carryforwards of losses or credits by other members of the
SFR group. If the Company or its subsidiaries cease to be members of the SFR
consolidated group, the Tax Allocation Agreement will continue to apply to prior
periods, and additional payments to SFR could be required if there is an audit
or similar adjustment subsequently made that impacts the computation of amounts
to be paid SFR as described above. In addition, if the Company and its
subsidiaries cease to be members of the SFR consolidated group, they would
forfeit any future rights to compensation or credit from SFR for the utilization
of their carryforwards by members of the SFR group.
REGISTRATION RIGHTS AND INDEMNIFICATION AGREEMENT. Concurrently with the
consummation of the Offerings, the Company will enter into a Registration Rights
and Indemnification Agreement with SFR pursuant to which SFR has the right to
require the Company to effect three registrations under the Securities Act of
all or any part of the Common Stock owned by SFR and to bear the expenses of
such registration. No such registration may be required by SFR prior to the
expiration of the 180 day period
65
<PAGE> 68
following the date of this Prospectus. See "Shares Eligible for Future Sale". In
addition, the Registration Rights and Indemnification Agreement gives SFR the
right to include its shares of Common Stock in any registration of shares of
Common Stock initiated by the Company following the Offerings. The Registration
Rights and Indemnification Agreement also contains provisions whereby the
Company and SFR agree to indemnify each other and their respective subsidiaries
as well as their respective directors, officers, employees, agents and
representatives for certain costs and liabilities relating to violations of
Federal and state securities laws in connection with the Offerings, the Spin Off
or any such registration of shares of Common Stock owned by SFR.
CONFLICTS OF INTEREST; TRANSACTIONS WITH AFFILIATES
The nature of the respective businesses of the Company and SFR is such as
to give rise to conflicts of interest between the two companies. Conflicts could
arise, for example, with respect to allocation of capital, dividends, incurrence
of indebtedness, tax matters, financial commitments, registration rights,
administration of benefit plans, service arrangements, potential acquisitions of
businesses or oil and gas properties and other corporate opportunities, the
issuance and sale of capital stock of the Company and the election of directors.
The Company owns all of SFR's oil and gas properties in California, except
for the Production Payment retained by SFR and the Excluded Assets. SFR has
advised the Company that it does not currently intend to engage in the
exploration, development and production of oil and gas in California except
through its ownership of Common Stock of the Company and the Excluded Assets,
nor does it intend to compete with the Company in the acquisition of oil and gas
properties. Circumstances may arise in the future, however, that would cause SFR
to engage in the exploration, development and production of oil and gas in
competition with the Company. For example, acquisition opportunities might arise
which would require financial resources greater than those available to the
Company or which are located in areas in which the Company does not intend to
operate. In addition, SFR might acquire a competing oil and gas business as part
of a larger acquisition. Thus, although SFR has no current intention to do so,
there can be no assurances that it will not engage in the oil and gas
exploration, development and production business in competition with the
Company.
The Company and SFR and its affiliates have in the past entered into
intercompany transactions and agreements incident to their respective
businesses, and the Company and SFR may be expected to enter into transactions
and agreements from time to time in the future. The Company intends that the
terms of any future transactions and agreements between the Company and SFR will
be on terms at least as favorable to the Company as it could obtain from third
parties. See "Risk Factors -- Control by SFR".
66
<PAGE> 69
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 100,000,000 shares of Common Stock, par value $0.01 per
share, and 25,000,000 shares of Preferred Stock, par value $0.01 per share
("Preferred Stock"). As of the date of this Prospectus, there are 45,350,000
shares of Common Stock outstanding, all of which are held of record by SFR. See
"Relationship Between the Company and SFR -- Ownership of Common Stock". Of the
authorized shares of Preferred Stock, no shares are outstanding. Immediately
after the closing of the Offerings, a total of 53,250,000 shares of Common Stock
will be outstanding, and 3,500,000 shares of Common Stock will be reserved for
issuance under the Company's incentive compensation plans. See
"Management -- Company Benefit Plans". The following description is a summary
and is subject to and qualified in its entirety by reference to the provisions
of the Company's Charter and Bylaws, copies of which are filed as exhibits to
the Registration Statement of which this Prospectus forms a part.
COMMON STOCK
VOTING RIGHTS. Each share of Common Stock entitles the holder to one vote
on each matter submitted to a vote of the Company's stockholders, including the
election of directors. There is no cumulative voting. After the Offerings, SFR
will hold approximately 85% of the issued and outstanding Common Stock and will
hold the voting power to determine the outcome of all matters upon which the
stockholders of the Company vote. See "Risk Factors -- Control by SFR" and
"Relationship Between the Company and SFR". The Charter prohibits the taking of
any action by written stockholder consent in lieu of a meeting.
DIVIDENDS. The holders of Common Stock are entitled to receive dividends
if, as and when such dividends are declared by the board of directors of the
Company out of assets legally available therefor after payment of dividends
required to be paid on shares of Preferred Stock, if any.
The Note Agreement pursuant to which the Company Senior Notes will be
issued contains covenants that, among other things, restrict the Company's
ability to pay cash dividends unless certain conditions are satisfied. Such
restriction permits the Company to pay dividends to the extent that the
aggregate dividends together with amounts previously expended to redeem or
purchase its capital stock or invested in other than permitted investments do
not exceed the sum of (i) $62 million, (ii) 100% of the Company's consolidated
net earnings (or minus 100% in the case of a deficit) for the period from the
date of the closing of the Offerings and terminating as of the end of the most
recent calendar quarter and (iii) the net cash proceeds to the Company from the
sale of its stock after the closing of the Offerings or in respect of any
convertible debt security that has been converted into stock of the Company. In
addition, dividends may not be paid under the Note Agreement if such payment
would reduce the Company's net worth below the thresholds indicated: $115
million through March 31, 1997 and, thereafter, the sum of $115 million and 20%
of the Company's consolidated net income for all then completed quarters
beginning with the quarter ending March 31, 1997. The New Credit Facility
contains similar restrictions on the payment of dividends.
LIQUIDATION OR DISSOLUTION. Upon liquidation or dissolution, holders of
Common Stock are entitled to share ratably in all net assets available for
distribution to stockholders after payment of any liquidation preferences to
holders of Preferred Stock.
OTHER PROVISIONS. The Common Stock carries no conversion or preemptive
rights. All outstanding shares of Common Stock are, and the shares of Common
Stock to be sold by the Company in the Offerings when issued will be, duly
authorized, validly issued, fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the
Common Stock is First Chicago Trust Company of New York.
LISTING. Application will be made to list the Common Stock on the
under the symbol " ".
67
<PAGE> 70
PREFERRED STOCK
The board of directors of the Company is authorized, without approval of
the stockholders, to cause shares of Preferred Stock to be issued in one or more
series, to determine the numbers of shares of each series, to fix the rights,
powers, preferences and privileges of each series and any qualifications,
limitations or restrictions thereon and to increase or decrease the number of
shares of each such series. Among the specific matters that may be determined by
the board of directors are: the annual rate of dividends; the redemption price,
if any; the terms of a sinking or purchase fund, if any; the amount payable in
the event of any voluntary liquidation, dissolution or winding up of the affairs
of the Company; conversion rights, if any; and voting powers, if any. Depending
upon the terms of the Preferred Stock established by the board of directors, any
or all series of Preferred Stock could have preferences over the Common Stock
with respect to dividends and other distributions and upon liquidation of the
Company or could have voting or conversion rights that could adversely affect
the holders of the outstanding Common Stock.
In addition, the Preferred Stock could delay, defer or prevent a change of
control of the Company. The Company has no present plans to issue shares of
Preferred Stock. Prior to the Spin Off, however, it is anticipated that the
Company's board of directors will adopt a preferred share purchase rights plan.
See "-- Rights Plan".
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS AND DELAWARE LAW
Certain provisions of the Charter and Bylaws are intended to enhance the
likelihood of continuity and stability in the board of directors of the Company
and in its policies, but might have the effect of delaying or preventing a
change in control of the Company and may make more difficult the removal of
incumbent management even if such transactions could be beneficial to the
interests of stockholders. Set forth below is a summary description of such
provisions:
NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL. The Company's Charter
provides that the number of directors constituting the Company's board of
directors shall be fixed by the board of directors, but shall not be less than
three nor more than 15. The Charter further provides that the directors shall be
divided into three classes, each class serving staggered three-year terms. The
board of directors of the Company, acting by a majority of the directors then in
office, may fill any vacancy or newly created directorship.
ANTI-TAKEOVER PROVISIONS. Delaware law permits and the Charter grants the
Company's board of directors broad discretionary authority to adopt certain
anti-takeover measures approved by it in response to any proposal to acquire the
Company, its assets or more than 15% of its outstanding capital stock. Measures
to be adopted could include a shareholder rights plan or bylaw provisions
requiring supermajority shareholder approval of acquisition proposals.
LIMITATION ON PERSONAL LIABILITY OF DIRECTORS. Delaware law authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
director's fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the limitations authorized by Delaware law, directors are accountable to
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Delaware
law enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Charter of the Company limits the liability of
directors of the Company to the Company or its stockholders (in their capacity
as directors but not in their capacity as officers) to the fullest extent
permitted by Delaware law. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
68
<PAGE> 71
redemptions as provided in Section 174 of the Delaware General Corporation Law,
or (iv) for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited the Company and its stockholders. The
Company's Bylaws provide indemnification to the Company's officers and directors
and certain other persons with respect to certain matters.
INDEMNIFICATION ARRANGEMENTS. The Charter and Bylaws provide that, to the
fullest extent permitted by the Delaware General Corporation Law, the directors
and officers of the Company shall be indemnified and shall be advanced expenses
in connection with actual or threatened proceedings and claims arising out of
their status as such. The Company has entered into indemnification agreements
with each of its directors and executive officers that provide for
indemnification and expense advancement to the fullest extent permitted under
the Delaware General Corporation Law.
SECTION 203 OF THE DELAWARE CORPORATE LAW
Section 203 of the Delaware General Corporation Law ("Section 203")
restricts certain transactions between a corporation organized under Delaware
law (or its majority owned subsidiaries) and any person holding 15% or more of
the corporation's outstanding voting stock, together with the affiliates or
associates of such person (an "Interested Stockholder"). Section 203 prevents,
for a period of three years following the date that a person becomes an
Interested Stockholder, the following types of transactions between the
corporation and an Interested Stockholder (unless certain conditions, described
below, are met): (a) mergers or consolidations, (b) sales, leases, exchanges or
other transfers of 10% or more of the aggregate assets of the corporation, (c)
issuances or transfers by the corporation of any stock of the corporation which
would have the effect of increasing the Interested Stockholder's proportionate
share of the stock of any class or series of the corporation, (d) any other
transaction which has the effect of increasing the proportionate share of the
stock of any class or series of the corporation which is owned by the Interested
Stockholder, and (e) receipt by the Interested Stockholder of the benefit
(except proportionately as a stockholder) of loans, advances, guarantees,
pledges or other financial benefits provided by the corporation.
The three-year ban does not apply if either the proposed transaction or the
transaction by which the Interested Stockholder became an Interested Stockholder
is approved by the board of directors of the corporation prior to the time such
stockholder becomes an Interested Stockholder. Additionally, an Interested
Stockholder may avoid the statutory restriction if, upon the consummation of the
transaction whereby such stockholder becomes an Interested Stockholder, the
stockholder owns at least 85% of the outstanding voting stock of the corporation
without regard to those shares owned by the corporation's officers who are also
directors or by certain employee stock plans. Business combinations are also
permitted within the three-year period if approved by the board of directors and
authorized at an annual or special meeting of stockholders by the holders of at
least 66 2/3% of the outstanding voting stock not owned by the Interested
Stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its shareholders to exempt itself from coverage, provided that such bylaw or
charter amendment shall not become effective until 12 months after the date it
is adopted. The Company has not adopted such a charter or bylaw amendment.
69
<PAGE> 72
NO ACTION BY WRITTEN CONSENT
The Charter prohibits the taking of any action by written stockholder
consent in lieu of a meeting. Such provisions may not be amended or repealed
without the affirmative vote of the holders of at least 80% of the capital stock
of the Company entitled to vote on such matters.
RIGHTS PLAN
Prior to the Spin Off, it is anticipated that the Company's board of
directors will adopt a preferred share purchase rights plan (the "Rights Plan")
pursuant to which, concurrently with or promptly after the Spin Off, one right
(collectively, the "Rights") to purchase one one-hundredth of a share of a newly
issued series of junior participating Preferred Stock of the Company would be
distributed as a dividend for each outstanding share of Common Stock. Such
Rights would be issuable on the terms and subject to the conditions set forth in
the Rights Plan. No Rights will be issued under the Rights Plan until the
consummation of the Spin Off. Because of the nature of the dividend, liquidation
and voting rights of the shares of the series of Preferred Stock issuable upon
exercise of a Right, the value of the one-hundredth interest in a share of this
series of Preferred Stock purchasable upon the exercise of each right should
approximate the value of one share of Common Stock. Each Right, when
exercisable, will represent the right to purchase one share of Common Stock at a
substantial premium to the per share trading price of the Common Stock on the
date the rights are distributed, subject to adjustment. The Rights will expire
no later than the tenth anniversary of the date the rights are first issued. The
Rights will be exercisable (i) 10 days after a person or group acquires
beneficial ownership of 15% or more of the Common Stock (other than any person
who owns more than 15% of the outstanding Common Stock immediately after the
Spin Off, provided such person does not thereafter acquire ownership of an
additional 1% of the Common Stock) (an "Acquiring Person"), or (ii) 10 business
days (or such later date as may be determined by the Company's board of
directors) after a person or group commences a tender offer or exchange upon
consummation of which such person or group would be an Acquiring Person.
If any person or group becomes an Acquiring Person or commences a tender
offer upon consummation of which such person or group would become an Acquiring
Person, each Right not owned by such Acquiring Person or certain related parties
would entitle its holder to purchase, at the Right's then current exercise
price, shares of Common Stock, having a value of twice the Right's exercise
price. In addition, if, after a person or group becomes an Acquiring Person, the
Company is involved in a merger or other business combination transaction with
another person in which it is not the surviving corporation, each Right will
entitle its holder to purchase, at the Right's then current exercise price,
shares of common stock of such other person or group having a value of twice the
Right's exercise price.
The purchase price payable, and the shares issuable, upon exercise of the
Rights will be subject to adjustment from time to time as specified in the
Rights Plan. The Company will generally be entitled to redeem the Rights at
$0.01 per Right at any time until the public announcement that a person or group
has become an Acquiring Person or has commenced a tender offer upon consummation
of which such person or group would become an Acquiring Person, provided that no
such redemption may occur after the Rights have become exercisable.
The terms of the series of junior participating Preferred Stock purchasable
upon exercise of the Rights will be established by the board of directors of the
Company upon the adoption of the rights plan, but it is expected that the terms
will be substantially as follows. Each share of such series of Preferred Stock
will have a minimum preferential quarterly dividend rate of $1.00 per share but
will be entitled to an aggregate dividend of 100 times the dividend declared on
shares of Common Stock. In the event of liquidation, the holders of such series
of Preferred Stock will receive a minimum preferred liquidation payment of $1.00
per share but will be entitled to receive an aggregate liquidation payment equal
to 100 times the payment made per share of the Common Stock. Each share of such
series of Preferred Stock will have 100 votes, voting together with the Common
Stock. The rights of this series of Preferred Stock as to dividends, liquidation
and voting, and in the event of mergers and consolidations, will be protected by
customary antidilution provisions.
70
<PAGE> 73
The inclusion of the foregoing provisions in the Charter and Bylaws, the
existence of authorized but unissued capital stock, the adoption of the Rights
Plan and the Spin Off Tax Indemnity Agreement and the application of Section 203
to stockholders of the Company may tend to deter unfriendly offers or other
efforts to obtain control of the Company that are not approved by the Company's
board of directors and thereby deprive the Company's stockholders of
opportunities to sell their shares of Common Stock at prices higher than
prevailing market prices.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offerings, the Company will have outstanding a
total of 53,250,000 shares of Common Stock, including the 7,900,000 shares
offered in the Offerings. The Common Stock sold in the Offerings will be
transferable without restriction or further registration under the Securities
Act, except for any shares acquired by an "affiliate" of the Company that will
be subject to the resale limitations of Rule 144 promulgated under the
Securities Act. All of the 45,350,000 shares of Common Stock owned by SFR are
"restricted" securities within the meaning of Rule 144 and may not be sold in
the absence of registration other than through Rule 144 as described below or
another exemption from registration under the Securities Act.
In general, under Rule 144, as currently in effect, a stockholder who
(together with predecessor holders who were not "affiliates" of the Company (as
such term is defined in Rule 144 under the Securities Act, "Affiliates")) has
beneficially owned Common Stock which is treated as "restricted securities" (as
defined in Rule 144) for at least two years from the date such restricted
securities were acquired from the Company or an Affiliate, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the Company's Common Stock then outstanding or the average
weekly trading volume in the Company's Common Stock during the four calendar
weeks preceding the date on which notice of such sale was filed under Rule 144.
Sales under Rule 144 are also subject to certain provisions relating to the
manner and notice of sale and availability of current public information about
the Company. In addition, Affiliates of the Company must comply with the
restrictions and requirements of Rule 144 (other than the two-year holding
period requirements) in order to sell shares of Common Stock that are not
restricted securities (such as Common Stock acquired by Affiliates in market
transactions). Furthermore, if a period of at least three years has elapsed from
the date restricted securities were acquired from the Company or an Affiliate, a
holder of such restricted securities who is not an Affiliate at the time of the
sale and has not been an Affiliate for at least three months prior to such sale
would be entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above. All shares held by SFR at the
time of the Offerings will be eligible for sale in August of 1998 if and to the
extent such shares continue to be held by SFR and pursuant to and in accordance
with the volume, manner of sale and other conditions of Rule 144 described
above.
SFR will have three demand registration rights to require the Company to
register its shares of Common Stock under the Securities Act and will have
rights to participate in any future registration of securities by the Company.
See "Relationship Between the Company and SFR -- Contractual
Arrangements -- Registration Rights and Indemnification Agreement".
The Company intends to file a registration statement on Form S-8 covering
all shares of Common Stock issuable under the Company's employee benefit plans
in effect on the date of this Prospectus. The Company has outstanding stock
options and restricted stock with respect to an aggregate of approximately
342,700 shares of Common Stock as of the date of this Prospectus. None of such
options will be exercisable and none of such restricted shares will be
transferable until the first anniversary of the Spin Off (except under certain
limited circumstances).
The Company, SFR and each director and executive officer of the Company
have agreed that, during the period beginning from the date of this Prospectus
and continuing to and including the date 180 days after the date of this
Prospectus, they will not offer, sell, contract to sell or otherwise dispose of,
except as provided in the U.S. Underwriting Agreement and the International
Underwriting Agreement, any securities of the Company that are substantially
similar to the shares of Common Stock or that are
71
<PAGE> 74
convertible into or exchangeable for securities of the Company that are
substantially similar to the shares of Common Stock without the prior written
consent of the representatives of the Underwriters. See "Underwriting". The
Registration Rights and Indemnification Agreement will provide that SFR will not
exercise its registration rights during the same 180-day period. The exercise of
registration rights could adversely affect the market price of the Common Stock.
See "Relationship Between the Company and SFR -- Contractual
Arrangements -- Registration Rights and Indemnification Agreement".
Prior to consummation of the Offerings, there has been no public market for
the Common Stock, and no prediction can be made as to the effect, if any, that
future sale of shares of Common Stock under Rule 144, or the availability of
such shares for future sale, will have on the market price of the Common Stock
prevailing from time to time. Nevertheless sales of substantial amounts of such
shares in the public market, or the perception that such sales could occur,
could adversely affect the prevailing market prices for the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the U.S. Underwriters named below, and
each of such U.S. Underwriters, for whom Goldman, Sachs & Co., Morgan Stanley &
Co. Incorporated and Petrie Parkman & Co., Inc., are acting as representatives,
has severally agreed to purchase from the Company, the respective number of
shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
---------------------------------------------------------------------- ------------
<S> <C>
Goldman, Sachs & Co...................................................
Morgan Stanley & Co. Incorporated.....................................
Petrie Parkman & Co., Inc.............................................
----------
Total.......................................................
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers at such price less
a concession of $ per share. The U.S. Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the International Offering
(the "International Underwriters") providing for the concurrent offer and sale
of shares of Common Stock in an international offering outside the
United States. The offering price and aggregate underwriting discounts and
commissions per share for the Offerings are identical. The closing of the
offering made hereby is a condition to the closing of the International
Offering, and vice versa. The representative of the International Underwriters
is Goldman Sachs International.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the Offerings, each of the U.S.
Underwriters named herein has agreed that, as a part of the distribution of the
shares offered hereby and subject to certain exceptions, it will offer, sell or
deliver the shares of Common Stock, directly or indirectly, only in the United
States of America (including the States and the District of Columbia), its
territories, its possessions and other areas subject to its jurisdiction (the
"United States") and to U.S. persons, which term shall mean, for
72
<PAGE> 75
purposes of this paragraph: (a) any individual who is a resident of the United
States or (b) any corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof and whose
office most directly involved with the purchase is located in the United States.
Each of the International Underwriters has agreed pursuant to the Agreement
Between that, as a part of the distribution of the shares offered as a part of
the International Offering, and subject to certain exceptions, it will (i) not,
directly or indirectly, offer, sell or deliver shares of Common Stock (a) in the
United States or to any U.S. persons or (b) to any person who it believes
intends to reoffer, resell or deliver the shares in the United States or to any
U.S. persons, and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price less an amount not greater than the selling
concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
additional shares of Common Stock solely to cover over-allotments, if
any. If the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
shares of Common Stock offered. The Company has granted the International
Underwriters a similar option to purchase up to an aggregate of
additional shares of Common Stock.
The Company, SFR, and each director and executive officer of the Company
have agreed that, during the period beginning from the date of this Prospectus
and continuing to and including the date 180 days after the date of the
Prospectus, they will not offer, sell, contract to sell or otherwise dispose of
any securities of the Company (other than pursuant to stock option or stock
purchase plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) that are
substantially similar to the shares of the Common Stock or that are convertible
into or exchangeable for securities that are substantially similar to the shares
of the Common Stock without the prior written consent of the representatives,
except for the shares of Common Stock offered in connection with the concurrent
U.S. and International Offerings.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company and the
representatives of the Underwriters. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
Application will be made to list the Common Stock for trading on the
under the symbol " ". In order to meet one of
the requirements for listing the Common Stock on the ,
the Underwriters have undertaken to sell lots of or more shares to a
minimum of beneficial holders.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
Petrie Parkman & Co. ("Petrie Parkman") has been retained by SFR to provide
financial advisory services to SFR and the Company in connection with the Spin
Off. In this capacity, Petrie Parkman will receive fees for its advisory
services which the Company believes to be reasonable and customary.
73
<PAGE> 76
CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
GENERAL
The following is a general discussion of United States Federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
holder who is not a United States person (a "Non-U.S. Holder"), as defined
below. This discussion does not address all aspects of United States Federal
income and estate taxes and does not address any foreign, state or local tax
consequences. Furthermore, this discussion is based on provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. Each prospective purchaser of Common
Stock is advised to consult a tax advisor with respect to current and possible
future U.S. Federal income and estate tax consequences of holding and disposing
of Common Stock as well as any tax consequences that may arise under the laws of
any state, local or other taxing jurisdiction. For purposes of this summary, a
"U.S. Holder" with respect to the Common Stock is (i) an individual who is a
citizen or resident of the United States, (ii) a corporation or partnership
created or organized in the United States or under the laws of the United States
or of any state thereof, or (iii) an estate or trust the income of which is
includable in gross income for United States Federal income tax purposes
regardless of its source; and a "Non-U.S. Holder" is any person other than a
U.S. Holder.
DISTRIBUTIONS
Distributions on the shares of Common Stock (other than distributions in
redemption of the shares of Common Stock subject to section 302(b) of the Code)
will constitute dividends for Federal income tax purposes to the extent paid
from current or accumulated earnings and profits of the Company (as determined
under Federal income tax principles). Dividends paid to a Non-U.S. Holder of
Common Stock which are not effectively connected with a U.S. trade or business
of the Non-U.S. Holder will be subject to United States withholding tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Moreover, under United States Treasury regulations which are currently in
effect, withholding is generally imposed on the gross amount of the
distribution, without regard to whether the corporation has sufficient enough
earnings and profits to cause the distribution to be a dividend for Federal
income tax purposes. Certain certification and disclosure requirements must be
complied with in order to be exempt from withholding under the effectively
connected income exemption. Dividends that are effectively connected with the
conduct of a trade or business within the United States are subject to United
States Federal income tax on a net income basis at applicable graduated
individual or corporate rates. Any such effectively connected dividends received
by a foreign corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country for purposes of the withholding discussed above, and, under the current
interpretation of United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. Under proposed United States
Treasury regulations (the "Proposed Regulations") not currently in effect,
however, a Non-U.S. Holder of Common Stock would be required to satisfy
applicable certification and other requirements to qualify for withholding at an
applicable treaty rate. The Proposed Regulations would require a Non-U.S. Holder
to file a beneficial owner withholding certificate, e.g., a Form W-8, to obtain
the lower treaty rate. The Proposed Regulations would apply to dividends paid
after December 31, 1997, subject to certain transitional rules.
A Non-U.S. Holder of Common Stock may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the Internal Revenue
Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder will generally not be subject to United States Federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) the gain is effectively
74
<PAGE> 77
connected with a trade or business of the Non-U.S. Holder in the United States,
(ii) in the case of a Non-U.S. Holder who is an individual and holds the Common
Stock as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year of the sale or other disposition and certain other
conditions are met, or (iii) the Company is or has been a "U.S. real property
holding corporation" for United States Federal income tax purposes. The Company
believes that it is currently a "U.S. real property holding corporation" for
Federal income tax purposes. So long as the Common Stock continues to be
regularly traded on an established securities market, only a Non-U.S. Holder who
holds or held (at any time during the shorter of the five year period preceding
the date of disposition or the holder's holding period) more than five percent
of the Common Stock will be subject to U.S. Federal income tax on the
disposition of the Common Stock. Such holders should consult their tax advisors
concerning this and other tax effects of the ownership and disposition of Common
Stock.
FEDERAL ESTATE TAX
Common Stock held by an individual Non-U.S. Holder at the time of death
will be included in such holder's gross estate for United States Federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under Treasury regulations, the Company must report annually to the IRS and
to each Non-U.S. Holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends. These information reporting
requirements apply even if withholding was not required because the dividends
were effectively connected with a U.S. trade or business in the United States of
the Non-U.S. Holder or withholding was reduced or eliminated by an applicable
income tax treaty. Copies of the information returns reporting such dividends
and withholding may also be made available to the tax authorities in the country
in which the Non-U.S. Holder resides under the provisions of an applicable
income tax treaty.
Backup withholding (which generally is a withholding tax imposed at the
rate of 31% on certain payments to persons that fail to furnish certain
information under the United States information reporting requirements) will
generally not apply to dividends paid to Non-U.S. Holders that either are
subject to the U.S. withholding tax, whether at 30% or a reduced treaty rate, or
that are exempt from such withholding of effectively connected income. As a
general matter, information reporting and backup withholding will not apply to a
payment by or through a foreign office of a foreign broker of the proceeds of a
sale of Common Stock effected outside the United States. However, information
reporting requirements (but not backup withholding) will apply to a payment by
or through a foreign office of a broker of the proceeds of a sale of Common
Stock effected outside the United States where that broker (i) is a United
States person, (ii) is a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (iii) is a "controlled foreign corporation" as defined in the Code
(generally, a foreign corporation controlled by United States shareholders),
unless the broker has documentary evidence in its records that the holder is a
Non-U.S. Holder and certain conditions are met or the holder otherwise
establishes an exemption. Payment by a United States office of a broker of the
proceeds of a sale of Common Stock is subject to both backup withholding and
information reporting unless the holder certifies to the payor in the manner
required as to its non-United States status under penalties of perjury or
otherwise establishes an exemption.
Amounts withheld under the backup withholding rules do not constitute a
separate United States federal income tax. Rather, any amounts withheld under
the backup withholding rules will be refunded or allowed as a credit against the
holder's United States Federal income tax liability, if any, provided the
required information or appropriate claim for refund is filed with the IRS.
75
<PAGE> 78
LEGAL MATTERS
The validity of the Common Stock is being passed upon for the Company by
Andrews & Kurth L.L.P., Houston, Texas, and for the Underwriters by Cravath,
Swaine and Moore, New York, New York.
EXPERTS
The financial statements of the Western Division of Santa Fe Energy
Resources, Inc. as of December 31, 1995 and 1994 and for each of the three years
in the period ended December 31, 1995 and the balance sheet of Monterey
Resources, Inc. as of September 5, 1996 included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The estimates of proved and proved developed reserves, the related
estimates of future net cash flows and present value thereof and other related
calculations of Ryder Scott set forth in this Prospectus have been included
herein in reliance upon the authority of said firm as experts in petroleum
engineering.
76
<PAGE> 79
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MONTEREY RESOURCES, INC.
Audited Balance Sheet
Report of Independent Accountants.................................................... F-2
Balance Sheet -- September 5, 1996................................................... F-3
Notes to Balance Sheet............................................................... F-4
Pro Forma Financial Statements
Unaudited Pro Forma Condensed Statement of Operations for the six months ended June
30, 1996.......................................................................... F-5
Unaudited Pro Forma Condensed Balance Sheet -- June 30, 1996......................... F-6
Unaudited Pro Forma Condensed Statement of Operations for the year ended December 31,
1995.............................................................................. F-7
Notes to Pro Forma Condensed Financial Statements.................................... F-8
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
Audited Financial Statements
Report of Independent Accountants.................................................... F-11
Statement of Operations for the years ended December 31, 1995, 1994 and 1993......... F-12
Balance Sheet -- December 31, 1995 and 1994.......................................... F-13
Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993......... F-14
Statement of Division Equity for the years ended December 31, 1995, 1994 and 1993.... F-15
Notes to Financial Statements........................................................ F-16
Unaudited Financial Information
Supplemental Information to Financial Statements..................................... F-25
Unaudited Financial Statements
Statement of Operations for the six months ended June 30, 1996 and 1995.............. F-30
Balance Sheet -- June 30, 1996 and December 31, 1995................................. F-31
Statement of Cash Flows for the six months ended June 30, 1996 and 1995.............. F-32
Statement of Division Equity for the six months ended June 30, 1996 and 1995......... F-33
Notes to Unaudited Financial Statements.............................................. F-34
</TABLE>
F-1
<PAGE> 80
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Monterey Resources, Inc.
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of Monterey Resources, Inc. at September 5,
1996, in conformity with generally accepted accounting principles. This
financial statement is the responsibility of the management of Monterey
Resources, Inc.; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this statement in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
September 17, 1996
F-2
<PAGE> 81
MONTEREY RESOURCES, INC.
BALANCE SHEET
(IN MILLIONS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 5,
1996
------------
<S> <C>
Cash............................................................................ $0.5
====
SHAREHOLDER'S EQUITY
Shareholder's Equity
Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares
issued or outstanding...................................................... $ --
Common stock, $0.01 par value, 100,000,000 shares authorized, 45,350,000
shares issued and outstanding.............................................. 0.5
----
$0.5
====
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 82
MONTEREY RESOURCES, INC.
NOTES TO BALANCE SHEET
(1) ORGANIZATION AND BASIS OF PRESENTATION
Monterey Resources, Inc. ("Monterey" or the "Company") was incorporated in
August 1996 and is a wholly owned subsidiary of Santa Fe Energy Resources, Inc.
("SFR") engaged in the production, development and acquisition of oil and
natural gas in the State of California. In connection with the organization of
Monterey, SFR contributed $461,000 in exchange for 1,000 shares of Monterey
common stock. On September 17, 1996, the Company's board of directors approved a
45,350-to-1 stock split of its common stock. Accordingly, common stock and
paid-in-capital have been restated to give effect to this stock split. At or
prior to the closing of the public offering of the Company's common stock, SFR
will contribute to the Company substantially all of the assets and operations of
its Western Division, and the Company will assume the obligations and
liabilities of SFR related thereto, including $245 million of long-term debt.
Such contribution will be effected pursuant to a contribution and conveyance
agreement, the effective date for which is expected to be November 1, 1996. SFR
is retaining a dollar-denominated production payment (the "Production Payment")
on the Midway-Sunset field, pursuant to which SFR has the right to receive the
net proceeds of production up to a cumulative maximum of $30 million plus
interest thereon at a rate of 8% per annum, at which time the Production Payment
terminates and the Company will receive and retain all future proceeds of
production from such property interest. The Production Payment is prepayable
without penalty at any time in whole at the Company's option. SFR and the
Company will enter into a new $75 million revolving credit facility with a group
of banks and SFR is expected to borrow approximately $13 million thereunder. In
addition, SFR and the Company will enter into certain intercompany agreements
regarding corporate services, taxes, indemnification and certain other matters.
Upon receipt by the Company of the proceeds of the public offering, such
proceeds will be used to repay certain obligations incurred upon SFR's
contribution of the assets and operations to the Company.
(2) INCENTIVE STOCK COMPENSATION PLANS
The Company has adopted the 1996 Incentive Stock Compensation Plan for Key
Employees (the "Key Employee Plan") and the 1996 Incentive Stock Compensation
Plan for Nonexecutive Employees (the "Nonexecutive Plan" and, together with the
Key Employee Plan, the "Company Stock Plans"). The Company Stock Plans will also
permit the Compensation and Benefits Committee of the board of directors (the
"Committee") to grant (i) options to purchase shares of Common Stock, which may
be, under the Key Employee Plan, either Incentive Stock Options, as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
NQSOs, and, which may be, under the Nonexecutive Plan, NQSOs only, (ii) shares
of Restricted Stock, (iii) Stock Appreciation Rights ("SARs"), (iv) Phantom
Units and (v) Bonus Stock. Options and awards with respect to no more than
3,000,000 shares of Common Stock may be issued under the Key Employee Plan. The
Nonexecutive Plan allows for the grant of up to 500,000 shares annually. The
Committee, in its discretion, will select those employees to whom awards will be
granted, the form and amount of awards, and the terms and conditions of awards.
All nonexecutive employees of the Company who are responsible for the Company's
growth and profitability will be eligible to receive awards under the
Nonexecutive Plan.
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), which established financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123 encourages
companies to adopt a fair value based method of accounting for such plans but
continues to allow the use of the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("Opinion 25"). Companies electing to continue accounting in
accordance with Opinion 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method defined in SFAS 123 had
been applied. The Company will account for stock-based compensation in
accordance with Opinion 25 and will make pro forma disclosures in accordance
with the provisions of SFAS 123 in its financial statements.
F-4
<PAGE> 83
MONTEREY RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(IN MILLIONS OF DOLLARS, EXCEPT AS NOTED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------------------------------------
PRO FORMA PRO FORMA
WESTERN ADJUSTMENTS WESTERN ADJUSTMENTS MONTEREY
DIVISION FOR THE DIVISION FOR THE RESOURCES, INC.
HISTORICAL CONTRIBUTION PRO FORMA OFFERINGS PRO FORMA(A)
---------- ----------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues....................... $126.4 $ -- $ 126.4 $ -- $ 126.4
---------- ----------- --------- ----------- ---------------
Costs and Expenses
Production and operating..... 48.5 -- 48.5 -- 48.5
Exploration, including dry
hole costs................ 0.9 -- 0.9 -- 0.9
Depletion, depreciation &
amortization.............. 18.1 -- 18.1 -- 18.1
General and administrative... 3.9 -- 3.9 0.6(c) 4.5
Taxes (other than income).... 4.3 -- 4.3 -- 4.3
---------- ----------- --------- ----------- ---------------
75.7 -- 75.7 0.6 76.3
---------- ----------- --------- ----------- ---------------
Income from Operations......... 50.7 -- 50.7 (0.6) 50.1
Interest, net............. (12.5) (1.6)(b) (14.1) 4.0(d) (10.1)
---------- ----------- --------- ----------- ---------------
Income Before Income Taxes..... 38.2 (1.6) 36.6 3.4 40.0
Income tax expense........ (13.9) 0.7(e) (13.2) (1.4)(e) (14.6)
---------- ----------- --------- ----------- ---------------
Net Income (Loss).............. $ 24.3 $(0.9) $ 23.4 $ 2.0 $ 25.4
======= ========== ======== ========== ============
Earnings per share (in
dollars)..................... $ 0.48
============
Average shares outstanding
(millions)................... 45.3 7.9(f) 53.2
======== ========== ============
</TABLE>
The accompanying notes are an integrated part of these pro forma condensed
financial statements.
F-5
<PAGE> 84
MONTEREY RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
--------------------------------------------------------------------------
PRO FORMA PRO FORMA
WESTERN ADJUSTMENTS WESTERN ADJUSTMENTS MONTEREY
DIVISION FOR THE DIVISION FOR THE RESOURCES, INC.
HISTORICAL CONTRIBUTION PRO FORMA OFFERINGS PRO FORMA
---------- ----------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
$ 100.4(b)
Cash and cash equivalents........... $ -- $ $ -- (85.8)(c) $ 14.6
Accounts receivable............... 29.7 -- 29.7 -- 29.7
Other current assets.............. 2.0 -- 2.0 -- 2.0
---------- ----------- --------- ----------- ---------------
31.7 -- 31.7 14.6 46.3
---------- ----------- --------- ----------- ---------------
Properties and Equipment, at cost
Oil and gas (successful efforts
accounting).................... 993.3 -- 993.3 -- 993.3
Other............................. 20.8 -- 20.8 -- 20.8
---------- ----------- --------- ----------- ---------------
1,014.1 -- 1,014.1 -- 1,014.1
Accumulated depletion,
depreciation, amortization and
impairment..................... (637.3) -- (637.3) -- (637.3)
---------- ----------- --------- ----------- ---------------
376.8 -- 376.8 -- 376.8
---------- ----------- --------- ----------- ---------------
Other Assets........................ 1.5 -- 1.5 -- 1.5
---------- ----------- --------- ----------- ---------------
$ 410.0 $ -- $ 410.0 $ 14.6 $ 424.6
======== ========== ======== ========== ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.................. $ 14.6 $ -- $ 14.6 $ -- $ 14.6
Current portion of long-term
debt........................... 35.0 -- 35.0 (35.0)(c) --
Production payment payable........ 30.0(a) 30.0 30.0
Other current liabilities......... 13.4 (7.6)(a) 5.8 5.8
---------- ----------- --------- ----------- ---------------
63.0 22.4 85.4 (35.0) 50.4
---------- ----------- --------- ----------- ---------------
Long-Term Debt...................... 210.0 12.5(a) 222.5 (47.5)(c) 175.0
---------- ----------- --------- ----------- ---------------
Long-Term Obligations............... 5.7 (2.7)(a) 3.0 -- 3.0
---------- ----------- --------- ----------- ---------------
Deferred Income Taxes............... 80.2 (21.9)(a) 58.3 (1.3)(c) 57.0
---------- ----------- --------- ----------- ---------------
Shareholders' Equity
Common stock...................... -- 0.4(a) 0.4 0.1(b) 0.5
Paid-in capital................... -- 40.4(a) 40.4 100.3(b) 140.7
Retained earnings................. -- -- -- (2.0)(c) (2.0)
Western Division equity........... 51.1 (51.1)(a) -- --
---------- ----------- --------- ----------- ---------------
51.1 (10.3) 40.8 98.4 139.2
---------- ----------- --------- ----------- ---------------
$ 410.0 $ -- $ 410.0 $ 14.6 $ 424.6
======== ========== ======== ========== ============
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
financial statements.
F-6
<PAGE> 85
MONTEREY RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(IN MILLIONS OF DOLLARS, EXCEPT AS NOTED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------------------
PRO FORMA PRO FORMA
WESTERN ADJUSTMENTS WESTERN ADJUSTMENTS MONTEREY
DIVISION FOR THE DIVISION FOR THE RESOURCES, INC.
HISTORICAL CONTRIBUTION PRO FORMA OFFERINGS PRO FORMA(A)
---------- ----------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues....................... $211.3 $ -- $ 211.3 $ -- $ 211.3
---------- ----------- --------- ----------- ---------------
Costs and Expenses
Production and operating..... 85.3 -- 85.3 -- 85.3
Exploration, including dry
hole costs................ 2.3 -- 2.3 -- 2.3
Depletion, depreciation &
amortization.............. 32.4 -- 32.4 -- 32.4
General and administrative... 7.3 -- 7.3 1.7(c) 9.0
Taxes (other than income).... 7.9 -- 7.9 -- 7.9
---------- ----------- --------- ----------- ---------------
135.2 -- 135.2 1.7 136.9
---------- ----------- --------- ----------- ---------------
Income from Operations......... 76.1 -- 76.1 (1.7) 74.4
Interest, net............. (25.1) (3.3)(b) (28.4) 8.1(d) (20.3)
Other income (expense).... (0.6) -- (0.6) -- (0.6)
---------- ----------- --------- ----------- ---------------
Income Before Income Taxes..... 50.4 (3.3) 47.1 6.4 53.5
Income tax expense........ (16.0) 1.4(e) (14.6) (2.6)(e) (17.2)
---------- ----------- --------- ----------- ---------------
Net Income (Loss).............. $ 34.4 $(1.9) $ 32.5 $ 3.8 $ 36.3
======= ========== ======== ========== ============
Earnings per share (in
dollars)..................... $ 0.68
============
Average shares outstanding
(millions)................... 45.3 7.9(f) 53.2
======== ========== ============
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
financial statements.
F-7
<PAGE> 86
MONTEREY RESOURCES, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited pro forma condensed statements of operations of the Company
for the six months ended June 30, 1996 and the year ended December 31, 1995, and
the unaudited pro forma condensed balance sheet as of June 30, 1996
(collectively "the Pro Forma Financial Statements") have been prepared from the
historical financial statements of the Western Division of SFR presented
elsewhere in this prospectus. The Pro Forma Financial Statements are based on
numerous assumptions and include the adjustments as explained in Note 2 below.
The unaudited pro forma condensed statements of operations for the six months
ended June 30, 1996 and the year ended December 31, 1995 have been prepared as
if the transactions described below had occurred as of January 1, 1995. The
unaudited pro forma condensed balance sheet has been prepared as if the
transactions described below had occurred as of June 30, 1996.
Prior to or concurrently with the consummation of the Offerings, the
following transactions will occur: (a) the Company and SFR will enter into a
contribution and conveyance agreement (the "Contribution Agreement"), pursuant
to which, among other things: (i) SFR will contribute to the Company
substantially all of the assets and properties of the Western Division, subject
to the retention by SFR of the Production Payment (as defined below) and certain
other assets; (ii) SFR will retain a production payment (the "Production
Payment") in an aggregate amount not to exceed $30 million, with respect to
certain properties in the Midway-Sunset field, which Production Payment will be
prepayable in whole without penalty by the Company at any time; and (iii) the
Company will assume all obligations and liabilities of SFR associated with or
allocated to the assets and properties of the Western Division, including $245
million of indebtedness in respect of SFR's 10.23% Series E Notes due 1997,
10.27% Series F Notes due 1998 and 10.61% Series G Notes due 2005 (the "Series E
Notes", "Series F Notes" and "Series G Notes", respectively, and the "SFR Senior
Notes", collectively); (b) the Company will (i) use a portion of the net
proceeds of the Offerings to repay in full the $70 million aggregate principal
amount of the Series E Notes and Series F Notes, and pay a prepayment penalty of
approximately $2 million thereon and (ii) issue $175 million in aggregate
principal amount of its 10.61% Senior Notes due 2005 (the "Company Senior
Notes") to holders of the Series G Notes in exchange for the cancellation of
such notes, and pay a $1.3 million consent fee in connection therewith; (c) (i)
SFR and the Company will enter into a new $75 million revolving credit facility
with a group of banks (the "New Credit Facility") and SFR is expected to borrow
approximately $13 million thereunder, and (ii) upon consummation of the
Offerings, the Company will repay all such indebtedness outstanding under the
New Credit Facility with a portion of the net proceeds of the Offerings; and (d)
SFR and the Company will enter into certain intercompany agreements regarding
corporate services, taxes, indemnification and certain other matters. The
transactions described above, excluding the Offerings, are referred to herein
collectively as the "Transactions".
In addition to the Offerings and the Transactions described above, prior to
the consummation of the Offerings, SFR intends to commence: (a) an offer to
purchase for cash (the "SFR Tender Offer") outstanding shares of its Convertible
Preferred Stock, 7% Series (the "Convertible Preferred Stock"); and (b) a
consent solicitation from the holders of its 11% Senior Subordinated Debentures
due 2004 (the "SFR Debentures") with respect to certain amendments to the SFR
Debentures (the "SFR Debenture Amendments"). The Offerings and the Transactions
will not be consummated unless and until the SFR Debenture Amendments become
effective.
The Pro Forma Financial Statements are not necessarily indicative of the
current or future financial position or results of operations of the Company had
the transfer of the Western Division and offering occurred earlier and such
statements should be read in the context of the related historical financial
statements and notes thereto appearing elsewhere herein. The pro forma
adjustments are based upon
F-8
<PAGE> 87
MONTEREY RESOURCES, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
currently available information and contain estimates and assumptions.
Management believes that the estimates and assumptions provide a reasonable
basis for presenting the significant effects of the transactions as contemplated
and that the pro forma adjustments give appropriate effect to these estimates
and assumptions and are properly applied in the Pro Forma Financial Statements.
(2) PRO FORMA ADJUSTMENTS
The pro forma adjustments to the financial statements indicated are as set
forth below:
Unaudited Pro Forma Condensed Statement of Operations for the six months
ended June 30, 1996.
(a) The unaudited pro forma condensed statement of operations does not
reflect the following nonrecurring charges which are directly related
to the Transactions and the Offerings: (i) $2.0 million ($1.2 million
after tax) prepayment penalty related to the retirement of the Series E
Notes and the Series F Notes, and (ii) a $1.3 million ($0.8 million
after tax) consent fee related to the exchange of the Company Senior
Notes for the Series G Notes.
(b) Reflects interest expense with respect to the Production Payment at 8%
per annum ($1.2 million) and $12.5 million outstanding under the terms
of the New Credit Facility at 7% per annum ($0.4 million).
(c) Reflects (i) the reversal of $3.2 million of general and administrative
expenses allocated to the Western Division by SFR, and (ii) $3.8
million of estimated incremental direct and indirect general and
administrative expenses associated with the operations of the Company
as a stand-alone entity. This estimate includes additional salaries and
benefits, investor reporting and communications, annual costs of
computer hardware and telecommunications systems, annual computer
software licenses and maintenance, separate insurance and other costs.
(d) Reflects the reversal of interest expense of (i) $3.6 million with
respect to the Series E Notes and Series F Notes and (ii) $0.4 million
with respect to $12.5 million outstanding under the New Credit
Facility.
(e) Reflects the income tax effects of the pro forma adjustments.
(f) Average shares outstanding includes 45.350 million shares of common
stock held by SFR and 7.9 million shares of common stock issued in the
Offerings.
Unaudited Pro Forma Condensed Balance Sheet as of June 30, 1996
(a) Gives effect to (i) the contribution of the net assets of the Western
Division by SFR pursuant to the Contribution Agreement and the
assumption of certain Western Division liabilities by SFR; (ii) the
$12.5 million liability for amounts drawn on the New Credit Facility;
and (iii) the $30.0 million Production Payment retained by SFR.
Upon contribution by SFR of the net assets of the Western Division
pursuant to the Contribution Agreement and the assumption of certain
Western Division liabilities by SFR, the tax basis applicable to the
Western Division net assets will increase, and the deferred income tax
liability will decrease, as a result of the tax gain recognized by SFR.
(b) Gives effect to the receipt by Monterey of $100.4 million in proceeds
from the Offerings (consisting of the assumed sale of 7.9 million
shares at $14 per share), net of underwriting discounts of $6.6 million
and estimated expenses of the Offerings of $3.0 million.
F-9
<PAGE> 88
MONTEREY RESOURCES, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Gives effect to (i) the retirement of the Series E Notes ($35.0
million) and Series F Notes ($35.0 million) assumed by the Company
pursuant to the Contribution Agreement; (ii) the repayment of the $12.5
million outstanding under the New Credit Facility; (iii) the payment of
a $2.0 million prepayment penalty ($1.2 million, net of related taxes)
related to the retirement of the of the Series E Notes and Series F
Notes; and (iv) the payment of a $1.3 million consent fee ($0.8
million, net of related taxes) incurred in the exchange of the
Company's Senior Notes for the Series G Notes.
Unaudited Pro Forma Condensed Statement of Operations for the year ended
December 31, 1995
(a) The unaudited pro forma condensed statement of operations does not
reflect the following nonrecurring charges which are directly related
to the Transactions and the Offerings: (i) a $2.0 million ($1.2 million
after tax) prepayment penalty related to the retirement of the Series E
Notes and the Series F Notes, and (ii) a $1.3 million ($0.8 million
after tax) consent fee related to the exchange of the Company Senior
Notes for the Series G Notes.
(b) Reflects interest expense with respect to the Production Payment at 8%
($2.4 million) and $12.5 million outstanding under the terms of the New
Credit Facility at 7% ($0.9 million).
(c) Reflects (i) the reversal of $6.4 million of general and administrative
expenses allocated to the Western Division by SFR, and (ii) $8.1
million of estimated incremental direct and indirect general and
administrative expenses associated with the operations of the Company
as a stand-alone entity. This estimate includes additional salaries and
benefits, investor reporting and communications, annual costs of
computer hardware and telecommunications systems, annual computer
software licenses and maintenance, separate insurance and other costs.
(d) Reflects the reversal of interest expense of (i) $7.2 million with
respect to the Series E Notes and Series F Notes and (ii) $0.9 million
with respect to $12.5 million outstanding under the terms of the New
Credit Facility.
(e) Reflects the income tax effects of the pro forma adjustments.
(f) Average shares outstanding includes 45.35 million shares of common
stock held by SFR and 7.9 million shares of common stock issued in the
Offerings.
F-10
<PAGE> 89
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Santa Fe Energy Resources, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows and of division equity present fairly, in all material
respects, the financial position of the Western Division of Santa Fe Energy
Resources, Inc. at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
September 17, 1996
F-11
<PAGE> 90
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
STATEMENT OF OPERATIONS
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Revenues
Crude oil and liquids........................................ $205.0 $173.5 $180.2
Natural gas.................................................. 1.9 1.6 3.7
Crude oil marketing and trading.............................. 4.2 3.3 2.6
Other........................................................ 0.2 0.7 0.6
------ ------ ------
211.3 179.1 187.1
------ ------ ------
Costs and Expenses
Production and operating..................................... 85.3 86.3 100.3
Exploration, including dry hole costs........................ 2.3 1.4 1.7
Depletion, depreciation and amortization..................... 32.4 32.0 41.2
Impairment of oil and gas properties......................... -- -- 49.1
General and administrative................................... 7.3 7.8 9.2
Taxes (other than income).................................... 7.9 8.7 8.4
Restructuring charges........................................ -- 1.1 11.9
Loss (gain) on disposition of oil and gas properties......... -- (0.3) 0.2
------ ------ ------
135.2 137.0 222.0
------ ------ ------
Income (Loss) from Operations.................................. 76.1 42.1 (34.9)
Interest income.............................................. -- -- 0.2
Interest expense............................................. (25.8) (26.4) (27.2)
Interest capitalized......................................... 0.7 0.6 0.3
Other income (expense)....................................... (0.6) (0.1) (0.4)
------ ------ ------
Income (Loss) Before Income Taxes.............................. 50.4 16.2 (62.0)
Income taxes................................................. (16.0) (4.7) 26.9
------ ------ ------
Net Income (Loss).............................................. $ 34.4 $ 11.5 $(35.1)
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 91
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
BALANCE SHEET
(IN MILLIONS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1995 1994
------- -------
<S> <C> <C>
Current Assets
Cash and cash equivalents........................................... $ -- $ --
Accounts receivable................................................. 20.6 22.6
Inventories......................................................... 1.4 1.3
Other current assets................................................ 0.6 1.2
------- -------
22.6 25.1
------- -------
Properties and Equipment, at cost
Oil and gas (on the basis of successful efforts accounting)......... 970.8 921.1
Other............................................................... 20.0 20.4
------- -------
990.8 941.5
Accumulated depletion, depreciation, amortization and impairment.... (623.5) (591.9)
------- -------
367.3 349.6
------- -------
Other Assets.......................................................... 1.4 1.4
------- -------
$ 391.3 $ 376.1
======== ========
LIABILITIES AND DIVISION EQUITY
Current Liabilities
Accounts payable.................................................... $ 8.3 $ 11.1
Interest payable.................................................... 6.4 6.5
Other current liabilities........................................... 6.2 9.0
------- -------
20.9 26.6
Long-Term Debt........................................................ 245.0 245.0
Other Long-Term Obligations........................................... 5.7 5.4
Deferred Income Taxes................................................. 74.7 67.0
Commitments and Contingencies (Note 9)................................ -- --
Division Equity....................................................... 45.0 32.1
------- -------
$ 391.3 $ 376.1
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE> 92
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)............................................. $ 34.4 $ 11.5 $(35.1)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization................... 32.4 32.0 41.2
Impairment of oil and gas properties....................... -- -- 49.1
Deferred income taxes...................................... 7.7 4.7 (27.9)
Net loss (gain) on disposition of properties............... -- (0.3) 0.2
Exploratory dry hole costs................................. 1.0 -- --
Restructuring charges...................................... -- -- 11.3
Other...................................................... (0.2) (0.1) 0.3
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable............... 2.0 2.7 (1.0)
Decrease (increase) in other current assets.............. 0.5 0.5 0.8
Increase (decrease) in interest payable.................. -- -- (0.2)
Increase (decrease) in accounts payable.................. (2.8) (2.9) 0.5
Increase (decrease) in other current liabilities......... (2.8) 4.9 0.1
Net change in other assets and liabilities............... 3.5 1.3 (6.1)
------ ------ ------
Net Cash Provided by Operating Activities....................... 75.7 54.3 33.2
------ ------ ------
Investing Activities:
Capital expenditures, including exploratory dry hole costs.... (52.9) (27.3) (37.6)
Acquisition of producing properties........................... (1.3) -- (8.9)
Proceeds from sales of properties............................. -- 0.3 41.8
------ ------ ------
Net Cash Used in Investing Activities........................... (54.2) (27.0) (4.7)
------ ------ ------
Financing Activities:
Principal payments on long-term borrowings.................... -- (12.6) (5.4)
Settlements with parent -- net................................ (21.5) (14.7) (23.1)
------ ------ ------
Net Cash Used in Financing Activities........................... (21.5) (27.3) (28.5)
------ ------ ------
Net Increase (Decrease) in Cash and Cash Equivalents............ -- -- --
Cash and Cash Equivalents at Beginning of Period................ -- -- --
------ ------ ------
Cash and Cash Equivalents at End of Period...................... $ -- $ -- $ --
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE> 93
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
STATEMENT OF DIVISION EQUITY
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of period.................................. $ 32.1 $ 35.3 $ 93.5
Net income (loss)............................................... 34.4 11.5 (35.1)
Settlements with parent, net.................................... (21.5) (14.7) (23.1)
------ ------ ------
Balance at end of period........................................ $ 45.0 $ 32.1 $ 35.3
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE> 94
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
Monterey Resources, Inc. ("Monterey" or the "Company") was incorporated in
August 1996 and is a wholly-owned subsidiary of Santa Fe Energy Resources, Inc.
("SFR") engaged in the production, development and acquisition of oil and
natural gas in the State of California. In connection with the organization of
Monterey, SFR contributed $461,000 to Monterey in exchange for 1,000 shares of
Monterey common stock. At or prior to the closing of the public offering of the
Company's common stock (the "Offering"), SFR will contribute to the Company
substantially all of the assets and operations of its Western Division, and the
Company will assume the obligations and liabilities of SFR related thereto,
including $245 million of long-term debt. Such contribution will be effected
pursuant to a contribution and conveyance agreement, the effective date for
which is expected to be November 1, 1996. SFR is retaining a dollar-denominated
production payment (the "Production Payment") on the Midway-Sunset field,
pursuant to which SFR has the right to receive net proceeds of production up to
a cumulative maximum of $30 million plus interest thereon at a rate of 8% per
annum, at which time the Production Payment terminates and the Company will
receive and retain all future proceeds of production from such property
interest. The Production Payment is prepayable without penalty at any time in
whole at the Company's option. SFR and the Company will enter into a new $75
million revolving credit facility with a group of banks and SFR is expected to
borrow approximately $13 million thereunder. In addition, SFR and the Company
will enter into certain intercompany agreements regarding corporate services,
taxes, indemnification and certain other matters. Upon receipt by the Company of
the proceeds of the public offering, such proceeds will be used to repay certain
obligations incurred upon SFR's contribution of the assets and operations to the
Company.
Prior to the contribution as described above, the assets of the Company
were operated as a division of SFR and the accompanying financial statements
reflect such predecessor operations. For the purposes of preparing these
financial statements under generally accepted accounting principles, allocations
were made from certain SFR income statement and balance sheet accounts. Such
allocations are considered reasonable by management and were primarily based on
identifiable revenues, operating costs, assets and liabilities. General and
administrative expenses represent corporate overhead allocations. Certain
general and administrative expenses associated with production and exploration
operations are included in Production and Operating and Exploration costs in the
Statement of Operations. In addition, certain net hedging losses have been
allocated to the Company, see Note 9.
SFR provides cash management services through a centralized treasury system
with the associated transactions recorded in the intercompany accounts. No cash
balances are maintained by the Company and no interest is charged or received on
intercompany accounts. The Company's net cash settlements with SFR and amounts
for allocated costs from SFR are included in the equity section of the balance
sheet.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Operations
The Company follows the successful efforts method of accounting for its oil
and gas exploration and production activities. Costs (both tangible and
intangible) of productive wells and development dry holes, as well as the cost
of prospective acreage, are capitalized. The costs of drilling and equipping
exploratory wells which do not find proved reserves are expensed upon
determination that the well does not justify commercial development. Other
exploratory costs, including geological and geophysical costs and delay rentals,
are charged to expense as incurred.
F-16
<PAGE> 95
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depletion and depreciation of proved properties are computed on an
individual field basis using the unit-of-production method based upon proved oil
and gas reserves attributable to the field. Certain other oil and gas properties
are depreciated or amortized on a straight-line basis.
In the fourth quarter of 1995 the Company changed its impairment policy to
conform to the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". In accordance with the provisions of SFAS
No. 121 individual proved properties are reviewed periodically to determine if
the carrying value of the property exceeds the expected undiscounted future net
revenues from the operation of the property. Based on this review and the
continuing evaluation of development plans, economics and other factors, as
appropriate, the Company records impairment (additional depletion and
depreciation) to the extent that the carrying value of the property exceeds the
present value of such expected future net revenues. No impairments were recorded
in connection with the adoption of SFAS No. 121. Under its previous policy,
which required impairments to be recognized to the extent carrying value
exceeded undiscounted future net revenues, the Company recorded impairments of
$49.1 million in 1993.
The Company provides for future abandonment and site restoration costs with
respect to certain of its oil and gas properties. The Company estimates that
with respect to these properties such future costs total approximately $19.1
million and such amount is being accrued over the expected life of the
properties. At December 31, 1995, Accumulated Depletion, Depreciation,
Amortization and Impairment includes $4.8 million with respect to such costs.
The value of undeveloped acreage is aggregated and the portion of such
costs estimated to be nonproductive, based on historical experience, is
amortized to expense over the average holding period. Additional amortization
may be recognized based upon periodic assessment of prospect evaluation results.
The cost of properties determined to be productive is transferred to proved
properties; the cost of properties determined to be nonproductive is charged to
accumulated amortization.
Maintenance and repairs are expensed as incurred; major renewals and
improvements are capitalized. Gains and losses arising from sales of properties
are included in income currently.
Revenue Recognition
Revenues from the sale of crude oil and liquids produced are generally
recognized upon the passage of title, net of royalties and net profits
interests. Revenues from natural gas production are generally recorded using the
entitlement method, net of royalties and net profits interests.
A portion of the Company's oil sales are hedged. See Note 9 -- Commitments
and Contingencies -- Oil Hedging.
Revenues from crude oil marketing and trading represent the gross margin
resulting from such activities. Revenues from such activities are net of costs
of sales of $219.1 million in 1993, $201.6 million in 1994 and $234.2 million in
1995.
Accounts Receivable
Accounts Receivable relates primarily to sales of oil and gas and amounts
due from joint interest partners for expenditures made by the Company on behalf
of such partners. The Company reviews the financial condition of potential
purchasers and partners prior to signing sales or joint interest agreements.
F-17
<PAGE> 96
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are valued at the lower of cost (average price or first-in,
first-out) or market. Crude oil inventories at December 31, 1995 and 1994 were
$0.8 million and $0.9 million, respectively, and materials and supplies
inventories at such dates were $0.6 million and $0.4 million, respectively.
Environmental Expenditures
Environmental expenditures relating to current operations are expensed or
capitalized, as appropriate, depending on whether such expenditures provide
future economic benefits. Liabilities are recognized when the expenditures are
considered probable and can be reasonably estimated. Measurement of liabilities
is based on currently enacted laws and regulations, existing technology and
undiscounted site-specific costs. Generally, such recognition coincides with the
Company's commitment to a formal plan of action.
Income Taxes
The Company follows the asset and liability approach to accounting for
income taxes. Deferred tax assets and liabilities are determined using the tax
rate for the period in which those amounts are expected to be received or paid,
based on a scheduling of temporary differences between the tax bases of assets
and liabilities and their reported amounts. Under this method of accounting for
income taxes, any future changes in income tax rates will affect deferred income
tax balances and financial results.
The taxable income or loss of the Company is included in the consolidated
income tax returns filed by SFR. Payments of taxes currently due are included in
settlements with the parent. Income tax obligations reflected in these financial
statements are calculated assuming the Company files a separate income tax
return.
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities and the
periods in which certain items of revenue and expense are included. Actual
results may differ from such estimates.
Earnings Per Share
Earnings per share has been omitted from the statement of operations
because the Company was not a separate entity with its own capital structure
until September 1996.
F-18
<PAGE> 97
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosure About Fair Value of Financial Instruments"
requires the disclosure, to the extent practicable, of the fair value of
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences, if any, of realization or
settlement. The following table reflects the financial instruments for which the
fair value differs from the carrying amount of such financial instrument in the
Company's December 31, 1995 and 1994 balance sheets (in millions of dollars):
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Long-Term Debt................... 245.0 267.9 245.0 239.7
</TABLE>
The fair value of the Company's long-term debt is based upon current
borrowing rates available for financings with similar terms and maturities.
(4) CORPORATE RESTRUCTURING PROGRAM
In the fourth quarter of 1993 SFR adopted a corporate restructuring program
which included, among other things, (i) the concentration of capital spending in
SFR's core operating areas (one of which is the San Joaquin Valley of
California); (ii) the disposition of non-core assets; and (iii) an evaluation of
SFR's cost structures. As a result of the program, certain of the Company's
producing properties were sold to Vintage Petroleum, Inc. ("Vintage") and the
Company's salaried work force was reduced.
In implementing the corporate restructuring program, the Company recorded
restructuring charges of $11.9 million in 1993, comprised of losses on property
dispositions of $11.3 million and accruals for certain personnel benefits and
related costs of $0.6 million. In the first quarter of 1994 the Company recorded
additional restructuring charges of $1.1 million comprised of severance,
benefits and relocation expenses associated with the cost reduction program.
Sale to Vintage. In the fourth quarter of 1993 producing properties were
sold to Vintage for net proceeds totaling $34.9 million in cash, $26.2 million
of which was collected in 1993. The Company's income from operations for 1993
includes $2.7 million attributable to the assets sold to Vintage.
(5) CASH FLOWS
The Company made interest payments of $25.8 million, $26.3 million and
$27.4 million in 1995, 1994 and 1993, respectively.
(6) FINANCING AND DEBT
Long-term debt outstanding at December 31, 1995 and 1994 of $245.0 million
(which matures $35.0 million in 1997, $35.0 million in 1998 and $205.0 million
in 2005) represents outstanding indebtedness of SFR to be assumed by the Company
at or prior to the closing of the Offerings.
In 1994 the Company retired the $12.6 million outstanding balance of a term
loan which the Company had incurred in 1991 in connection with the purchase of
certain producing properties.
F-19
<PAGE> 98
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) SEGMENT INFORMATION
The principal business of the Company consists of the acquisition,
exploration and development of oil and gas properties and the production and
sale of crude oil and liquids and natural gas. All such operations are located
in the United States.
Crude oil and liquids accounted for more than 96% of revenues in 1995, 1994
and 1993. The following table (which with respect to certain properties includes
royalty and working interest owners' share of production) reflects sales to
crude oil purchasers who accounted for more than 10% of the Company's crude oil
and liquids revenues (in millions of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Celeron Corporation.............................................. 28 31 28
Shell Oil Company................................................ 44 42 31
</TABLE>
(8) PENSION AND OTHER EMPLOYEE BENEFIT PLANS
Pension Plans
The Company sponsors a pension plan covering certain hourly-rated employees
in California (the "Hourly Plan"). The Hourly Plan provides benefits that are
based on a stated amount for each year of service. The Company annually
contributes amounts which are actuarially determined to provide the Hourly Plan
with sufficient assets to meet future benefit payment requirements.
The following table sets forth the funded status of the Hourly Plan at
December 31, 1995 and 1994 (in millions of dollars):
<TABLE>
<CAPTION>
1995 1994
----- ----
<S> <C> <C>
Plan assets at fair value, primarily invested in fixed-rate
securities......................................................... 8.7 7.5
Actuarial present value of projected benefit obligations
Accumulated benefit obligations
Vested.......................................................... (10.4) (9.3)
Nonvested....................................................... (0.4) (0.3)
----- ----
Excess of projected benefit obligation over plan assets.............. (2.1) (2.1)
Unrecognized net (gain) loss from past experience different from that
assumed and effects of changes in assumptions...................... (0.3) (0.4)
Unrecognized prior service cost...................................... 0.4 0.5
Unrecognized net obligation.......................................... 1.2 1.3
Additional minimum liability......................................... (1.3) (1.3)
----- ----
Accrued pension liability............................................ (2.1) (2.0)
===== ====
Major assumptions at year-end
Discount rate...................................................... 7.50% 8.25%
Expected long-term rate of return on plan assets................... 8.50% 8.50%
</TABLE>
F-20
<PAGE> 99
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the components of pension expense for the
Hourly Plan for 1995, 1994 and 1993 (in millions of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost.................................................. 0.2 0.2 0.2
Interest cost................................................. 0.8 0.8 0.7
Return on plan assets......................................... (1.4) (0.4) (0.8)
Net amortization and deferral................................. 0.9 -- 0.4
---- ---- ----
0.5 0.6 0.5
==== ==== ====
</TABLE>
SFR has a defined benefit retirement plan (the "SFR Plan") covering
substantially all salaried employees not covered by collective bargaining
agreements and a nonqualified supplemental retirement plan (the "Supplemental
Plan"). The Supplemental Plan will pay benefits to participants in the SFR Plan
in those instances where the SFR Plan formula produces a benefit in excess of
limits established by ERISA and the Tax Reform Act of 1986. Benefits payable
under the SFR Plan are based on years of service and compensation during the
five highest paid years of service during the ten years immediately preceding
retirement. SFR's funding policy is to contribute annually not less than the
minimum required by ERISA and not more than the maximum amount deductible for
income tax purposes. The Company has been allocated its proportionate share of
the expense associated with such plans. The Company's share of such expenses
totaled $0.2 million, $0.2 million and $0.2 million in 1995, 1994 and 1993,
respectively.
Postretirement Benefits Other Than Pensions
SFR provides healthcare and life insurance benefits for substantially all
employees who retire under the provisions of a SFR-sponsored retirement plan and
their dependents. Participation in the plans is voluntary and requires a monthly
contribution by the employee. Effective January 1, 1993 SFR adopted the
provisions of SFAS No. 106 -- "Employers' Accounting for Postretirement Benefits
Other Than Pensions." The Statement requires the accrual, during the years the
employee renders service, of the expected cost of providing postretirement
benefits to the employee and the employee's beneficiaries and covered
dependents. The Company has been allocated its proportionate share of SFR's
expense with respect to such benefits. The Company's share of such expense
totaled $0.1 million in each of the years 1995 and 1994 and $0.2 million in
1993.
Savings Plan
SFR has a savings plan available to substantially all salaried employees
and intended to qualify as a deferred compensation plan under Section 401(k) of
the Internal Revenue Code (the "401(k) Plan"). SFR will match employee
contributions for an amount up to 4% of each employee's base salary. In
addition, if at the end of each fiscal year SFR's performance for such year has
exceeded certain predetermined criteria, each participant will receive an
additional matching contribution equal to 50% of the regular matching
contribution. The Company has been allocated its proportionate share of
contributions to the 401(k) Plan, which are charged to expense. The Company's
share of such contributions totaled $0.2 million in 1995, $0.2 million in 1994
and $0.3 million in 1993.
F-21
<PAGE> 100
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES
Oil Hedging
From time to time SFR hedges a portion of its oil sales to provide a
certain minimum level of cash flow from its sales of oil and gas. While the
hedges are generally intended to reduce SFR's exposure to declines in market
price, SFR's gain from increases in market price may be limited. SFR uses
various financial instruments whereby monthly settlements are based on
differences between the prices specified in the instruments and the settlement
prices of certain futures contracts quoted on the New York Mercantile Exchange
("NYMEX") or certain other indices. Generally, in instances where the applicable
settlement price is less than the price specified in the contract, SFR receives
a settlement based on the difference; in instances where the applicable
settlement price is higher than the specified price, SFR pays an amount based on
the difference. The instruments utilized by SFR differ from futures contracts in
that there is no contractual obligation which requires or allows for the future
delivery of the product. Gains or losses on hedging activities are recognized in
oil and gas revenues in the period in which the hedged production is sold.
SFR's hedging program in 1995 has been to hedge the price of its light oil
production. In certain months when a favorable price could be obtained, heavy
oil quantities (i.e., quantities in excess of light oil production) were hedged.
The allocation of hedging gains and losses to the Western Division during this
period has been calculated on the basis of its light oil production and its
heavy oil hedges as determined above. During 1995 such hedges resulted in a $0.1
million reduction in the Company's revenues.
In addition to its oil sales hedges, for the first six months of 1996 SFR
has hedged 20 MMcf per day of the natural gas it purchases for use in steam
generation operations in the San Joaquin Valley of California. Monthly
settlements are based on the difference between the settlement price quoted on
the NYMEX and the index price for San Juan Basin natural gas. Gains or losses
are recognized in production and operating costs in the period in which the
hedged gas is consumed in operations. All such gains and losses are allocated to
the Company.
Environmental Regulation
Federal, state and local laws and regulations relating to environmental
quality control affect the Company in all of its oil and gas operations.
The Company has been identified as one of over 250 potentially responsible
parties ("PRPs") at a superfund site in Los Angeles County, California. The site
was operated by a third party as a waste disposal facility from 1948 until 1983.
The Environmental Protection Agency ("EPA") is requiring the PRPs to undertake
remediation of the site in several phases, which include site monitoring and
leachate control, gas control and final remediation. In November 1988 the EPA
and a group of PRPs that includes the Company entered into a consent decree
covering the site monitoring and leachate control phases of remediation. The
Company was a member of the group Coalition Undertaking Remediation Efforts
("CURE") which was responsible for constructing and operating the leachate
treatment plant. This phase is now complete and the Company's share of costs
with respect to this phase was $1.6 million ($0.9 million after recoveries from
working interest participants in the unit in which the wastes were generated).
Another consent decree provides for the predesign, design and construction of a
gas plant to harness and market methane gas emissions. The Company is a member
of the New CURE group which is responsible for the gas plant construction and
operation and landfill cover. Currently, New CURE is in the design stage of the
gas plant. The Company's share of costs of this phase is expected to be $1.7
million and such costs have been provided for in the financial statements.
Another consent decree has been entered into allowing for the settlement of the
pending lawsuits against the municipalities and
F-22
<PAGE> 101
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
transporters not named by the EPA. The settlement payment by such municipalities
and transporters totals approximately $70.0 million of which approximately $52.0
million will be credited against future expenses. The Company cannot currently
estimate the cost of any subsequent phases of work or final remediation which
may be required by the EPA. The Company has entered into a Joint Defense
Agreement with the other PRPs to defend against a lawsuit filed in September
1994 by ninety-five homeowners alleging, among other things, nuisance, trespass,
strict liability and infliction of emotional distress. At this stage of the
lawsuit the Company is not able to estimate costs or potential liability.
In April 1994 the Company received a request from the EPA for information
pursuant to Section 104(e) of the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and a letter ordering the Company and
seven other PRPs to negotiate with the EPA regarding implementation of a
remedial plan for a site located in Santa Fe Springs, California. The Company
owned the property on which the site is located from 1921 to 1932. During that
time the property was leased to another company and in 1932 the property was
sold to that company. During the time the other company leased or owned the
property, hazardous wastes were allegedly disposed at the site. Total past and
future costs for remediation are estimated to be approximately $8.0 million. The
Company filed its response to the Section 104(e) order setting forth its
position and defenses based on the fact that the other company was the lessee
and operator of the site during the time the Company was the owner of the
property. However, the Company has also given its Notice of Intent to comply
with the EPA's order to prepare a remediation design plan. Efforts are underway
to identify additional PRP's. The cost of the remediation design plan is
estimated to be $1.0 million and the Company has provided for such costs in the
financial statements, assuming that the costs will be equally divided among the
eight PRPs.
In 1995 the Company and twelve other companies received notice that they
have been identified as PRPs by the California Department of Toxic Substances
Control (the "DTSC") as having generated and/or transported hazardous waste to
the Environmental Protection Corporation ("EPC") Eastside Landfill during its
fourteen-year operation from 1971 to 1985. EPC has since liquidated all assets
and placed the proceeds in trust for closure and post-closure activities.
However, these monies will not be sufficient to close the site. The PRPs have
entered into an enforceable agreement with the DTSC to characterize the
contamination at the site and prepare a focused remedial investigation and
feasibility study. The DTSC has agreed to implement reasonable measures to bring
new PRPs into the agreement. The DTSC will address subsequent phases of the
cleanup, including remedial design and implementation in a separate order
agreement. The cost of the remedial investigation and feasibility study is
estimated to be $1.0 million and the Company has provided for such costs in the
financial statements assuming that the costs will be divided equally among the
thirteen PRP's. The costs of subsequent phases cannot be estimated until the
remedial investigation and feasibility study is completed.
Operating Leases
The Company has noncancellable agreements with terms ranging from one to
six years to lease office space and equipment. Minimum rental payments due under
the terms of these agreements are: 1996 -- $0.8 million, 1997 -- $0.8 million,
1998 -- $0.8 million, 1999 -- $0.7 million, 2000 -- $0.7 million and $0.8
million thereafter. Rental payments made under the terms of noncancellable
agreements totaled $0.8 million in 1995, $0.9 million in 1994 and $0.8 million
in 1993.
Other Matters
The Company has certain long-term contracts ranging up to twelve years for
the supply and transportation of approximately 20 million cubic feet per day of
natural gas to the Company's operations in Kern County, California. In the
aggregate, these contracts involve a minimum commitment on the part
F-23
<PAGE> 102
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the Company of approximately $10.2 million per year (based on prices and
transportation charges in effect for December 1995).
There are other claims and actions, including certain other environmental
matters, pending against the Company. In the opinion of management, the amounts,
if any, which may be awarded in connection with any of these claims and actions
could be significant to the results of operations of any period but would not be
material to the Company's financial position.
(10) INCOME TAXES
The Company's income tax expense (benefit) for the years ended December 31,
1995, 1994 and 1993 consisted of (in million of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Current
U.S. federal................................................ 5.0 -- --
State....................................................... 3.3 -- 1.0
---- --- -----
8.3 -- 1.0
---- --- -----
Deferred
U.S. federal................................................ 6.4 3.0 (22.5)
U.S. federal tax rate change................................ -- -- 1.5
State....................................................... 1.3 1.7 (6.9)
---- --- -----
7.7 4.7 (27.9)
---- --- -----
16.0 4.7 (26.9)
==== === =====
</TABLE>
The Company's deferred income tax liabilities (assets) at December 31, 1995
and 1994 are composed of the following differences between financial and tax
reporting (in millions of dollars):
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Capitalized costs and write-offs..................................... 72.4 67.2
State deferred liability............................................. 17.0 15.7
----- -----
Gross deferred liabilities........................................... 89.4 82.9
----- -----
Accruals not currently deductible for tax purposes................... (7.3) (7.1)
EOR credit carryforwards............................................. (4.6) (6.0)
AMT credit carryforwards............................................. (2.8) (2.8)
----- -----
Gross deferred assets................................................ (14.7) (15.9)
----- -----
Deferred tax liability............................................... 74.7 67.0
===== =====
</TABLE>
F-24
<PAGE> 103
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's U.S. income tax expense (benefit)
computed by applying the statutory U.S. federal income tax rate to the Company's
income (loss) before income taxes for the years ended December 31, 1995, 1994
and 1993 is presented in the following table (in millions of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
U.S. federal income taxes (benefit) at statutory rate......... 17.6 5.7 (21.7)
Increase (reduction) resulting from:
State income taxes, net of federal effect................... 3.0 1.1 (3.9)
Effect of increase in statutory rate on deferred taxes...... -- -- 1.5
Enhanced oil recovery credit................................ (4.2) (2.5) (3.0)
Permanent differences....................................... (0.2) (0.2) (0.2)
Other....................................................... (0.2) 0.6 0.4
---- ---- -----
16.0 4.7 (26.9)
==== ==== =====
</TABLE>
The Company increased its deferred tax liability in 1993 as a result of
legislation enacted during 1993 increasing the corporate tax rate from 34% to
35% commencing in 1993.
F-25
<PAGE> 104
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
FINANCIAL STATEMENTS (UNAUDITED)
OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
Information with respect to the Company's oil and gas producing activities,
all of which are located in the United States, is presented in the following
tables. Reserve quantities as well as certain information regarding future
production and discounted cash flows were determined by independent petroleum
consultants, Ryder Scott Company.
Oil and Gas Reserves
The following table sets forth the Company's net proved oil and gas
reserves at December 31, 1992, 1993, 1994 and 1995 and the changes in net proved
oil and gas reserves for the years ended December 31, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
CRUDE OIL NATURAL
AND LIQUIDS GAS
(MMBBLS) (BCF)
----------- -------
<S> <C> <C>
Proved reserves at December 31, 1992........................... 190.3 18.8
Revisions to previous estimates.............................. (14.4) 0.3
Improved recovery techniques................................. 26.7 --
Purchases of minerals-in-place............................... 1.3 0.4
Sales of minerals-in-place................................... (4.8) (5.4)
Production................................................... (15.5) (2.3)
----- ----
Proved reserves at December 31, 1993........................... 183.6 11.8
Revisions of previous estimates.............................. 9.9 2.9
Improved recovery techniques................................. 12.6 --
Purchases of minerals-in-place............................... 0.2 0.1
Production................................................... (15.1) (1.4)
----- ----
Proved reserves at December 31, 1994........................... 191.2 13.4
Revisions of previous estimates.............................. 9.7 0.9
Improved recovery techniques................................. 13.7 --
Purchases of minerals-in-place............................... 0.1 --
Production................................................... (15.2) (1.9)
----- ----
Proved reserves at December 31, 1995........................... 199.5 12.4
===== ====
</TABLE>
<TABLE>
<CAPTION>
CRUDE OIL NATURAL
AND LIQUIDS GAS
(MMBBLS) (BCF)
----------- -------
<S> <C> <C>
Proved developed reserves at December 31
1992......................................................... 154.3 14.5
1993......................................................... 140.8 9.0
1994......................................................... 140.2 9.4
1995......................................................... 157.1 9.2
</TABLE>
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data indicate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods.
F-26
<PAGE> 105
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Estimated Present Value of Future Net Cash Flows
Estimated future net cash flows from the Company's proved oil and gas
reserves at December 31, 1995, 1994 and 1993 are presented in the following
table (in millions of dollars, except as noted):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Future cash inflows............................ 2,763.0 2,428.5 1,569.9
Future production costs........................ (1,383.6) (1,219.9) (1,133.4)
Future development costs....................... (170.0) (167.9) (126.6)
Future income tax expenses..................... (421.5) (352.7) (44.9)
--------- --------- ---------
Net future cash flows........................ 787.9 688.0 265.0
Discount at 10% for timing of cash flows....... (361.5) (321.9) (122.0)
--------- --------- ---------
Present value of future net cash flows from
proved reserves.............................. 426.4 366.1 143.0
========= ========= =========
Present value of pretax future net cash flows
from proved reserves......................... 654.4 553.8 167.1
========= ========= =========
Average sales prices
Oil ($/Barrel)............................... 13.78 12.62 8.44
Natural gas ($/Mcf).......................... 0.98 1.07 1.64
</TABLE>
The following table sets forth the changes in the present value of
estimated future net cash flows from proved reserves during 1995, 1994 and 1993
(in millions of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year................... 366.1 143.0 275.4
--------- --------- ---------
Increase (decrease) due to:
Sales of oil and gas, net of production
costs..................................... (119.2) (85.2) (79.6)
Net changes in prices and production costs... 89.9 405.5 (212.7)
Extensions, discoveries and improved
recovery.................................. 39.6 25.6 46.3
Purchases of minerals-in-place............... 0.8 0.6 1.0
Sales of minerals-in-place................... -- -- (24.9)
Development costs incurred................... 49.1 22.7 41.8
Changes in estimated volumes................. 8.8 20.1 (3.2)
Changes in estimated development costs....... (24.8) (22.7) 1.6
Interest factor -- accretion of discount..... 56.5 20.0 13.6
Income taxes................................. (40.4) (163.5) 83.7
--------- --------- ---------
60.3 223.1 (132.4)
--------- --------- ---------
426.4 366.1 143.0
========= ========= =========
</TABLE>
Estimated future cash flows represent an estimate of future net cash flows
from the production of proved reserves using estimated sales prices and
estimates of the production costs, ad valorem and production taxes, and future
development costs necessary to produce such reserves. No deduction has been made
for depletion, depreciation or any indirect costs such as general corporate
overhead or interest expense.
The sales prices used in the calculation of estimated future net cash flows
are based on the prices in effect at year end. Such prices have been held
constant except for known and determinable escalations.
F-27
<PAGE> 106
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Operating costs and ad valorem and production taxes are estimated based on
current costs with respect to producing oil and gas properties. Future
development costs are based on the best estimate of such costs assuming current
economic and operating conditions.
Income tax expense is computed based on applying the appropriate statutory
tax rate to the excess of future cash inflows less future production and
development costs over the current tax basis of the properties involved. While
applicable investment tax credits and other permanent differences are considered
in computing taxes, no recognition is given to tax benefits applicable to future
exploration costs or the activities of the Company that are unrelated to oil and
gas producing activities.
The information presented with respect to estimated future net revenues and
cash flows and the present value thereof is not intended to represent the fair
value of oil and gas reserves. Actual future sales prices and production and
development costs may vary significantly from those in effect at year-end and
actual future production may not occur in the periods or amounts projected. This
information is presented to allow a reasonable comparison of reserve values
prepared using standardized measurement criteria and should be used only for
that purpose.
Costs Incurred in Oil and Gas Producing Activities
The following table includes all costs incurred, whether capitalized or
charged to expense at the time incurred (in millions of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Property acquisition costs
Unproved...................................................... 0.1 -- --
Proved........................................................ 1.3 -- 3.6
Exploration costs............................................... 2.5 1.4 1.7
Development costs............................................... 47.8 22.7 38.2
Other........................................................... -- -- 0.1
---- ---- ----
51.7 24.1 43.6
==== ==== ====
</TABLE>
Capitalized Costs Related to Oil and Gas Producing Activities
The following table sets forth information concerning capitalized costs at
December 31, 1995 and 1994 related to the Company's oil and gas operations (in
millions of dollars):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Oil and gas properties
Unproved....................................................... 0.4 0.3
Proved......................................................... 960.7 911.1
Other.......................................................... 9.7 9.7
Accumulated amortization of unproved properties.................. (0.1) (0.1)
Accumulated depletion, depreciation and impairment of proved
properties..................................................... (614.8) (582.7)
Accumulated depreciation of other oil and gas properties......... (3.4) (3.0)
------ ------
352.5 335.3
====== ======
</TABLE>
F-28
<PAGE> 107
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Results of Operations From Oil and Gas Producing Activities
The following table sets forth the Company's results of operations from oil
and gas producing activities for the years ended December 31, 1995, 1994 and
1993 (in millions of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ------
<S> <C> <C> <C>
Revenues................................................... 211.3 179.1 187.1
Production costs:
Production and operating costs........................... (85.3) (86.3) (100.3)
Taxes (other than income)................................ (6.8) (7.6) (7.2)
Exploration, including dry hole costs...................... (2.3) (1.4) (1.7)
Depletion, depreciation and amortization................... (31.1) (31.1) (40.3)
Impairment of oil and gas properties....................... -- -- (49.1)
Restructuring charges...................................... -- (1.1) (11.9)
Gain (loss) on disposition of properties................... -- 0.3 (0.2)
----- ----- ------
85.8 51.9 (23.6)
Income taxes............................................... (35.1) (21.2) 9.7
----- ----- ------
50.7 30.7 (13.9)
===== ===== ======
</TABLE>
Income taxes are computed by applying the appropriate statutory rate to the
results of operations before income taxes. Applicable tax credits and allowances
related to oil and gas producing activities have been taken into account in
computing income tax expenses. No deduction has been made for indirect cost such
as corporate overhead or interest expense.
F-29
<PAGE> 108
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------------
1996 1995
------ ------
<S> <C> <C>
Revenues
Crude oil and liquids.............................................. $123.8 $101.5
Natural gas........................................................ 0.7 1.2
Crude oil marketing and trading.................................... 1.8 1.9
Other.............................................................. 0.1 0.2
------ ------
126.4 104.8
------ ------
Costs and Expenses
Production and operating........................................... 48.5 43.1
Exploration, including dry hole costs.............................. 0.9 1.6
Depletion, depreciation and amortization........................... 18.1 14.9
General and administrative......................................... 3.9 3.6
Taxes (other than income).......................................... 4.3 4.6
------ ------
75.7 67.8
------ ------
Income from Operations............................................... 50.7 37.0
Interest expense................................................... (12.9) (12.9)
Interest capitalized............................................... 0.4 0.3
Other expense...................................................... -- (0.2)
------ ------
Income Before Income Taxes........................................... 38.2 24.2
Income taxes....................................................... (13.9) (7.6)
------ ------
Net Income........................................................... $ 24.3 $ 16.6
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 109
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
BALANCE SHEET
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------- DECEMBER 31,
PRO FORMA HISTORICAL 1995
--------- ----------- ------------
(NOTE 2)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................... $ -- $ -- $ --
Accounts receivable..................................... 29.7 29.7 20.6
Inventories............................................. 1.7 1.7 1.4
Other current assets.................................... 0.3 0.3 0.6
-------- -------- -------
31.7 31.7 22.6
-------- -------- -------
Properties and Equipment, at cost
Oil and gas (on the basis of successful efforts
accounting).......................................... 993.3 993.3 970.8
Other................................................... 20.8 20.8 20.0
-------- -------- -------
1,014.1 1,014.1 990.8
Accumulated depletion, depreciation, amortization and
impairment........................................... (637.3) (637.3) (623.5)
-------- -------- -------
376.8 376.8 367.3
-------- -------- -------
Other Assets............................................ 1.5 1.5 1.4
-------- -------- -------
$ 410.0 $ 410.0 $ 391.3
======== ======== =======
LIABILITIES AND DIVISION EQUITY
Current Liabilities
Accounts payable........................................ $ 14.6 $ 14.6 $ 8.3
Current maturities of long-term debt.................... 35.0 35.0 --
Production payment payable.............................. 30.0 -- --
Interest payable........................................ -- 6.4 6.4
Other current liabilities............................... 5.8 7.0 6.2
-------- -------- -------
85.4 63.0 20.9
Long-Term Debt............................................ 222.5 210.0 245.0
Long-Term Obligations..................................... 3.0 5.7 5.7
Deferred Income Taxes..................................... 58.3 80.2 74.7
Commitments and Contingencies (Note 3).................... -- -- --
Division Equity........................................... 40.8 51.1 45.0
-------- -------- -------
$ 410.0 $ 410.0 $ 391.3
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 110
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------
1996 1995
------ ------
<S> <C> <C>
Operating Activities:
Net income......................................................... $ 24.3 $ 16.6
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization........................ 18.1 14.9
Deferred income taxes........................................... 5.5 3.6
Exploratory dry hole costs...................................... 0.3 1.0
Other........................................................... (0.1) (0.1)
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable.................... (9.1) 0.7
Decrease (increase) in other current assets................... -- (0.3)
Increase (decrease) in accounts payable....................... 7.0 (3.7)
Increase (decrease) in other current liabilities.............. 0.8 (0.9)
Net change in other assets and liabilities.................... 0.8 4.3
------ ------
Net Cash Provided by Operating Activities............................ 47.6 36.1
------ ------
Investing Activities:
Capital expenditures, including exploratory dry hole costs......... (26.8) (29.4)
Acquisition of producing properties................................ (2.7) --
Proceeds from sales of properties.................................. 0.1 --
------ ------
Net Cash Used in Investing Activities................................ (29.4) (29.4)
------ ------
Financing Activities:
Settlements with parent-net........................................ (18.2) (6.7)
------ ------
Net Cash Used in Financing Activities................................ (18.2) (6.7)
------ ------
Net Increase (Decrease) in Cash and Cash Equivalents................. -- --
Cash and Cash Equivalents at Beginning of Period..................... -- --
------ ------
Cash and Cash Equivalents at End of Period........................... $ -- $ --
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 111
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
STATEMENT OF DIVISION EQUITY
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1995
------ -----
<S> <C> <C>
Balance at beginning of period........................................ $ 45.0 $32.1
Net income............................................................ 24.3 16.6
Settlements with parent, net.......................................... (18.2) (6.7)
------ -----
Balance at end of period.............................................. $ 51.1 $42.0
====== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 112
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Monterey Resources, Inc. ("Monterey") was incorporated in August 1996 and
is a wholly-owned subsidiary of Santa Fe Energy Resources, Inc. ("SFR") engaged
in the production, development and acquisition of oil and natural gas in the
State of California. At or prior to the closing of the public offering of
Monterey's common stock, SFR will contribute to Monterey substantially all of
the assets and operations of its Western Division, and Monterey will assume the
obligations and liabilities of SFR related thereto, including $245 million of
long-term debt. Such contribution will be effected pursuant to a contribution
and conveyance agreement, the effective date for which is expected to be
November 1, 1996. SFR is retaining a production payment (the "Production
Payment") on the Midway-Sunset field, pursuant to which SFR has the right to
receive net proceeds of production up to a cumulative maximum of $30 million
plus interest thereon at a rate of 8% per annum, at which time the production
payment terminates and Monterey will receive and retain all future proceeds of
production from such property interest. The Production Payment is prepayable
without penalty at any time in whole at Monterey's option. SFR and the Company
will enter into a new $75 million revolving credit facility with a group of
banks and SFR is expected to borrow approximately $13 million thereunder. In
addition, SFR and the Company will enter into certain intercompany agreements
regarding corporate services, taxes, indemnification and certain other matters.
Upon receipt by Monterey of the proceeds of the public offering, such proceeds
will be used to repay certain obligations incurred upon SFR's contribution of
the assets and operations to Monterey.
Prior to the contribution as described above, the assets of Monterey were
operated as a division of SFR and the accompanying financial statements reflect
such predecessor operations. For the purposes of preparing these financial
statements under generally accepted accounting principles, allocations were made
from certain SFR income statement and balance sheet accounts. Such allocations
are considered reasonable by management and were primarily based on identifiable
revenues, operating costs, assets and liabilities. General and administrative
expenses represent corporate overhead allocations. Certain general and
administrative expenses associated with production and exploration operations
are included in Production and Operating and Exploration costs in the Statement
of Operations. In addition, certain net hedging losses have been allocated to
the Company, see Note 3.
SFR provides cash management services through a centralized treasury system
with the associated transactions recorded in the intercompany accounts. No cash
balances are maintained by the Western Division and no interest is charged or
received on intercompany accounts. The Western Division's net cash settlements
with SFR and amounts for allocated costs from SFR are included in the equity
section of the balance sheet.
The unaudited financial statements of the Western Division of Santa Fe
Energy Resources, Inc. (the "Company") reflect, in the opinion of management,
all adjustments, consisting only of normal and recurring adjustments, necessary
to present fairly the Company's financial position at June 30, 1996 and the
Company's results of operations and cash flows for the six-month periods ended
June 30, 1996 and 1995. Interim period results are not necessarily indicative of
results of operations or cash flows for a full-year period.
These financial statements and the notes thereto should be read in
conjunction with the Company's audited financial statements included elsewhere
in this prospectus.
(2) JUNE 30, 1996 PRO FORMA BALANCE SHEET
The June 30, 1996 pro forma balance sheet gives effect to (i) the
contribution of the net assets of the Western Division by SFR pursuant to the
Contribution Agreement and the assumption of certain
F-34
<PAGE> 113
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Western Division liabilities by SFR; (ii) the $12.5 million liability for
amounts drawn on the New Credit Facility; and (iii) the $30.0 million Production
Payment retained by SFR.
Upon contribution of the net assets of the Western Division by SFR pursuant
to the Contribution Agreement and the assumption of certain Western Division
liabilities by SFR, the tax basis applicable to the Western Division net assets
will increase, and the deferred income tax liability will decrease, as a result
of the tax gain recognized by SFR.
(3) COMMITMENTS AND CONTINGENCIES
Oil Hedging
From time to time SFR hedges a portion of its oil and gas sales to provide
a certain minimum level of cash flow from its sales of oil and gas. While the
hedges are generally intended to reduce SFR's exposure to declines in market
price, SFR's gain from increases in market price may be limited. SFR uses
various financial instruments whereby monthly settlements are based on
differences between the prices specified in the instruments and the settlement
prices of certain futures contracts quoted on the New York Mercantile Exchange
("NYMEX") or certain other indices. Generally, in instances where the applicable
settlement price is less than the price specified in the contract, SFR receives
a settlement based on the difference; in instances where the applicable
settlement price is higher than the specified price, SFR pays an amount based on
the difference. The instruments utilized by SFR differ from futures contracts in
that there is no contractual obligation which requires or allows for the future
delivery of the product. Gains or losses on hedging activities are recognized in
oil and gas revenues in the period in which the hedged production is sold.
SFR's hedging program in 1996 has been to hedge the price of its light oil
production. In certain months when a favorable price could be obtained, heavy
oil quantities (i.e., quantities in excess of light oil production) were hedged.
The allocation of hedging gains and losses to the Western Division during this
period has been calculated on the basis of its light oil production and its
heavy oil hedges as determined above. During the first six months of 1996 such
hedges resulted in a $2.5 million reduction in the Company's revenues.
In addition to its oil sales hedges, during the first six months of 1996
SFR hedged 20 MMcf per day of the natural gas purchased for use in steam
generation operations in the San Joaquin Valley of California. Such hedges,
which terminated at the end of June, resulted in a $3.2 million increase in the
Company's production and operating costs in the first six months of 1996.
Environmental Regulation
Federal, state and local laws and regulations relating to environmental
quality control affect the Company in all of its oil and gas operations.
The Company has been identified as one of over 250 potentially responsible
parties ("PRPs") at a superfund site in Los Angeles County, California. The site
was operated by a third party as a waste disposal facility from 1948 until 1983.
The Environmental Protection Agency ("EPA") is requiring the PRPs to undertake
remediation of the site in several phases, which include site monitoring and
leachate control, gas control and final remediation. In November 1988 the EPA
and a group of PRPs that includes the Company entered into a consent decree
covering the site monitoring and leachate control phases of remediation. The
Company was a member of the group Coalition Undertaking Remediation Efforts
("CURE") which was responsible for constructing and operating the leachate
treatment plant. This phase is now complete and the Company's share of costs
with respect to this phase was $1.6 million ($0.9 million after recoveries from
working interest participants in the unit in which the wastes were generated).
Another consent decree provides for the predesign, design and construction of a
gas plant to harness and market methane gas emissions. The Company is a member
of the New CURE group which
F-35
<PAGE> 114
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
is responsible for the gas plant construction and operation and landfill cover.
Currently, New CURE is in the design stage of the gas plant. The Company's share
of costs of this phase is expected to be $1.7 million and such costs have been
provided for in the financial statements. Another consent decree has been
entered into allowing for the settlement of the pending lawsuits against the
municipalities and transporters not named by the EPA. The settlement payment by
such municipalities and transporters totals approximately $70.0 million of which
approximately $52.0 million will be credited against future expenses. The
Company cannot currently estimate the cost of any subsequent phases of work or
final remediation which may be required by the EPA. The Company has entered into
a Joint Defense Agreement with the other PRPs to defend against a lawsuit filed
in September 1994 by ninety-five homeowners alleging, among other things,
nuisance, trespass, strict liability and infliction of emotional distress. A
second lawsuit has been filed by thirty-three additional homeowners and the
Company and the other PRP's intend to enter into a Joint Defense Agreement. At
this stage of the lawsuit the Company is not able to estimate costs or potential
liability.
In April 1994 the Company received a request from the EPA for information
pursuant to Section 104(e) of CERCLA and a letter ordering the Company and seven
other PRPs to negotiate with the EPA regarding implementation of a remedial plan
for a site located in Santa Fe Springs, California. The Company owned the
property on which the site is located from 1921 to 1932. During that time the
property was leased to another company and in 1932 the property was sold to that
company. During the time the other company leased or owned the property,
hazardous wastes were allegedly disposed at the site. Total past and future
costs for remediation are estimated to be approximately $8.0 million. The
Company filed its response to the Section 104(e) order setting forth its
position and defenses based on the fact that the other company was the lessee
and operator of the site during the time the Company was the owner of the
property. However, the Company has also given its Notice of Intent to comply
with the EPA's order to prepare a remediation design plan. Efforts are underway
to identify additional PRP's. The cost of the remediation design plan is
estimated to be $1.0 million and the Company has provided for such costs in the
financial statements, assuming that the costs will be equally divided among the
eight PRPs.
In 1995 the Company and twelve other companies received notice that they
have been identified as PRPs by the California Department of Toxic Substances
Control (the "DTSC") as having generated and/or transported hazardous waste to
the Environmental Protection Corporation ("EPC") Eastside Landfill during its
fourteen-year operation from 1971 to 1985. EPC has since liquidated all assets
and placed the proceeds in trust for closure and post-closure activities.
However, these monies will not be sufficient to close the site. The PRPs have
entered into an enforceable agreement with the DTSC to characterize the
contamination at the site and prepare a focused remedial investigation and
feasibility study. The DTSC has agreed to implement reasonable measures to bring
new PRPs into the agreement. The DTSC will address subsequent phases of the
cleanup, including remedial design and implementation in a separate order
agreement. The cost of the remedial investigation and feasibility study is
estimated to be $1.0 million and the Company has provided for such costs in the
financial statements assuming that the costs will be divided equally among the
thirteen PRP's. The costs of subsequent phases cannot be estimated until the
remedial investigation and feasibility study is completed.
Other Matters
The Company has certain long-term contracts ranging up to twelve years for
the supply and transportation of approximately 20 million cubic feet per day of
natural gas to the Company's operations in Kern County, California. In the
aggregate, these contracts involve a minimum commitment on the part of the
Company of approximately $9.6 million per year (based on prices and
transportation charges in effect for June 1996).
F-36
<PAGE> 115
WESTERN DIVISION OF SANTA FE ENERGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
There are other claims and actions, including certain other environmental
matters, pending against the Company. In the opinion of management, the amounts,
if any, which may be awarded in connection with any of these claims and actions
could be significant to the results of operations of any period but would not be
material to the Company's financial position.
F-37
<PAGE> 116
==============================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................... 3
Certain Definitions...................... 3
Prospectus Summary....................... 4
Risk Factors............................. 14
Use of Proceeds.......................... 20
Dividend Policy.......................... 20
Dilution................................. 21
Capitalization........................... 22
Selected Historical and Pro Forma
Financial Information and Operating
Data................................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 26
Business................................. 33
Management............................... 50
Security Ownership of Management......... 61
Relationship Between the Company and
SFR.................................... 63
Description of Capital Stock............. 67
Shares Eligible for Future Sale.......... 71
Underwriting............................. 72
Certain U.S. Tax Consequences to Non-U.S.
Holders................................ 74
Legal Matters............................ 76
Experts.................................. 76
Index to Financial Statements............ F-1
</TABLE>
---------------------
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
==============================================================================
==============================================================================
7,900,000 SHARES
MONTEREY RESOURCES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------
[MONTEREY RESOURCES LOGO]
---------------------
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO.
INCORPORATED
PETRIE PARKMAN & CO.
REPRESENTATIVES OF THE UNDERWRITERS
==============================================================================
<PAGE> 117
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
<TABLE>
<S> <C>
SEC Registration Fee.............................................................. $46,991
NASD Filing Fee................................................................... 14,128
Listing Fee................................................................. *
Accounting Fees and Expenses...................................................... *
Legal Fees and Expenses........................................................... *
Printing Expenses................................................................. *
Blue Sky Qualification Fees and Expenses.......................................... *
Transfer Agent's Fees............................................................. *
Miscellaneous..................................................................... *
-------
TOTAL................................................................... $ *
=======
</TABLE>
- ---------------
(1) The amounts set forth above, except for the SEC, NASD and NYSE fees, are in
each case estimated.
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason for the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expense which the Court of Chancery or such other
court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defenses of
any action, suit or proceeding referred to in subsections (a) and (b) of Section
145 in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; that indemnification provided for by Section
145 shall, unless otherwise provided when authorized or ratified, continue as to
a person who has
II-1
<PAGE> 118
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit.
Article Eleventh of the Company's Certificate of Incorporation states that:
ELEVENTH: No director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty by such director as a director; provided, however, that
this Article ELEVENTH shall not eliminate or limit the liability of a
director to the extent provided by applicable law (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
an improper personal benefit. No amendment to or repeal of this
Article ELEVENTH shall apply to, or have any effect on, the liability
or alleged liability of any director of the Corporation for or with
respect to any acts or omissions of such director occurring prior to
such amendment or repeal. If the General Corporation Law of the State
of Delaware is amended 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.
In addition, Article VI of the Company's Bylaws further provides that the
Company shall indemnify its officers and directors to the fullest extent
permitted by law.
The Company has entered or will enter into indemnification agreements with
each of its directors and executive officers.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification of the Registrant and
certain controlling persons under certain circumstances against certain
liabilities, including liabilities under the Securities Act of 1933.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Except for 1,000 shares of stock issued to Santa Fe Energy Resources, Inc.
in connection with the formation of the Company in August 1996, the Company has
not sold any securities during the past three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBITS
<C> <S>
1.1 -- Form of Underwriting Agreement.
*3.1 -- Amended and Restated Certificate of Incorporation.
*3.2 -- Amended and Restated Bylaws.
</TABLE>
II-2
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBITS
<C> <S>
*4.1 -- Specimen Common Stock Certificate.
*5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
10.1 -- Conveyance and Contribution Agreement dated , 1996
between Monterey Resources, Inc. and Santa Fe Energy Resources, Inc.
10.2 -- Agreement for the Allocation of Consolidated Federal Income Tax
Liability and State and Local Taxes among the members of the Santa Fe
Energy Resources, Inc. Affiliated Group dated , 1996.
*10.3 -- Agreement Concerning Taxes and Tax Indemnifications Upon Spin Off,
dated , 1996, between Monterey Resources, Inc. and
Santa Fe Energy Resources, Inc.
10.4 -- Corporate Services Agreement dated , 1996, between
Monterey Resources, Inc. and Santa Fe Energy Resources, Inc.
10.5 -- Registration Rights and Indemnification Agreement dated
, 1996, between Monterey Resources, Inc. and Santa Fe Energy
Resources, Inc.
10.6 -- Monterey Resources, Inc. Incentive Compensation Plan, dated
, 1996.
10.7 -- Monterey Resources, Inc. Incentive Stock Compensation Plan for Key
Employees, dated , 1996.
10.8 -- Monterey Resources, Inc. Incentive Stock Compensation Plan for
Nonexecutive Employees dated , 1996.
10.9 -- Monterey Resources, Inc. Severance Program, dated ,
1996.
10.10 -- Monterey Resources, Inc. Savings Investment Plan dated
, 1996.
10.11 -- Monterey Resources, Inc. Deferred Compensation Plan dated
, 1996.
10.12 -- Monterey Resources, Inc. Employee Stock Ownership Plan dated
, 1996.
10.13 -- Employment Agreement dated , 1996 between Monterey
Resources, Inc. and R. Graham Whaling.
10.14 -- Form of Employment Agreement between Monterey Resources, Inc. and
certain executive officers.
*23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
23.2 -- Consent of Price Waterhouse LLP.
23.3 -- Consent of Ryder Scott Company.
24.1 -- Powers of Attorney (included in Part II of this Registration
Agreement).
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 14 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such
II-3
<PAGE> 120
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declares
effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
II-4
<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Houston, State of Texas, on September 17, 1996.
MONTEREY RESOURCES, INC.
By: /s/ R. GRAHAM WHALING
------------------------------------
R. Graham Whaling
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints R. Graham Whaling, and Terry L. Anderson,
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 by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ R. GRAHAM WHALING Chairman of the Board, September 17, 1996
- --------------------------------------------- Chief Executive Officer
R. Graham Whaling and Director (Principal
Executive and Financial
Officer)
/s/ JAMES L. PAYNE Director September 17, 1996
- ---------------------------------------------
James L. Payne
/s/ HUGH L. BOYT Director September 17, 1996
- ---------------------------------------------
Hugh L. Boyt
/s/ CRAIG A. HUFF Director September 17, 1996
- ---------------------------------------------
Craig A. Huff
/s/ MICHAEL A. MORPHY Director September 17, 1996
- ---------------------------------------------
Michael A. Morphy
/s/ ROBERT F. VAGT Director September 17, 1996
- ---------------------------------------------
Robert F. Vagt
/s/ ROBERT J. WASIELEWSKI Director September 17, 1996
- ---------------------------------------------
Robert J. Wasielewski
</TABLE>
II-5
<PAGE> 122
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
<C> <S>
1.1 -- Form of Underwriting Agreement.
*3.1 -- Amended and Restated Certificate of Incorporation.
*3.2 -- Amended and Restated Bylaws.
*4.1 -- Specimen Common Stock Certificate.
*5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
10.1 -- Conveyance and Contribution Agreement dated , 1996
between Monterey Resources, Inc. and Santa Fe Energy Resources, Inc.
10.2 -- Agreement for the Allocation of Consolidated Federal Income Tax
Liability and State and Local Taxes among the members of the Santa Fe
Energy Resources, Inc. Affiliated Group dated , 1996.
*10.3 -- Agreement Concerning Taxes and Tax Indemnifications Upon Spin Off,
dated , 1996, between Monterey Resources, Inc. and
Santa Fe Energy Resources, Inc.
10.4 -- Corporate Services Agreement dated , 1996, between
Monterey Resources, Inc. and Santa Fe Energy Resources, Inc.
10.5 -- Registration Rights and Indemnification Agreement dated
, 1996, between Monterey Resources, Inc. and Santa Fe Energy
Resources, Inc.
10.6 -- Monterey Resources, Inc. Incentive Compensation Plan, dated
, 1996.
10.7 -- Monterey Resources, Inc. Incentive Stock Compensation Plan for Key
Employees, dated , 1996.
10.8 -- Monterey Resources, Inc. Incentive Stock Compensation Plan for
Nonexecutive Employees dated , 1996.
10.9 -- Monterey Resources, Inc. Severance Program, dated ,
1996.
10.10 -- Monterey Resources, Inc. Savings Investment Plan dated
, 1996.
10.11 -- Monterey Resources, Inc. Deferred Compensation Plan dated
, 1996.
10.12 -- Monterey Resources, Inc. Employee Stock Ownership Plan dated
, 1996.
10.13 -- Employment Agreement dated , 1996 between Monterey
Resources, Inc. and R. Graham Whaling.
10.14 -- Form of Employment Agreement between Monterey Resources, Inc. and
certain executive officers.
*23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
23.2 -- Consent of Price Waterhouse LLP.
23.3 -- Consent of Ryder Scott Company.
24.1 -- Powers of Attorney (included in Part II of this Registration
Agreement).
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
MONTEREY RESOURCES, INC.
COMMON STOCK
($.01 PAR VALUE PER SHARE)
UNDERWRITING AGREEMENT
(U.S. VERSION)
-----------------------------------------
, 1996
Goldman, Sachs & Co.,
Morgan Stanley & Co. Incorporated
Petrie Parkman & Co.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Monterey Resources, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an
aggregate of ........ shares (the "Firm Shares") and, at the election of the
Underwriters, up to ......... additional shares (the "Optional Shares") of
the Common Stock, $.01 par value per share ("Stock"), of the Company (the Firm
Shares and the Optional Shares that the Underwriters elect to purchase pursuant
to Section 2 hereof being collectively called the "Shares").
The Company is a recently organized corporation which will acquire
substantially all of the assets and liabilities of the Western Division (the
"Western Division") of Santa Fe Energy Resources, Inc., a Delaware corporation
("SFR"), pursuant to the terms and conditions of a Contribution and Conveyance
Agreement dated as of [ ], 1996 (the "Contribution Agreement") by and
between the Company and SFR, all in exchange for (i) [ ] shares of Common
Stock and (ii) a production payment in an aggregated amount of $30 million plus
interest (the "Contribution"). It is understood that the Contribution will
occur immediately prior to and substantially
<PAGE> 2
contemporaneously with the closing of the sale of the Firm Shares to the
Underwriters. Prior to the closing of the sale of the Firm Shares to the
Underwriters, the Company was a wholly owned subsidiary of SFR.
It is understood and agreed to by all parties that the Company is
concurrently entering into an agreement (the "International Underwriting
Agreement") providing for the sale by the Company of up to a total of ........
shares of Stock (the "International Shares"), including the overallotment
option thereunder, through arrangements with certain underwriters outside the
United States (the "International Underwriters"), for whom Goldman Sachs
International, Morgan Stanley & Co. International and Petrie Parkman & Co. are
acting as lead managers. Anything herein or therein to the contrary
notwithstanding, the respective closings under this Agreement and the
International Agreement are hereby expressly made conditional on one another.
The Underwriters hereunder and the International Underwriters are
simultaneously entering into an Agreement between U.S. and International
Underwriting Syndicates (the "Agreement between Syndicates") which provides,
among other things, for the transfer of shares of Stock between the two
syndicates. Two forms of prospectus are to be used in connection with the
offering and sale of shares of Stock contemplated by the foregoing, one
relating to the Shares hereunder and the other relating to the International
Shares. The latter form of prospectus will be identical to the former except
for certain substitute pages and amendments thereto as mentioned below. Except
as used in Sections 2, 3, 4, 9 and 11 herein, and except as the context may
otherwise require, references hereinafter to the Shares shall include all the
shares of Stock which may be sold pursuant to either this Agreement or the
International Underwriting Agreement, and references herein to any prospectus
whether in preliminary or final form, and whether as amended or supplemented,
shall include both the U.S. and the international versions thereof.
1. Each of the Company and SFR, jointly and severally, represents
and warrants to, and agrees with, each of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 33-....)
(the "Initial Registration Statement") in respect of the Shares has
been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore
delivered to you, and, excluding exhibits thereto, to you for each of
the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing
the size of the offering (a "Rule 462(b) Registration Statement"),
filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended (the "Act"), which became effective upon filing, no other
document with respect to the
2
<PAGE> 3
Initial Registration Statement has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the
Initial Registration Statement, any post-effective amendment thereto
or the Rule 462(b) Registration Statement, if any, has been issued and
no proceeding for that purpose has been initiated or threatened by the
Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the Act,
is hereinafter called a "Preliminary Prospectus"; the various parts of
the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with
Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to
be part of the Initial Registration Statement at the time it was
declared effective, each as amended at the time such part of the
registration statement became effective or such part of the Rule
462(b) Registration Statement, if any, became or hereafter becomes
effective, are hereinafter collectively called the "Registration
Statement"; such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus";
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in
all material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in writing
to the Company by an Underwriter through Goldman, Sachs & Co.
expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration
Statement or the Prospectus will conform, in all material respects to
the requirements of the Act and the rules and regulations of the
Commission thereunder and do not and will not, as of the applicable
effective date as to the Registration Statement and any amendment
thereto and as of the applicable filing date as to the Prospectus and
any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or
3
<PAGE> 4
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein;
(d) SFR has consummated a consent solicitation of the holders
of its 11% Senior Subordinated Debentures (the "Debentures") pursuant
to which it has received the consent of a majority of such holders to
amend the indenture relating to the Debentures such that the
consummation of the Contribution and the transactions contemplated by
this Agreement and the International Underwriting Agreement will not
conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under such indenture; and
such indenture, as amended, has been duly and validly authorized by
all necessary action on the part of SFR, has been duly executed and
delivered by or on behalf of SFR and constitutes the legally valid and
binding obligation of SFR, enforceable against it in accordance with
its terms, except as such enforcement may be subject to or limited by
bankruptcy, insolvency and general principles of equity;
(e) Neither the Company, SFR nor any of their respective
subsidiaries has sustained since the date of the latest audited
financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the
capital stock [other items] or long-term debt of the Company, SFR or
any of their respective subsidiaries or any material adverse change,
or any development involving a prospective material adverse change, in
or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of SFR and its
subsidiaries prior to giving effect to the Contribution, or of the
Company and its subsidiaries after giving effect to the Contribution,
otherwise than as set forth or contemplated in the Prospectus;
(f) (a) Each of SFR and its subsidiaries prior to giving
effect to the Contribution has, and each of the Company and its
subsidiaries after giving effect to the Contribution will have, good
title to its producing oil and gas properties, free and clear of all
liens, encumbrances and defects, except
4
<PAGE> 5
(i) those described in the Prospectus, (ii) liens securing taxes and
other governmental charges, or claims of materialmen, mechanics and
similar persons, not yet due and payable, (iii) liens and encumbrances
under operating agreements, unitization and pooling agreements, and
gas sales contracts, securing payment of amounts not yet due and
payable and of a scope and nature customary in the oil and gas
industry and (iv) liens, encumbrances and defects that do not,
individually or in the aggregate, materially affect the value of such
oil and gas properties or materially interfere with the ability of the
Company or SFR to conduct its business as currently conducted or to
utilize such properties for their intended purposes; and (b) except to
the extent described in the Prospectus, the leases, options to lease,
drilling concessions or other arrangements held by SFR prior to giving
effect to the Contribution and by the Company after giving effect to
the Contribution reflect in all material respects the right of SFR
prior to giving effect to the Contribution and of the Company after
giving effect to the Contribution to explore the unexplored and
undeveloped acreage described in the Prospectus, and the care taken by
the Company or SFR with respect to acquiring or otherwise procuring
such leases, options to lease, drilling concessions and other
arrangements was generally consistent with standard industry practices
for acquiring or procuring leases to explore acreage for hydrocarbons;
(g) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus,
and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; and each subsidiary of the Company
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation;
(h) SFR has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus, and has been
duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no
5
<PAGE> 6
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; and each subsidiary of the SFR has
been duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation;
(i) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company have been duly and validly authorized, have been or, after
giving effect to the Contribution, will have been duly and validly
issued, and are or, after giving effect to the Contribution, will be
fully paid and non-assessable and conform to the description of the
Stock contained in the Prospectus; and all of the issued shares of
capital stock of each subsidiary of the Company have been duly and
validly authorized and issued, are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims;
(j) The unissued Shares to be issued and sold by the Company
to the Underwriters hereunder and under the International Underwriting
Agreement have been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein and in the
International Underwriting Agreement, will be duly and validly issued
and fully paid and non-assessable and will conform to the description
of the Stock contained in the Prospectus;
(k) The Contribution Agreement (A) has been duly and validly
authorized by all necessary action on the part of the Company and SFR
and (B) has been duly executed and delivered by or on behalf of each
of the Company and SFR, and constitutes the legally valid and binding
obligation of each of the Company and SFR, enforceable against each of
them in accordance with its terms, except as such enforcement may be
subject to or limited by bankruptcy, insolvency and general principles
of equity; each of [the Registration Rights and Indemnification
Agreement, the Corporate Services Agreement, the Spin-Off Tax
Indemnification Agreement and the Agreement for the Allocation of the
Consolidated Federal Income Tax Liability and State and Local Taxes
among the Members of the Santa Fe Energy Resources, Inc. Affiliated
Group] described in the Prospectus (collectively, the "Material
Contracts") is or when executed and delivered by the Company and SFR
will be, duly and validly authorized, executed and delivered by the
Company and SFR and is or will be, when executed and delivered by the
Company and SFR, a legally valid and binding obligation of the Company
and SFR enforceable against the Company and SFR in accordance with its
terms, except as such enforcement may be subject to
6
<PAGE> 7
or limited by bankruptcy, insolvency and general principles of equity;
(l) The issue and sale of the Shares by the Company hereunder
and under the International Underwriting Agreement, the compliance by
the Company and SFR with all of the provisions of this Agreement and
the International Underwriting Agreement, the consummation of the
transactions herein and therein contemplated and the execution,
delivery and performance by the Company and SFR of each of the
Contribution Agreement and the Material Contracts will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to
which the Company, SFR or any of their respective subsidiaries is a
party or by which the Company, SFR or any of their respective
subsidiaries is bound or to which any of the property or assets of the
Company or SFR or any of their respective subsidiaries is subject, nor
will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or SFR or any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company, SFR or any of
their respective subsidiaries or any of their respective properties;
and no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
is required for the execution, delivery and performance by the Company
and SFR of each of the Contribution Agreement and the Material
Contracts or for the issue and sale of the Shares or the consummation
by the Company and SFR of the transactions contemplated by this
Agreement and the International Underwriting Agreement, except the
registration under the Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters and the
International Underwriters;
(m) Neither the Company, SFR nor any of their respective
subsidiaries is in violation of its Certificate of Incorporation or
By-laws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or any
of its properties may be bound;
(n) The statements set forth in the Prospectus under the
captions "Business--Other Business Matters-- Regulation of Crude Oil
and Natural Gas
7
<PAGE> 8
Production" and "--Environmental Regulation", insofar as they purport
to describe the provisions of the laws and the documents referred to
therein, under the caption "Relationship Between the Company and
SFR--Contractual Arrangements", insofar as they purport to contain a
summary of the provisions of the documents referred to therein, under
the caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, under the caption
"Certain U.S. Tax Consequences to Non-U.S. Holders" and under the
caption "Underwriting", insofar as they purport to describe the
provisions of the laws and documents referred to therein, are
accurate, complete and fair;
(o) Other than as set forth or contemplated in the
Prospectus, there are no legal or governmental proceedings pending to
which the Company, SFR or any of their respective subsidiaries is a
party or of which any property of the Company, SFR or any of their
respective subsidiaries is the subject which, if determined adversely
to SFR, the Company or any of their respective subsidiaries, would
individually or in the aggregate have a material adverse effect on the
current or future consolidated financial position, stockholders'
equity or results of operations of SFR and its subsidiaries prior to
giving effect to the Contribution, or of the Company and its
subsidiaries after giving effect to the Contribution; and, to the best
of the knowledge of the Company and SFR, no such proceedings are
threatened or contemplated by governmental authorities or threatened
by others;
(p) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company"
or an entity "controlled" by an "investment company", as such terms
are defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(q) Neither the Company or any of its affiliates, nor SFR or
any of its affiliates, does business with the government of Cuba or
with any person or affiliate located in Cuba within the meaning of
Section 517.075, Florida Statutes;
(r) Price Waterhouse LLP, who have certified certain
financial statements of the Company and its subsidiaries, are
independent public accountants as required by the Act and the rules
and regulations of the Commission thereunder;
(s) Each of SFR and its subsidiaries has and, after giving
effect to the
8
<PAGE> 9
Contribution, the Company and its subsidiaries will have, such
certificates of convenience or necessity, easements, rights-of-way,
operating rights, permits, licenses, franchises and authorizations of
governmental or regulatory authorities ("Permits") as are necessary to
own their respective properties and to conduct their respective
businesses in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; each of SFR and
its subsidiaries has and, after giving effect to the Contribution, the
Company and its subsidiaries will have, fulfilled and performed all
its material obligations with respect to such Permits and no event has
occurred which allows (or after notice or lapse of time or both would
allow) revocation or termination thereof or results in any other
material impairment of the rights of the holder of any such Permit,
subject in each case to such qualification as may be set forth in the
Prospectus (and it being understood that certain Permits, by their
respective terms, lapse as described in the Prospectus); and, except
as described in the Prospectus, none of such Permits contains any
restriction that is materially burdensome to SFR or any of its
subsidiaries or that, after giving effect to the Contribution, would
be materially burdensome to the Company or to any of its subsidiaries;
(t) Except as described in the Registration Statement, no
holder of any security of the Company has any right to require
registration of shares of Stock or any other security of the Company
because of the filing of the Registration Statement or consummation of
the transactions contemplated by this Agreement nor will any holder of
any security of the Company have, as of the closing of the sale of the
Firm Shares to the Underwriters after giving effect to the
Contribution, any such right;
(u) No action taken by or on behalf of the Company or SFR in
connection with the solicitation of consents of the holders of the
Debentures or of any other security or indebtedness of the Company or
SFR to the Contribution violated any Federal or state securities law;
(v) Each of the Company, SFR and their respective
subsidiaries is in compliance with all applicable Federal, state and
local environmental laws and regulations and all environmental laws
and regulations of each foreign jurisdiction in which it conducts
business, including, without limitation, those applicable to emissions
to the environment, waste management and waste disposal (collectively
the "Environmental Laws"), except as disclosed in the Prospectus or
where such noncompliance would not have a material adverse effect on
the earnings, financial condition, business affairs or business
9
<PAGE> 10
prospects of SFR and its subsidiaries prior to giving effect to the
Contribution, or of the Company and its subsidiaries after giving
effect to the Contribution. To the knowledge of the Company and SFR
under current law and interpretation, there are no circumstances that
would prevent or materially increase the cost of such compliance in
the future;
(w) Except as disclosed in the Prospectus, there is no claim
under any Environmental Law, including common law, pending or, to the
knowledge of the Company and SFR, threatened against or affecting the
Company or SFR, except for such claims which, if determined adversely
to the Company or SFR, would not have a material adverse effect on the
earnings, financial condition, business affairs or business prospects
of SFR and its subsidiaries prior to giving effect to the
Contribution, or of the Company and its subsidiaries after giving
effect to the Contribution ("Environmental Claim"), and, to the
knowledge of the Company and SFR, under applicable law there are no
past or present actions, activities, circumstances, events or
incidents, including, without limitation, releases of any material
into the environment that could reasonably be expected to form the
basis of any Environmental Claim against or affecting the Company or
SFR; and
(x) Ryder Scott Co. Petroleum Engineers, Inc. ("Ryder Scott"),
whose estimates are included in the Prospectus, do not, nor do any of
their employees, have any interest in the Company, SFR or any of their
respective subsidiaries; nor is their employment to review and report
upon the reserve estimates of the Company and SFR or their
compensation for such work contingent upon their estimates for the
properties they reviewed.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $........................, the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I hereto and
(b) in the event and to the extent that the Underwriters shall exercise the
election to purchase Optional Shares as provided below, the Company agrees to
issue and sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company, at the
purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction, the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to
10
<PAGE> 11
purchase as set forth opposite the name of such Underwriter in Schedule I
hereto and the denominator of which is the maximum number of Optional Shares
that all of the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to ............ Optional Shares, at the purchase price per
share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of
such notice.
3. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter
hereunder, in definitive form, and in such authorized denominations
and registered in such names as Goldman, Sachs & Co. may request upon
at least forty- eight hours' prior notice to the Company, shall be
delivered by or on behalf of the Company to Goldman, Sachs & Co., for
the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by certified or
official bank check or checks, payable to the order of the Company in
New York Clearing House (next day) funds. The Company will cause the
certificates representing the Shares to be made available for checking
and packaging at least twenty-four hours prior to the Time of Delivery
(as defined below) with respect thereto at the office of Goldman,
Sachs & Co., 85 Broad Street, New York, New York 10004 (the
"Designated Office"). The time and date of such delivery and payment
shall be, with respect to the Firm Shares, 9:30 a.m., New York City
time, on ............., 1996 or such other time and date as Goldman,
Sachs & Co. and the Company may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York time, on the date
specified by Goldman, Sachs & Co. in the written notice given by
Goldman, Sachs & Co. of the Underwriters' election to purchase such
Optional Shares, or such other time and date as Goldman, Sachs & Co.
and the Company may agree upon in writing. Such time and date for
delivery of the Firm Shares is herein called the "First Time of
Delivery", such time and date for delivery of the
11
<PAGE> 12
Optional Shares, if not the First Time of Delivery, is herein called
the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 7 hereof,
including the cross receipt for the Shares and any additional
documents requested by the Underwriters pursuant to Section 7(o)
hereof, will be delivered at the offices of Cravath, Swaine & Moore,
Worldwide Plaza, 825 Eighth Avenue, New York, New York 10019 (the
"Closing Location"), and the Shares will be delivered at the
Designated Office, all at such Time of Delivery. A meeting will be
held at the Closing Location at 3:00 p.m., New York City time, on the
New York Business Day next preceding such Time of Delivery, at which
meeting the final drafts of the documents to be delivered pursuant to
the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which
is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and
to file such Prospectus pursuant to Rule 424(b) under the Act not
later than the Commission's close of business on the second business
day following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus which shall be disapproved by you
promptly after reasonable notice thereof; to advise you, promptly
after it receives notice thereof, of the time when any amendment to
the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed
and to furnish you with copies thereof; to advise you, promptly after
it receives notice thereof, of the issuance by the Commission of any
stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction,
of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, promptly to use its best efforts to obtain
12
<PAGE> 13
the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as you may request and to
comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary
to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Prospectus in
New York City in such quantities as you may reasonably request, and,
if the delivery of a prospectus is required at any time prior to the
expiration of nine months after the time of issue of the Prospectus in
connection with the offering or sale of the Shares and if at such time
any event shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary during
such period to amend or supplement the Prospectus in order to comply
with the Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably
request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such
compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time
nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and
deliver to such Underwriter as many copies as you may request of an
amended or supplemented Prospectus complying with Section 10(a)(3) of
the Act;
(d) To make generally available to its securityholders as
soon as practicable, but in any event not later than eighteen months
after the effective date of the Registration Statement (as defined in
Rule 158(c) under the Act), an earnings statement of the Company and
its subsidiaries (which need not be audited) complying with Section
11(a) of the Act and the rules and regulations
13
<PAGE> 14
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose
of, except as provided hereunder and under the International
Underwriting Agreement, any securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially
similar securities (other than pursuant to employee stock option plans
existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this
Agreement), without your prior written consent;
(f) To furnish to its stockholders as soon as practicable
after the end of each fiscal year an annual report (including a
balance sheet and statements of income, stockholders' equity and cash
flows of the Company and its consolidated subsidiaries certified by
independent public accountants) and, as soon as practicable after the
end of each of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable
detail;
(g) During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to stockholders,
and to deliver to you (i) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the
Company as you may from time to time reasonably request (such
financial statements to be on a consolidated basis to the extent the
accounts of the Company and its subsidiaries are consolidated in
reports furnished to its stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of
the Shares pursuant to this Agreement and the International
Underwriting Agreement in the manner specified in the Prospectus under
the caption "Use of Proceeds";
(i) To use its best efforts to list, subject to notice of
issuance, the Shares on the New York Stock Exchange (the "Exchange");
14
<PAGE> 15
(j) To file with the Commission such reports on Form SR as
may be required by Rule 463 under the Act;
(k) If the Company elects to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement, and the Company shall at the
time of filing either pay to the Commission the filing fee for the
Rule 462(b) Registration Statement or give irrevocable instructions
for the payment of such fee pursuant to Rule 111(b) under the Act;
(l) Prior to the First Time of Delivery, the Company will,
and SFR will cause the Company to, deliver to you a copy of any
proposed amendment to or waiver of the Contribution Agreement, and
neither the Company nor SFR will amend or waive any provision of such
agreement which amendment or waiver in your judgment would be adverse
to prospective purchasers of the Shares in the public offering; and
(m) Prior to the First Time of Delivery, the Company will,
and SFR will cause the Company to, deliver to you a copy of any
amendment to any Material Contract proposed to be entered into prior
to the First Time of Delivery, and neither the Company nor SFR will
amend or waive any provision of such agreement which amendment or
waiver in your judgment would be adverse in any material respects to
prospective purchasers of the Shares in the public offering.
6. The Company covenants and agrees with the several Underwriters
that the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the International
Underwriting Agreement, the Agreement between Syndicates, the Selling
Agreement, the Blue Sky Memorandum, closing documents (including compilations
thereof) and any other documents in connection with the offering, purchase,
sale and delivery of the Shares; (iii) all expenses in connection with the
qualification of the Shares for offering and sale under state securities laws
as provided in Section 5(b) hereof, including the fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky survey; (iv) all fees and expenses in connection
with listing the Shares on the New York Stock
15
<PAGE> 16
Exchange; (v) the filing fees incident to, and the fees and disbursements of
counsel for the Underwriters in connection with, securing any required review
by the National Association of Securities Dealers, Inc. of the terms of the
sale of the Shares; (vi) the cost of preparing stock certificates; (vii) the
cost and charges of any transfer agent or registrar; and (viii) all other costs
and expenses incident to the performance of its obligations hereunder which are
not otherwise specifically provided for in this Section. It is understood,
however, that, except as provided in this Section, and Sections 8 and 11
hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, stock transfer taxes on resale of any of
the Shares by them, and any advertising expenses connected with any offers they
may make.
7. The obligations of the Underwriters hereunder, as to the Shares
to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and other
statements of the Company herein are, at and as of such Time of Delivery, true
and correct, the condition that the Company shall have performed all of its
obligations hereunder theretofore to be performed, and the following additional
conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the rules and regulations under the Act and in
accordance with Section 5(a) hereof; if the Company has elected to
rely upon Rule 462(b), the Rule 462(b) Registration Statement shall
have become effective by 10:00 P.M., Washington, D.C. time, on the
date of this Agreement; no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued
and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional
information on the part of the Commission shall have been complied
with to your reasonable satisfaction;
(b) The Contribution and related transactions shall have been
consummated (or shall be consummated at the First Time of Delivery
substantially contemporaneously with the transactions contemplated
hereby) on a basis satisfactory to the Underwriters;
(c) Each of the Material Contracts shall have been duly and
validly authorized, executed and delivered by the Company and SFR;
(d) Cravath, Swaine & Moore, counsel for the Underwriters,
shall have furnished to you such opinion or opinions, dated such Time
of Delivery, with respect to the issuance and sale of the Shares, the
Registration Statement and
16
<PAGE> 17
the Prospectus (together with any further amendments and supplements
thereto) as well as such other related matters as you may reasonably
request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon
such matters;
(e) Andrews & Kurth L.L.P., counsel for the Company and SFR,
shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(a) hereto), dated such Time of
Delivery, in form and substance satisfactory to you, to the effect
that:
(i) Each of the Company and SFR has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware with power and authority
(corporate and other) to own its properties and conduct its business
as described in the Prospectus;
(ii) The Company has an authorized capitalization
as set forth in the Prospectus, and all of the issued shares of
capital stock of the Company (including the shares issued in the
Contribution and the Shares being delivered at such Time of Delivery)
have been duly and validly authorized and issued and are fully paid
and nonassessable; and the Shares conform to the description of the
Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a
foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction (such
counsel being entitled to rely in respect of the opinion in this
clause upon opinions of local counsel and in respect of matters of
fact upon certificates of officers of the Company, provided that such
counsel shall state that they believe that both you and they are
justified in relying upon such opinions and certificates);
(iv) Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation; and all of the
issued shares of capital stock of each such subsidiary have been duly
and validly authorized and issued, are fully paid and non-assessable,
and (except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims (such counsel being entitled to rely in respect of
the opinion
17
<PAGE> 18
in this clause upon opinions of local counsel and in respect to
matters of fact upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions and
certificates);
(v) Each of SFR and its subsidiaries prior to
giving effect to the Contribution has, and each of the Company and its
subsidiaries after giving effect to the Contribution will have, good
title to the producing oil and gas properties to be transferred to the
Company pursuant to the Contribution, free and clear of all liens,
encumbrances and defects, except (i) those described in the
Prospectus, (ii) liens securing taxes and other governmental charges,
or claims of materialmen, mechanics and similar persons, not yet due
and payable, (iii) liens and encumbrances under operating agreements,
unitization and pooling agreements, and gas sales contracts, securing
payment of amounts not yet due and payable and of a scope and nature
customary in the oil and gas industry and (iv) liens, encumbrances and
defects that do not, individually or in the aggregate, materially
affect the value of such oil and gas properties or materially
interfere with the ability of the Company or SFR to conduct the
business to be transferred to the Company pursuant to the Contribution
as currently conducted or to utilize such properties for their
intended purposes; and (b) except to the extent described in the
Prospectus, the leases, options to lease, drilling concessions or
other arrangements held prior to giving effect to the Contribution by
SFR with respect to the properties to be transferred to the Company
pursuant to the Contribution or by the Company after giving effect to
the Contribution reflect in all material respects the right of SFR
prior to giving effect to the Contribution and of the Company after
giving effect to the Contribution to explore the unexplored and
undeveloped acreage described in the Prospectus, and the care taken by
SFR and the Company with respect to acquiring or otherwise procuring
such leases, options to lease, drilling concessions and other
arrangements was generally consistent with standard industry practices
for acquiring or procuring leases to explore acreage for hydrocarbons;
(vi) To the best of such counsel's knowledge and
other than as set forth in the Prospectus, after giving effect to the
Contribution, there are no legal or governmental proceedings pending
to which the Company or any of its subsidiaries is a party or of which
any property of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the current or future consolidated financial
position,
18
<PAGE> 19
stockholders' equity or results of operations of the Company and its
subsidiaries; and, to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(vii) This Agreement and the International
Underwriting Agreement have been duly authorized, executed and
delivered by the Company and SFR;
(viii) The issue and sale of the Shares being
delivered at such Time of Delivery by the Company, the compliance by
the Company with all of the provisions of this Agreement and the
International Underwriting Agreement, the consummation of the
transactions herein and therein contemplated and the execution,
delivery and performance by the Company and SFR of each of the
Contribution Agreement and the Material Contracts will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument known
to such counsel to which the Company, SFR or any of their respective
subsidiaries is a party or by which the Company, SFR or any of their
respective subsidiaries is bound or to which any of the property or
assets of the Company, SFR or any of their respective subsidiaries is
subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the
Company or SFR or any statute or any order, rule or regulation known
to such counsel of any court or governmental agency or body having
jurisdiction over the Company, SFR or any of their respective
subsidiaries or any of their properties;
(ix) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for execution, delivery and
performance by the Company and SFR of each of the Contribution
Agreement and the Material Contracts or for the issue and sale of the
Shares or the consummation by the Company and SFR of the transactions
contemplated by this Agreement and the International Underwriting
Agreement, except the registration under the Act of the Shares, and
such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by
the Underwriters and the International Underwriters;
(x) SFR has consummated a consent solicitation
of the holders
19
<PAGE> 20
of its Debentures pursuant to which it has received the consent of a
majority of such holders to amend the indenture relating to the
Debentures such that the consummation of the Contribution and the
transactions contemplated by this Agreement and the International
Underwriting Agreement will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under such indenture; and such indenture, as amended, has been
duly and validly authorized by all necessary action on the part of
SFR, has been duly executed and delivered by or on behalf of SFR and
constitutes the legally valid and binding obligation of SFR,
enforceable against it in accordance with its terms, except as such
enforcement may be subject to or limited by bankruptcy, insolvency and
general principles of equity;
(xi) Neither the Company nor any of its
subsidiaries is in violation of its Certificate of Incorporation or
By-laws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or any
of its properties may be bound;
(xii) The statements set forth in the Prospectus
under the captions "Business--Other Business Matters--Regulation of
Crude Oil and Natural Gas Production" and "--Environmental
Regulation", insofar as they purport to describe the provisions of the
laws and the documents referred to therein, under the caption
"Relationship Between the Company and SFR--Contractual Arrangements",
insofar as they purport to contain a summary of the provisions of the
documents referred to therein, under the caption "Description of
Capital Stock", insofar as they purport to constitute a summary of the
terms of the Stock, under the caption "Certain U.S. Tax Consequences
to Non-U.S. Holders" and under the caption "Underwriting", insofar as
they purport to describe the provisions of the laws and documents
referred to therein, are accurate, complete and fair;
(xiii) The Company is not an "investment company" or
an entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act;
(xiv) The Registration Statement and the Prospectus and
any further amendments and supplements thereto made by the Company
prior to such Time of Delivery (other than the financial statements
and related schedules therein, and other financial data and
information included therein that is
20
<PAGE> 21
extracted from a report of Ryder Scott pertaining to natural resource
reserves that is referred to or included therein, as to which such
counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act and the rules and
regulations thereunder, although they do not assume any responsibility
for the accuracy, completeness or fairness of the statements contained
in the Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (xii) of this Section 7(e);
they have no reason to believe that, as of its effective date, the
Registration Statement or any further amendment thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related statements and related schedules therein, and
other financial data and information included therein that is
extracted from a report of Ryder Scott pertaining to natural resource
reserves that is referred to or included therein, as to which such
counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein, and other financial data and information included therein
that is extracted from a report of Ryder Scott pertaining to natural
resource reserves that is referred to or included therein, as to which
such counsel need express no opinion) contained an untrue statement of
a material fact or omitted to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading or that, as of such Time of Delivery,
either the Registration Statement or the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein, and other financial data and information included therein
that is extracted from a report of Ryder Scott pertaining to natural
resource reserves that is referred to or included therein, as to which
such counsel need express no opinion) contains an untrue statement of
a material fact or omits to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading; and they do not know of any amendment
to the Registration Statement required to be filed or of any contracts
or other documents of a character required to be filed as an exhibit
to the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or
described as required;
(xv) Each of SFR and its subsidiaries has prior to
giving effect to the
21
<PAGE> 22
Contribution and, after giving effect to the Contribution, the Company
and its subsidiaries will have, such Permits as are necessary to own
the properties and to conduct the businesses to be transferred to the
Company pursuant to the Contribution in the manner described in the
Prospectus, subject to such qualifications as may be set forth in the
Prospectus; each of SFR and its subsidiaries has and, after giving
effect to the Contribution each of the Company and its subsidiaries
will have, fulfilled and performed all its material obligations with
respect to such Permits and no event has occurred which allows (or
after notice or lapse of time or both would allow) revocation or
termination thereof or results in any other material impairment of the
rights of the holder of any such Permit, subject in each case to such
qualification as may be set forth in the Prospectus (and it being
understood that certain Permits, by their respective terms, lapse as
described in the Prospectus); and, except as described in the
Prospectus, none of such Permits contains any restriction that is
materially burdensome to SFR or its subsidiaries or that, after giving
effect to the Contribution, would be materially burdensome to the
Company or to any of its subsidiaries;
(xvi) Except as described in the Registration Statement,
no holder of any security of the Company has any right to require
registration of shares of Stock or any other security of the Company
because of the filing of the Registration Statement or consummation of
the transactions contemplated by this Agreement nor will any holder of
any security of the Company have, as of the closing of the sale of the
Firm Shares to the Underwriters after giving effect to the
Contribution, any such right;
(xvii) Each of the Contribution Agreement and the
Material Contracts (A) has been duly and validly authorized by all
necessary corporate and stockholder action on the part of each of the
Company and SFR and (B) has been duly executed and delivered by or on
behalf of each of the Company and SFR, and constitutes the legally
valid and binding obligation of each of the Company and SFR,
enforceable against it in accordance with its terms, except as such
enforcement may be subject to or limited by bankruptcy, insolvency and
general principles of equity;
(xviii) No action taken by or on behalf of the Company
or SFR in connection with the solicitation of consents of the holders
of the Debentures or of any other securities or indebtedness of the
Company or SFR to the Contribution violated any Federal or state
securities law;
22
<PAGE> 23
(xix) No approval by the stockholders of SFR is required
for the consummation of the Contribution or the transactions
contemplated by this Agreement or the International Underwriting
Agreement;
(xx) After giving effect to the Contribution, each of
the Company and its subsidiaries is in compliance with all applicable
Environmental Laws except as disclosed in the Prospectus or where such
noncompliance would not have a material adverse effect on the
earnings, financial condition, business affairs or business prospects
of the Company and its subsidiaries after giving effect to the
Contribution. To the knowledge such counsel under current law and
interpretation, there are no circumstances that would prevent or
materially increase the cost of such compliance in the future; and
(xxi) Except as disclosed in the Prospectus, after
giving effect to the Contribution, there is no Environmental Claim
pending or, to the knowledge of such counsel, threatened against or
affecting the Company, and, to the knowledge of such counsel, under
applicable law there are no past or present actions, activities,
circumstances, events or incidents, including, without limitation,
releases of any material into the environment that could reasonably be
expected to form the basis of any Environmental Claim against or
affecting the Company or SFR.
In rendering such opinion, such counsel may state that
they express no opinion as to the laws of any jurisdiction outside the
United States.
(f) David L. Hicks, General Counsel for SFR, shall have
furnished to you his written opinion (a draft of such opinion is
attached as Annex II(b) hereto), dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that:
(i) SFR has been duly qualified as a foreign corporation
for the transaction of business in the State of California and is in
good standing under the laws of the State of California (such counsel
being entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact upon
certificates of officers of SFR, provided that such counsel shall
state that they believe that both you and they are justified in
relying upon such opinions and certificates);
(ii) Each subsidiary of SFR constituting apart of the
Western Division has been duly incorporated and is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation; and all of the issued shares of capital stock of each
such subsidiary have been duly and
23
<PAGE> 24
validly authorized and issued, are fully paid and non-assessable, and
(except for directors' qualifying shares) are owned directly or
indirectly by SFR, free and clear of all liens, encumbrances, equities
or claims (such counsel being entitled to rely in respect of the
opinion in this clause upon opinions of local counsel and in respect
to matters of fact upon certificates of officers of SFR or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions and
certificates);
(iii) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which SFR or any of its
subsidiaries is a party or of which any property of SFR or any of its
subsidiaries is the subject which, if determined adversely to SFR or
any of its subsidiaries, would individually or in the aggregate have a
material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of operations of
SFR and its subsidiaries; and, to the best of such counsel's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(iv) Each of SFR and its subsidiaries is in compliance
with all applicable Environmental Laws with respect properties and
businesses constituting a part of the Western Division, except as
disclosed in the Prospectus or where such noncompliance would not have
a material adverse effect on the earnings, financial condition,
business affairs or business prospects the Western Division. To the
knowledge of such counsel under current law and interpretation, there
are no circumstances that would prevent or materially increase the
cost of such compliance in the future;
(v) Except as disclosed in the Prospectus, there is no
Environmental Claim with respect to the Western Division pending or,
to the knowledge of such counsel, threatened against or affecting SFR,
and, to the knowledge of such counsel, under applicable law there are
no past or present actions, activities, circumstances, events or
incidents, including, without limitation, releases of any material
into the environment that could reasonably be expected to form the
basis of any Environmental Claim with respect to the Western Division
against or affecting SFR; and
(vi) The Registration Statement and the Prospectus and
any further amendments and supplements thereto made by the Company
prior to such Time of Delivery (other than the financial statements
and related schedules therein, and other financial data and
information included therein that is extracted from a report of Ryder
Scott pertaining to natural resource reserves that is referred to or
included therein, as to which such counsel need express
24
<PAGE> 25
no opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder,
although they do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in subsection (xii) of this Section 7(e); they have no
reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related statements and related schedules therein, and other financial
data and information included therein that is extracted from a report
of Ryder Scott pertaining to natural resource reserves that is
referred to or included therein, as to which such counsel need express
no opinion) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that, as of
its date, the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery (other than
the financial statements and related schedules therein, and other
financial data and information included therein that is extracted from
a report of Ryder Scott pertaining to natural resource reserves that
is referred to or included therein, as to which such counsel need
express no opinion) contained an untrue statement of a material fact
or omitted to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading or that, as of such Time of Delivery, either the
Registration Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules therein,
and other financial data and information included therein that is
extracted from a report of Ryder Scott pertaining to natural resource
reserves that is referred to or included therein, as to which such
counsel need express no opinion) contains an untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and they do not know of any amendment to
the Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an exhibit to
the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or
described as required.
In rendering such opinion, such counsel may state that
they express no opinion as to the laws of any jurisdiction outside the
United States.
(g) On the date of the Prospectus at a time prior to the
execution of this
25
<PAGE> 26
Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time of
Delivery, Price Waterhouse LLP shall have furnished to you a letter or
letters, dated the respective dates of delivery thereof, in form and
substance satisfactory to you, to the effect set forth in Annex I
hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a
draft of the form of letter to be delivered on the effective date of
any post-effective amendment to the Registration Statement and as of
each Time of Delivery is attached as Annex I(b) hereto);
(h) On or prior to the date of this Agreement, you shall have
received from Ryder Scott a letter, dated as of the date of the date
of delivery thereof, to the effect that (other than changes in prices
received by the Company for the sale of its hydrocarbon production,
which changes have occurred since September 1, 1996), as of such date
nothing has come to the attention of Ryder Scott which would cause it
to change any opinion expressed by it in its report dated
[...........], 1996, from which information included in the Prospectus
was extracted with respect to its estimates of proved developed and
proved undeveloped oil and gas reserves of the Company and its
subsidiaries as a whole, and the estimated future net cash flows from
such reserves as described in the Prospectus;
(i)(i) Neither the Company, SFR nor any of their respective
subsidiaries shall have sustained since the date of the latest audited
financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus, and (ii) since
the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock
or long-term debt of SFR or any of its subsidiaries prior to giving
effect to the Contribution, or of the Company or any of its
subsidiaries after giving effect to the Contribution, or any change,
or any development involving a prospective change, in or affecting the
general affairs, management, financial position, stockholders' equity
or results of operations of the SFR or any of its subsidiaries prior
to giving effect to the Contribution, or of Company and its
subsidiaries after giving effect to the Contribution, otherwise than
as set forth or contemplated in the Prospectus, the effect of which,
in any such case described in Clause (i) or (ii), is in the judgment
of the Representatives so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares
26
<PAGE> 27
being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(j) On or after the date hereof (i) no downgrading shall
have occurred in the rating accorded the Company's debt securities by
any "nationally recognized statistical rating organization", as that
term is defined by the Commission for purposes of Rule 436(g)(2) under
the Act, and (ii) no such organization shall have publicly announced
that it has under surveillance or review, with possible negative
implications, its rating of any of the Company's debt securities;
(k) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in
trading in securities generally on the New York Stock Exchange; (ii) a
suspension or material limitation in trading in the Company's
securities on the New York Stock Exchange; (iii) a general moratorium
on commercial banking activities declared by either Federal or New
York State authorities; or (iv) the outbreak or escalation of
hostilities involving the United States or the declaration by the
United States of a national emergency or war, or change in financial
markets, if the effect of any such event specified in this Clause (iv)
in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and
in the manner contemplated in the Prospectus;
(l) The Shares to be sold at such Time of Delivery shall have
been duly listed, subject to notice of issuance, on the Exchange;
(m) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from SFR and from each director and
officer of the Company owing Stock or receiving options convertible
into Stock pursuant to the Company's stock option plans substantially
to the effect set forth in Subsection 5(e) hereof in form and
substance satisfactory to you;
(n) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on
the New York Business Day next succeeding the date of this Agreement;
and
(o) The Company shall have furnished or caused to be
furnished to you at such Time of Delivery certificates of officers of
the Company satisfactory to you as to the accuracy of the
representations and warranties of the Company herein at and as of such
Time of Delivery, as to the performance by the Company of all of its
obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a), (b), (c),
(i) and
27
<PAGE> 28
(j) of this Section and as to such other matters as you may reasonably
request.
8. (a) The Company and SFR, jointly and severally, will
indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses
are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus
or any such amendment or supplement in reliance upon and in conformity
with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which
the Company may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs &
Co. expressly for use therein; and will reimburse the Company for any
legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such action or claim as
such expenses are incurred.
28
<PAGE> 29
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under such subsection,
notify the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party shall not relieve
it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall
be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and, after
notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party
shall not be liable to such indemnified party under such subsection
for any legal expenses of other counsel or any other expenses, in each
case subsequently incurred by such indemnified party, in connection
with the defense thereof other than reasonable costs of investigation.
No indemnifying party shall, without the written consent of the
indemnified party, effect the settlement or compromise of, or consent
to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified
party is an actual or potential party to such action or claim) unless
such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of
such action or claim and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf
of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law
or if the indemnified party failed to give the notice required under
subsection (c) above, then each
29
<PAGE> 30
indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect
not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering of the Shares purchased
under this Agreement (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions
received by the Underwriters with respect to the Shares purchased
under this Agreement, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding
the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to
the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection
(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
30
<PAGE> 31
(e) The obligations of the Company under this Section 8 shall
be in addition to any liability which the Company may otherwise have
and shall extend, upon the same terms and conditions, to each person,
if any, who controls any Underwriter within the meaning of the Act;
and the obligations of the Underwriters under this Section 8 shall be
in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions,
to each officer and director of the Company and to each person, if
any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation
to purchase the Shares which it has agreed to purchase hereunder at a
Time of Delivery, you may in your discretion arrange for you or
another party or other parties to purchase such Shares on the terms
contained herein. If within thirty-six hours after such default by
any Underwriter you do not arrange for the purchase of such Shares,
then the Company shall be entitled to a further period of thirty-six
hours within which to procure another party or other parties
satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the
Company that you have so arranged for the purchase of such Shares, or
the Company notifies you that it has so arranged for the purchase of
such Shares, you or the Company shall have the right to postpone such
Time of Delivery for a period of not more than seven days, in order to
effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments
to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any person substituted under this Section with
like effect as if such person had originally been a party to this
Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by
you and the Company as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed
one-eleventh of the aggregate number of all the Shares to be purchased
at such Time of Delivery, then the Company shall have the right to
require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such
Time of Delivery and, in addition, to require each non-defaulting
Underwriter to purchase its pro rata share (based on the number of
Shares which such Underwriter agreed to purchase hereunder) of the
Shares of such
31
<PAGE> 32
defaulting Underwriter or Underwriters for which such arrangements
have not been made; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by
you and the Company as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh
of the aggregate number of all the Shares to be purchased at such Time
of Delivery, or if the Company shall not exercise the right described
in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this
Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell
the Optional Shares) shall thereupon terminate, without liability on
the part of any non-defaulting Underwriter or the Company, except for
the expenses to be borne by the Company and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution
agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless
of any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company, and
shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Sections 6 and 8 hereof; but, if for any other reason,
any Shares are not delivered by or on behalf of the Company as provided herein,
the Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter in respect of the
Shares not so delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
32
<PAGE> 33
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of Goldman,
Sachs & Co., 85 Broad Street, New York, New York 10004, Attention:
Registration Department; and if to the Company shall be delivered or sent by
mail, telex or facsimile transmission to the address of the Company set forth
in the Registration Statement, Attention: Secretary; provided, however, that
any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered
or sent by mail, telex or facsimile transmission to such Underwriter at its
address set forth in its Underwriters' Questionnaire, or telex constituting
such Questionnaire, which address will be supplied to the Company by you upon
request. Any such statements, requests, notices or agreements shall take
effect at the time of receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company, SFR and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser
of any of the Shares from any Underwriter shall be deemed a successor or assign
by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein,
the term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
33
<PAGE> 34
If the foregoing is in accordance with your understanding, please sign and
return to us six counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the
Company and SFR. It is understood that your acceptance of this letter on
behalf of each of the Underwriters is pursuant to the authority set forth in a
form of Agreement among Underwriters (U.S. Version), the form of which shall be
submitted to the Company for examination upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
MONTEREY RESOURCES, INC.
By: . . . . . . . . . . . . . . . . .
Name:
Title:
Very truly yours,
SANTA FE ENERGY RESOURCES, INC.
By: . . . . . . . . . . . . . . . . .
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
Petrie Parkman & Co.
By: . . . . . . . . . . . . . . .
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
34
<PAGE> 35
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- ---------------- -------------------
<S> <C> <C>
Goldman, Sachs & Co. . . . . . . . . . . . . . . . . . . . . .
Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . .
Petrie Parkman & Co. . . . . . . . . . . . . . . . . . . . . . .
[Names of other Underwriters] . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . .
</TABLE>
35
<PAGE> 36
ANNEX I
Pursuant to Section 7(g) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined
by them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Western Division or
SFR for the periods specified in such letter, as indicated in their
reports thereon, copies of which have been furnished to the
representatives of the Underwriters (the "Representatives") and are
attached hereto;
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus as indicated in their reports thereon
copies of which are attached hereto and on the basis of specified
procedures including inquiries of officials of the Company and SFR who
have responsibility for financial and accounting matters regarding
whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations, nothing came to
their attention that caused them to believe that the unaudited
condensed consolidated financial statements do not comply as to form
in all material respects with the applicable accounting requirements
of the Act and the related published rules and regulations;
(iv) They have compared the information in the Prospectus
under selected captions with the disclosure requirements of Regulation
S-K and on the basis of limited procedures specified in such letter
nothing came to their attention as a result of the foregoing
procedures that caused them to believe that this information does not
conform in all material respects with the disclosure requirements of
Items 301, 302, 402 and 503(d), respectively, of Regulation S-K;
(v) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the
1
<PAGE> 37
unaudited financial statements and other information referred to
below, a reading of the latest available interim financial statements
of the Western Division, inspection of the minute books of SFR, the
Company and their respective subsidiaries since the date of the latest
audited financial statements included in the Prospectus, inquiries of
officials of SFR, the Company and their respective subsidiaries
responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter, nothing
came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of
income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published
rules and regulations, or (ii) any material modifications
should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree
with the corresponding items in the unaudited consolidated
financial statements from which such data and items were
derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with
the basis for the audited consolidated financial statements
included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply
as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not
been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any changes
in the consolidated capital stock (other than issuances of
capital stock upon exercise of options and stock appreciation
rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were
outstanding on
2
<PAGE> 38
the date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt
of the Western Division, or any decreases in consolidated net
current assets or stockholders' equity or other items
specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as
compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter;
and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in Clause (E) there were any
decreases in consolidated net revenues or operating profit or
the total or per share amounts of consolidated net income or
other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of the Western Division, which appear in the Prospectus, or in Part II
of, or in exhibits and schedules to, the Registration Statement
specified by the Representatives, and have compared certain of such
amounts, percentages and financial information with the accounting
records of Western Division and have found them to be in agreement.
3
<PAGE> 1
EXHIBIT 10.1
CONVEYANCE AND CONTRIBUTION AGREEMENT
This Conveyance and Contribution Agreement (this "Agreement"),
dated effective 7:00 a.m., Pacific Time, _________________, 1996 (the
"Effective Date"), is from Santa Fe Energy Resources, Inc., a Delaware
corporation ("Santa Fe"), having its principal office at 1616 S. Voss Road,
Houston, Texas 77057 to Monterey Resources, Inc., a Delaware corporation
("Monterey"), having its principal office at 5201 Truxtun Avenue, Suite No.
100, Bakersfield, California 93309. Santa Fe and Monterey are hereinafter
sometimes referred to individually as a "Party" and collectively as the
"Parties."
RECITAL
Santa Fe is executing and delivering this Agreement to convey
and contribute all property and other assets to Monterey that are held by Santa
Fe in its Western Division in the State of California, other than certain
excluded assets, as more fully described herein, and to perform certain other
acts in connection with such conveyance and contribution. Monterey is
executing this Agreement in performance of its obligations to assume certain
liabilities of Santa Fe with respect to such property and assets and to
undertake certain other obligations in connection with such conveyance and
contribution.
NOW, THEREFORE, for valuable consideration, the Parties agree
and grant as follows:
ARTICLE 1
DEFINITIONS
1.1 Defined Terms. The following definitions shall apply
to the following terms when used in this Agreement:
"Agreement" is defined in the introductory paragraph of this
instrument.
"Ancillary Agreements" means the Spin-Off Tax Indemnity
Agreement, Corporate Services Agreement, Tax Allocation Agreement, and
Registration Rights and Indemnification Agreement, all between Monterey and
Santa Fe and dated of even date herewith.
"Assistance Costs" is defined in Section 3.11(d).
"Assumed Liabilities" means (a) the liabilities, obligations,
and other matters of Santa Fe described in Exhibit A, and (b) all other
liabilities, losses, costs, expenses, fines, penalties,
Conveyance and Contribution Agreement
Page 1
<PAGE> 2
payments, and other obligations of Santa Fe relating to or arising out of the
Subject Assets or the Business, whether accrued, contingent, known or unknown,
and whether or not reflected on the books and records of Santa Fe on the date
of this Agreement, excluding, however, (x) the Retained Liabilities and (y)
obligations and liabilities of Santa Fe under the Ancillary Agreements.
"Business" means all of the business activities now or
heretofore conducted by Santa Fe, its affiliates, and its and their
predecessors in interest, in the Business Area, including the oil and gas
exploration, development, and production business of Santa Fe and the
businesses and operations identified in Exhibit B.
"Business Area" means the State of California and all lands
lying in federal or state waters seaward of the west coast of the State of
California.
"Excluded Assets" means the following assets:
(a) The assets described in Exhibit C, and all rights,
privileges and benefits pertaining to the assets described in Exhibit
C;
(b) All of Santa Fe's right, title and interest in and to
all non-proprietary seismic, geological, geophysical and similar data
and computer software related to the Subject Assets, to the extent
Santa Fe is contractually prohibited by unaffiliated third parties
from transferring such data and software;
(c) All proprietary computer software (including, without
limitation, tapes, data, and program documentation) and other
intellectual property that is used in, or useful to, Santa Fe's
retained businesses;
(d) Except as provided in Section 3.11, all of Santa Fe's
rights under all policies or agreements of insurance or indemnity; and
(e) All cash, proceeds, income, or revenues accruing with
respect to the other Excluded Assets described above.
"Insurance Administration" means, in respect of each Policy,
the accounting for premiums, retrospectively-rated premiums, defense costs,
indemnity payments, deductibles, and retentions as appropriate under each
Policy, and the distribution of Insurance Proceeds under each Policy.
"Insurance Proceeds" means, in respect of each Policy, those
monies (i) received by an insured from an insurance carrier or (ii) paid by an
insurance carrier on behalf of the insured, in
Conveyance and Contribution Agreement
Page 2
<PAGE> 3
either case, net of any applicable premium adjustment, retrospectively-rated
premium, deductible, retention, cost or reserve paid or held by or for the
benefit of such insured.
"Insured Claims" means those claims, losses, liabilities,
costs, and expenses that, individually or in the aggregate, are covered by a
Policy, whether or not subject to deductibles, co-insurance, uncollectability
or retrospectively-rated premium adjustments, but only to the extent that such
claims, losses, liabilities, costs, and expenses are within applicable Policy
limits.
"IPO Date" means the closing date for the initial public
offering of the common stock of Monterey.
"Party" and "Parties" are defined in the introductory
paragraph of this Agreement.
"Perpetuities Period" means that period of time commencing on
the date of this Agreement and ending 21 years after the death of the last to
die of all descendants of Joseph P. Kennedy, father of our late President, John
F. Kennedy, who are living on the date of this Agreement.
"Person" means an individual, a corporation, a partnership, a
trust, an unincorporated organization, an association or any other entity.
"Policies" means insurance policies and contracts of indemnity
described in Exhibit I.
"Restriction" is defined in Section 3.5.
"Retained Liabilities" means (a) the liabilities, obligations,
and matters of Santa Fe described in Exhibit J and (b) all losses, costs,
expenses, fines, penalties, payments, and other obligations related to the
Excluded Assets.
"Specific Conveyances" is defined in Section 3.6.
"Spin-Off" means the sale, distribution, or other disposition
of the remaining shares of common stock held by Santa Fe after the IPO Date in
a single transaction or series of transactions.
"Spin-Off Date" means the date on which the Spin-Off occurs.
"Subject Assets" means all of the assets owned by Santa Fe in
the Business Area or used or held for use by Santa Fe solely to conduct the
Business, on the Effective Date, including the following assets:
Conveyance and Contribution Agreement
Page 3
<PAGE> 4
(a) All right, title, and interest of Santa Fe in and to
the plots, pieces, and parcels of land, surface estates, and fee
interests of Santa Fe in the Business Area, including those described
in Exhibit D-1 and Exhibit D-2 (collectively, the "Lands");
(b) All right, title, and interest of Santa Fe in the
estates created by the oil and gas leases described in Exhibit E-1 and
the undivided interests therein and the operating rights, mineral
servitudes, and fee, mineral, royalty, and overriding interests of
Santa Fe in the Business Area, including those described in Exhibit
E-2 (collectively, the "Oil and Gas Interests");
(c) All right, title, and interest of Santa Fe in all
presently existing and valid unitization, pooling and communitization
agreements, declarations and orders and production sharing agreements,
and the properties covered and the units created thereby (including,
but not limited to, all units formed under orders, regulations, rules,
or other official acts of any federal, state, or other governmental
agency having jurisdiction), to the extent attributable to any of the
Lands or the Oil and Gas Interests;
(d) All right, title, and interest of Santa Fe in
existing and valid oil, casinghead gas and gas sales, purchase,
exchange, transportation and processing contracts, operating
agreements, joint venture agreements, partnership agreements,
participation agreements, exploration agreements, farmin and farmout
agreements, acreage contribution agreements, bidding agreements,
option agreements, purchase and sale agreements, advance payment
agreements, and all other contracts to the extent attributable to any
of the Lands or the Oil and Gas Interests or the Business, including
those contracts, agreements, and instruments set forth on Exhibit F;
(e) All right, title, and interest of Santa Fe in all
improvements, easements, permits, licenses, rights-of-way, surface
leases, and other surface rights, including any wells, wellbores,
casing, tubing, tanks, buildings, fixtures, compression and steam
generation facilities, pipelines, gathering systems, lines and other
appurtenances, easements and facilities, production platforms,
drilling platforms, docks, shore facilities and bases, radio and
microwave equipment (and associated licenses), and vessels to the
extent located in, on or under any of the Lands or Oil and Gas
Interests or used or held for use as a part of the Business as
presently conducted;
(f) All right, title, and interest of Santa Fe in all
seismic, geological, geophysical and similar data related to the
Subject Assets, all lease files, land files, legal files, well files,
gas and oil sales contract files, division order files, abstracts,
title opinions, land surveys, computer software (including tapes, data
and program documentation), and all other books, records, files, and
accounting records to the extent attributable to or used in the
exploration,
Conveyance and Contribution Agreement
Page 4
<PAGE> 5
development, maintenance, or operation of any of the Subject Assets
described in subsections (a), (b), (c), (d), and (e) above or the
Business (collectively, the "Records");
(g) All of the following:
(i) All right, title, and interest of Santa Fe in
and to all inventories of oil, gas and other petroleum
products, tubular goods, supplies and tools, in each case to
the extent produced from or held for use on the Subject Assets
described in subsections (a), (b), (c), (d), and (e) above;
and
(ii) All right, title, and interest of Santa Fe in
all personal property to the extent used or held for use in
connection with the exploration, development, operation, or
maintenance of the Subject Assets described in subsections
(a), (b), (c), (d), and (e) above, including office furniture
and equipment, computer hardware, leasehold interests therein,
and the other items described in Exhibit G;
(h) All right, title, and interest of Santa Fe in and to
all governmental permits, licenses, franchises, registrations, and
similar rights relating to the Business or the Subject Assets;
(i) All right, title, and interest of Santa Fe in and to
all automobiles, trucks, trailers, other vehicles, and similar assets
used in connection with the Business, including leasehold interests
therein;
(j) Cash, cash equivalents, accounts receivable,
goodwill, claims, causes of action and choses in action relating to
the Subject Assets and the Business;
(k) All right, title, and interest of Santa Fe in and to
the stock certificates partnership interests, contract rights, and
other intangible interests described in Exhibit H;
(l) All of Santa Fe's right, title, and interest in and
to any patents, trade secrets, copyrights, or other intellectual
property rights that relate solely to the Subject Assets; and
(m) All rights, benefits, privileges and appurtenances
pertaining to any of the foregoing;
less and except, however, the Excluded Assets.
"Title Policy" is defined in Section 3.1.
"Uninsured Retentions" is defined in Section 3.11(f).
Conveyance and Contribution Agreement
Page 5
<PAGE> 6
ARTICLE 2
CONTRIBUTION AND CONVEYANCE OF SUBJECT ASSETS
TO MONTEREY
2.1 Contribution and Conveyance of Subject Assets. Santa
Fe hereby grants, conveys, assigns, transfers, contributes, and delivers unto
Monterey, its successors and assigns, forever, all of its right, title, and
interest in and to the Subject Assets, subject, however, to the terms and
conditions stated in this Agreement.
TO HAVE AND TO HOLD the above described interests in the
Subject Assets unto Monterey, its successors and assigns, forever, subject,
however, to the terms and conditions stated in this Agreement.
2.2 Assumption of Certain Liabilities by Monterey.
Monterey hereby assumes and agrees to pay, perform, and discharge the Assumed
Liabilities, to the full extent that Santa Fe has been or would be obligated to
pay, perform, and discharge the Assumed Liabilities.
2.3 Reservation of Production Payment. Santa Fe hereby
reserves and retains unto Santa Fe, its successors and assigns, as a production
payment, a variable undivided interest in and to certain of the Subject Assets,
as more particularly provided in the Reservation of Production Payment attached
hereto as Exhibit J.
ARTICLE 3
OTHER PROVISIONS
3.1 Real Property Covered by Title Policies. With
respect to any Subject Asset that (a) constitutes real property or an interest
in real property, and (b) is covered by a policy of title insurance that is in
favor of, or otherwise provides protection in its capacity as owner to, Santa
Fe (a "Title Policy"), the following provisions shall apply:
(i) Santa Fe binds itself and its successors and assigns
to warrant and forever defend all and singular such Subject Asset to
Monterey, its successors and assigns, against every person whomsoever
lawfully claiming or to claim the same or any part thereof; subject,
however, to the matters set forth in paragraph (ii) below.
(ii) The contribution and conveyance of such Subject Asset
made by Section 2.1 is made expressly subject to (A) those matters
excluded or excepted from coverage under the
Conveyance and Contribution Agreement
Page 6
<PAGE> 7
applicable Title Policy and (B) all recorded and unrecorded liens,
charges, encumbrances, contracts, agreements, instruments,
obligations, defects and irregularities affecting such Subject Asset
that have accrued or arisen since the effective date of the applicable
Title Policy.
(iii) The sole remedy for breach of the warranty contained
in this Section 3.1 shall be recovery of damages limited to the
amount, if any, recovered by Monterey or Santa Fe under the applicable
Title Policy.
(iv) Monterey hereby expressly waives and disclaims any
remedies and damages, other than those provided for in paragraph (iii)
above, that may be available under applicable law for breach of the
warranty contained in this Section 3.1, including, without limitation,
consequential damages, incidental damages, punitive damages, attorneys
fees, and court costs.
(v) Santa Fe and Monterey acknowledge that the warranty
contained in this Section 3.1 would not have been granted had Santa Fe
not also been able to limit the remedies available for breach of the
warranty. Santa Fe and Monterey therefore adopt the following
procedure for ensuring that their mutual intent with regard to such
warranty be respected. If a court having jurisdiction over a Subject
Asset subject to this Section 3.1 should determine that the limitation
and waiver of remedies provided for herein are, under applicable law
with respect to such Subject Asset, unenforceable, then (A) the
warranty provided for in this Section 3.1 shall automatically be
waived, negated, and disclaimed for such Subject Asset; (B) such
Subject Asset shall automatically be deemed to have been conveyed to
Monterey subject to the matters set forth in Section 3.2 and in the
manner described in Section 3.3; and (C) Monterey shall execute and
deliver or cause to be delivered such instruments as may be necessary
to evidence the effect of this paragraph (v).
3.2 Encumbrances. Except as provided in Section 3.1, the
contributions and conveyances made by Section 2.1 are made expressly subject to
all recorded and unrecorded liens, charges, encumbrances, contracts,
agreements, instruments, obligations, defects, and irregularities affecting the
Subject Assets.
3.3 Disclaimer of Warranties; Subrogation.
(a) No Warranty of Title. Except as provided in Section
3.1, the contributions and conveyances made by Section 2.1 are made without
warranty of title, express, implied or statutory, and without recourse even as
to the return of the purchase price, but with full substitution and subrogation
of Monterey, and all persons claiming by, through and under Monterey, to the
extent assignable, in and to all covenants and warranties by Santa Fe's
predecessors in title and with full subrogation of all rights accruing under
the statutes of limitation or prescription under the laws of
Conveyance and Contribution Agreement
Page 7
<PAGE> 8
various states in which the Subject Assets are located and all rights of
actions of warranty against all former owners of the Subject Assets.
(b) Disclaimer. Monterey and Santa Fe agree that, to the
extent required by applicable law to be operative, the disclaimers of certain
warranties contained in this paragraph are "conspicuous" disclaimers for the
purposes of any applicable law, rule, or order. Except as provided in Section
3.1, the Subject Assets are assigned to Monterey without recourse (even as to
the return of the purchase price), covenant or warranty of any kind, express,
implied, or statutory. WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATELY
PRECEDING SENTENCE, SANTA FE HEREBY EXPRESSLY DISCLAIMS AND NEGATES ANY
REPRESENTATION OR WARRANTY, EXPRESSED, IMPLIED, AT COMMON LAW, BY STATUTE OR
OTHERWISE, RELATING TO (A) THE CONDITION OF THE SUBJECT ASSETS (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED OR EXPRESSED WARRANTY OF MERCHANTABILITY, OF
FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF
MATERIALS), OR (B) ANY INFRINGEMENT BY SANTA FE OR ANY OF ITS AFFILIATES OF ANY
PATENT OR PROPRIETARY RIGHT OF ANY THIRD PARTY; IT BEING THE INTENTION OF SANTA
FE AND MONTEREY THAT THE SUBJECT ASSETS ARE TO BE CONVEYED IN THEIR PRESENT
CONDITION AND STATE OF REPAIR.
(c) No Implied Warranties. Any covenants implied by
statute or law by the use of the words "grant", "convey", "assign", "transfer",
"contribute", or "deliver", or any other words used in this Agreement (except
those in Section 3.1), are hereby expressly disclaimed, waived, and negated.
3.4 Indemnification.
(a) Monterey's Indemnity. MONTEREY AGREES TO PROTECT,
DEFEND, INDEMNIFY, AND HOLD HARMLESS SANTA FE AND ITS OFFICERS, DIRECTORS,
EMPLOYEES, AND REPRESENTATIVES FROM AND AGAINST ALL CLAIMS, COSTS, EXPENSES,
LIABILITIES (INCLUDING ATTORNEYS' FEES, COURT COSTS, AND OTHER COSTS OF SUIT),
LOSSES, DAMAGES, PENALTIES, AND FINES RELATING TO OR ARISING OUT OF THE SUBJECT
ASSETS OR THE ASSUMED LIABILITIES, WHETHER ATTRIBUTABLE TO PERIODS BEFORE OR
AFTER THE EFFECTIVE DATE, AND WHETHER OR NOT ATTRIBUTABLE TO THE SOLE, JOINT,
AND/OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, OR OTHER FAULT OF SANTA FE,
ITS PREDECESSORS, AND ITS AND THEIR EMPLOYEES, REPRESENTATIVES, OFFICERS, OR
DIRECTORS.
(b) Santa Fe's Indemnity. SANTA FE AGREES TO PROTECT,
DEFEND, INDEMNIFY, AND HOLD HARMLESS MONTEREY AND ITS OFFICERS, DIRECTORS,
Conveyance and Contribution Agreement
Page 8
<PAGE> 9
EMPLOYEES, AND REPRESENTATIVES FROM AND AGAINST ALL CLAIMS, COSTS, EXPENSES,
LIABILITIES (INCLUDING ATTORNEYS' FEES, COURT COSTS, AND OTHER COSTS OF SUIT),
LOSSES, DAMAGES, PENALTIES, AND FINES RELATING TO OR ARISING OUT OF THE
EXCLUDED ASSETS OR THE RETAINED LIABILITIES, WHETHER ATTRIBUTABLE TO PERIODS
BEFORE OR AFTER THE EFFECTIVE DATE, AND WHETHER OR NOT ATTRIBUTABLE TO THE
SOLE, JOINT, AND/OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, OR OTHER FAULT OF
MONTEREY AND ITS EMPLOYEES, REPRESENTATIVES, OFFICERS, OR DIRECTORS.
3.5 Restrictions on Conveyance. Santa Fe and Monterey
acknowledge that (a) there may exist certain prohibitions against the
conveyance or assignment of certain of the Subject Assets without the consent
of third parties (including governmental agencies); and (b) certain of the
Subject Assets may be incapable of being conveyed or assigned to Monterey prior
to the execution, acknowledgment, and/or delivery of Specific Conveyances.
Both types of impediments to conveyance or assignment are referred to herein as
a "Restriction." Any provisions of this Agreement to the contrary
notwithstanding, the following provisions shall apply to all Subject Assets
burdened by a Restriction:
(i) The conveyance or assignment to Monterey shall not
become effective unless and until such time as the Restriction is
satisfied.
(ii) Santa Fe and Monterey shall each use their reasonable
efforts to cause the Restriction to be satisfied.
(iii) When and if the Restriction is satisfied, the
conveyance or assignment to Monterey shall become automatically
effective as to such Subject Asset as of the date of this Agreement.
(iv) If (A) any of the Subject Assets burdened by a
Restriction constitutes real property or an interest in real property,
and (B) such Restriction is not satisfied within the Perpetuities
Period, then the conveyance or assignment to Monterey of such Subject
Asset shall be null and void.
3.6 Further Assurances. Without further consideration,
Santa Fe and Monterey agree to take all such further actions and execute,
acknowledge, and deliver all such further documents that are necessary or
useful in carrying out the purposes of this Agreement. So long as not
prohibited by applicable laws so to do:
(a) Santa Fe agrees to execute, acknowledge, and deliver
to Monterey and, if applicable, record in the official property records of the
applicable jurisdiction, all such additional deeds, conveyances, assignments,
bills of sale, motor vehicle titles, and other documents (the
Conveyance and Contribution Agreement
Page 9
<PAGE> 10
"Specific Conveyances"), and to do all such further acts and things as may be
necessary more fully and effectively to grant, convey, assign, transfer,
contribute, and deliver to Monterey the interests in the Subject Assets
contributed and conveyed by this Agreement or intended so to be. The Specific
Conveyances (i) shall evidence and perfect the conveyance made by this
Agreement and shall not constitute any additional conveyance of the Subject
Assets or interests therein; (ii) are not intended to modify, and shall not
modify, any of the terms, covenants and conditions herein set forth; and (iii)
are not intended to create and shall not create any additional covenants or
warranties of or by Santa Fe to Monterey. To the extent that the Specific
Conveyances purport to create any additional covenants or warranties, Monterey
hereby expressly waives such additional covenants or warranties.
(b) Santa Fe agrees to execute, acknowledge, and deliver
to Monterey and, if applicable, record in the official property records of the
applicable jurisdiction, substantially all of the Specific Conveyances within
120 days after the date of this Agreement.
(c) Santa Fe represents to Monterey that all Specific
Conveyances for Subject Assets that constitute real property or interests in
real property shall conform as to form in all material respects with all
applicable laws of the states in which such Subject Assets are located
governing the conveyance of such assets, including all applicable recording,
filing and registration laws and regulations.
(d) Monterey agrees to execute and deliver or cause to be
delivered such other instruments as may be reasonably required to assume and
take responsibility more effectively for the Assumed Liabilities and the other
obligations and liabilities that Monterey has assumed or undertaken pursuant to
this Agreement.
3.7 Assets Intended to be Conveyed. Santa Fe and Monterey
acknowledge that the assets intended to be conveyed by this Agreement are all of
the assets and properties held by the Western Division of Santa Fe in the
Business Area or used or held for use by Santa Fe solely to conduct the
Business, on the Effective Date, other than the Excluded Assets. If this
Agreement erroneously fails to convey all such assets and properties, or
erroneously conveys an asset other than such assets or properties, Santa Fe
and Monterey shall execute such corrective documents and take such other
actions as are necessary to correct the error.
3.8 Ad Valorem Taxes. All ad valorem and property taxes
for the Subject Assets shall be the responsibility of and paid by Monterey.
3.9 Finance Matters.
(a) Cash Management. Monterey will establish its own
cash management system which is to be separate and distinct from the cash
management system maintained by Santa Fe, and such system will be operational
prior to or shortly after the Effective Date. Santa Fe further acknowledges
and agrees that after Monterey's cash management system is established and
Conveyance and Contribution Agreement
Page 10
<PAGE> 11
operational, Santa Fe shall transfer to Monterey all funds, if any, in Santa
Fe's cash management system attributable to the Subject Assets or the Business,
which transfer shall be effected by wire transfer of immediately available
funds to such account as Monterey may designate. Santa Fe shall transfer such
funds to Monterey upon notification from Monterey that its cash management
system is operational together with wire transfer instructions. Any funds
received in Santa Fe's cash management system subsequent to such transfer that
are attributable to the Business shall be promptly (but in no event more than
30 days after receipt) delivered to Monterey by Santa Fe, and any funds
received in Monterey's cash management system subsequent to such transfer that
are attributable to Santa Fe or its other subsidiaries shall be promptly (but
in no event more than 30 days after receipt) delivered to Santa Fe by Monterey.
The Parties shall make appropriate adjustments for late deposits, checks
returned for not sufficient funds and other post-Effective Date transactions
that occur after the transfer as shall be reasonable under the circumstances
consistent with the purpose and intent of this Agreement.
(b) Settlement of Intercompany Accounts. The Parties
agree that the net balance of all intercompany accounts owed by Santa Fe to
Monterey, or owed by Monterey to Santa Fe, in each case as of the Effective
Date, shall be paid by Santa Fe or Monterey, as appropriate, as promptly as
reasonably practicable after the Effective Date (but in no event more than 30
days after receipt). All transactions contemplated in this Section 3.9 shall
be subject to audit by the Parties, and any dispute with respect to any such
transactions thereunder shall be resolved by Price Waterhouse LLP (or another
nationally recognized accounting firm acceptable to the Parties) whose decision
shall be final and nonappealable.
3.11 Insurance Matters.
(a) Existing Surety Bonds. Santa Fe shall continue to
maintain, and not to cancel, those surety and indemnity bonds currently
maintained by or for the benefit of the Subject Assets until the earlier of (i)
the expiration or renewal date therefor next following the IPO Date or (ii) one
year after the IPO Date. Santa Fe shall give Monterey at least 15 days'
advance notice of the expiration or renewal of each such surety and indemnity
bond. If Monterey decides not to renew any bond, Monterey agrees to provide
appropriate documentation to Santa Fe to allow Santa Fe to cancel such bonds.
Monterey shall indemnify and hold harmless Santa Fe from and against any
expense or loss incurred by Santa Fe after the IPO Date as a result of
maintaining such surety bonds. After the IPO Date, Monterey shall be
responsible for obtaining its own surety and indemnity bonds as may be
necessary for its operations, subject to the preceding sentences with respect
to existing bonds. Santa Fe shall have the right at any time or from time to
time, in Santa Fe's sole discretion, to require that Monterey provide
collateral security in favor of Santa Fe of the same kind that any surety
providing a bond or indemnity agreement for the benefit of Monterey advised
Santa Fe it will or might require under any applicable indemnity agreement or
bond.
Conveyance and Contribution Agreement
Page 11
<PAGE> 12
(b) Policies and Rights Prior to Spin-Off. Prior to the
Spin-Off Date, Monterey shall be entitled to any and all rights of an insured
party under each of the Policies, specifically including rights of indemnity
and the right to be defended by or at the expense of the insurer, with respect
to all injuries, losses, liabilities, damages, and expenses incurred or claimed
to have been incurred prior to the Spin-Off Date (to the extent covered) by any
party in connection with the conduct of the Business. Nothing in this clause
shall be deemed to constitute (or to reflect) the assignment of the Policies,
or any of them, to Monterey. From and after the Spin-Off Date (or earlier upon
mutual agreement), Monterey agrees that it shall be responsible for obtaining
and maintaining, on such terms as Monterey determines to be appropriate,
insurance policies for injuries, claims, liabilities, losses, costs, and
expenses arising with respect to occurrences after the Spin-Off Date.
(c) Administration and Costs. Santa Fe shall be
responsible for (i) the Insurance Administration of the Policies, (ii) the
processing and management of claims under the Policies, and (iii) the
collection and distribution of Insurance Proceeds under the Policies; provided,
that, Monterey shall be required to give notice of any claim or potential claim
to Santa Fe in sufficient time for Santa Fe to notify the insurance carrier of
the Policy. For the period prior to the Spin-Off Date, Monterey shall pay
Santa Fe the portion of the cost of the Policies that is properly allocable to
the Assumed Liabilities. Monterey shall pay such amounts within 15 days of
receiving Santa Fe's invoice therefor.
(d) Santa Fe's Assistance After the Spin-Off Date. The
Policies, with respect to the Business, will automatically cease and terminate
with respect to the Business on the Spin-Off Date for any occurrences after the
Spin-Off Date. After the Spin-Off Date, Santa Fe shall, to the extent
reasonably practicable, assist Monterey in the recovery of any amounts to which
Monterey is validly entitled under any of the Policies on account of Insured
Claims. Santa Fe does not assume any liability and shall not incur any
liability to Monterey or its affiliates in agreeing to provide or providing
such action or assistance and shall promptly be advanced, or reimbursed, if
applicable, for all reasonable costs and expenses incurred after the Spin-Off
Date at Monterey's request in providing such action or assistance requested by
Monterey ("Assistance Costs"). Assistance Costs include employee salaries and
out-of-pocket expenses, attorneys' fees, adjustor fees, surveyor fees,
brokerage fees, travel expenses, communication expenses and other similar costs
and expenses incurred.
(e) Insurance Application to Assumed Liabilities. Upon
receipt of Insurance Proceeds that relate to Assumed Liabilities, Santa Fe may
directly apply such Insurance Proceeds to such Assumed Liabilities without
distribution to Monterey. To the extent Santa Fe is paid by, or reimbursed
from, the Policies for such Assumed Liabilities, Monterey shall be relieved of
its indemnification obligations that would otherwise apply under Sections 3.4(a)
for such Assumed Liabilities, provided, that, this subsection (e) shall not
apply to any amounts attributable to Uninsured Retentions or Assistance Costs
for which Monterey shall remain obligated to pay in full.
Conveyance and Contribution Agreement
Page 12
<PAGE> 13
(f) Uninsured Retentions. Monterey recognizes that the
Policies are subject to various deductibles, self-insured retentions,
retentions under retrospective premium rating plans and similar charges, which
may not be reinsured by or collectible from commercial insurance markets. All
amounts incurred or payable by Santa Fe or its affiliates, attributable to such
deductibles, retentions, plans or non-reinsured or non-collectible insurance,
after giving effect to maximum premium provisions and stop loss provisions on a
first come first served basis ("Uninsured Retentions") shall not be considered
as insured losses or claims, or insurance proceeds, within the meaning of this
Agreement and notwithstanding anything to the contrary shall be and remain the
obligation of Monterey to the extent arising out of the Subject Assets, the
Business, or the Assumed Liabilities. Monterey shall reimburse Santa Fe for
all amounts incurred or paid by Santa Fe or its affiliates for such Uninsured
Retentions to the extent arising out of Assumed Liabilities.
3.12 Delivery of Release. At the closing of the initial
public offering of Monterey, Monterey shall execute and deliver to Santa Fe a
release (in a form acceptable to Santa Fe) that releases any and all rights
Monterey may have to seek contribution or reimbursement for amounts borrowed by
Santa Fe under the $75 million Credit Facility between Santa Fe and Monterey,
as borrowers, and The Chase Manhattan Bank, as agent for the lenders that are
parties to the Credit Facility.
3.13 Successors and Assigns. This Agreement shall bind
and inure to the benefit of the parties hereto and their respective successors
and assigns. Nothing in this Agreement is intended to confer upon any other
person any benefits, rights, or remedies.
3.14 Articles, Sections and Exhibits. Except to the
extent otherwise stated in this Agreement, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement, and references to
"Exhibits" are to Exhibits attached to this Agreement, which are made parts
hereof for all purposes.
3.15 Governing Law. THIS AGREEMENT AND THE LEGAL
RELATIONS BETWEEN THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAWS THAT MIGHT REQUIRE OR PERMIT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION.
3.16 Deed; Bill of Sale; Assignment. To the extent
required by applicable law, this Agreement shall also constitute a "deed,"
"bill of sale" or "assignment" of the Subject Assets.
3.17 Construction of Agreement. In construing this
Agreement, the following principles shall be followed:
Conveyance and Contribution Agreement
Page 13
<PAGE> 14
(i) no consideration shall be given to the captions of
the articles, sections, subsections, or clauses, which are inserted
for convenience in locating the provisions of this Agreement and not
as an aid in its construction;
(ii) no consideration shall be given to the fact or
presumption that one party had a greater or lesser hand in drafting
this Agreement;
(iii) the word "includes" and its syntactical variants
means "includes, but is not limited to" and corresponding syntactical
variant expressions;
(iv) a defined term has its defined meaning throughout
this Agreement, regardless of whether it appears before or after the
place in this Agreement where it is defined;
(v) the plural shall be deemed to include the singular,
and vice versa; and
(vi) each exhibit, attachment, and schedule to this
Agreement is a part of this Agreement, but if there is any conflict or
inconsistency between the main body of this Agreement and any exhibit,
attachment, or schedule, the provisions of the main body of this
Agreement shall prevail.
3.18 Counterparts. This Agreement may be executed in any
number of counterparts, and each counterpart hereof shall be deemed to be an
original instrument, but all such counterparts shall constitute but one
instrument.
3.19 Survival. This Agreement shall survive the execution
and delivery of the Specific Conveyances.
3.20 Integrated Agreement. This Agreement is the final,
complete, and exclusive expression of the agreements of the Parties with
respect to the matters covered by this Agreement.
3.21 Severability. If any provision of this Agreement is
held to be unenforceable or invalid, the remaining provisions shall remain in
full force and effect.
Conveyance and Contribution Agreement
Page 14
<PAGE> 15
EXECUTED by the Parties as of the Effective Date.
Santa Fe:
SANTA FE ENERGY RESOURCES, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Monterey:
MONTEREY RESOURCES, INC.
By:
-----------------------------------
Name:
----------------------------------
Title:
---------------------------------
Conveyance and Contribution Agreement
Page 15
<PAGE> 16
LIST OF EXHIBITS
Exhibit A - Assumed Liabilities
Exhibit B - Businesses
Exhibit C - Excluded Assets
Exhibit D-1 - Surface Interests
Exhibit D-2 - Fee Simple Interests
Exhibit E-1 - Leasehold Interests
Exhibit E-2 - Mineral Interests
Exhibit F - Contracts
Exhibit G - Personal Property
Exhibit H - Certain Intangible Property Rights
Exhibit I - Insurance Policies
Exhibit J - Reservation of Production Payment
Conveyance and Contribution Agreement
Page 16
<PAGE> 1
EXHIBIT 10.2
AGREEMENT FOR THE ALLOCATION OF
THE CONSOLIDATED FEDERAL INCOME TAX LIABILITY
AND STATE AND LOCAL TAXES
AMONG THE MEMBERS OF THE
SANTA FE ENERGY RESOURCES, INC.
AFFILIATED GROUP
This AGREEMENT, dated as of September ____, 1996, is by and
between Santa Fe Energy Resources, Inc., a Delaware corporation ("SFER") and
the members of SFER's consolidated group identified below.
R E C I T A L S
WHEREAS, Santa Fe Energy Resources, Inc. ("SFER") and its
respective subsidiaries constitute an affiliated group for federal income tax
purposes (the "SFER Group");
WHEREAS, the SFER Group has filed a consolidated federal
income tax return for the taxable years ending December 31, 1990, 1991, 1992,
1993, 1994 and 1995, and intends to file a consolidated federal income tax
return for subsequent years; and
WHEREAS, it is the desire of the parties hereto that the
federal income tax liability of the SFER Group be allocated for all purposes
as herein provided,
WHEREAS, Monterey Resources, Inc. ("Monterey") and those
subsidiaries of Monterey which are signatory hereto ("Monterey Subsidiaries")
are members of a group of corporations of which SFER is the common parent and
which file certain consolidated, combined or unitary state or local tax
returns; and
WHEREAS, the parties desire to set forth their agreement with
regard to the sharing of the burden of taxes due with respect to such returns
effective immediately as to estimated taxes and tax returns filed for periods
including the date hereof;
NOW, THEREFORE, in consideration of the premises and the
mutual undertakings and covenants herein contained, the parties hereto agree as
follows:
<PAGE> 2
Article 1 - Definitions
For purposes of this Agreement:
1.1 "Affiliated group" means an affiliated group as
defined in section 1504(a) of the Code.
1.2 "Code" means the Internal Revenue Code of 1986, as
amended and in effect from time to time, or any law which may be a successor
thereto. A reference to any section of the Code means such section as in
effect from time to time and any comparable provision of the Code or any
successor law.
1.3 "Consolidated return year" means a taxable year to
which this Agreement applies and for which a consolidated federal income tax
return is filed or required to be filed by the SFER Group.
1.4 "Consolidated tax liability" means, with respect to
any consolidated return year, the consolidated federal income tax (including
alternative minimum tax and environmental tax) liability of the SFER Group.
1.5 "Member" means, with respect to any consolidated
return year, an includible corporation (as defined in section 1504(b) of the
Code) in the SFER Group.
1.6 "Monterey Company" means Monterey and the Monterey
Subsidiaries.
1.7 "Parent" means any Member that directly owns stock
that possesses more than 50 percent of the total voting power of the stock of
another Member. If any Member other than SFER has no Parent as defined in the
previous sentence (e.g., if all of the stock of such Member is owned in equal
shares by two other Members), the Chief Financial Officer of SFER shall
designate a Parent for such Member.
1.8 "Regulation" or "Treas. Reg." means a regulation in
effect from time to time under the Code. A reference to any section of the
Regulations means such section as in effect from time to time and any
comparable regulation under the Code or any successor law.
1.9 "Separate return tax liability" means the tax
liability described in Article 2.1.
1.10 "Separate Returns" shall mean each return of Separate
Taxes of an Monterey Company to the appropriate jurisdiction.
1.11 "Separate Taxes" means state and local taxes imposed
on any Monterey Company other than SFER Combined Taxes.
-2-
<PAGE> 3
1.12 "Subgroup" means a Parent (other than SFER), its
Subsidiaries, and all corporations as to which its relationship is that of
Parent as set forth in Article 1.7.
1.13 "Subsidiary" means, with respect to any Parent, a
Member, the majority of whose voting stock is owned directly by such Parent or
for which such Parent has been designated the Parent by the Chief Financial
Officer of SFER.
1.14 "SFER Combined Return" shall mean each consolidated,
combined or unitary return of SFER Combined Taxes to the appropriate
jurisdiction.
1.15 "SFER Combined Taxes" means state or local taxes for
which liability is computed on a consolidated, combined or unitary basis among
one or more of the SFER Companies and one or more of the Monterey Companies.
1.16 "SFER Company" means SFER and each of its direct or
indirect subsidiaries other than a Monterey Company.
Article 2 - Separate Return Tax Liability
2.1 For each consolidated return year, each Member shall
compute its separate return tax liability for the portion of the year in which
it is a Member. "Separate return tax liability" means, with respect to any
consolidated return year, the federal income tax liability (including
alternative minimum tax and environmental tax) which (1) in the case of a
Member that is not a Parent, is computed as if the Member had filed a separate
federal income tax return and (2) in the case of a Parent, is computed as if
the Parent had filed a consolidated federal income return with the Members of
its Subgroup. In computing separate return tax liability, each Member or
Parent, as the case may be, shall follow the tax elections and other tax
positions adopted or prescribed by SFER and shall take into account the
adjustments and modifications set forth in Article 2.2.
2.2 In computing separate return tax liability, each
Member shall take into account the following adjustments and modifications:
(a) Dividends from any Member of the SFER Group shall be
eliminated;
(b) Gains or losses on intercompany transactions and
intercompany distributions between any Members of the
SFER Group shall be deferred and recognized pursuant
to Treas. Reg. Sections 1.1502-13 and Code section
267 and the regulations thereunder regardless of
whether both Members involved are included in the
hypothetical separate return of the Member or Parent;
-3-
<PAGE> 4
(c) All carryforwards of tax credits, net operating
losses, capital losses, charitable contributions and
other similar items shall be determined under Article
3;
(d) No carrybacks of credits, deductions, losses or
similar items shall be taken into account;
(e) Any credits, deductions or other items of any Member
that are limited or otherwise adjusted when its
Parent takes such items into account in computing its
separate return liability shall be adjusted as
provided in Article 4;
(f) All ordinary income shall be subject to tax at the
highest effective tax rate applicable to taxable
ordinary income of corporations and all capital gains
shall be subject to tax at the highest effective tax
rate applicable to capital gains of corporations;
(g) Any exemption or similar item that must be prorated
or apportioned among the component Members of a
controlled group of corporations (e.g., the $40,000
exemption in section 55(d)(2) of the Code, the
$25,000 limitation in section 38(c)(1)(B) of the
Code, and the $2,000,000 amount in section 59A(a)(2))
shall not be taken into account; and
(h) Other adjustments specified by the senior tax officer
of SFER ("Tax Officer") shall be made.
2.3 Each Member (other than SFER) shall pay its separate
return tax liability to its Parent on or before the due date (without
extensions) of the SFER consolidated federal income tax return for the
appropriate consolidated return year. Such payment shall be reduced by the
estimated tax payments made by such Member pursuant to Article 5. For
administrative or other reasons, a Parent may direct or allow such payment to
be made after the prescribed date. If all relevant information necessary to
determine the amount of the payment is not available by that date, the payment
shall be based on estimates, and adjustments shall be made when sufficient
information is available or as soon as practicable after the SFER consolidated
federal income tax return for the appropriate consolidated return year is
filed.
Article 3 - Carryforwards
3.1 The adjustment to separate return tax liability
specified in Article 2.2(c) shall be determined as provided in this Article.
3.2 In computing separate return tax liability for the
first consolidated return year to which this Agreement applies to a Member,
such Member shall have available as a carryforward
-4-
<PAGE> 5
only the following items: carryforwards of credits, deductions and other
similar items that would be available to the Member if the Member were not a
Member of the SFER Group; but only to the extent that the Member previously has
not been compensated or has not received benefit for such item. Any such
available carryforward shall be utilized in the order and according to the
priorities designated in the Code and regulations. For subsequent consolidated
return years, a Member's available carryforwards shall be increased by
carryforwards generated in consolidated return years and shall be reduced by
carryforwards used by the Member in previous consolidated return years and
carryforwards that have expired according to the restrictions and limitations
of the Code.
3.3 In computing separate return tax liability, a Parent
may take into account, to the extent allowable under the Code and regulations,
only carryforwards available to itself under the principles of Article 3.2,
carryforwards described in Article 3.2 that are available to the Members of its
Subgroup and carryforwards generated by Members of its Subgroup during
consolidated return years to which this Agreement applies. Nothing in this
provision shall be construed as allowing a Parent to take into account any item
more than once.
3.4 If a Member uses an available carryforward in
computing its separate return tax liability, but the item has not yet been used
in the current year by its Parent in computing the Parent's separate return tax
liability or as a carryback by its Parent pursuant to Article 6, either as a
result of limitations specified in the Code or regulations or as a result of a
limitation placed on such Parent by its Parent pursuant to Article 4, the
Member's separate return tax liability shall be increased by the difference
between the tax liability computed with and without the limited carryforward.
The limited carryforward shall no longer be available as a carryforward to the
Member, but it shall be available to the Member's Parent as a carryforward to
subsequent years. Upon the use of such carryforward by the Member's Parent in
a subsequent year, the Member's separate return tax liability shall also be
reduced by the separate return tax savings realized by the Parent as a result
of the use of the carryforward. If such reduction in the Member's separate
return tax liability exceeds the Member's separate return tax liability before
the reduction, the difference shall be paid by the Parent to the Member at the
time specified in Article 2.3.
3.5 If a carryforward expires prior to its use by a
Member or by the Member's Parent in computing separate return tax liability,
the Member that generated the carryforward shall not be compensated for the
item. If a Member ceases to be a Member of the SFER Group prior to the
Member's or its Parent's use of a carryforward, the Member shall not be
entitled to compensation for the carryforward regardless of whether the item
was used by any other Member of the SFER Group.
-5-
<PAGE> 6
Article 4 - Adjustments for Limitations
4.1 The adjustment to separate return tax liability
specified in Article 2.2(e) shall be determined as provided in this Article.
4.2 If any item generated in the current year and
utilized on a separate return basis in the current year by a Parent's
Subsidiary (regardless of whether the item was generated by the Subsidiary
itself or a Member of the Subsidiary's Subgroup) cannot be used by the Parent
either currently in the Parent's computation of its separate return tax
liability or as a carryback pursuant to Article 6, the Subsidiary's separate
return tax liability shall be increased by the adjustment specified in Article
4.3.
4.3 The adjustment referred to in Article 4.2 shall equal
the increase in the Subsidiary's separate return tax liability that would arise
if the item on the Subsidiary's return were reduced by the amount not usable by
the Parent that would be allocable to the Subsidiary and Members of its
Subgroup under the principles of the Code and the Regulations. That is, in
most cases, the unused item would be allocated between the Parent and its
Subsidiaries according to the relative proportion of the total of such items
generated by the Parent and each Subsidiary's Subgroup. Where the Code does
not provide a method of allocating such item, the allocation method shall be
determined by the Tax Officer. The amount reallocated to the Subsidiary shall
not be allowed as a carryforward to the Subsidiary.
4.4 After an adjustment is made under Article 4.2 to any
Subsidiary, such Subsidiary shall then make a similar adjustment with respect
to its Subsidiaries under the principles of this Article. If such adjustment
is made, the Subsidiary shall promptly compensate its Subsidiaries when it
receives a benefit from its Parent under Article 4.5 upon the Parent's use of
the item as a carryforward.
4.5 When a Parent uses an item referred to in Article 4.2
as a carryforward, the Subsidiary's separate return tax liability for the
carryforward year shall be reduced by the separate return tax savings realized
by the Parent. If such reduction exceeds the Subsidiary's separate return tax
liability before the reduction, the difference shall be paid by the Parent to
the Subsidiary at the time specified in Article 2.3. If a Member ceases to be
a Member of the SFER Group prior to its Parent's use of an item covered by this
Article, the Member shall not be entitled to compensation for such item
regardless of whether the item was used by any other Member of the SFER Group.
Article 5 - Estimated Tax Payments
5.1 Each Member shall pay to its Parent quarterly
installments of estimated tax. The amount of such payments for the first,
second, third and fourth installments shall cumulatively equal 25 percent, 50
percent, 75 percent and 100 percent, respectively, of the estimated full-year
separate return tax liability (including the minimum tax and environmental
tax), as adjusted under
-6-
<PAGE> 7
Article 5.2. Settlement for such payment shall be made on or before, or as
soon as practicable after, the due date of the applicable estimated tax payment
to be paid by SFER.
5.2 The computation of separate return tax liability for
purposes of Article 5.1 shall be based on the most recent update of the current
year profit plan. The following additional adjustments to separate return
tax liability shall be made for estimated tax purposes:
(a) Carryforwards of credits (except the minimum tax
credit), losses, and deductions and currently
generated credits shall be taken into account only to
the extent permitted by the Member's Parent according
to the Parent's estimate as to the amount of such
credits that were previously utilized or will be
utilized by the Parent in computing its separate
return tax liability, or, where SFER is the Parent,
according to SFER's estimate as to the amount of such
credits that were previously utilized or will be
utilized on a consolidated basis in the current year;
and
(b) Other adjustments specified by the Tax Officer shall
be taken into account.
5.3 Interest and penalties imposed on the SFER Group as a
result of the underpayment of estimated tax shall be allocated to the Members
to which the underpayment is attributable and shall be paid to SFER by such
Members. For purposes of all such allocations of interest and underpayment
penalties, the Chief Financial Officer of SFER shall determine to which Member
or Members the underpayment is attributable. Such determination of the Chief
Financial Officer shall be final. A payment of such interest and penalties
shall not be considered a payment of estimated tax.
Article 6 - Carrybacks
6.1 Any item that (a) cannot be used by a Member in
computing separate return tax liability for the year in which the item is
generated but (b) can be carried back by the Member on a separate return basis,
shall be treated for purposes of this Agreement as provided in this Article.
6.2 If the item referred to in Article 6.1 is actually
carried back to a previous year (e.g., if Form 1139 or 1120X is filed with the
Internal Revenue Service), whether the return was filed by the SFER Group, the
common Parent of the affiliated group of which the Member was an includible
corporation in such previous year, or the Member itself, the item shall not be
used by any Member of the SFER Group in computing separate return tax
liability. The Member that generated the item shall be entitled to any refund
(including interest) received by any Member of the SFER Group from the Internal
Revenue Service as a result of the carryback. If the item results in a refund
to a corporation that is not a party to this Agreement, the right of the Member
that generated the carryback to receive such refund shall depend on the
Member's tax allocation or other agreement with the refund recipient.
-7-
<PAGE> 8
6.3 If the item referred to in Article 6.1 is not
actually carried back, the Member shall be entitled to receive from its Parent
the reduction in the Parent's separate return tax liability resulting from the
current use of the item or the future use of the item as a carryforward. The
payment for this item shall be made at the time specified in Article 2.3 for
the year in which the item is used by the Member's Parent in computing separate
return tax liability.
Article 7 - Adjustments
7.1 If any adjustment in consolidated tax liability is
made as a result of an audit by the Internal Revenue Service, the granting of a
claim for refund, a final decision by a court, the carryback or carryforward of
a loss, deduction or credit or any other similar circumstance, the tax refund
or liability resulting therefrom shall be allocated in accordance with the
principles of this Agreement as if such adjustments had been taken into account
in the year to which they relate.
7.2 Any interest and penalties paid by SFER with respect
to the adjustments referred to above shall be allocated at or near the time of
payment to the Members that generated the items giving rise to the adjustments.
In the case of penalties and other items that are computed by reference to a
consolidated deficiency (e.g., the negligence penalty imposed under section
6653 of the Code), the Chief Financial Officer of SFER, upon the advice of the
Tax Officer, shall have authority to allocate all or part of the liability for
such item (including the interest thereon) to the Member or Members whose
action or inaction resulted in the imposition of the penalty or similar item.
7.3 Interest received by SFER with respect to such
adjustments shall be allocated to its appropriate Subsidiaries according to the
principles of this Agreement and shall be paid by SFER to its Subsidiaries and
by such Subsidiaries to their Subsidiaries and so on only after the underlying
items could properly have been used by the Subsidiaries in computing their
respective separate return tax liabilities.
7.4 The allocations under Articles 7.2 and 7.3 shall,
when appropriate, take into account the offsetting effects of positive and
negative adjustments. For example, if a $100 deficiency attributable to one
Member is offset by a $60 overpayment of another Member so that the SFER Group
pays interest only on a net $40 deficiency, the interest paid by the deficiency
Member under Article 7.2 shall be based on a deficiency of $100 and an interest
receipt based on an overpayment of $60 shall be allocated to the overpayment
Member under Article 7.3. The Tax Officer of SFER shall determine when it is
appropriate to make such offsetting adjustments for interest paid and received.
7.5 (a) Any direct out-of-pocket expenses (e.g., travel
expenses, attorneys' fees, experts' fees, etc.) incurred by the SFER Group in
connection with proposed or actual adjustments of the type contemplated in this
Article; and (b) that portion of the SFER Group's legal, accounting,
secretarial, bookkeeping, data processing, salaries, fees and all other
expenses allocable to such proposed or actual adjustments or otherwise incurred
by the SFER Group in connection with such
-8-
<PAGE> 9
proposed or actual adjustments shall be borne by the Members to which the
adjustments relate. SFER shall determine the expenses that are allocable to
such proposed or actual adjustments in any reasonable manner determined by SFER
in its sole discretion. In cases where such expenses relate to more than one
Member, the Chief Financial Officer of SFER shall determine how such expenses
shall be allocated to the appropriate Members.
Article 8 - State and Local Taxes
8.1 SEPARATE RETURNS.
A. Responsibility. After consultation with SFER and the
senior tax officer of SFER ("Tax Officer") Monterey and each Monterey
Subsidiary shall be solely responsible for the preparation of all Separate
Returns and the payment of all Separate Taxes. Accordingly, Monterey or the
appropriate Monterey Subsidiary shall be entitled to the benefit of all refunds
of such Separate Taxes, and SFER shall not have any obligations with respect to
such Separate Taxes.
B. Consultation. Monterey or the appropriate Monterey
Subsidiary shall provide SFER with all information necessary to keep SFER
apprised of all matters pertaining to the Separate Returns of the Monterey
Companies and shall consult with SFER and keep SFER fully advised as to the
resolution of disputes with taxing authorities concerning such Separate Taxes,
including any matters relating to audits in connection with Separate Returns of
the Monterey Companies. The decision of the Tax Officer will be determinative
of any position the Monterey Companies takes with respect to matters affecting
such returns as well as any audits thereof.
8.2 SFER COMBINED RETURNS.
A. Payment to SFER. For each year in which any Monterey
Company is included in any SFER Combined Return, each Monterey Company included
in such return shall pay to SFER an amount equal to the Separate Taxes that
would have been incurred by such Monterey Company if it had filed a Separate
Return with respect to such jurisdiction less any payments theretofore made
pursuant to paragraph B hereof.
B. Estimated Payments. Each Monterey Company shall pay
to SFER quarterly installments of the amounts estimated to be due SFER pursuant
to paragraph A of Article 8.2. Such estimated payments shall be determined on
such basis and made at such times as SFER and Monterey may mutually agree or,
absent such agreement, as if the Monterey Companies were filing Separate
Returns in the applicable jurisdictions.
C. Adjustments. If, as a result of the adjustment of
the separate taxable income of a Monterey Company, the amount due SFER by such
Monterey Company included in such return shall be redetermined, such Monterey
Company shall remit to SFER or SFER shall refund to such Monterey Company the
amount of the resulting underpayment or overpayment, as the case may be,
-9-
<PAGE> 10
together with interest at the statutory rate provided by the jurisdiction in
which such adjustment arose.
D. Utilization of Losses. No Monterey Companies shall
be entitled to reimbursement from SFER for any losses or credits which are
includable in an SFER Combined Return unless such losses or credits result in a
"current benefit" to SFER or any SFER Company, in which case such Monterey
Company shall be entitled to receive from SFER the amount of such benefit. For
the purposes hereof, a "current benefit" shall be the difference in the SFER
Combined Tax determined with and without utilization of the loss or credit
attributable to the affected Monterey Company.
8.3 Termination. The provisions of this Article 8 shall
terminate as to a Monterey Company with respect to each jurisdiction upon such
corporation's ceasing to be eligible for inclusion in the SFER Combined Return
for such jurisdiction, but shall continue to apply with respect to any period
in which the income of such Monterey Company is included in the SFER Combined
Return. SFER and the terminating Monterey Company shall be liable for the
payments, adjustments and reimbursements required under Article 8.2 with
respect to such periods.
Article 9 - Miscellaneous Provisions
9.1 Each Member shall be required to make tax elections
and adopt tax provisions adopted or prescribed by SFER.
9.2 It is understood and acknowledged that, in accordance
with Treas. Reg. Section 1.1502-77, SFER will be the agent for all Members of
the SFER Group with respect to all matters referred to therein and SFER has the
power, without the consent of any Member, to exercise the authority with
respect to the matters set forth therein, including, without limitation, making
or revoking any elections. SFER shall have authority to compromise or concede
any tax issues for any consolidated return year. In addition, it is
acknowledged and agreed that SFER has the power and authority to make all
decisions and take any actions with respect to all matters affecting Separate
Returns or Combined Returns or any other matter affecting state or local taxes.
9.3 If for any reason the application of this Agreement
results in an inequitable and unintended allocation (e.g., if a Parent that
realizes a benefit from an item generated by a Subsidiary in one year is not
the same Parent that realizes the detriment when the item is used by the
Subsidiary in a different year), the Tax Officer shall have the authority to
reallocate items to eliminate or reduce the inequity, provided such
reallocation is based on the principles of this Agreement.
9.4 If a Member ceases to be a Member of the SFER Group,
this Agreement shall apply with respect to any period in which the income of
the terminating Member is included in the SFER consolidated federal income tax
return. The terminating Member shall remain liable to SFER for payments
required under this Agreement, including, but not limited to, payments of tax
and estimated tax for periods in which the Member's income is included in the
SFER consolidated return and payments attributable to adjustments referred to
in Article 7.1 and to interest and penalties
-10-
<PAGE> 11
referred to in Articles 5.3 and 7.2. Additionally, the terminating Member
shall cooperate and provide reasonable access to books, records and other
information needed in connection with audits, administrative proceedings,
litigation and other similar matters related to periods in which the Member was
a Member of the SFER Group. A Member that ceases to be a Member of the SFER
Group shall not be entitled to any compensation or reimbursement with respect
to any tax refund, benefit or other similar item realized by the SFER Group
after the Member leaves the SFER Group or with respect to any carryforward not
used by the Member or its Parent prior to the Member leaving the SFER Group.
Federal income taxes will be calculated for the taxable period of termination
on the basis of allocations made in accordance with Treasury Regulation Section
1.1502-76(b)(2)(i) or (ii), as SFER determines. State or local taxes will be
calculated for such period using such reasonable method as will be determined
by SFER.
9.5 If a Member acquires the assets of another Member in
a transaction described in section 381(a) of the Code, the acquiring Member
shall succeed to and assume all rights and liabilities of the acquired Member
under this Agreement.
9.6 If any Member of the SFER Group has items of loss,
deduction or credit which are to be carried back from a taxable year for which
such Member is not included in a consolidated return filed by SFER to a
consolidated return year for which it was so included, such Member shall
promptly inform SFER of the carryback and assist SFER in filing a proper and
timely claim for any refund which may be available in respect of such items.
9.7 Each Member shall use the computer software, methods
and procedures designated by SFER for purposes of tax record maintenance and
tax return preparation.
9.8 SFER shall have authority to amend this Agreement
through a collateral agreement with any Member to take into account any special
facts and circumstances of such Member. The collateral agreement shall be
effective upon execution by all affected parties and need not be executed by
Members whose rights and liabilities under this Agreement are not affected by
the collateral agreement.
9.9 This Agreement may be unilaterally amended by SFER in
response to legislative or regulatory changes in the tax law, provided that any
such amendment is consistent with the overall general principles of this
Agreement.
9.10 Any matter not specifically covered by this Agreement
shall be handled in the manner determined by SFER in accordance with the
general principles of this Agreement. Any dispute concerning the
interpretation of this Agreement shall be settled by the Chief Executive
Officer, Chief Financial Officer and Tax Officer of SFER.
9.11 Any Member of the SFER Group may, in lieu of signing
and executing this Agreement, become a party to this Agreement by resolution of
its Board of Directors accepting the provisions of this Agreement.
-11-
<PAGE> 12
9.12 This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
9.13 This Agreement shall be binding upon and inure to the
benefit of any successor to the parties hereto as if such successor had been a
party to this Agreement; provided, nothing in this Agreement is intended to
confer any rights or impose any obligations on any third parties.
9.14 This Agreement shall be governed by the laws of the
State of Texas and shall be construed in accordance with such laws.
Article 10 - Effective Date and Transitional Rules
10.1 This Agreement shall become effective with respect to
the consolidated return year beginning January 1, 1996. Estimated tax payments
made by a Member for such year prior to the execution of this Agreement shall
be treated in the same manner as payments made pursuant to Article 5. The
termination of this Agreement shall not relieve any party of any obligation
arising hereunder.
10.2 This Agreement supersedes all previous tax allocation
agreements between SFER and the Members of its affiliated group, and other
federal income tax allocation agreements or arrangements between the parties to
this Agreement. Any unused carryovers from years subject to such other
agreements shall be allowed or taken into account only as provided in this
Agreement.
IN WITNESS WHEREOF, the, parties hereto have caused this Agreement to
be duly executed and attested.
SANTA FE ENERGY RESOURCES, INC.
By
----------------------------------------
----------------------------------------
President
MONTEREY RESOURCES, INC.
By
---------------------------------------
---------------------------------------
President
-12-
<PAGE> 13
SANTA FE PLATFORM MANAGEMENT, INC.
By
---------------------------------------
---------------------------------------
President
SANTA FE ENERGY COMPANY OF ARGENTINA
By
---------------------------------------
President
SANTA FE ENERGY RESOURCES (DELAWARE) LTD.
By
---------------------------------------
---------------------------------------
President
ADOBE OFFSHORE PIPELINE COMPANY
By
---------------------------------------
---------------------------------------
President
SANTA FE PACIFIC FUELS COMPANY
By
---------------------------------------
---------------------------------------
President
-13-
<PAGE> 14
SANTA FE ENERGY RESOURCES OF BOLIVIA, INC.
By
------------------------------------------
------------------------------------------
President
SECURITY PURCHASING, INC.
By
------------------------------------------
------------------------------------------
President
GULF COAST AMERICAN CORPORATION
By
------------------------------------------
------------------------------------------
President
-14-
<PAGE> 1
EXHIBIT 10.4
CORPORATE SERVICES AGREEMENT
THIS CORPORATE SERVICES AGREEMENT (the "Agreement") is
effective as of _______________, 1996 (the "Effective Date"), and is entered
into by and between SANTA FE ENERGY RESOURCES, INC., a Delaware corporation
("SFER"), and MONTEREY RESOURCES, INC., a Delaware corporation (the "Company").
R E C I T A L S:
WHEREAS, the Company was formed in August 1996 as a wholly
owned subsidiary of SFER to own and operate substantially all of the assets
constituting the Western Division of SFER, which is engaged in the oil and gas
business in California; and
WHEREAS, pursuant to a Conveyance and Contribution Agreement
dated as of _______________, 1996, SFER transfered to the Company substantially
all of the assets constituting the Western Division of SFER and the Company
assumed the liabilities and obligations of SFER associated therewith or
allocated thereto; and
WHEREAS, SFER has historically provided to its operating
divisions and its subsidiaries, including the Company, certain specialized
corporate and administrative services more particularly described hereinafter;
and
WHEREAS, the Company proposes to offer up to, but not
including, twenty percent (20%) of its common stock for sale to the public; and
WHEREAS, SFER is considering the distribution to its
shareholders of all of SFER's common stock in the Company; and
WHEREAS, in view of the proposed public offering and potential
distribution of the Company's common stock, SFER and the Company desire by
their execution of this Agreement to evidence their understanding with respect
to the terms and conditions upon which SFER will, from and after the Effective
Date, provide certain services to the Company in connection with its business
and affairs.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the premises recited above
and the covenants, conditions, and agreements contained herein, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
<PAGE> 2
1. Term.
The initial term of this Agreement shall commence on the Effective
Date and shall continue thereafter for so long as SFER and its wholly owned
corporate affiliates own more than 80% of the outstanding shares of the
Company's capital stock ordinarily entitled to vote in the election of
directors, and for 90 days thereafter, unless terminated sooner in accordance
with Section 20 below. Thereafter, the term shall be automatically extended
for successive periods of one (1) year each unless terminated sooner in
accordance with Section 20 below.
2. Services.
(a) Services by SFER. During the Applicable Period (as defined in
Section 21 hereof), in consideration for the payments to be made by the Company
as described herein, SFER agrees to provide to the Company certain corporate
and administrative services described below in this subparagraph (a) (the
"Services") to the extent such Services may be reasonably requested by the
Company from time to time during the Applicable Period.
(i) Advisory Management Services. SFER shall provide
advisory management services to assist and advise the Company in the
conduct of its business.
(ii) Audit and Tax. SFER shall assist the Company with
negotiating services for both internal and contract audit functions,
and shall provide the services necessary to provide required tax
information to the Company, arrange and coordinate external audits by
an independent accounting firm selected by the Company and prepare tax
returns, if any are required, and administer any tax matters or tax
reporting requirements of the Company to the extent required.
(iii) Data Processing and Personnel. SFER shall provide
data processing and human resources services to the Company to the
extent required. Data processing services shall include, without
limitation (A) the maintenance of corporate records, such as corporate
minutes, and (B) the maintenance of business accounting and other
records, such as the Company's general ledger and financial
statements, accounts payable, invoicing and accounts receivable,
personnel, inventory and engineering design activities. Human
resources services shall include, without limitation, advice with
respect to the selection, employment, evaluation, counseling and
motivation, and termination of employees.
(iv) Financial Management. SFER shall provide services
related to treasury and banking matters, including cash management
services, for the Company.
(v) Legal Services. SFER shall provide or contract to
have provided legal services related to the operations of the Company.
-2-
<PAGE> 3
(vi) Insurance. SFER shall assist the Company in
obtaining director and officer liability insurance, either under SFER
insurance policies if reasonably permitted by SFER's insurers or under
separate policies arranged by SFER.
(vii) SEC Filings. SFER shall provide services necessary
to provide assistance in connection with the Company's obligation to
prepare any and all filings required to be made with the Securities
and Exchange Commission pursuant to the Securities Act of 1933 or the
Securities Exchange Act of 1934 or the Nasdaq National Market or other
applicable securities exchange pursuant to the laws, rules and
regulations governing the same, and in the preparation and
distribution of all materials required to be delivered to the holders
of securities, including annual and quarterly reports and proxy
statements, issued by the Company pursuant to such laws or
regulations. In connection therewith, SFER shall (i) provide the
Company with investor relation services and (ii) provide assistance in
determining the impact of new and proposed accounting standards.
(viii) Employee Benefit Plan Administration. SFER shall
provide advice and administrative services in connection with any
employee benefit plans offered to the Company employees.
(ix) Governmental Reports. SFER shall file various
reports on behalf of the Company with governmental agencies,
including, but not limited to, the Department of Energy (EIA 28) and
Department of Labor.
SFER shall perform the Services with the same degree of care, skill and
prudence customarily exercised for its own operations. It is understood and
agreed that the Services will be substantially identical in nature and quality
to the Services performed by SFER for the Western Division of SFER during the
year prior to the Effective Date, except as required by the Company becoming a
public company following the initial public offering of common stock of the
Company.
(b) Contractors. SFER may engage any third-party contractor
(foreign or domestic) to perform any Service (an "Outsourced Service");
provided, that SFER shall remain responsible for the provision of the
Outsourced Service in accordance with this Agreement. The Company may not
terminate any such Outsourced Service except upon proper notice as provided in
any agreement between SFER and the third-party contractor; provided, however,
that no agreement entered into by SFER with a third-party contractor after the
Effective Date shall give to any such third-party contractor a preferential
right to provide the Company with Services following the expiration of this
Agreement.
(c) Cancellation or Reduction of Services. (i) General. The
Company may remove and terminate or reduce the level of any Service or Services
and SFER may remove and terminate or reduce the level of any Service or
Services that are part of the SFER Consolidated Program (as defined below), in
each case upon 30 days' prior written notice to the other party, subject to the
provisions of subparagraph (ii) below, subparagraph (b) above and Section 5(a)
hereof.
-3-
<PAGE> 4
(ii) Consolidated Programs. The "SFER Consolidated
Programs" are SFER's consolidated pension, health and welfare plans ("SFER
Consolidated Benefit Plans") and SFER's consolidated treasury, accounting and
tax operations ("SFER Consolidated Reporting").
(1) Removal by the Company. The Company may remove from
this Agreement a Service provided as part of the SFER Consolidated Programs
only with the prior consent of SFER (which shall not be unreasonably withheld)
and upon terms and conditions reasonably acceptable to SFER (including
reimbursement of costs incurred by SFER in effecting such removal).
(2) Removal by SFER. SFER shall continue to provide all
services that are part of the SFER Consolidated Programs until either SFER
ceases providing such services for its consolidated group of companies or the
Company no longer participates in the applicable SFER Consolidated Program.
(iii) Should the Company terminate any Service being
provided hereunder or cease to be eligible to purchase certain Services from
SFER's third-party providers (such as the inability of the Company to use
computer licenses or otherwise not qualify under certain agreements to purchase
equipment or Services as a result of the Company not being an "affiliate" of
SFER as required by such agreement), SFER shall have no liability to the
Company for SFER's failure or inability to replace such terminated Services.
(d) Corporate Management. Except as provided below in this
Section, nothing in this Agreement delegates or assigns to SFER any general
right or responsibility to set corporate policies for the Company or to make
decisions or take actions commonly reserved to corporate officers, directors or
managers, and nothing in this Agreement shall be construed to relieve the
directors or officers of the Company from the performance of their respective
duties or to limit the exercise of their powers in accordance with the charter
or by-laws of the Company or in accordance with any applicable statute or
regulation. SFER shall perform all Services, including those associated with
the SFER Consolidated Programs, in accordance with the policies, practices and
standards established by SFER from time to time for such services, which shall
not unfairly discriminate against the Company, compared with other SFER
subsidiaries. If the Company ever requests that SFER change any such policy,
practice or standard, and SFER fails or refuses to do so, that failure or
refusal shall also constitute "cause" for immediate termination of this
Agreement under Section 20(a) below.
(e) Other Activities of SFER. The Company recognizes that SFER
now renders and may continue to render management and other services to other
companies that may or may not have policies and conduct activities similar to
those of the Company. SFER shall be free to render such advice and other
services, and the Company hereby consents thereto. SFER shall not be required
to devote full time and attention to the performance of its duties under this
Agreement, but shall devote only so much of its time and attention as it deems
reasonable or necessary to perform the services required hereunder.
-4-
<PAGE> 5
3. Transfer of Responsibility of Services.
(a) General. In addition to the specific Services covered by this
Agreement, SFER shall on request assist the Company in assuming responsibility
for some or all of the specific Services to be performed by SFER under this
Agreement. For example, on request SFER shall provide on-the-job training for
the Company's agents and employees who are assigned to assume responsibility
for a Service. SFER shall not be liable or responsible to the Company in any
way for the acts or omission of such agents or employees.
(b) Procedures for Transferring Services.
(i) Notices. Upon termination of this Agreement or upon
removal, termination or reduction of any Service from this Agreement,
the Party who is terminating the Agreement or removing, terminating or
reducing the Service shall, as part of the requisite Notice, identify
the Services, if any, to be transferred to the Company and propose
the procedures and timetable for such transfer.
(ii) Transfer. The Parties shall then promptly assign
sufficient personnel and resources to effect the transfer of
responsibility in an efficient and orderly manner, shall negotiate in
good faith to agree upon reasonable procedures and a timetable for the
transfer, and shall cause the transfer to occur in accordance with
those procedures and on the agreed timetable. The term of this
Agreement shall be deemed to have been extended with respect to the
affected Services, if any, until such transfer has been fully carried
out.
(iii) Information. SFER shall deliver to the Company
copies of all books, records, accounts, documents, contracts, files,
data bases, and other information ("Information") reasonably requested
by the Company in connection with any Service provided hereunder or
reasonably necessary for the Company to assume responsibility for that
Service, including those maintained in electronic form. To the extent
SFER lawfully may do so, SFER shall also furnish the Company with
copies of the computer programs, operating systems, codes,
instructions, training materials, and manuals ("Related Materials")
necessary or useful to receive, store, update, manipulate, use, and
report the Information; and to the extent that SFER may not lawfully
furnish such copies, SFER shall assist the Company in obtaining them
from third parties.
(iv) Costs. In addition to the other sums SFER is
entitled to be paid under this Agreement, the Company shall reimburse
SFER for its reasonable out-of-pocket costs of transferring each
Service to the Company, including the costs of copying and
transferring Information. Notwithstanding the foregoing, SFER shall
not be entitled to receive payment for any incremental cost increases
to which SFER may become subject due to the transfer of the Service,
including, but not limited to, health and/or life insurance premiums
and/or employee benefit or pension plan contributions.
-5-
<PAGE> 6
4. Payment for Services.
(a) Payments by the Company. The Company, in consideration for
the performance of the Services by or on behalf of SFER, agrees to reimburse
SFER, without duplication, for (i) the actual cost of any item purchased for
the Company, at the request of the Company, by SFER ("Direct Costs"), (ii) all
reasonable expenses actually incurred by SFER for Outsourced Services or other
contract services or utilities provided by any third party providers for the
Company under an agreement with such third party ("Outsourced Charges"), (iii)
reasonable out-of-pocket expenses incurred by SFER employees in providing
Services hereunder, (iv) insurance premiums, funding contributions, costs and
expenses related to the Company's properties, employees, including their
continued participation in SFER employee benefit plans and programs, and
operations, whether such insurance or funding is provided by third parties or
self-insurance programs, and (v) other expenses and Services in accordance with
the schedule or charges shown on Exhibit A attached hereto. If the
compensation for the Services does not include sales, use, excise, value added
or similar taxes, and if any such taxes are imposed on the Services, the
Company shall pay or reimburse SFER for any such taxes.
5. Invoicing.
(a) SFER shall invoice the Company for all Services, Direct Costs
and Outsourced Charges for each calendar month within 45 days following the end
of such calendar month, provided that any failure by SFER to provide an invoice
within such time period shall not relieve the Company of its obligation to pay
an invoice received after such date. All invoices shall reflect in reasonable
detail a description of the Services performed, and the aggregate amount
reflected on any such invoice shall be due and payable within 30 days following
the Company's receipt of the invoice.
(b) In the event of a dispute as to the propriety of invoiced
amounts, the Company shall pay all undisputed amounts on each invoice, but
shall be entitled to withhold payment of any amount in dispute and shall notify
SFER within ten (10) business days from receipt of the disputed invoice of the
disputed amount and the reasons each such charge is disputed by the Company.
SFER shall provide the Company with records relating to the disputed amount so
as to enable the parties to resolve the dispute.
(c) In the event the aggregate amount on any invoice is not
disputed and is not paid within 30 days following the Company's receipt of the
invoice, the unpaid amount thereof shall bear interest at the prime rate of
Chase Manhattan Bank, N.A. for the period such amount remains unpaid.
(d) Any statement or payment not disputed in writing by either
party within two years of the date of such statement shall be considered final
and no longer subject to adjustment. Either party shall not be obligated to
pay for any charges for which statements for payment are submitted more than
two years after the termination of this Agreement.
-6-
<PAGE> 7
6. The Company as Sole Beneficiary.
The Company acknowledges that the Services shall be provided only with
respect to the business of the Company and its Subsidiaries as currently
operated or as mutually agreed by the parties hereto. The Company shall not
request performance of any Services for the benefit of any entity other than
the Company and its Subsidiaries. The Company represents and agrees that the
Company will use the Services only in accordance with all applicable federal,
state and local laws and regulations and communications and common carrier
tariffs, and in accordance with the reasonable conditions, rules, regulations
and specifications which may be set forth in any manuals, materials, documents
or instructions furnished from time to time by SFER to the Company. SFER
reserves the right to take all actions, including termination of any particular
Services, that SFER reasonably believes to be necessary to assure compliance
with applicable laws, regulations and tariffs. SFER will notify the Company of
the reasons for any such termination of Services.
7. Limited Warranty, Limitation of Liability
SFER represents that it will provide or cause the Services to be
provided to the Company with reasonable diligence. EXCEPT AS SET FORTH IN THE
IMMEDIATELY PRECEDING SENTENCE, ALL PRODUCTS OBTAINED FOR, AND SERVICES
PROVIDED TO, THE COMPANY ARE AS IS, WHERE IS, WITH ALL FAULTS. SFER MAKES NO
(AND HEREBY DISCLAIMS AND NEGATES ANY AND ALL) REPRESENTATIONS AND WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE WITH RESPECT TO THE SERVICES PROVIDED TO OR PRODUCTS
OBTAINED FOR THE COMPANY. FURTHERMORE, THE COMPANY MAY NOT RELY UPON ANY
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE MADE TO SFER BY ANY PARTY
(INCLUDING AN AFFILIATE OF SFER) PERFORMING SERVICES ON BEHALF OF SFER
HEREUNDER, UNLESS SUCH PARTY MAKES AN EXPRESS WARRANTY TO THE COMPANY.
IT IS EXPRESSLY UNDERSTOOD BY THE COMPANY AND THE COMPANY AGREES THAT
SFER SHALL HAVE NO LIABILITY FOR ANY DAMAGES ARISING OUT OF THE PERFORMANCE OR
NON-PERFORMANCE OF ANY SERVICES PROVIDED HEREUNDER BY SFER OR ANY THIRD PARTY
PROVIDER UNLESS IN EACH CASE SUCH DAMAGES ARISE OUT OF THE GROSS NEGLIGENCE OR
INTENTIONAL MISCONDUCT ON THE PART OF SFER. THE COMPANY AGREES THAT THE
REMUNERATION PAID TO SFER HEREUNDER FOR THE SERVICES TO BE PERFORMED REFLECT
THIS LIMITATION OF LIABILITY AND DISCLAIMER OF WARRANTIES. IN NO EVENT SHALL
SFER BE LIABLE TO THE COMPANY OR ANY OTHER PERSON FOR ANY INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES RESULTING FROM ANY ERROR IN THE PERFORMANCE OF SERVICES
OR FROM
-7-
<PAGE> 8
THE BREACH OF THIS AGREEMENT, REGARDLESS OF THE FAULT OF SFER, OR ANY THIRD
PARTY PROVIDER OR WHETHER SFER, OR ANY THIRD PARTY PROVIDER OR WHETHER SFER OR
THE THIRD PARTY PROVIDER ARE WHOLLY, CONCURRENTLY, PARTIALLY, OR SOLELY
NEGLIGENT, UNLESS IN EACH CASE SUCH DAMAGES ARISE OUT OF THE GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT OF SFER OR SUCH THIRD PARTY PROVIDER. TO THE EXTENT ANY
THIRD PARTY PROVIDER HAS LIMITED ITS LIABILITY TO SFER FOR SERVICES UNDER AN
OUTSOURCING OR OTHER AGREEMENT, THE COMPANY AGREES TO BE BOUND BY SUCH
LIMITATION OF LIABILITY FOR ANY PRODUCT OR SERVICE PROVIDED TO THE COMPANY BY
SUCH THIRD PARTY PROVIDER UNDER SFER'S AGREEMENT.
8. Force Majeure.
SFER SHALL HAVE NO OBLIGATION TO PERFORM OR CAUSE THE SERVICES
TO BE PERFORMED IF ITS FAILURE TO DO SO IS CAUSED BY OR RESULTS FROM ANY ACT OF
GOD, GOVERNMENTAL ACTION, NATURAL DISASTER, STRIKE, FAILURE OF ESSENTIAL
EQUIPMENT OR ANY OTHER CAUSE OR CIRCUMSTANCE BEYOND THE CONTROL OF SFER OR, IF
APPLICABLE, THIRD PARTY PROVIDERS OF SERVICES TO SFER ("EVENT OF FORCE
MAJEURE"). SFER will notify the Company of any Event of Force Majeure
affecting its Services to the Company. SFER agrees that following any Event
of Force Majeure, the Company shall have no obligation to pay for the Services
affected thereby and SFER will use its reasonable best efforts to restore such
Services.
9. Liability and Indemnification.
(a) Liability of SFER and Indemnitees. (i) Notwithstanding anything
to the contrary set forth in this Agreement, neither SFER nor any Indemnitee
(as defined in Section 21 hereof) shall be liable, responsible or accountable
in damages or otherwise to the Company for any expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the Company in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except to the extent such expenses, judgments, fines and amounts
arose out of the gross negligence or willful misconduct of SFER or such
Indemnitee. Neither SFER nor any Indemnitee shall be liable to the Company for
any action of any other employee or agent of the Company (acting in its
capacity as such).
(ii) Subject to its obligations and duties under this
Agreement set forth in Section 2, SFER may exercise any powers granted to it by
this Agreement and perform any of the duties imposed upon it hereunder either
directly, by or through its agents or by or through third party contractors.
(iii) Any amendment, modification or repeal of this Section 9
or any provisions hereof shall be prospective only and shall not in any way
affect the limitations on the liability to the
-8-
<PAGE> 9
Company of the Indemnitees under this Section 9 as in effect immediately prior
to such amendment, modification or repeal with respect to claims arising from
or relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal regardless of when such claims may arise or be asserted.
(b) Indemnification.
(i) The Company shall indemnify and hold harmless SFER and
each Indemnitee from and against any and all losses, claims, damages,
liabilities (joint or several) expenses (including legal fees and expenses),
judgments, fines, penalties, interest, settlements and other amounts arising
from any and all claims, demands, actions, suits or proceedings, whether civil,
criminal, administrative or investigative, in which SFER or any Indemnitee may
be involved, or is threatened to be involved, as a party or otherwise, by
reason of its status or in connection with services rendered in connection with
the activities of the Company; except to the extent such expenses, judgments,
fines and amounts arose out of the gross negligence or willful misconduct of
SFER or such Indemnitee and provided in each case that SFER or the Indemnitee
acted in good faith and in a manner that SFER or such Indemnitee reasonably
believed to be in, or not opposed to, the best interests of the Company and,
with respect to any criminal proceeding, had no reasonable cause to believe its
conduct was unlawful.
(ii) Expenses (including legal fees and expenses) incurred by
SFER or any Indemnitee who is entitled to indemnification pursuant to this
Section 9 in defending any claim, demand, action, suit or proceeding shall,
from time to time, be advanced by the Company prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Company of
an undertaking by or on behalf of SFER or such Indemnitee to repay such amount
if it shall be determined that SFER or such Indemnitee is not entitled to be
indemnified as authorized in this Section 9.
(iii) The indemnification provided for by this Section 9
shall be in addition to any other rights to which SFER or an Indemnitee shall
be entitled under any agreement, as a matter of law, or otherwise, and shall
continue as to SFER or any Indemnitee who has ceased to serve in such capacity
and shall inure to the benefit of the heirs, successors, assigns and
administrators of SFER or the Indemnitee.
(iv) No amendment, modification or repeal of this Section 9
or any provision hereof shall in any manner terminate, reduce or impair the
right of SFER or any past, present or future Indemnitee to be indemnified by
the Company, nor the obligation of the Company to indemnify any such Indemnitee
under and in accordance with the provisions of this Section 9 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such claims
may arise or be asserted.
-9-
<PAGE> 10
(c) Insurance. The Company may purchase and maintain (or shall
reimburse SFER for the cost of) insurance, on behalf of SFER and such other
Persons as SFER shall reasonably determine, against any liability that may be
asserted against or expense that may be incurred by such Person in connection
with Services performed for or on behalf of the Company, regardless of whether
the Company has the obligation to indemnify such Person against such liability
under the provisions of this Agreement.
10. Severability.
In the event any portion of this Agreement shall be found by a court
of competent jurisdiction to be unenforceable, that portion of the Agreement
will be null and void and the remainder of the Agreement will be binding on the
parties as if the unenforceable provisions had never been contained herein.
11. Assignment.
Except for the ability of SFER to cause one or more of the Services to
be performed by a third party provider, no party shall have the right to assign
its rights or obligations under this Agreement without the prior written
consent of the other party.
12. Entire Agreement, Supersedure.
This Agreement constitutes the entire agreement of the parties
relating to the performance of the Services by SFER, and all prior or
contemporaneous written or oral agreements are merged herein.
13. Choice of Law.
THIS AGREEMENT SHALL BE SUBJECT TO AND GOVERNED BY THE LAWS OF THE
STATE OF TEXAS, EXCLUDING ANY CONFLICTS-OF- LAW RULE OR PRINCIPLE THAT MIGHT
REFER THE CONSTRUCTION OR INTERPRETATION OF THIS AGREEMENT TO THE LAWS OF
ANOTHER STATE.
14. Amendment or Modification.
This Agreement may be amended or modified from time to time only by a
written amendment signed by SFER and the Company.
15. Notices.
Any notice, request, instruction, correspondence or other document to
be given hereunder by any party to the other (herein collectively called
"Notice") shall be in writing and delivered personally or mailed, postage
prepaid, or by telegram or telecopier, as follows:
-10-
<PAGE> 11
IF TO SFER:
Santa Fe Energy Resources, Inc.
1616 South Voss Road
Suite No. 1000
Houston, Texas 77057
Attention: General Counsel
IF TO THE COMPANY:
Monterey Resources, Inc.
5201 Truxtun Avenue
Suite No. 100
Bakersfield, California 93309
Attention: General Counsel
Notice given by personal delivery or mail shall be effective upon actual
receipt. Notice given by telegram or telecopier shall be effective upon actual
receipt if received during the recipient's normal business hours, or at the
beginning of the recipient's next business day after receipt if not received
during the recipient's normal business hours. Any party may change any address
to which Notice is to be given to it by giving Notice as provided above of such
change of address.
16. Further Assurances.
In connection with this Agreement and all transactions contemplated by
this Agreement, by execution of this Agreement each signatory party hereto
agrees to execute and deliver such additional documents and instruments as may
be required for SFER to provide the Services hereunder and to perform such
other additional acts as may be necessary or appropriate to effectuate, carry
out and perform all of the terms, provisions, and conditions of this Agreement.
17. Acknowledgment Regarding Certain Provisions.
EACH OF THE PARTIES HERETO SPECIFICALLY ACKNOWLEDGES AND AGREES (A)
THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THAT IT IS CHARGED WITH NOTICE
AND KNOWLEDGE OF THE TERMS HEREOF, (B) THAT IT HAS IN FACT READ THIS AGREEMENT
AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS,
CONDITIONS AND EFFECTS OF THIS AGREEMENT, AND (C) THAT IT RECOGNIZES THAT
CERTAIN OF THE TERMS OF THIS AGREEMENT PROVIDE FOR THE ASSUMPTION BY ONE PARTY
OF, AND/OR RELEASE OF THE OTHER PARTY FROM, CERTAIN LIABILITIES ATTRIBUTABLE TO
THE MATTERS COVERED BY THIS AGREEMENT THAT SUCH PARTY WOULD OTHERWISE BE
RESPONSIBLE FOR UNDER THE LAW. EACH PARTY HERETO FURTHER AGREES AND COVENANTS
THAT IT WILL NOT
-11-
<PAGE> 12
CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY SUCH PROVISIONS OF THIS AGREEMENT
ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR
THAT SUCH PROVISIONS ARE NOT "CONSPICUOUS."
18. No Third Party Beneficiary.
The provisions of this Agreement are enforceable solely by the parties
to this Agreement, and no Assignee or other Person, other than pursuant to
Section 9 hereof, shall have the right, separate and apart from the Company or
SFER, to enforce any provision of this Agreement or to compel any party to this
Agreement to comply with the terms of this Agreement.
19. Mediation.
SFER and the Company agree to negotiate in good faith in an effort to
resolve any dispute related to this Agreement that may arise between the
parties. If the dispute cannot be resolved promptly by negotiation, then
either party may give the other party written notice that the dispute should be
submitted to mediation. Promptly thereafter, a mutually acceptable mediator
shall be chosen by the parties, who shall share the cost of mediation services
equally. If the dispute has not been resolved by mediation within 90 days
after the date of written notice requesting mediation, then either party may
initiate litigation and pursue any and all remedies at law or at equity that
such party is entitled to.
20. Termination.
This Agreement may be terminated prior to the expiration of the terms
described in Section 1 hereof as follows:
(a) By the Company. The Company shall have the right to terminate
this Agreement for "Cause" (as defined below and in Section 2(d)) in which case
no further payment shall be due SFER pursuant to this Agreement, other than
obligations already accrued as of the Notice Date (as defined below). For
purposes of this Section 20(a), "Cause" shall mean the material failure by SFER
to perform its obligations hereunder. In addition, the Company shall have the
right to terminate this Agreement without cause, for any reason, upon 90 days'
prior written notice.
(b) By SFER. SFER shall have the right to terminate this
Agreement upon any "Constructive Termination," which shall mean:
(i) The failure by the Company to pay Charges in
accordance with this Agreement and such failure continues for 30 days
after written notice to the Company; or
(ii) Dissolution or liquidation of the Company for any
reason.
-12-
<PAGE> 13
In addition, SFER shall have the right to terminate this Agreement without
cause, for any reason, upon 90 days written notice.
(c) By Mutual Agreement. This Agreement may be terminated by
mutual agreement on the terms and dates stipulated in a writing signed by the
Company and SFER.
(d) Notice of Termination. Termination of this Agreement pursuant
to this Section 20 shall be effected by giving written notice, signed by the
terminating party, to the other party and this Agreement shall terminate 30
days from the date on which such notice is delivered ("Notice Date"); provided,
that in the case of termination without cause by either party, this Agreement
shall terminate 90 days from the Notice Date; and provided further, that in the
case of a Constructive Termination described in Section 20(b), termination of
this Agreement shall automatically occur on the date of such event.
21. Definitions.
The following terms shall have the indicated meanings for the purposes
of this Agreement:
"Applicable Period" shall mean the period from the Effective
Date to the date that this Agreement is terminated in accordance with
Section 20.
"Indemnitee," except as otherwise noted, shall mean for
purposes of this Agreement (a) any Person who is or was an officer,
director, employee, agent or trustee of SFER, or (b) any Person who is
or was serving at the request of SFER as a director, officer,
employee, agent, fiduciary or trustee of another Person; provided,
that a Person shall not be an Indemnitee pursuant to this clause (b)
by reason of providing, on a fee-for-services basis, trustee,
fiduciary or custodial services.
-13-
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed on their behalf by their duly authorized officers.
SANTA FE ENERGY RESOURCES, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
MONTEREY RESOURCES, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
-14-
<PAGE> 1
EXHIBIT 10.5
REGISTRATION RIGHTS AND INDEMNIFICATION AGREEMENT
This Registration Rights and Indemnification Agreement, dated
as of ____________, 1996 (this "Agreement"), is entered into by and between
Monterey Resources, Inc., a Delaware corporation (the "Company"), and Santa Fe
Energy Resources, Inc., a Delaware corporation ("Santa Fe").
W I T N E S S E T H
WHEREAS, the Company is a wholly owned subsidiary of Santa
Fe;
WHEREAS, the Company intends to issue shares of its Common
Stock, par value $0.01 per share ("Common Stock"), in a public offering
pursuant to a Registration Statement on Form S-1 (No. 333-____), as amended
(the "Offering") and Santa Fe intends, after the Offering and subject to
certain conditions, to distribute its remaining interest in the Company to its
stockholders (a "Distribution"); and
WHEREAS, the Company has agreed to grant to Santa Fe certain
registration rights with respect to the Common Stock now owned by or issued to
Santa Fe during the term of this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the
following terms shall have the meanings set forth below:
(a) "Closing" shall mean the closing of the Offering.
(b) "Commercially Reasonable Efforts", when used with
respect to an obligation to be performed or term or provision to be
observed hereunder, shall mean such efforts as a prudent person
seeking the benefits of such performance or action would make, use,
apply or exercise to preserve, protect or advance its rights or
interests, provided that such efforts do not require such person to
incur a material financial cost or a substantial risk of material
liability unless such cost or liability (i) would customarily be
incurred in the course of performance or observance of the relevant
obligation, term, or provision, (ii) is caused by or results from the
wrongful act or negligence of the person whose performance or
observance is required hereunder or (iii) is not excessive or
unreasonable in view of the rights or interests to be preserved,
protected or advanced. Such efforts may include, without limitation,
(A) the expenditure of such funds and retention by such person of such
accountants, attorneys or other experts or advisors as may be
necessary or appropriate to effect the relevant action, (B)
<PAGE> 2
the undertaking of any special audit or internal investigation that
may be necessary or appropriate to effect the relevant action and
(C) the commencement, termination or settlement of any action, suit or
proceeding involving such person to the extent necessary or
appropriate to effect the relevant action.
(c) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act.
(d) "Common Stock" shall have the meaning set forth in the
recitals of this Agreement.
(e) "Company" shall have the meaning set forth in the
initial paragraph of this Agreement.
(f) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended, or any similar successor federal statute and the
rules and regulations thereunder, all as the same shall be in effect
from time to time.
(g) "Holder" shall mean Santa Fe and any holder of
Registrable Securities to whom the registration rights conferred by
this Agreement have been transferred in compliance with Section 9
hereof.
(h) "Initiating Holders" shall mean any Holder or Holders
who in the aggregate hold not less than 50% of the outstanding
Registrable Securities.
(i) "Liabilities" shall mean all debts, liabilities and
obligations, actual or contingent, liquidated or unliquidated, accrued
or unaccrued, known or unknown, whenever and however arising,
including all costs and expenses (including fees and disbursements of
counsel) relating thereto, and including without limitation debts,
liabilities and obligations arising in connection with any actual or
threatened claim, action, suit, arbitration, inquiry, proceeding or
investigation by or before any court, governmental or other regulatory
or administrative agency or commission or any arbitration panel.
(j) "Monterey Securities Liabilities" shall mean any
Liability under the Securities Act, the Exchange Act, or any other
federal or state statutory securities law or regulation, at
-2-
<PAGE> 3
common law or otherwise, arising out of the Offering or any
subsequent Distribution (except a Distribution registered under the
Securities Act and subject to this Agreement), including without
limitation any such Liability arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in
a registration statement filed under federal or state securities laws
in connection with the Offering or any Distribution, or in any
amendment or supplement thereto, or in any prospectus relating to the
Offering or any Distribution or in any amendment or supplement thereto
or in any proxy or information statement filed under the Exchange Act
or distributed in connection with any Distribution, or in any
amendment or supplement thereto or based on the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, that Monterey Securities Liabilities shall not
include (i) in the case of a registration statement, prospectus,
information statement or other document prepared or filed by or on
behalf of the Company, any Liability that arises or is based upon any
untrue statement or alleged untrue statement of a material fact or an
omission or alleged omission to state a material fact required to be
stated (or necessary to make the statement not misleading) contained
in material furnished in writing by Santa Fe expressly for use in such
document (collectively, the "Santa Fe Information"); Santa Fe
acknowledges supplying the following portions of the Registration
Statement on Form S-1 (Registration No. 333- ) filed with respect to
the Offering: the second and third sentences of the second paragraph
and the caption "The Company"; clauses (a)(i), (a)(ii), (a)(iii) and
(c)(i) in the first paragraph and the third paragraph under the caption
"Transactions at Closing" and the first paragraph under the caption
"Intended Spin Off by SFR" in the section entitled "Prospectus
Summary"; the first paragraph under the caption "Control by SFR"; the
first paragraph under the caption "Intended Spin Off by SFR" in the
section entitled "Risk Factors"; the information relating to Santa Fe
in the section entitled "Dilution"; the eighth paragraph and the first
sentence of the ninth paragraph in the caption "General" and the first
and third sentence of the third paragraph under the caption
"Intercompany Agreement" in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations"; the first, second, third and fourth sentences of the
second paragraph under the caption "General" in the section entitled
"Business"; all of the paragraphs under the caption "Compensation
Pursuant to SFR Plans" and the information under the captions "Stock
Option Grants During 1995" and "1995 Option Exercises and Outstanding
Stock Option Values as of December 31, 1995" in the section entitled
"Management"; the third column of the table, footnotes 2 through 9,
11 and 13 (except the last sentence of each footnote) in the section
entitled "Security Ownership of Management"; the first paragraph and
the first sentence of the second paragraph under the caption
"Ownership of Common Stock"; and the first paragraph under the
caption "Intended Spin Off" and the second sentence of the second
paragraph under the caption "Conflicts of Interest;Transactions with
Affiliates" in the section entitled "Relationship Between the Company
and SFR"; or (ii) in the case of any registration statement,
prospectus, information statement or other document prepared or filed
by or on behalf of Santa Fe other than referred to in (i) above, any
Liability that arises or is based upon any untrue statement or
alleged untrue statement of a material fact contained in, or an
omission or alleged omission to state a material fact required to be
stated (or necessary to make the statement not misleading) unless
such misstatement or omission is contained in material furnished in
writing by the Company expressly for use in such document
(collectively, the "Monterey Information").
(k) The terms "register," "registered" and "registration"
shall refer to a registration effected by preparing and filing a
registration statement in compliance with the
-3-
<PAGE> 4
Securities Act and applicable rules and regulations thereunder, and the
declaration or ordering of the effectiveness of such registration
statement.
(l) "Registrable Securities" shall mean (i) the shares of
Common Stock issued to Santa Fe, and (ii) any Common Stock issued as a
dividend or other distribution with respect to or in exchange for or
in replacement of such shares, provided, however, that Registrable
Securities shall not include any shares of Common Stock which have
previously been registered under the Securities Act, which have been
sold or otherwise transferred under Rule 144 or which may be sold
without restriction pursuant to Rule 144(k).
(m) "Registration Expenses" shall mean all expenses
incurred in effecting any registration pursuant to this Agreement,
including, without limitation, all registration, qualification, and
filing fees, printing expenses, escrow fees, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and expenses of
any regular or special audits incident to or required by any such
registration, but shall not include Selling Expenses (and shall not
include the compensation of regular employees of the Company, which
shall be paid in any event by the Company).
(n) "Rule 144" shall mean Rule 144 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from
time to time, or any similar successor rule that may be promulgated by
the Commission.
(o) "Rule 145" shall mean Rule 145 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from
time to time, or any similar successor rule that may be promulgated by
the Commission.
(p) "Santa Fe Securities Liabilities" shall mean any
Liability under the Securities Act, the Exchange Act or any other
federal or state statutory law or regulation, at common law or
otherwise, arising out of the Offering or any subsequent Distribution
(except a Distribution registered under the Securities Act and subject
to this Agreement), and arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in
a registration statement filed under federal or state securities laws
in connection with the Offering or any Distribution, or in any
amendment or supplement thereto, or in any prospectus relating to the
Offering or any Distribution or in any amendment or supplement thereto
or in any proxy or information statement filed under the Exchange Act
or distributed in connection with any Distribution, or in any
amendment or supplement thereto, or based on the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, that Santa Fe Securities Liabilities shall not
include (i) in the case of a registration statement, prospectus,
information statement or other document prepared or filed by or on
behalf of the Santa Fe, any Liability that arises or is based upon any
untrue statement or alleged untrue statement of a material fact or an
omission or alleged omission to state a material fact required to be
stated (or necessary to make the statement not misleading) contained
in
-4-
<PAGE> 5
Monterey Information or (ii) in the case of any registration
statement, prospectus, information statement or other document
prepared or filed by or on behalf of the Company other than referred
to in (i) above, any Liability that arises or is based upon any untrue
statement or alleged untrue statement of a material fact contained in,
or an omission or alleged omission to state a material fact required
to be stated (or necessary to make the statement not misleading)
unless such misstatement or omission is contained in Santa Fe
Information.
(q) "Securities Act" shall mean the Securities Act of 1933,
as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time
to time.
(r) "Selling Expenses" shall mean all underwriting
discounts and selling commissions applicable to the sale of
Registrable Securities and all fees and disbursements of counsel for
any Holder.
(s) "Subsidiary" shall mean each direct and indirect
subsidiary at the time of or at any time following the Closing.
(t) "Taxes" shall mean any and all taxes (including
interest, penalties and additions to tax), fees and charges (including
sales, use, excise, value added, personal property and other taxes)
imposed by any federal, state or local or government tax authority in
the United States of America or by any foreign government or taxing
authority.
2. Demand Registration.
2.1 REQUEST FOR REGISTRATION. (a) If the Company shall
receive from Initiating Holders, at any time or times not earlier than 180 days
after the date of this Agreement, a written request that the Company effect any
registration with respect to all or a part of the Registrable Securities,
representing the lesser of (i) 10% of the Company's then-outstanding shares of
Common Stock and (ii) the number of Registrable Securities held by such
Initiating Holders at the time of such request, the Company will:
(i) promptly give written notice of the proposed
registration to all other Holders; and
(ii) as soon as practicable, use Commercially Reasonable
Efforts to effect such registration (including, without limitation,
filing a registration statement and any appropriate pre-effective or
post-effective amendments, appropriate qualifications under
applicable blue sky or other state securities laws, and appropriate
compliance with the Securities Act) so as to permit or facilitate the
sale and distribution of all or such portion of the Registrable
Securities as are specified in such request, together with all or such
portion of the Registrable Securities of any Holder or Holders joining
in such request as are specified in a written
-5-
<PAGE> 6
request received by the Company within 20 days after such written
notice from the Company is effective.
Each request for registration under this Section 2 shall specify the
amount of Registrable Securities proposed to be registered.
(b) The Company shall not be obligated to effect, or to
take any action to effect, any such registration pursuant to this Section 2:
(i) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process
in effecting such registration, qualification, or compliance, unless
the Company is already subject to service in such jurisdiction and
except as may be required by the Securities Act;
(ii) within 180 days after the consummation of the
Offering;
(iii) (A) prior to the expiration of a period of six months
after the Company has initiated any registration pursuant to this
Section 2.1, provided that a registration initiated pursuant to this
Section 2.1 and subsequently withdrawn by the Holders registering
shares therein shall not be counted as a requested registration
pursuant to this clause (ii) if (X) such withdrawal is based upon
material adverse information relating to the Company that is not known
by or available (upon request from the Company or otherwise) to the
Initiating Holders at the time of their request for registration
pursuant to this Section 2.1 or (Y) the Holders bear the Registration
Expenses for such registration;
(iv) during the period starting with the date 60 days
prior to the Company's good faith estimate of the date of filing of,
and ending on a date 180 days after the effective date of, a
Company-initiated registration, provided that the Company is in good
faith continuing to use all Commercially Reasonable Efforts to cause
such registration statement to become effective;
(v) if the Initiating Holders do not request that such
offering be firmly underwritten by underwriters selected by a majority
in interest of the Initiating Holders (subject to the consent of the
Company, which consent will not be unreasonably withheld);
(vi) if the Company and the Initiating Holders are unable
to obtain the commitment of the underwriters described in clause (iv)
above to firmly underwrite the offer;
(vii) if, within 14 days after its receipt of a written
request to effect such registration, the Company causes to be
delivered to the Initiating Holders an opinion of Andrews & Kurth
L.L.P. or other counsel reasonably acceptable to the Initiating
Holders to the effect that the proposed disposition of Registrable
Securities by the Initiating Holders will not require registration or
qualification under the Securities Act, it being specifically
-6-
<PAGE> 7
understood and agreed that the Initiating Holders will promptly
furnish to the Company and such counsel all information such counsel
may reasonably request in order to enable such counsel to determine
whether it would be able to render such opinion; or
(viii) if the Company has effected three such registrations
pursuant to subparagraph 2.1(a) and such registrations have been
declared or ordered effective.
2.2 RIGHT TO DEFER REGISTRATION. Subject to the
provisions of Section 2.1(b), the Company shall use its Commercially Reasonable
Efforts to file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable after receipt of the request
or requests of the Initiating Holders; provided, however, that if (i) in the
good faith judgment of the Board of Directors of the Company, such registration
would be detrimental to the Company and the Board of Directors of the Company
concludes, as a result, that it is essential to defer the filing of such
registration statement at such time, and (ii) the Company shall furnish to such
Holders a certificate signed by the President of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would be
detrimental to the Company for such registration statement to be filed in the
near future and that it is, therefore, essential to defer the filing of such
registration statement, then the Company shall have the right to defer such
filing for the period during which such filing would be detrimental,
provided that (except as provided in Section 2.1(b)(iii) above) the Company may
not defer the filing for a period of more than 180 days after receipt of the
request of the Initiating Holders, and, provided further, that the Company
shall not defer its obligation in this manner more than once in any
twelve-month period.
2.3 UNDERWRITING. (a) The right of any Holder to
registration pursuant to Section 2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting
(together with the Company and other holders of securities of the Company
exercising registration rights with respect to such registration) shall enter
into an underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by a majority in interest of the
Initiating Holders, subject to the consent of the Company, which consent shall
not be unreasonably withheld.
(b) Notwithstanding any other provision of this
Section 2, if the representative of the underwriters advises the Initiating
Holders in writing that marketing factors require a limitation on the number of
shares to be underwritten, the number of shares to be included in the
underwriting or registration shall be allocated as set forth in Section 10
hereof. If a person who has requested inclusion in such registration as
provided above does not agree to the terms of any such underwriting, such
person shall be excluded therefrom by written notice from the Company, the
underwriter or the Initiating Holders. Any Registrable Securities or other
securities excluded or withdrawn from such underwriting shall also be withdrawn
from such registration. If shares are so withdrawn from the registration and
if the number of shares to be included in such registration was previously
reduced as a result of marketing factors pursuant to this Section 2.3, then the
Company shall offer to all Holders who have retained rights to include
securities in the registration the right
-7-
<PAGE> 8
to include additional securities in the registration in an aggregate amount
equal to the number of shares so withdrawn, with such shares to be allocated
among such Holders requesting additional inclusion in accordance with Section
10 hereof.
3. Piggyback Registration.
3.1 NOTICE OF REGISTRATION. If the Company shall
determine to register any of its securities either for its own account or the
account of a security holder or holders exercising their respective demand
registration rights (other than pursuant to Section 2 hereof), other than a
registration relating solely to employee benefit plans, a registration relating
solely to a Rule 145 transaction, a registration relating to a business
combination or a registration on any registration form that does not permit
secondary sales, the Company will:
(a) promptly give to each Holder written notice thereof;
and
(b) use Commercially Reasonable Efforts to include in
such registration (and any related qualification under blue sky laws
or other compliance), except as set forth in Section 3.2 below, and in
any underwriting involved therein, all the Registrable Securities
specified in a written request or requests, made by any Holder within
20 days after the written notice from the Company described in clause
(i) above is given. Such written request may specify all or a part of
a Holder's Registrable Securities.
3.2 RIGHT TO TERMINATE REGISTRATION. The Company shall
have the right to terminate or withdraw any registration initiated by it under
this Section 3 prior to the effectiveness of such registration whether or not
any Holder has elected to include Registrable Securities in such registration.
3.3 UNDERWRITING. (a) If the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as a part of the written
notice given pursuant to Section 3.1 above. In such event, the right of any
Holder to registration pursuant to this Section 3 shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting (together with the Company and such other holders of securities of
the Company exercising registration rights with respect to such registration)
shall enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected by the Company or
the security holders initiating such registration, as the case may be.
(b) Notwithstanding any other provision of this Section
3, if the representative of the underwriters advises the Company in writing
that marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitations set forth
below) exclude all Registrable Securities from, or limit the number of
Registrable Securities to be included in, the registration and underwriting.
The Company shall so advise all holders of securities
-8-
<PAGE> 9
requesting registration, and the amount of securities that are entitled to be
included in the registration and underwriting shall be allocated first to the
Company for securities being sold for its own account and thereafter as set
forth in Section 10 hereof. If any person does not agree to the terms of any
such underwriting, such person shall be excluded therefrom by written notice
from the Company or the underwriter. Any Registrable Securities or other
securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration.
4. Expenses of Registration. All Registration Expenses
in any registration, qualification or compliance pursuant to Section 2 and
Section 3 shall be borne by the Company. All Selling Expenses relating to
securities so registered shall be borne by the holders of such securities pro
rata on the basis of the number of shares of securities so registered on their
behalf.
5. Registration Procedures. In the case of each
registration effected by the Company pursuant to this Agreement, the Company
will keep each Holder advised in writing as to the initiation of each
registration and as to the completion thereof. At its expense (except, as
otherwise provided herein), the Company will use Commercially Reasonable
Efforts to:
(a) keep such registration effective for a period of 120
days or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever
first occurs; provided, however, that such 120-day period shall be
extended for a period of time equal to the period after the
effectiveness of such registration that the Holder refrains from
selling any securities included in such registration at the request of
an underwriter of Common Stock (or other securities) of the Company;
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used
in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement;
(c) furnish such number of prospectuses and other
documents incident thereto, including any amendment of or supplement
to the prospectus, as a Holder from time to time may reasonably
request;
(d) notify each seller of Registrable Securities covered
by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances then existing, not
misleading, and at the request of any such seller, prepare and furnish
to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such shares, such prospectus
shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein
-9-
<PAGE> 10
or necessary to make the statements therein, in the light of the
circumstances then existing, not misleading;
(e) cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange on which
similar securities issued by the Company are then listed;
(f) provide a transfer agent and registrar for all
Registrable Securities registered pursuant to such registration
statement and a CUSIP number for all such Registrable Securities, in
each case not later than the effective date of such registration; and
(g) comply with all applicable rules and regulations of
the Commission, and make available to its security holders, as soon as
reasonably practicable, an earnings statement covering the period of
at least 12 months, but not more than 18 months, beginning with the
first month after the effective date of the Registration Statement,
which earnings statement shall satisfy the provisions of Section 11(a)
of the Securities Act.
In connection with any underwritten offering pursuant to a registration
statement filed pursuant to Section 2 hereof, the Company will enter into an
underwriting agreement reasonably necessary to effect the offer and sale of
Common Stock, provided such underwriting agreement contains customary
underwriting provisions.
6. Indemnification.
(a) The Company will, with respect to any registration,
qualification or compliance undertaken pursuant to the rights granted
in this Agreement, indemnify each Holder, each of its officers,
directors and partners, and each person controlling such Holder within
the meaning of Section 15 of the Securities Act, if Registrable
Securities of such Holder are included in the securities with respect
to which registration, qualification, or compliance has been effected
pursuant to this Agreement, against all expenses, claims, losses,
damages, and liabilities (or actions, proceedings, or settlements in
respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any
prospectus, offering circular, or other document filed by the Company
(including any related registration statement, notification, or the
like) incident to any such registration, qualification, or compliance,
or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of
the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required by the Company
in connection with any such registration, qualification, or
compliance, and will reimburse each such Holder, each of its officers,
directors, partners and each person controlling such Holder, for any
legal and any other expenses reasonably incurred in connection with
investigating and defending or settling any such claim, loss, damage,
liability, or action, provided that the Company will not be liable in
any such case to the extent that any such claim, loss, damage,
liability, or expense arises out of or is based on any untrue
statement or omission based upon written
-10-
<PAGE> 11
information furnished to the Company by such Holder and stated to be
specifically for use therein. It is agreed that the indemnity
agreement contained in this Section 6(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the
Company (which consent has not been unreasonably withheld).
(b) Each Holder (an "Indemnifying Holder") will, if
Registrable Securities held by the Indemnifying Holder are included in
the securities as to which such registration, qualification, or
compliance is being effected, indemnify the Company, each of its
directors, officers, partners, each person who controls the Company
within the meaning of Section 15 of the Securities Act, each other
such Holder (an "Indemnified Holder"), and each of their officers,
directors, and partners, and each person controlling such Indemnified
Holder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained
in any such registration statement, prospectus, offering circular, or
other document, or any omission (or alleged omission) to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and
such Indemnified Holders, directors, officers, partners or control
persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss,
damage, liability, or action, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular, or other document in
reliance upon and in conformity with written information furnished to
the Company by the Indemnifying Holder and stated to be specifically
for use therein; provided, however, that the obligations of the
Indemnifying Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages, or liabilities (or
actions in respect thereof) if such settlement is effected without the
consent of such Holder (which consent shall not be unreasonably
withheld); and provided further that the liability of an Indemnifying
Holder pursuant to this Section 6(b) in connection with a registration
shall be limited to the net proceeds from the sale of the Registrable
Securities of such Indemnifying Holder pursuant to such registration.
(c) Each party entitled to indemnification under this
Section 6 (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party")
promptly after such Indemnified Party has actual knowledge of any
claim as to which indemnity may be sought, and, except as provided in
the following sentence, shall permit the Indemnifying Party to assume
the defense of such claim or any litigation resulting therefrom;
provided that counsel for the Indemnifying Party, who shall conduct
the defense of such claim or any litigation resulting therefrom, shall
be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld); provided further that the Indemnified Party
may participate in such defense at its own expense; and provided
further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its
obligations under this Agreement, to the extent such failure is not
materially prejudicial. After the Indemnifying Party assumes the
defense of such claim or litigation, the Indemnifying Party shall not
be liable to the Indemnified Party under this Section 6 for any legal
or other expenses subsequently incurred by such Indemnified Party in
connection with the defense thereof, other than reasonable costs of
investigation, unless the named
-11-
<PAGE> 12
parties to any such proceeding (including any impleaded parties)
include both the Indemnified Party and the Indemnifying Party and
representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between
them. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that
does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation. Each Indemnified
Party shall furnish such information regarding itself or the claim in
question as an Indemnifying Party may reasonably request in writing
and as shall be reasonably required in connection with defense of such
claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 6
is held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any loss, liability, claim, damage,
or expense referred to therein, then the Indemnifying Party, in lieu
of indemnifying such Indemnified Party hereunder, shall contribute to
the amount paid or payable by such Indemnified Party as a result of
such loss, liability, claim, damage, or expense in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party
on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions that resulted in such
loss, liability, claim, damage, or expense as well as any other
relevant equitable considerations. The relative fault of the
Indemnifying Party and of the Indemnified Party shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the
Indemnified Party and the parties' relative intent, knowledge, access
to information, and opportunity to correct or prevent such statement
or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the
underwriting agreement entered into in connection with the
underwritten public offering are in conflict with the foregoing
provisions, the provisions in the underwriting agreement shall
control.
7. Information by Holder. Each Holder of Registrable
Securities shall furnish to the Company such information regarding such Holder
and the distribution proposed by such Holder as the Company may reasonably
request in writing and as shall be reasonably required in connection with any
registration, qualification, or compliance referred to in this Agreement.
8. Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the Commission that may permit
the sale of the Restricted Securities to the public without registration, the
Company agrees to use its Commercially Reasonable Efforts to:
(a) make and keep public information regarding the
Company available as those terms are understood and defined in Rule
144 under the Securities Act, at all times from and after 90 days
following the effective date of the first registration under the
Securities Act filed by the Company for an offering of its securities
to the general public;
-12-
<PAGE> 13
(b) file with the Commission in a timely manner all
reports and other documents required of the Company under the
Securities Act and the Exchange Act at any time after it has become
subject to such reporting requirements; and
(c) so long as a Holder owns any restricted Registrable
Securities, furnish to the Holder forthwith upon written request a
written statement by the Company as to its compliance with the
reporting requirements of Rule 144 (at any time from and after 90 days
following the effective date of the first registration statement filed
by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of the Company, and such
other reports and documents so filed as a Holder may reasonably
request in availing itself of any rule or regulation of the Commission
allowing a Holder to sell any such securities without registration.
9. Transfer or Assignment of Registration Rights. The
rights to cause the Company to register securities granted to Santa Fe by the
Company under this Agreement may be transferred or assigned by Santa Fe only to
a transferee or assignee of Registrable Securities representing no less than
10% of the Company's then outstanding shares of Common Stock. Any transfer or
assignment of the registration rights granted under this Agreement shall be
conditioned upon (i) the Company's being given written notice at the time of or
within a reasonable time after said transfer or assignment, stating the name
and address of the transferee or assignee and identifying the securities with
respect to which such registration rights are being transferred or assigned and
(ii) the assumption in writing by the transferee or assignee of the obligations
of a Holder under this Agreement.
10. Allocation of Registration Opportunities. In any
circumstance in which all of the Registrable Securities requested to be
included in a registration on behalf of the Holders cannot be so included as a
result of limitations of the aggregate number of shares of Registrable
Securities that may be so included, the number of shares of Registrable
Securities that may be so included shall be allocated among the Holders
requesting inclusion of shares pro rata on the basis of the number of shares of
Registrable Securities held by such Holders. The Company shall not limit the
number of Registrable Securities to be included in a registration pursuant to
this Agreement in order to include shares held by stockholders with no
registration rights or, with respect to registrations under Section 2 hereof,
in order to include in such registration securities registered for the
Company's own account or securities other than Registrable Securities.
11. Delay of Registration. No Holder shall have any
right to take any action to restrain, enjoin, or otherwise delay any
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Agreement.
12. Termination of Registration Rights. The right of any
Holder to request registration or inclusion in any registration pursuant to
Section 2 or 3 hereof shall terminate on such
-13-
<PAGE> 14
date as all shares of Registrable Securities held or entitled to be held upon
conversion by such Holder may immediately be sold under Rule 144 during any
90-day period.
13. Securities Indemnification with Respect to the
Offering and Distribution.
(a) The Company shall release, indemnify, defend and hold
harmless Santa Fe and its subsidiaries and their respective directors,
officers, employees, agents and representatives from and against any
and all losses, claims, damages, liabilities, demands, suits and
actions (by any person), including all reasonable attorneys' fees and
disbursements and other costs and expenses incurred in connection
therewith (collectively, "Indemnifiable Losses"), relating to,
resulting from, or arising out of any Monterey Securities Liabilities
and any failure by the Company to comply with the terms and conditions
of this Agreement or (subject to any express limitations of liability
set forth therein) any other agreement executed in connection with the
Offering or a Distribution. No payment by the Company pursuant to
this Section shall be required until such time as the aggregate amount
which would be so payable exceeds [$ ], and at such time the
entire aggregate amount (and not only the excess over [$ ])
will become payable.
(b) Santa Fe shall release, indemnify, defend and hold
harmless the Company and its subsidiaries and the respective
directors, officers, employees, agents and representatives thereof
from and against any and all Indemnifiable Losses relating to,
resulting from, or arising out of any Santa Fe Securities Liabilities
and any failure by Santa Fe to comply with the terms and conditions of
this Agreement or (subject to any express limitations of liability set
forth therein) any other agreement executed in connection with the
Offering or a Distribution. No payment by Santa Fe pursuant to this
Section shall be required until such time as the aggregate amount
which would be so payable exceeds [$ ], and at such time the
entire aggregate amount (and not only the excess over [$ ])
will become payable.
(c) (i) If any person entitled to indemnification under
this Agreement (an "Indemnitee") receives notice of the assertion of
any claim or of the commencement of any action or proceeding by any
person that is not a party to this Agreement or a subsidiary of any
such party (a "Third Party Claim") against such Indemnitee, the
Indemnitee shall promptly provide written notice thereof (including a
description of the Third Party Claim and an estimate of any
Indemnifiable Losses (which estimate shall not be conclusive as to the
final amount of such Indemnifiable Losses)) to the party required to
provide indemnification under this Agreement (the "Indemnifying
Party") within 10 calendar days after the Indemnitee's receipt of
notice of such Third Party Claim. Any delay by the Indemnitee in
providing such written notice shall not relieve the Indemnifying Party
of any liability for indemnification hereunder except to the extent
that the rights of the Indemnifying Party are materially prejudiced by
such delay.
(ii) The Indemnifying Party shall have the right to
participate in or, by giving written notice to the Indemnitee, to
assume the defense of any Third Party Claim at such Indemnifying
Party's expense and by such Indemnifying Party's own counsel (which
shall be reasonably satisfactory to the Indemnitee), and the
Indemnitee will cooperate in good faith in such
-14-
<PAGE> 15
defense. The Indemnifying Party shall not be liable for any legal
expenses incurred by the Indemnitee after the indemnitee has received
notice of the Indemnifying Party's intent to assume the defense of a
Third Party Claim; provided, however, that if (i) the Indemnifying
Party fails to take steps reasonably necessary to diligently pursue the
defense of such Third Party Claim within 10 days of receipt of notice
from the Indemnitee that such steps are not being taken, (ii) the use
of counsel chosen by the Indemnifying Party would present such counsel
with a conflict of interest, (iii) the actual or potential defendants
in any such action or proceeding (including any impleaded parties)
include both the Indemnitee and the Indemnifying Party and the
Indemnitee shall have reasonably concluded, based on the advice of
counsel to the Indemnitee, that there may be one or more legal
defenses available to the Indemnitee which are different from or
additional to those available to the Indemnifying Party or (iv) the
Indemnifying Party shall authorize the Indemnitee to employ separate
counsel at the expense of the Indemnifying Party, the Indemnitee may
assume its own defense and the Indemnifying Party shall be liable for
the reasonable costs thereof.
(iii) The Indemnifying Party shall not settle any Third
Party Claim which it has elected to defend without the written
consent of the Indemnitee unless such settlement includes an
unconditional release of the Indemnitee from all liability arising
out of such Third Party Claim (which consent shall not be unreasonably
withheld). The Indemnified Party shall not settle any Third Party
Claim without the written consent of the Indemnifying Party unless the
Indemnifying Party elects not to defend such Third Party Claim.
(iv) In the event that a Third Party Claim involves a
proceeding as to which both Santa Fe and the Company may be
Indemnifying Parties, the parties hereto agree to cooperate in good
faith in a joint defense of such Third Party Claim.
(d) If the indemnification provided for in this Agreement
with respect to Monterey Securities Liabilities or Santa Fe Securities
Liabilities is for any reason held by a court or other tribunal to be
unavailable on policy grounds or otherwise, Santa Fe and the Company
shall contribute to the Indemnifiable Losses in such proportion as to
reflect each party's relative fault in connection with such
Indemnifiable Losses. The relative fault of the parties shall be
determined by reference to, among other things, whether the conduct or
information giving rise to the Indemnifiable Losses is attributable to
Santa Fe or the Company and each party's relative intent, access to
information and opportunity to prevent or correct the Indemnifiable
Losses. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who is not guilty of fraudulent
misrepresentation.
(e) So long as any books, records and files retained by
Santa Fe and its subsidiaries or the Company and its subsidiaries
relating to the present or past businesses, operations or assets of
the Company and its subsidiaries remain in existence and available,
Santa Fe and the Company shall have the right upon prior written
notice to inspect and copy the same at any time during business hours
for any proper purpose, provided that such right will not extend to
any books, records and files, disclosure of which in accordance
herewith would result in a waiver of the attorney-client, work product
or other privileges which permit non-disclosure of otherwise relevant
material in litigation or other proceedings, or which are subject on
the date hereof and at the time inspection is requested to a
nondisclosure agreement with a third party and a waiver cannot
reasonably be obtained, provided that, in the case of the Company,
such agreement relates only to the past businesses, operations or
assets of the Company and its subsidiaries held by Santa Fe and its
subsidiaries at the time of the Closing. Santa Fe and the Company
agree that neither they nor any of their subsidiaries shall destroy
any such books, records or files without reasonable notice to the
other party or if such party receives within 10 days of such notice
any reasonable objection from the other party to such destruction.
Except in the case of dispute between the parties hereto, Santa Fe
-15-
<PAGE> 16
and the Company shall cooperate with one another in a timely manner in
any administrative or judicial proceeding involving any matter
affecting the actual or potential liability of either party hereunder.
Such cooperation shall include, without limitation, making available
to the other party during normal business hours all books, records and
information, and officers and employees (without substantial
disruption of operations or employment) necessary or useful in
connection with any inquiry, audit, investigation or dispute, any
litigation or any other matter requiring any such books, records,
information, officers or employees for any reasonable business
purpose. The party requesting or otherwise entitled to any books,
records, information, officers or employees pursuant to this Section
13(e) shall bear all reasonable out-of-pocket costs and expenses
(except for salaries, employee benefits and general overhead) incurred
in connection with providing such books, records, information,
officers or employees. Notwithstanding the foregoing, the provisions
of this Section 13(e) shall not affect the rights and obligations of
the parties under the Agreement for Allocation of Federal Income Tax
Liability and State and Local Taxes among Members of the Santa Fe
Energy Resources, Inc. Affiliated Group and Agreement Concerning Taxes
and Tax Indemnification Upon Spin Off.
(f) Neither party may assign any of its rights or
delegate any of its duties under this Agreement without first
obtaining the prior written consent of the other party, which may be
withheld by such other party in its absolute discretion. This
Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and permitted assigns.
(g) The provisions of this Section are intended solely to
establish the relative rights and responsibilities between Santa Fe
and the Company, and except as set forth in the provisions of this
Agreement which expressly provide for the indemnification of
subsidiaries of Santa Fe or the Company, or the respective directors,
officers, employees, agents and representatives of Santa Fe, the
Company and the subsidiaries of Santa Fe and the Company, nothing in
this Agreement, expressed or implied, is intended or will be construed
to confer upon or give any person other than the parties hereto and
their respective successors and permitted assigns any rights, remedies
or obligations under or by reason of this Agreement or any transaction
contemplated hereby.
14. Miscellaneous.
14.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN
ALL RESPECTS BY THE INTERNAL LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO
THE CONFLICTS OF LAW PRINCIPLES THEREOF.
14.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
14.3 ENTIRE AGREEMENT. This Agreement constitutes the
full and entire understanding and agreement between the parties with regard to
the subjects hereof.
-16-
<PAGE> 17
14.4 NOTICES, ETC. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, or otherwise delivered by hand
or by messenger, including Federal Express or similar courier services,
addressed (a) if to a Holder, to such Holder c/o Santa Fe at 1616 South Voss,
Suite 1000, Houston, Texas 77057, Attention: President, or at such other
address as such Holder shall have furnished to the Company in writing, or (b)
if to the Company, to 5201 Truxtun, Suite 100, Bakersfield, California 93309,
Attention: Chief Executive Officer, or at such other address as the Company
shall have furnished to the Holders. Each such notice or other communication
shall for all purposes of this Agreement be treated as effective or having been
given when delivered if delivered personally, or, if sent by mail or courier,
at the earlier of its receipt or 48 hours after the same has been deposited in
a regularly maintained receptacle for the deposit of the United States mail,
addressed and mailed as aforesaid.
14.5 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which may be executed by less than all of the
Holders, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
14.6 SEVERABILITY. Whenever possible, each provision of
this Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability will
not affect such provision in any other jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
14.7 TITLES AND SUBTITLES. The titles and subtitles used
in this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
14.8 AMENDMENT. Except as expressly provided herein, this
Agreement may be amended only upon the written consent of the Company and the
Holders of at least seventy-five percent (75%) of the Registrable Securities
then subject to this Agreement.
-17-
<PAGE> 18
IN WITNESS WHEREOF, this Agreement has been executed effective
as of the date first set forth above.
MONTEREY RESOURCES, INC.
By:
------------------------------------
R. Graham Whaling,
Chief Executive Officer
SANTA FE ENERGY RESOURCES, INC.
By:
------------------------------------
James L. Payne,
Chief Executive Officer
-18-
<PAGE> 1
EXHIBIT 10.6
MONTEREY RESOURCES, INC.
INCENTIVE COMPENSATION PLAN
I. OBJECTIVES
The objectives of the Incentive Compensation Plan (the "Plan") are:
-- To communicate and focus management's attention on
significant business goals.
-- To identify and reward superior performance.
-- To provide a competitive compensation package to
attract and retain high quality key employees.
The Plan is intended to encourage key management to achieve and
surpass Company, group and individual objectives through establishing
annual objectives, reviewing performance and awarding cash bonuses
based on the achievement of such objectives.
The purposes of the Plan are to achieve strong business performance,
equitable compensation and a staff of high quality, motivated key
employees.
II. ADMINISTRATION
The Plan shall be under the direction of the Compensation and Benefits
Committee ("Committee") of the Board of Directors of Monterey
Resources, Inc. (the "Company").
However, the responsibility for ensuring that administrative
procedures are established for Plan operation, that the Plan is
managed in a timely and effective manner and that periodic analyses of
the Plan's effectiveness are undertaken shall be the duty of a Plan
Administrator appointed by the Committee, who need not be a member of
the Committee. The Plan Administrator shall report his findings,
conclusions and recommendations regarding the Plan's operation and
effectiveness to the Committee from time to time.
The Committee shall have such discretionary authority to administer
the Plan, to construe and interpret the Plan, to decide all questions
of eligibility, to determine the amount, manner and time of payment of
any benefits hereunder and to make all other determinations deemed
necessary or advisable for the administration of the Plan. The
attached Administrative Guidelines have been adopted by the Committee
and may be changed at any time by the Committee in its discretion.
<PAGE> 2
III. ELIGIBILITY
Eligible employees under the Plan are those key employees of the
Company and its subsidiaries who may have a substantial impact on the
operating performance of the Company and its subsidiaries.
Employment positions eligible for participation in the Plan each Plan
Year, and the assigned levels of participation for such positions,
shall be determined by the Committee based upon the recommendation of
the Plan Administrator. However, the Committee may modify such
recommendations in any manner it deems appropriate.
IV. INCENTIVE OPPORTUNITIES
The incentive award opportunity with respect to an eligible employment
position shall be designed to reflect the overall impact of the
position on Company performance and to provide a total cash
compensation package for such position that is in line with key
competitors of the Company.
V. BASIS FOR DETERMINING THE INCENTIVE AWARD
The incentive award may be based upon a combination of Company,
operating unit and/or individual results, in the Committee's
discretion.
The combination of factors, and the respective weights, used in
determining the maximum award for an eligible position will be
established by the Committee on an annual basis. The maximum award
with respect to an eligible position shall be expressed as a
percentage (which shall not be less than 20% or more than 100%) of the
participant's base salary at the beginning of the Plan Year. The
percentage applicable to an eligible position shall be determined by
the Committee. A participant's basis of participation in the Plan
will be communicated to him in writing as early as possible in the
Plan Year. However, incentive awards may be increased by up to 25% at
the discretion of the Committee or reduced or eliminated in certain
instances pursuant to Article VII and/or VIII.
VI. PERFORMANCE OBJECTIVES
Performance objectives are intended to support the strategic mission
of the Company and shall be:
-- Specific and based upon measurable results,
-- Challenging, but attainable, and
-- Tailored to each position.
-2-
<PAGE> 3
The basis and amount of the incentive award to be provided for
different levels of performance will be established at the beginning
of the Plan Year for each participating position. A performance
schedule for each specific objective shall be established by the
Committee to indicate the award payable at varying levels of
performance. Performance objectives may be revised at any time by the
Committee in light of unanticipated or extraordinary events.
Specific objectives will be based primarily on the Company's business
plans and competitive levels of performance. For any specific
performance objective, the award payable (as a percent of the maximum)
for a given level of performance will be consistent throughout the
Plan.
The Committee may assign objectives, based upon the recommendation of
the Plan Administrator, which are appropriate to the managerial impact
of each participant's position. As appropriate, the individual
objectives may include departmental, district or combined operating
unit performance objectives.
Performance objectives may include, among others:
-- Earnings per share,
-- Pre-tax Income and Cash Flow,
-- Operating Expenses Control,
-- Capital Spending Control,
-- Reserve Additions,
-- Reservoir Management,
-- Prospect Development, and
-- Land Management.
VII. PERFORMANCE
Performance will be reviewed at appropriate intervals as financial and
operating results are available. At the end of each Plan Year, the
determination of the achievement of the objectives for such Plan Year
and the payment of awards earned will occur as soon as practicable
after the compilation of the year-end financial and operating results.
All financial and operating results will be reviewed by the Controller
of the Company and the achievement of all individual objectives shall
be approved by the Chief Executive Officer of the Company prior to the
recommendation to the Committee of the payment of awards by the Plan
Administrator. The Committee has the authority to approve all awards
recommended for payment.
At the discretion of the Committee, incentive awards, either
individually or collectively, may be increased, decreased, or
completely eliminated at any time during a Plan Year or after the end
of the Plan Year but before payment on the basis of the following
considerations:
-3-
<PAGE> 4
-- Company performance relative to its competitors,
-- Balancing of long-term versus short-term
considerations,
-- Handling of unforeseen opportunities and obstacles, or
-- Overall individual performance.
VIII. AWARD PAYMENTS
Payment of earned awards will be made as soon as possible after the
close of each Plan Year upon the approval of the Committee and may
include the receipt of a stock-based award under a stock plan of the
Company in lieu of cash under this Plan. Payments will be subject to
all applicable tax withholding requirements.
If a participant's employment terminates during a Plan Year, whether
voluntarily or involuntarily, the participant shall forfeit all rights
to any incentive award for the Plan Year, unless the Committee, in its
discretion, elects to pay all or a portion of the award. If a
participant voluntarily resigns after the Plan Year-end, but before
award payout, the participant shall be entitled to the incentive award
payment, if any, he would be eligible to receive pursuant to Article
VII.
In the discretion of the Committee and the election of the participant
- made irrevocably prior to the beginning of the applicable Plan Year
- all or a portion of an incentive award for a Plan Year may be
deferred until a future date or event. The methods of deferment and
subsequent payment shall be determined by the Committee.
IX. COMMUNICATIONS
The effectiveness of the Plan depends upon participants fully
understanding the purpose of the Plan, the performance objectives and
the administration of the Plan. It shall be the responsibility of the
Plan Administrator to ensure that all aspects of the Plan are
presented to and understood by the participants.
X. CHANGE IN CONTROL
A "Change in Control" shall be deemed to have occurred if:
(a) any "person," as such term is used in Section 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than any trustee or other fiduciary
holding securities under an employee benefit plan of Santa Fe
Energy Resources, Inc. ("SFER"), or any affiliate thereof, or
any company owned, directly or indirectly, by the stockholders
of SFER in substantially the same proportions as their
ownership of stock of SFER), is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of SFER
-4-
<PAGE> 5
representing 25% or more of the combined voting power of
SFER's then outstanding securities;
(b) during any period of two consecutive years (not including any
period prior to the effective date of this provision),
individuals who at the beginning of such period constitute the
Board of Directors of SFER, and any new director (other than a
director designated by a person who has entered into an
agreement with SFER to effect a transaction described in
clause (a), (c) or (d) of this definition) whose election by
the Board of Directors of SFER or nomination for election by
SFER's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose
election or nomination for election was previously so
approved, cease for any reason to constitute at least a
majority thereof;
(c) the stockholders of SFER approve a merger or consolidation of
SFER with any other company other than (i) a merger or
consolidation which would result in the voting securities of
SFER outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more
than 65% of the combined voting power of the voting securities
of SFER (or such surviving entity) outstanding immediately
after such merger or consolidation, or (ii) a merger or
consolidation effected to implement a recapitalization of SFER
(or similar transaction) in which no "person" (as hereinabove
defined) acquires more than 25% of the combined voting power
of SFER's then outstanding securities; or
(d) the stockholders of SFER adopt a plan of complete liquidation
of SFER or approve an agreement for the sale or disposition by
the Company of all or substantially all of SFER's assets. For
purposes of this clause (d), the term "the sale or disposition
by SFER of all or substantially all of SFER's assets" shall
mean a sale or other disposition transaction or series of
related transactions involving assets of SFER or of any direct
or indirect subsidiary of SFER (including the stock of any
direct or indirect subsidiary of SFER) in which the value of
the assets or stock being sold or otherwise disposed of (as
measured by the purchase price being paid therefor or by such
other method as the Board of Directors of SFER determines is
appropriate in a case where there is no readily ascertainable
purchase price) constitutes more than two-thirds of the fair
market value of SFER (as hereinafter defined). For purposes
of the preceding sentence, the "fair market value of SFER"
shall be the aggregate market value of the outstanding shares
of common stock of SFER (on a fully diluted basis) plus the
aggregate market value of SFER's other outstanding equity
securities. The aggregate market value of the shares of common
stock of SFER shall be determined by multiplying the number of
shares of SFER's common stock (on a fully diluted basis)
outstanding on the date of the execution and delivery of a
definitive agreement with respect to the transaction or series
of related transactions (the
-5-
<PAGE> 6
"Transaction Date") by the average closing price of the shares
of common stock of SFER for the ten trading days immediately
preceding the Transaction Date. The aggregate market value of
any other equity securities of SFER shall be determined in a
manner similar to that prescribed in the immediately preceding
sentence for determining the aggregate market value of the
shares of common stock of SFER or by such other method as the
Board of Directors of SFER shall determine is appropriate.
(e) If SFER ceases to own 80% of the combined voting power of the
then outstanding voting securities of the Company, the term
"Company" shall be substituted for SFER as used in this
definition of "Change in Control;" provided, however, as long
as SFER owns 35% or more of the combined voting power of the
voting securities of the Company, the above "Change in
Control" definition shall be applied separately with respect
to SFER and with respect to the Company as substituted for
SFER in the definition, and a Change in Control with respect
to either SFER or the Company in such situation shall be a
Change in Control for purposes of this Plan. Notwithstanding
anything herein to the contrary, a distribution by SFER to its
stockholders of its interest in such voting securities of the
Company shall not constitute a Change in Control.
In the event that a Change in Control occurs, the performance
objectives established pursuant to Section VI hereof for the year
during which the Change in Control occurred shall be deemed to have
been met in full at the maximum performance level so established, and
each participant shall be entitled to receive a bonus in respect of
the year in which such Change in Control occurs; provided, however,
that if a participant's employment is terminated prior to December 31
of such year, such participant shall be entitled to a prorated bonus,
the amount of which shall be determined by multiplying the bonus which
he would have been entitled had he remained employed until December 31
by a fraction, the numerator of which is the number of days in such
year through the date of the participant's termination of employment,
and the denominator of which is 365.
XI. TERMINATIONS OR AMENDMENT
The Plan may be terminated or amended at any time by the Board of
Directors of the Company.
XII. EFFECTIVE DATE
This Plan is effective as of January 1, 1997.
-6-
<PAGE> 7
ATTACHMENT A
ADMINISTRATIVE GUIDELINES
1. An employee's participation in the Plan will be based upon the
calendar months in which the employee held a position eligible for
participation during a Plan Year.
2. The employee must be in an eligible position on the 1st day of the
month in order to participate in the Plan for that month.
3. Except as provided for in the Plan, an employee must be on the active
payroll on the last day of the Plan Year in order to participate for
any portion of that year.
4 If a participant transfers between eligible positions under the Plan
during the Plan Year, his/her participation will be based on full
months of participation in each position at the participation levels
established for each position.
5. New hires or employees who first assume an eligible position on
October 1st or later in a given Plan Year are not eligible for
participation in that Plan Year.
6. Nothing contained in these Administrative Guidelines will take
precedence over specific decisions rendered by the Committee
concerning eligibility, participation, or other Plan administration
policies and practices.
-7-
<PAGE> 1
EXHIBIT 10.7
MONTEREY RESOURCES, INC.
1996 INCENTIVE STOCK COMPENSATION PLAN
FOR KEY EMPLOYEES
STATEMENT OF PURPOSE
One purpose of the Monterey Resources, Inc. 1996 Incentive
Stock Option Compensation Plan For Key Employees (the "Plan") is to encourage
superior performance by employees, by allowing the Board of Directors of
Monterey Resources, Inc. ("MRI") to award several forms of incentive
compensation to employees of the Company. By providing incentive compensation
commensurate and competitive with that provided by other companies, the Plan
should also assist MRI in attracting and retaining the services of qualified
and capable employees.
In order to further the identity of interest of employees with
the stockholders of MRI, all of the forms of compensation under the Plan
relate to MRI Common Stock. Employees' success in enhancing stockholder value
will translate directly into an enhanced benefit for the employee.
An additional purpose of the Plan is to encourage the
Directors to own shares of the Company's stock and thereby to align their
interests more closely with the interests of the other stockholders of MRI, to
encourage the highest level of Director performance by providing the Directors
with a direct interest in MRI's attainment of its financial goals, and to
provide a financial incentive that will help attract and retain the most
qualified Directors.
Notwithstanding anything in the Plan or any Award agreement to
the contrary, no Award shall become exercisable or payable (even if vested)
prior to the first anniversary of the date the Company is spunoff by Santa Fe
Energy Resources, Inc. (or during such additional period, if any, as may be
recommended by counsel to the Company as necessary or helpful to the tax-free
status of the spinoff); provided, however, the foregoing restriction shall not
apply to a Participant whose employment or Board membership terminates due to
death or Disability and such restriction shall also lapse upon a Change in
Control.
I. DEFINITIONS
Unless the context indicates otherwise, the following terms have the
meanings set forth below:
"Acceleration Date" means the earliest date on which any of
the following events shall first have occurred: (i) the acquisition
described in clause (a) of the definition of
<PAGE> 2
"Change in Control" contained in this Section I, (ii) the change in
the composition of the Board of Directors described in clause (b) of
such definition, or (iii) the stockholder approval or adoption
described in clause (c) or (d) of such definition.
"Award" means a grant of Options, Director Options, Restricted
Stock, Phantom Units, Bonus Stock or Stock Appreciation Rights
pursuant to the Plan.
"Board" means the Board of Directors of MRI.
"Bonus Stock" means Common Stock, which is not subject to a
Restricted Period, awarded by the Committee pursuant to the Plan.
"Cause" means (a) the willful and continued failure by the
Participant (other than a Director) to substantially perform his
duties with the Company (other than any such failure resulting from
his incapacity due to physical or mental illness), or (b) the willful
engaging by the Participant (other than a Director) in conduct which
is demonstrably and materially injurious to the Company, monetarily or
otherwise. For purposes of this definition, no act, or failure to
act, shall be deemed "willful" unless done, or omitted to be done, by
the Participant not in good faith and without reasonable belief that
his action or omission was in the best interest of the Company.
A "Change in Control" shall be deemed to have occurred if:
(a) any "person," as such term is used in Section 13(d)
and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), other than any trustee
or other fiduciary holding securities under an
employee benefit plan of SFER or an affiliate, or any
company owned, directly or indirectly, by the
stockholders of SFER in substantially the same
proportions as their ownership of stock of SFER), is
or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of SFER representing 25% or
more of the combined voting power of SFER's then
outstanding securities;
(b) during any period of two consecutive years (not
including any period prior to the effective date of
this provision), individuals who at the beginning of
such period constitute the Board of Directors of
SFER, and any new director (other than a director
designated by a person who has entered into an
agreement with SFER to effect a transaction described
in clause (a), (c) or (d) of this definition) whose
election by the Board of Directors of SFER or
nomination for election by SFER's stockholders was
approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were
directors at the beginning of the period or whose
election or nomination for
-2-
<PAGE> 3
election was previously so approved, cease for any
reason to constitute at least a majority thereof;
(c) the stockholders of SFER approve a merger or
consolidation of SFER with any other company other
than (i) a merger or consolidation which would result
in the voting securities of SFER outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the surviving
entity) more than 65% of the combined voting power of
the voting securities of SFER (or such surviving
entity) outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation
effected to implement a recapitalization of SFER (or
similar transaction) in which no "person" (as
hereinabove defined) acquires more than 25% of the
combined voting power of SFER's then outstanding
securities; or
(d) the stockholders of SFER adopt a plan of complete
liquidation of SFER or approve an agreement for the
sale or disposition by SFER of all or substantially
all of SFER's assets. For purposes of this clause
(d), the term "the sale or disposition by SFER of all
or substantially all of SFER's assets" shall mean a
sale or other disposition transaction or series of
related transactions involving assets of SFER or of
any direct or indirect subsidiary of SFER (including
the stock of any direct or indirect subsidiary of
SFER) in which the value of the assets or stock being
sold or otherwise disposed of (as measured by the
purchase price being paid therefor or by such other
method as the Board of Directors of SFER determines
is appropriate in a case where there is no readily
ascertainable purchase price) constitutes more than
two-thirds of the fair market value of SFER (as
hereinafter defined). For purposes of the preceding
sentence, the "fair market value of SFER" shall be
the aggregate market value of the outstanding shares
of common stock of SFER (on a fully diluted basis)
plus the aggregate market value of SFER's other
outstanding equity securities. The aggregate market
value of the shares of common stock of SFER shall be
determined by multiplying the number of shares of
SFER's common stock (on a fully diluted basis)
outstanding on the date of the execution and delivery
of a definitive agreement with respect to the
transaction or series of related transactions (the
"Transaction Date") by the average closing price of
the shares of common stock of SFER for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of SFER shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of the shares of common stock of SFER or
by such other method as the Board shall determine is
appropriate.
-3-
<PAGE> 4
(e) If SFER ceases to own 80% of the combined voting
power of the then outstanding voting securities of
the Company, the term "Company" shall be substituted
for SFER as used in this definition of "Change in
Control" and all other appropriate places; provided,
however, as long as SFER owns 35% or more of the
combined voting power of the voting securities of the
Company, the above "Change in Control" definition
shall be applied separately with respect to SFER and
with respect to the Company as substituted for SFER
in the definition, and a Change in Control with
respect to either SFER or the Company in such
situation shall be a Change in Control for purposes
of this Plan. Notwithstanding anything herein to the
contrary, a distribution by SFER to its stockholders
of its interest in such voting securities of the
Company shall not constitute a Change in Control.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation and Benefits Committee of
the Board.
"Common Stock" means the common stock, $0.01 par value, of MRI.
"Company" means collectively MRI, its parent and all companies
in which MRI owns, directly or indirectly, more than 50% of the voting
stock.
"Director" means a member of the Board who is not also an
employee of the Company.
"Director Option" means an option to purchase shares of Common
Stock granted pursuant to Section XVIII.
"Disability" means the inability of a Participant to continue
to perform the duties of his or her employment with the Company or as
a member of the Board, as the case may be, as determined by the
Committee.
"Dividend Equivalents" means, with respect to an Option or
Phantom Unit, an amount equal to the amount of any dividends that are
declared and become payable after the Grant Date for such Award and on
or before the date such Award is exercised, paid or forfeited, as the
case may be.
"Fair Market Value" means the average of high and low (or bid
and ask, if applicable) price per share of the Common Stock on the
applicable date (or if there are no transactions on that date, the
last preceding date on which there were transactions) in the principal
market in which the Common Stock is traded, as reported in The Wall
Street Journal, or the fair market value per share as determined by
the Committee in good faith, using any fair and reasonable means for
this purpose.
-4-
<PAGE> 5
"Grant Date" as used with respect to a particular Award means
the date as of which such Award is granted pursuant to the Plan.
"Option" means an option, other than a Director Option, to
purchase shares of Common Stock granted by the Committee pursuant to
the Plan, which may be designated as either an "Incentive Stock
Option" or a "Non-Qualified Stock Option."
"Incentive Stock Option" means an Option that is intended to
qualify as an Incentive Stock Option as described in Section 422 of
the Code.
"Non-Qualified Stock Option" means an Option granted pursuant
to the Plan, other than an Incentive Stock Option.
"Participant" means any key employee of the Company or
Director who has an Award outstanding under the Plan.
"Phantom Unit" means a right to receive upon the achievement
of specified performance goals a payment from the Company in an amount
equal to a specified percentage of the Fair Market Value of a share of
Common Stock on the date on which such right becomes payable.
"Plan" means the Monterey Resources, Inc. 1996 Incentive Stock
Compensation Plan for Key Employees as set forth herein and as may be
amended from time to time.
"Restricted Period" means the period of time for which
Restricted Stock and/or Phantom Units are subject to forfeiture
pursuant to the Plan or during which Options and Stock Appreciation
Rights are not exercisable.
"Restricted Stock" means Common Stock subject to a Restricted
Period which is granted pursuant to the Plan.
"Retirement" means an employee's leaving the employment of the
Company, other than for Cause, after attaining age 55 and completing
five years of service with the Company. With respect to a Director,
"Retirement" means ceasing to be a member of the Board on or after
reaching age 65.
"SFER" means Santa Fe Energy Resources, Inc.
"Stock Appreciation Right" means the right, granted by the
Committee pursuant to the Plan, to receive a payment equal to the
increase in the Fair Market Value of a share of Common Stock
subsequent to the Grant Date of such Award.
-5-
<PAGE> 6
II. STOCK AND PHANTOM UNITS SUBJECT TO THE PLAN
Subject to adjustment as provided in the Plan, the maximum aggregate
number of shares of Common Stock with respect to which Options,
Director Options, Restricted Stock, Bonus Stock, Phantom Units and
Stock Appreciation Rights may be granted from time to time under the
Plan is 3,000,000; provided, however, no more than 500,000 shares of
Common Stock shall be issued as Restricted Stock. The Common Stock
issued under the Plan may be either previously authorized but unissued
shares or treasury shares acquired by MRI. In the event that any
Award expires, lapses, is forfeited or otherwise terminates, any
shares of Common Stock allocable to the terminated portion of such
Award may again be made subject to an Award under the Plan. Further,
to the extent an Award is paid in cash, rather than in Common Stock,
or shares of Common Stock are tendered to the Company, or withheld by
the Company from an Award, as payment of the exercise price of an
Award or in satisfaction of any Company tax withholding obligation,
such shares of Common Stock may again be made subject to an Award
(other than Incentive Stock Options) under the Plan.
III. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. The members of the
Committee shall not be eligible to participate in the Plan, except as
provided in Section XVIII. The Committee shall select from time to
time those employees to be granted Awards under the Plan. The
Committee shall also determine the terms and provisions of Awards,
which need not be identical. The Committee shall grant all Awards.
The Committee shall construe the Plan, prescribe and rescind rules and
regulations relating to the Plan and make all other determinations
deemed necessary or advisable for the administration of the Plan,
subject to the limitations of Section XXII.
IV. ELIGIBILITY
Subject to the discretion of the Committee, all officers and other key
employees of the Company who have responsibility for the growth and
profitability of the Company are eligible to receive Awards under the
Plan; provided, however, no employee may receive in any calendar year
an Award or Awards of Options and/or Stock Appreciation Rights with
respect to more than 1,000,000 shares of Common Stock. Directors
shall automatically participate in the Plan as provided in Section
XVIII.
V. OPTIONS
The Committee may, from time to time and subject to the provisions of
the Plan, grant Awards of Options to key employees of the Company to
purchase shares of Common Stock. Any Options granted may be
designated as either Incentive Stock Options or as Non-Qualified Stock
Options, or the Committee may designate a portion of an Award as
"Incentive Stock Options" and the remaining portion as "Non-Qualified
Stock Options." Any
-6-
<PAGE> 7
portion of an Award that is not designated as "Incentive Stock
Options" shall be "NonQualified Stock Options" and shall not be
subject to the requirements of Section VI of the Plan. The Committee
may grant replacement or substitution options (or Stock Appreciation
Rights) to affected employees in conjunction with any Company merger,
consolidation, purchase or acquisition of property or stock, spinoff
or other distribution of stock or property, reorganization, or partial
or complete liquidation, on such terms as the Committee deems
equitable.
The purchase price of the Common Stock subject to any Options shall be
determined by the Committee, but, except with respect to a replacement
Option, may not be less than 100% of the Fair Market Value of the
Common Stock on the Grant Date. Such price shall be subject to
adjustment as provided in Section XIII of the Plan.
The Committee may include in each agreement evidencing the Option
grant a provision stating that the Option granted therein may not be
exercised in whole or in part for such period(s) of time specified in
such agreement, and may further limit the exercisability of the Option
in such manner as the Committee deems appropriate, including, without
limitation, the achievement of performance goals. The Committee may,
in its discretion, at any time and from time-to-time accelerate the
exercisability of all or part of any Option.
The period of any Option, which is the time period during which the
Option may be exercised, shall be determined by the Committee and
shall not extend more than ten years after the Grant Date.
Each grant will specify the number of shares of Common Stock to which
it pertains and whether Dividend Equivalents are awarded with respect
to the Option, and, if awarded, the payment or crediting of such
Dividend Equivalents.
Options granted to a key employee who is an officer of the Company
may, in the discretion of the Committee, provide for an automatic
"reload" grant upon the exercise of the Option, with such terms and
conditions on any such reload grant as the Committee may choose,
provided, however, the option price may not be less than 100% of the
Fair Market Value per share on the Grant Date of the reload option and
its term may not exceed the remaining term for the exercised option.
Options shall not be transferable other than by will or the laws of
descent and distribution during the Participant's lifetime shall be
exercisable only by the Participant.
Termination for Cause, as defined in Section I, shall result in
forfeiture of all outstanding Options. Termination by the Company for
any reason other than Cause (including terminations pursuant to formal
severance programs sponsored by the Company or an affiliate), or
terminations by reason of death, Disability or Retirement, shall
result in a lapse
-7-
<PAGE> 8
of all or a proportion of the Restricted Period applicable to any
outstanding Award as set forth in Section XI.
A person electing to exercise an Option shall give written notice of
such election to the Company in such form as the Committee may
require. Upon exercise of an Option, the full option purchase price
for the shares with respect to which the Option is being exercised
shall be payable to the Company (i) in cash or by check payable and
acceptable to the Company or (ii) subject to the approval of the
Committee, (a) by tendering to the Company shares of Common Stock
owned by such person having an aggregate Fair Market Value as of the
date of exercise and tender that is not greater than the full option
purchase price for the shares with respect to which the Option is
being exercised and by paying any remaining amount of the option
purchase price as provided in (i) above (provided that the Committee
may, upon confirming that such person owns the number of additional
shares being tendered, authorize the issuance of a new certificate for
the number of shares being acquired pursuant to the exercise of the
Option less the number of shares being tendered upon the exercise and
return to such person (or not require surrender of) the certificate
for the shares being tendered upon the exercise) or (b) by such person
delivering to the Company a properly executed exercise notice together
with irrevocable instructions to a broker to promptly deliver to the
Company cash or a check payable and acceptable to the Company to pay
the option purchase price and any withholding taxes; provided that in
the event such person chooses to pay the option purchase price and
withholding taxes as provided in (ii)(b) above, such person and the
broker shall comply with such procedures and enter into such
agreements of indemnity and other agreements as the Committee shall
prescribe as a condition of such payment procedure. Payment
instruments will be received subject to collection.
Notwithstanding any other provision in the Plan, if a Change in
Control occurs while unexercised Options, and Stock Appreciation
Rights relating thereto, remain outstanding under the Plan, then from
and after the Acceleration Date, all Options and Stock Appreciation
Rights shall be exercisable in full, whether or not otherwise
exercisable.
VI. INCENTIVE STOCK OPTIONS
An Option designated by the Committee as an "Incentive Stock Option"
is intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Code and shall satisfy, in addition to
the conditions of Section V, the conditions set forth in this Section
VI.
The purchase price of the Common Stock subject to an Incentive Stock
Option shall be the greater of the Fair Market Value of the Common
Stock on the Grant Date or the "fair market value" of the Common Stock
as such term is used for purposes for Section 422(b)(4) of the Code.
-8-
<PAGE> 9
An Incentive Stock Option shall not be granted to an employee who, on
the Grant Date, owns stock possessing more than ten percent of the
total combined voting power of all classes of stock of SFER, or of its
parent or subsidiary corporations.
VII. RESTRICTED STOCK
The Committee may, from time to time and subject to the provisions of
the Plan, grant Awards of Restricted Stock to employees of the
Company; provided, however, no employee may receive in any calendar
year Restricted Stock Awards with respect to more than 500,000 shares
of Common Stock.
The Committee shall, at the time shares of Restricted Stock are
granted, designate the Restricted Period and the performance goals, if
any, of the Company with respect to such Award. Such goals must be
achieved (and certified by the Committee) in order for a Participant
to receive the unrestricted shares of Common Stock at the designated
time.
With respect to any Restricted Stock Award that is intended to meet
the requirements of Section 162(m) of the Code, the performance goal
or goals for such Award shall be with respect to one or more of the
following: earnings per share; earnings before interest, taxes,
depreciation and amortization expenses ("EBITDA"); earnings before
interest and taxes ("EBIT"); EBITDA, EBIT or earnings before taxes and
unusual or nonrecurring items as measured either against the annual
budget or as a ratio to revenue; market share; sales; costs; return on
equity; operating cash flow; production volumes compared to plan or
prior years; reserves added; discretionary cash flow; return on net
capital employed and/or stock price performance. The goals can be
applied, where appropriate, with respect to an individual, a business
unit or the Company as a whole and need not be based on increases or
positive results, but can be based on maintaining the status quo or
limiting economic losses, for example. Which goals to use with
respect to such Award, the weighting of the goals if more than one is
used, and whether the goal is to be measured against a
Company-established budget or target, an index or a peer group of
companies, shall also be determined by the Committee at the time of
grant of the Award.
Each certificate representing Restricted Stock awarded under the Plan
shall be registered in the name of the Participant and, during the
Restricted Period, shall be left on deposit with the Company with a
stock power endorsed in blank. Participants shall have the right to
receive dividends paid on their Restricted Stock and to vote such
shares. Restricted Stock may not be sold, pledged, assigned,
transferred or encumbered during the Restricted Period other than by
will or the laws of descent and distribution.
Termination for Cause, as defined in Section I, shall result in
forfeiture of all outstanding Restricted Stock. Termination by the
Company for any reason other than Cause (including terminations
pursuant to formal severance programs sponsored by the Company or an
affiliate), or termination by reason of death, Disability or
Retirement, shall result in a lapse
-9-
<PAGE> 10
on all or a portion of the Restricted Period applicable to any
outstanding Award as set forth in Section XI.
Notwithstanding any other provisions in the Plan, if a Change in
Control occurs while any shares of Restricted Stock remain subject to
restrictions relating thereto, then from and after the Acceleration
Date, (1) all such restrictions and all Restricted Periods shall lapse
and (2) no later than the fifth day following the Acceleration Date,
any Restricted Stock theretofore granted a Participant shall be
delivered to the Participant.
VIII. STOCK APPRECIATION RIGHTS
The Committee may, from time to time and subject to the provisions of
the Plan, grant Awards of Stock Appreciation Rights to employees of
the Company subject to the limitation in Section II. An Award of
Stock Appreciation Rights, in the Committee's discretion, may or may
not be made in tandem with the grant of an Option, and need not be
granted at the same time as the Option grant to be made in tandem with
the Option grant.
The period of any Stock Appreciation Right, which is the time period
during which the Stock Appreciation Right may be exercised, shall be
determined by the Committee and shall not extend more than ten years
after the Grant Date or, if in tandem with an Option, the period of
such Option.
Stock Appreciation Rights shall not be transferable other than by will
or the laws of descent and distribution and during the Participant's
lifetime shall be exercisable only by the Participant.
Termination for Cause, as defined in Section I, shall result in
forfeiture of all outstanding Stock Appreciation Rights. Termination
by the Company for any reason other than Cause (including terminations
pursuant to formal severance programs sponsored by the Company or an
affiliated company), or termination by reason of death, Disability or
Retirement, shall result in a lapse on all or a portion of the
Restricted Period applicable to any outstanding Award as set forth in
Section XI.
Subject to any restrictions or conditions imposed by the Committee,
upon the exercise of a Stock Appreciation Right, the Company shall pay
the amount, if any, by which the Fair Market Value of a share of
Common Stock on the date of exercise exceeds the Fair Market Value of
a share of Common Stock on the Grant Date. The amount payable by the
Company upon the exercise of a Stock Appreciation Right may be paid in
cash or in shares of Common Stock or in any combination thereof as the
Committee, in its sole discretion, shall determine, but no fractional
shares shall be issuable pursuant to any Stock Appreciation Right.
A person electing to exercise a Stock Appreciation Right shall give
written notice of such election to the Company in such form as the
Committee may require. The exercise of Stock
-10-
<PAGE> 11
Appreciation Rights or Options granted in tandem will result in an
equal reduction in the number of corresponding Options or Stock
Appreciation Rights which were granted in tandem with such Stock
Appreciation Rights and Options.
The Change in Control provisions in Section V, concerning Options and
Stock Appreciation Rights granted in tandem with an Option, shall also
apply to Stock Appreciation Rights that are not granted in tandem with
Options.
IX. PHANTOM UNITS
The Committee may, from time to time and subject to the provisions of
the Plan, grant Awards of Phantom Units to employees of the Company;
provided, however, no employee may receive in any calendar year
Phantom Unit Awards with respect to more than 500,000 shares of Common
Stock. Each grant will specify the number of Phantom Units to which
it pertains and the payment or crediting of any Dividend Equivalents
with respect to such Phantom Units. Phantom Units may not be sold,
pledged, assigned, transferred or encumbered during the Restricted
Period, other than by will or the laws of descent and distribution.
The Committee shall, at the time Phantom Units are granted, designate
the Restricted Period and the performance goals, if any, of the
Company with respect to such Award. Such goals must be achieved (and
certified by the Committee) in order for a Participant to receive the
value of the Phantom Units at the designated time. To the extent
earned in accordance with this Section and the grant of such Award,
all such Phantom Units must be paid as soon as practicable following
the end of the Restricted Period in cash or in shares of Common Stock
or in any combination thereof as the Committee, in its sole discretion
shall determine, but no fractional shares shall be issuable pursuant
to any Phantom Unit.
With respect to any Phantom Unit Award that is intended to meet the
requirements of Section 162(m) of the Code, the performance goal or
goals for such Award shall be with respect to one or more of the
following: earnings per share; earnings before interest, taxes,
depreciation and amortization expenses ("EBITDA"); earnings before
interest and taxes ("EBIT"); EBITDA, EBIT or earnings before taxes and
unusual or nonrecurring items as measured either against the annual
budget or as a ratio to revenue; market share; sales; costs; return on
equity; operating cash flow; production volumes compared to plan or
prior years; reserves added; discretionary cash flow; return on net
capital employed and/or stock price performance. The goals can be
applied, where appropriate, with respect to an individual, a business
unit or the Company as a whole and need not be based on increases or
positive results, but can be based on maintaining the status quo or
limiting economic losses, for example. Which goals to use with
respect to such Award, the weighting of the goals if more than one is
used, and whether the goal is to be measured against a
Company-established budget or target, an index or a peer group of
companies, shall also be determined by the Committee at the time of
grant of the Award.
-11-
<PAGE> 12
At the discretion of the Committee, Phantom Units (other than those
intended to meet the requirements of Section 162(m) of the Code) may
at any time be converted into NonQualified Stock Options, Bonus Stock
or shares of Restricted Stock or any combination thereof having a
value, as determined in the good faith judgment of the Committee,
substantially equal to the value of the Phantom Units so converted.
Termination for Cause, as defined in Section I, shall result in
forfeiture of all outstanding Phantom Units. Termination by the
Company for any reason other than Cause (including terminations
pursuant to formal severance programs sponsored by the Company or an
affiliate), or termination by reason of death, Disability or
Retirement, shall result in a lapse on all or a proportion of the
Restricted Period applicable to any outstanding Award as set forth in
Section XI.
Notwithstanding any other provisions in the Plan, if a Change in
Control occurs while any Phantom Units remain outstanding, then from
and after the Acceleration Date, (1) all designated goals shall be
deemed to have been met and (2) no later than the fifth day following
the Acceleration Date, the full value of all such Phantom Units shall
be paid to the Participant in cash.
X. CONTINUED EMPLOYMENT
Participation in the Plan shall confer no rights to continued
employment with the Company, nor shall it restrict the rights of the
Company to terminate a Participant's employment relationship at any
time.
XI. TERMINATION OF EMPLOYMENT
In the event of a Participant's termination of employment with the
Company by reason of death, the Restricted Period shall lapse on all
of the Participant's outstanding Awards.
In the event of a Participant's termination of employment with the
Company by reason of Disability, Retirement or by the Company for any
reason other than Cause, a portion of all of the Participant's
outstanding Awards shall be immediately forfeited to the extent not
then otherwise vested. The portion of an Award forfeited shall be a
fraction, the denominator of which is the total number of months of
any Restricted Period applicable to the Award (rounded up to the
nearest whole month) and the numerator of which is the number of
months remaining in such Restricted Period (rounded up to the nearest
whole month) as of the termination of employment.
Unless the Committee directs the acceleration of the payment of that
portion of an Award of Phantom Units or Restricted Stock that is not
automatically forfeited as provided above upon the Participant's
termination of employment such Phantom Units and Restricted Stock
shall be payable or issued, as the case may be, at the end of the
Restricted Period applicable
-12-
<PAGE> 13
to such Awards, but only to the extent otherwise payable pursuant to
the Award Agreement evidencing such Phantom Units or Restricted Stock,
e.g., the goals, if any, for such Award are achieved. However, the
Committee shall not accelerate the payment of any Award intended to
qualify under Section 162(m). Any Awards not payable or earned at the
end of such Restricted Period, as provided above, shall be forfeited
at such time.
Phantom Units and Restricted Stock upon which the Restricted Period
lapse as provided above shall be paid or issued to the Participant or,
in the case of death prior to such payment or issuance, to the
Participant's designated beneficiary, or in the absence of such
designation, to the person to whom the Participant's rights pass by
will or the laws of descent and distribution.
Options and Stock Appreciation Rights which are or become exercisable
at the time of a Participant's termination of employment with the
Company (i) by reason of Disability or Retirement or by the Company
for any reason other than Cause, may be exercised by the Participant
within three years following such termination of employment and (ii)
for any reason other than Cause, death or a reason specified in (i),
may be exercised by the Participant within three months following such
termination, but, in either event, not after the expiration of the
period of the Option or Stock Appreciation Right. Options and Stock
Appreciation Rights which are or become exercisable at the time of a
Participant's termination of employment with the Company by reason of
death, may be exercised by the Participant's designated beneficiary,
or in the absence of such designation, by the person to whom the
Participant's rights pass by will or the laws of descent and
distribution at any time within three years after the Participant's
death but not after the expiration of the period of the Option or
Stock Appreciation Right. Options and Stock Appreciation Rights that
do not become exercisable as provided above, or that are not otherwise
vested, shall be immediately forfeited on termination.
In the event of a Participant's termination of employment with the
Company for any reason other than as provided above, all Awards not
otherwise vested or earned as of the date of such termination of
employment shall be immediately forfeited on termination.
Notwithstanding the foregoing however, the Committee may determine
that termination of employment by reasons of any other special
circumstances not set forth above shall not terminate an Award or a
portion thereof.
XII. AWARD AGREEMENT
Each person granted an Award pursuant to the Plan shall sign an Award
Agreement which signifies the offer of the Award by the Company and
the acceptance of the Award by the person in accordance with the terms
of the Award and the provisions of the Plan. Each Award Agreement
shall reflect the terms and conditions of the Award.
-13-
<PAGE> 14
XIII. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of a change in the capitalization of MRI due to a stock
split, stock dividend, recapitalization, merger, consolidation,
combination, or similar event, the aggregate shares subject to the
Plan and the terms of any existing Awards shall be adjusted by the
Committee to reflect such change.
XIV. PARACHUTE TAX PROVISION
To the extent that the acceleration of vesting or any payment,
distribution or issuance made to a Participant under the Plan (a
"Benefit") would be subject to a golden parachute excise tax under
Section 4999(a) of the Code (a "Parachute Tax"), such acceleration of
the Participant's Awards shall be reduced to the extent necessary so
that no portion thereof shall be subject to the Parachute Tax, but
only if, by reason of such reduction, the Participant's net after tax
benefit shall exceed the net after tax benefit if such reduction were
not made. The Participant may direct which Awards shall not be
accelerated for this purpose.
XV. BONUS STOCK
The Committee may, from time to time and subject to the provision of
the Plan, grant Awards of Bonus Stock to employees of the Company. In
addition, the Committee shall have the authority to pay in shares of
Common Stock all or any portion of the cash amounts payable under any
other compensation program of the Company, but not exceeding $1
million with respect to any employee during any calendar year.
XVI. SECURITIES LAW AGREEMENT
If, at the time of the exercise of any Option, Director Option, or
Stock Appreciation Right or Award of Restricted Stock or Bonus Stock,
in the opinion of counsel for the Company, it is necessary or
desirable, in order to comply with any then applicable laws or
regulations relating to the sale of securities, for the individual
exercising the Option, Director Option, or Stock Appreciation Right or
receiving the Restricted Stock or Bonus Stock to agree to hold any
shares issued to the individual for investment and without intention
to resell or distribute the same and for the individual to agree to
dispose of such shares only in compliance with such laws and
regulations, the individual will, upon the request of the Company,
execute and deliver to the Company a further agreement to such effect.
XVII. WITHHOLDING FOR TAXES
Any cash payment under the Plan shall be reduced by any amounts
required to be withheld or paid with respect thereto under all present
or future federal, state and local taxes and other laws and
regulations that may be in effect as of the date of each such payment
("Tax Amounts"). Any issuance of Common Stock pursuant to the
exercise of an Option or other
-14-
<PAGE> 15
distribution of Common Stock under the Plan shall not be made until
appropriate arrangements have been made for the payment of any amounts
that may be required to be withheld or paid with respect thereto.
Such arrangements may, at the discretion of the Committee, include
allowing the Participant to tender to the Company shares of Common
Stock owned by the Participant, being part of the broker-cashless
exercise procedure; or to request the Company to withhold a portion of
the shares of Common Stock being acquired pursuant to the exercise or
otherwise distributed to the Participant, which have a Fair Market
Value per share as of the date of such Award exercise, tender or
withholding that is not greater than the sum of all Tax Amounts,
together with payment of any remaining portion of all Tax Amounts in
cash or by check payable and acceptable to the Company.
XVIII. AUTOMATIC DIRECTOR AWARDS
Each Director who serves in such capacity on the date of the closing
of the initial public offering of the Common Stock (the "IPO") shall
automatically receive, on such date, a Director Option for 10,000
shares of Common Stock. Each person who was a member of the Board on
the IPO date, did not qualify to receive the foregoing grant on the
IPO date, and is a Director on the date MRI is spunoff from SFER shall
receive a Director Option for 10,000 shares of Common Stock on such
spinoff date. Each Director who is elected or appointed to the Board
for the first time after the IPO date shall automatically receive, on
the date of his or her election or appointment, a Director Option for
10,000 shares of Common Stock. These Director Options shall be
subject to the limitations described in subparagraph 1. below.
On the date of the regular Annual Meeting of Stockholders of the
Company in each year that this Plan is in effect (commencing with the
Annual Meeting of Stockholders that follows the above initial grant
date), each Director who is serving on that day, including a Director
who was elected for the first time at such annual meeting, shall
automatically receive the following:
1. Director Options. A Director Option grant for 5,000 shares of
Common Stock. Each Director Option will be subject to all of
the limitations contained in the following provisions:
(a) Each Director Option shall become exercisable
(vested) on the earlier of (i) the first day that is
more than six months following its Grant Date or (ii)
an Acceleration Date occurring after the Grant Date;
provided that in no event shall any Director Option
be exercisable prior to the approval of this Plan by
the Company's stockholders.
(b) The option purchase price of each Director Option
shall be the Fair Market Value of the Common Stock on
its effective Grant Date.
-15-
<PAGE> 16
(c) Each Director Option that is vested may be exercised
in full at one time or in part from time to time by
giving written notice to the Company, stating the
number of shares of Common Stock with respect to
which the Director Option is being exercised,
accompanied by payment in full of the option purchase
price for such shares, which payment may be (i) in
cash by check acceptable to the Company, (ii) by the
transfer to the Company of shares of Common Stock
already-owned by the optionee having an aggregate
Fair Market Value at the date of exercise equal to
the aggregate option purchase price, (iii) from the
proceeds of a sale through a broker of some or all of
the shares to which such exercise relates, or (iv) by
a combination of such methods of payment.
(d) Each Director Option shall expire 10 years from the
Grant Date thereof, but shall be subject to earlier
termination as follows: (1) to the extent exercisable
as of the date a Director ceases to serve as a
director of the Company (the "Resignation Date"), the
Director Option may be exercised only within three
years of such Resignation Date by the optionee or the
optionee's legal representative or the person to whom
the Nonemployee Director's rights shall pass by will
or the laws of descent and distribution, as the case
may be, and to the extent not so exercised shall
terminate on the third anniversary of the Resignation
Date and (2) to the extent not exercisable as of the
Resignation Date, the Director Option shall terminate
on such Resignation Date.
2. Restricted Stock. A Restricted Stock Award for 1,000 shares
of Common Stock.
(a) The Restricted Period shall lapse on an Award of
Restricted Stock granted pursuant to this Section
XVIII upon the earlier of the date that is six months
and one day after the Grant Date, the Director's
death, Retirement, or Disability or the occurrence of
a Change in Control. If a Director ceases to be a
member of the Board during a Restricted Period for
any reason other than death, Disability or
Retirement, the Restricted Stock subject to such
Restricted Period shall be forfeited.
(b) Each certificate representing Restricted Stock
awarded hereunder shall be registered in the name of
the director and, during the Restricted Period, shall
be left on deposit with MRI with a stock power
endorsed in blank. Directors shall have the right to
receive dividends paid on their Restricted Stock and
to vote such shares. Restricted Stock may not be
sold, pledged, assigned, transferred or encumbered
during the Restricted Period other than by will or
the laws of descent and distribution.
In the event that the number of shares of Common Stock available for
Director Awards under this Plan is insufficient to make all automatic
Awards provided for in this Section XVIII on
-16-
<PAGE> 17
the applicable date, then all Directors who are entitled to a grant on
such date shall share ratably in the number of shares then available
for grant under this Plan (Restricted Stock Awards shall be made
first, then the Director Options), and shall have no right to receive
a grant with respect to the deficiencies in the number of available
shares and all future grants under this Section XVIII shall terminate.
Grants made pursuant to this Section XVIII shall be subject to all of
the terms and conditions of this Plan; however, if there is a conflict
between the terms and conditions of this Section XVIII and the terms
and conditions of any other Section, then the terms and conditions of
this Section XVIII shall control.
XIX. DESIGNATION OF BENEFICIARY
Each Participant to whom an Award has been made under this Plan may
designate a beneficiary or beneficiaries (which beneficiary may be an
entity other than a natural person) to exercise any rights or receive
any payment that under the terms of such Award may become exercisable
or payable on or after the Participant's death. At any time, and from
time to time, any such designation may be changed or canceled by the
Participant without the consent of any such beneficiary. Any such
designation, change or cancellation must be on a form provided for
that purpose by the Committee and shall not be effective until
received by the Committee. If no beneficiary has been named by a
deceased Participant, or the designated beneficiaries have predeceased
the Participant, the beneficiary shall be the Participant's estate.
If a Participant designates more than one beneficiary, any such
exercise or payment under this Plan shall be made in equal shares
unless the Participant has designated otherwise, in which case the
exercise or payment shall be made in the shares designated by the
Participant.
XX. PREEMPTION BY APPLICABLE LAWS AND REGULATIONS
Anything in the Plan or any agreement entered into pursuant to the
Plan to the contrary notwithstanding, if, at any time specified herein
or therein for the making of any determination, the issuance or other
distribution of shares of Common Stock, the payment of consideration
to an employee as a result of the exercise of any Stock Appreciation
Right or Limited Right, or the payment of any Phantom Units, as the
case may be, any law, regulation or requirement of any governmental
authority having jurisdiction in the premises shall require either the
Company or the Participant (or the Participant's beneficiary), as the
case may be, to take any action in connection with any such
determination, the shares then to be issued or distributed, or such
payment, the issue or distribution of such shares or the making of
such determination or payment, as the case may be, shall be deferred
until such action shall have been taken.
-17-
<PAGE> 18
XXI. EFFECTIVE DATE AND DURATION OF PLAN
This Plan shall become effective upon its approval by the stockholders
of MRI. Unless previously terminated by the Board, the Plan shall
terminate on the tenth anniversary of its approval by the
stockholders; provided, however, that such termination shall not
terminate any Award then outstanding. No Awards shall be made
pursuant to this Plan after ______________, 2006.
XXII. TERMINATION AND AMENDMENT
The Board may suspend, terminate, modify or amend the Plan at such
times and in such manner as it deems appropriate, provided that any
amendment that would increase the number of shares available under the
Plan shall be subject to the approval of MRI's stockholders. No
suspension, termination, modification or amendment of the Plan may
terminate a Participant's existing Award or materially adversely
affect a Participant's rights under such Award.
XXIII. MISCELLANEOUS
(a) Nothing contained in the Plan shall be construed as conferring
upon any employee the right to continue in the employ of the Company.
(b) No person shall have any rights as a stockholder with respect
to shares covered by such person's Option, Director Option, Stock
Appreciation Rights or Restricted Stock award until the date of the
issuance of shares pursuant thereto. No adjustment will be made for
dividends or other distributions or rights for which the record date
is prior to the date of such issuance. An employee shall have no
rights as a stockholder with respect to any award of Phantom Units
under the Plan.
(c) Nothing contained in the Plan shall be construed as giving any
person, such person's beneficiaries or any other person any equity or
other interest of any kind in any assets of the Company or creating a
trust of any kind or a fiduciary relationship of any kind between the
Company and any such person.
(d) Nothing contained in the Plan shall be construed to prevent
the Company from taking any corporate action that is deemed by the
Company to be appropriate or in its best interest, whether or not such
action would have an adverse effect on the Plan or any award made
under the Plan. No employee, beneficiary or other person shall have
any claim against the Company as a result of any such action.
(e) No grantee nor any beneficiary thereof shall have the power or
right to sell, exchange, pledge, transfer, assign or otherwise
encumber or dispose of such grantee's or beneficiary's interest
arising under the Plan or in any Award received under the Plan; nor
shall such
-18-
<PAGE> 19
interest be subject to seizure for the payment of any grantee's or
beneficiary's debts, judgments, alimony, or separate maintenance or be
transferable by operation of law in the event of a grantee's or
beneficiary's bankruptcy or insolvency and to the extent any such
interest arising under the Plan or Award received under the Plan is
awarded to a spouse pursuant to any divorce proceeding, such interest
shall be deemed to be terminated and forfeited notwithstanding any
vesting provisions or other terms herein or in the agreement
evidencing such award.
(f) All rights and obligations under the Plan shall be governed
by, and the Plan shall be construed in accordance with, the laws of
the State of Delaware without regard to the principles of conflicts of
laws. Titles and headings to Sections herein are for purposes of
reference only, and shall in no way limit, define or otherwise affect
the meaning or interpretation of any provisions of the Plan.
-19-
<PAGE> 1
EXHIBIT 10.8
MONTEREY RESOURCES, INC.
1996 INCENTIVE STOCK COMPENSATION PLAN
FOR NONEXECUTIVE EMPLOYEES
STATEMENT OF PURPOSE
The purpose of the Monterey Resources, Inc. 1996 Incentive Stock
Compensation Plan For Nonexecutive Employees (the "Plan") is to encourage
superior performance by employees, by allowing the Board of Directors of
Monterey Resources, Inc. ("MRI") to award several forms of incentive
compensation to employees of the Company. By providing incentive compensation
commensurate and competitive with that provided by other companies, the Plan
should also assist MRI in attracting and retaining the services of qualified
and capable employees.
In order to further the identity of interest of employees with the
stockholders of MRI, all of the forms of compensation under the Plan relate to
MRI Common Stock. Employees' success in enhancing stockholder value will
translate directly into an enhanced benefit for the employee.
Notwithstanding anything in the Plan or any Award agreement to the
contrary, no Award shall become exercisable or payable (even if vested) prior
to the first anniversary of the date the Company is spunoff by Santa Fe Energy
Resources, Inc. (or during such additional period, if any, as may be
recommended by counsel to the Company as necessary or helpful to the tax-free
status of the spinoff); provided, however, the foregoing restriction shall not
apply to a Participant whose employment terminates due to death or Disability
and such restriction shall also lapse upon a Change in Control.
I. DEFINITIONS
Unless the context indicates otherwise, the following terms have the
meanings set forth below:
"Acceleration Date" means the earliest date on which any of
the following events shall first have occurred: (i) the acquisition
described in clause (a) of the definition of "Change in Control"
contained in this Section I, (ii) the change in the composition of the
Board of Directors described in clause (b) of such definition or (iii)
the stockholder approval or adoption described in clause (c) or (d) of
such definition.
"Award" means a grant of Options, Restricted Stock, Phantom
Units, Bonus Stock or Stock Appreciation Rights pursuant to the Plan.
"Board" means the Board of Directors of MRI.
<PAGE> 2
"Bonus Stock" means Common Stock, which is not subject to a
Restricted Period, awarded by the Committee pursuant to the Plan.
"Cause" means (a) the willful and continued failure by the
Participant to substantially perform his duties with the Company
(other than any such failure resulting from his incapacity due to
physical or mental illness), or (b) the willful engaging by the
Participant in conduct which is demonstrably and materially injurious
to the Company, monetarily or otherwise. For purposes of this
definition, no act, or failure to act, shall be deemed "willful"
unless done, or omitted to be done, by the Participant not in good
faith and without reasonable belief that his action or omission was in
the best interest of the Company.
A "Change in Control" shall be deemed to have occurred if:
(a) any "person," as such term is used in Section 13(d)
and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), other than any trustee
or other fiduciary holding securities under an
employee benefit plan of Santa Fe Energy Resources,
Inc. ("SFER") or any affiliate thereof, or any
company owned, directly or indirectly, by the
stockholders of SFER in substantially the same
proportions as their ownership of stock of SFER), is
or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of SFER representing 25% or
more of the combined voting power of SFER's then
outstanding securities;
(b) during any period of two consecutive years (not
including any period prior to the effective date of
this provision), individuals who at the beginning of
such period constitute the Board of Directors of
SFER, and any new director (other than a director
designated by a person who has entered into an
agreement with SFER to effect a transaction described
in clause (a), (c) or (d) of this definition) whose
election by the Board of Directors of SFER or
nomination for election by SFER's stockholders was
approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were
directors at the beginning of the period or whose
election or nomination for election was previously so
approved, cease for any reason to constitute at least
a majority thereof;
(c) the stockholders of SFER approve a merger or
consolidation of SFER with any other company other
than (i) a merger or consolidation which would result
in the voting securities of SFER outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the surviving
entity) more than 65% of the combined voting power of
the voting securities of SFER (or such surviving
entity) outstanding immediately after such merger or
consolidation, or (ii) a
-2-
<PAGE> 3
merger or consolidation effected to implement a
recapitalization of SFER (or similar transaction) in
which no "person" (as hereinabove defined) acquires
more than 25% of the combined voting power of SFER's
then outstanding securities; or
(d) the stockholders of SFER adopt a plan of complete
liquidation of SFER or approve an agreement for the
sale or disposition by SFER of all or substantially
all of SFER's assets. For purposes of this clause
(d), the term "the sale or disposition by SFER of all
or substantially all of SFER's assets" shall mean a
sale or other disposition transaction or series of
related transactions involving assets of SFER or of
any direct or indirect subsidiary of SFER (including
the stock of any direct or indirect subsidiary of
SFER) in which the value of the assets or stock being
sold or otherwise disposed of (as measured by the
purchase price being paid therefor or by such other
method as the Board of Directors of SFER determines
is appropriate in a case where there is no readily
ascertainable purchase price) constitutes more than
two-thirds of the fair market value of SFER (as
hereinafter defined). For purposes of the preceding
sentence, the "fair market value of SFER" shall be
the aggregate market value of the outstanding shares
of common stock of SFER (on a fully diluted basis)
plus the aggregate market value of SFER's other
outstanding equity securities. The aggregate market
value of the shares of common stock of SFER shall be
determined by multiplying the number of shares of
SFER's common stock (on a fully diluted basis)
outstanding on the date of the execution and delivery
of a definitive agreement with respect to the
transaction or series of related transactions (the
"Transaction Date") by the average closing price of
the shares of common stock of SFER for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of SFER shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of the shares of common stock of SFER or
by such other method as the Board shall determine is
appropriate.
(e) If SFER ceases to own 80% of the combined voting
power of the then outstanding voting securities of
the Company, the term "Company" shall be substituted
for SFER as used in this definition of "Change in
Control" and all other appropriate places; provided,
however, as long as SFER owns 35% or more of the
combined voting power of the voting securities of the
Company, the above "Change in Control" definition
shall be applied separately with respect to SFER and
with respect to the Company as substituted for SFER
in the definition, and a Change in Control with
respect to either SFER or the Company in such
situation shall be a Change in Control for purposes
of this Plan. Notwithstanding anything herein to the
contrary, a distribution by
-3-
<PAGE> 4
SFER to its stockholders of its interest in such
voting securities of the Company shall not constitute
a Change in Control.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation and Benefits Committee of
the Board.
"Common Stock" means the common stock, $0.01 par value, of MRI.
"Company" means collectively MRI, its parent and all companies
in which MRI owns, directly or indirectly, more than 50% of the voting
stock.
"Disability" means the inability of a Participant to continue
to perform the duties of his or her employment with the Company as
determined by the Committee.
"Fair Market Value" means the average of high and low (or bid
and ask, if applicable) price per share of the Common Stock on the
applicable date (or if there are no transactions on that date, the
last preceding date on which there were transactions) in the principal
market in which the Common Stock is traded, as reported in The Wall
Street Journal, or the fair market value per share as determined by
the Committee, in good faith, using any fair and reasonable means for
this purpose.
"Grant Date" as used with respect to a particular Award means
the date as of which such Award is granted pursuant to the Plan.
"Option" means an option to purchase shares of Common Stock
granted by the Committee pursuant to the Plan, which shall be a
"Non-Qualified Stock Option."
"Limited Right" means a Stock Appreciation Right that is
exercisable only as set forth in Section XIV of the Plan.
"Non-Qualified Stock Option" means an Option granted pursuant
to the Plan, which is not an Incentive Stock Option within the meaning
of Code Section 422.
"Participant" means any eligible employee of the Company who
has an Award outstanding under the Plan.
"Phantom Unit" means a right to receive upon the achievement
of specified performance goals a payment from the Company in an amount
equal to a specified percentage of the Fair Market Value of a share of
Common Stock on the date on which such right becomes payable.
-4-
<PAGE> 5
"Plan" means the Monterey Resources, Inc. 1996 Incentive Stock
Compensation Plan For Nonexecutive Employees as set forth herein and
as may be amended from time to time.
"Related LSAR Option" means an Option outstanding under the
Plan with respect to which a Limited Right is granted pursuant to
Section XIV.
"Restricted Period" means the period of time for which
Restricted Stock and/or Phantom Units are subject to forfeiture
pursuant to the Plan or during which Options and Stock Appreciation
Rights are not exercisable.
"Restricted Stock" means Common Stock subject to a Restricted
Period which is granted pursuant to the Plan.
"Retirement" means an Employee's leaving the employment of the
Company, other than for Cause, after attaining age 55 and completing
five years of service with the Company.
"Stock Appreciation Right" means the right, granted by the
Committee pursuant to the Plan, to receive a payment equal to the
increase in the Fair Market Value of a share of Common Stock
subsequent to the Grant Date of such Award.
II. SHARES SUBJECT TO AWARDS UNDER THE PLAN
Subject to the adjustment as provided in the Plan, the maximum number
of shares of Common Stock with respect to which Options, Restricted
Stock, Bonus Stock, Phantom Units and Stock Appreciation Rights may be
granted under the Plan in any year is 500,000. The Common Stock
issued under the Plan may be either previously authorized but unissued
shares or treasury shares acquired by MRI.
III. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. The members of the
Committee shall not be eligible to participate in the Plan. The
Committee shall select from time to time those employees to be granted
Awards under the Plan. The Committee shall also determine the terms
and provisions of Awards, which need not be identical. The Committee
shall grant all Awards. The Committee shall construe the Plan,
prescribe and rescind rules and regulations relating to the Plan and
make all other determinations deemed necessary or advisable for the
administration of the Plan, subject to the limitations of Section XX.
IV. ELIGIBILITY
Subject to the discretion of the Committee, all employees of the
Company who have responsibility for the growth and profitability of
the Company, but excluding any employee who is subject to the
provisions of Section 16 of the Securities Exchange Act of 1934, as
-5-
<PAGE> 6
amended, as determined by the Committee, are eligible to receive
Awards under the Plan ("Eligible Employees").
V. OPTIONS
The Committee may, from time to time and subject to the provisions of
the Plan, grant Awards of Options to Eligible Employees of the Company
to purchase shares of Common Stock. The Committee may grant
replacement or substitution options (or Stock Appreciation Rights) to
affected employees in conjunction with any Company merger,
consolidation, purchase or acquisition of property or stock, spinoff
or other distribution of stock or property, reorganization, or partial
or complete liquidation, on such terms as the Committee deems
equitable. Any Options granted shall be designated as Non-Qualified
Stock Options.
The purchase price of the Common Stock subject to any Options shall be
determined by the Committee, but, except with respect to a replacement
Option, may not be less than the Fair Market Value of the Common Stock
on the Grant Date. Such price shall be subject to adjustment as
provided in Section XIII of the Plan.
The Committee may include in each agreement evidencing the Option
grant a provision stating that the Option granted therein may not be
exercised in whole or in part for such period(s) of time specified in
such agreement, and may further limit the exercisability of the Option
in such manner as the Committee deems appropriate, including, without
limitation, the achievement of performance goals. The Committee may,
in its discretion, at any time and from time-to-time accelerate the
exercisability of all or part of any Option.
The period of any Option, which is the time period during which the
Option may be exercised, shall be determined by the Committee and
shall not extend more than ten years after the Grant Date.
Options shall not be transferable other than by will or the laws of
descent and distribution and during the Participant's lifetime shall
be exercisable only by the Participant.
Termination for Cause, as defined in Section I, shall result in
forfeiture of all outstanding Options. Termination by the Company for
any reason other than Cause (including terminations pursuant to formal
severance programs sponsored by the Company or an affiliate), or
terminations by reason of death, Disability or Retirement, shall
result in a lapse of all or a proportion of the Restricted Period
applicable to any outstanding Award as set forth In Section XI.
A person electing to exercise an Option shall give written notice of
such election to the Company in such form as the Committee may
require. Upon exercise of an Option, the full option purchase price
for the shares with respect to which the Option is being exercised
shall be payable to the Company (i) in cash or by check payable and
acceptable to the Company
-6-
<PAGE> 7
or (ii) subject to the approval of the Committee, (a) by tendering to
the Company shares of Common Stock owned by such person having an
aggregate Fair Market Value as of the date of exercise and tender that
is not greater than the full option purchase price for the shares with
respect to which the Option is being exercised and by paying any
remaining amount of the option purchase price as provided in (i) above
(provided that the Committee may, upon confirming that such person
owns the number of additional shares being tendered, authorize the
issuance of a new certificate for the number of shares being acquired
pursuant to the exercise of the Option less the number of shares being
tendered upon the exercise and return to such person (or not require
surrender of) the certificate for the shares being tendered upon the
exercise) or (b) by such person delivering to the Company a properly
executed exercise notice together with irrevocable instructions to a
broker to promptly deliver to the Company cash or a check payable and
acceptable to the Company to pay the option purchase price; provided
that in the event such person chooses to pay the option purchase price
as provided in (ii)(b) above, such person and the broker shall comply
with such procedures and enter into such agreements of indemnity and
other agreements as the Committee shall prescribe as a condition of
such payment procedure. Payment instruments will be received subject
to collection.
Notwithstanding any other provision in the Plan, if a Change In
Control occurs while unexercised Options, and Stock Appreciation
Rights relating thereto, remain outstanding under the Plan, then from
and after the Acceleration Date, all Options and Stock Appreciation
Rights shall be exercisable in full, whether or not otherwise
exercisable.
VI. BONUS STOCK
The Committee may, from time to time and subject to the provision of
the Plan, grant Awards of Bonus Stock to Eligible Employees of the
Company. In addition, the Committee shall have the authority to pay
in shares of Common Stock all or any portion of the cash amounts
payable under any other compensation program of the Company.
VII. RESTRICTED STOCK
The Committee may, from time to time and subject to the provisions of
the Plan, grant Awards of Restricted Stock to Eligible Employees of
the Company.
Each certificate representing Restricted Stock awarded under the Plan
shall be registered in the name of the Participant and, during the
Restricted Period, shall be left on deposit with the Company with a
stock power endorsed in blank. Participants shall have the right to
receive dividends paid on their Restricted Stock and to vote such
shares. Restricted Stock may not be sold, pledged, assigned,
transferred or encumbered during the Restricted Period other than by
will or the laws of descent and distribution.
-7-
<PAGE> 8
Termination for Cause, as defined in Section I, shall result in
forfeiture of all outstanding Restricted Stock. Termination by the
Company for any reason other than Cause (including terminations
pursuant to formal severance programs sponsored by the Company or an
affiliate), or termination by reason of death, Disability or
Retirement, shall result in a lapse on all or a portion of the
Restricted Period applicable to any outstanding Award as set forth in
Section XI.
Notwithstanding any other provisions in the Plan, if a Change in
Control occurs while any shares of Restricted Stock remain subject to
restrictions relating thereto, then from and after the Acceleration
Date, (1) all such restrictions and all Restricted Periods shall lapse
and (2) no later than the fifth day following the Acceleration Date,
any Restricted Stock theretofore granted a Participant shall be
delivered to the Participant.
VIII. STOCK APPRECIATION RIGHTS
The Committee may, from time to time and subject to the provisions of
the Plan, grant Awards of Stock Appreciation Rights to Eligible
Employees of the Company subject to the limitation in Section II. An
Award of Stock Appreciation Rights, in the Committee's discretion, may
or may not be made in tandem with the grant of an Option, and need not
be granted at the same time as the Option grant to be made in tandem
with the Option grant.
The period of any Stock Appreciation Right, which is the time period
during which the Stock Appreciation Right may be exercised, shall be
determined by the Committee and shall not extend more than ten years
after the Grant Date or, if in tandem with an Option, the period of
such Option.
Stock Appreciation Rights shall not be transferable other than by will
or the laws of descent and distribution and during the Participant's
lifetime shall be exercisable only by the Participant.
Termination for Cause, as defined in Section I, shall result in
forfeiture of all outstanding Stock Appreciation Rights. Termination
by the Company for any reason other than Cause (including terminations
pursuant to formal severance programs sponsored by the Company or an
affiliated company), or termination by reason of death, Disability or
Retirement, shall result in a lapse on all or a portion of the
Restricted Period applicable to any outstanding Award as set forth in
Section XI.
Subject to any restrictions or conditions imposed by the Committee,
upon the exercise of a Stock Appreciation Right, the Company shall pay
the amount, if any, by which the Fair Market Value of a share of
Common Stock on the date of exercise exceeds the Fair Market Value of
a share of Common Stock on the Grant Date. The amount payable by the
Company upon the exercise of a Stock Appreciation Right may be paid in
cash or in shares of Common
-8-
<PAGE> 9
Stock or in any combination thereof as the Committee, in its sole
discretion, shall determine, but no fractional shares shall be
issuable pursuant to any Stock Appreciation Right.
A person electing to exercise a Stock Appreciation Right shall give
written notice of such election to the Company in such form as the
Committee may require. The exercise of Stock Appreciation Rights or
Options granted in tandem will result in an equal reduction in the
number of corresponding Options or Stock Appreciation Rights which
were granted in tandem with such Stock Appreciation Rights and
Options.
The Change in Control provisions in Section V, concerning Options and
Stock Appreciation Rights granted in tandem with an Option, shall also
apply to Stock Appreciation Rights that are not granted in tandem with
Options.
IX. PHANTOM UNITS
The Committee may, from time to time and subject to the provisions of
the Plan, grant Awards of Phantom Units to Eligible Employees of the
Company. Phantom Units may not be sold, pledged, assigned,
transferred or encumbered during the Restricted Period, other than by
will or the laws of descent and distribution.
The Committee shall, at the time Phantom Units are granted, designate
certain goals for the performance of the Company and the Restricted
Period over which the goals must be achieved. Such designated goals
must be achieved in order for a Participant to receive the full value
of the Phantom Units at the designated time. To the extent earned in
accordance with this Section and the grant of such Award, all such
Phantom Units must be paid as soon as practicable following the end of
the Restricted Period in cash or in shares of Common Stock or in any
combination thereof as the Committee, in its sole discretion shall
determine, but no fractional shares shall be issuable pursuant to any
Phantom Unit.
At the discretion of the Committee, Phantom Units may at any time be
converted into Non-Qualified Stock Options, Bonus Stock or shares of
Restricted Stock or any combination thereof having a value, as
determined in the good faith judgment of the Committee, substantially
equal to the value of the Phantom Units so converted.
Termination for Cause, as defined in Section I, shall result in
forfeiture of all outstanding Phantom Units. Termination by the
Company for any reason other than Cause (including terminations
pursuant to formal severance programs sponsored by the Company or an
affiliate), or termination by reason of death, Disability or
Retirement, shall result in a lapse on all or a proportion of the
Restricted Period applicable to any outstanding Award as set forth in
Section XI.
Notwithstanding any other provisions in the Plan, if a Change in
Control occurs while any Phantom Units remain outstanding, then from
and after the Acceleration Date, (1) all
-9-
<PAGE> 10
designated goals shall be deemed to have been met and (2) no later
than the fifth day following the Acceleration Date, the full value of
all such Phantom Units shall be paid to the Participant in cash.
X. CONTINUED EMPLOYMENT
Participation in the Plan shall confer no rights to continued
employment with the Company, nor shall it restrict the rights of the
Company to terminate a Participant's employment relationship at any
time.
XI. TERMINATION OF EMPLOYMENT
In the event of a Participant's termination of employment with the
Company by reason of death, the Restricted Period shall lapse on all
of the Participant's outstanding Awards.
In the event of a Participant's termination of employment with the
Company by reason of Disability, Retirement or by the Company for any
reason other than Cause, a portion of all of the Participant's
outstanding Awards shall be immediately forfeited to the extent not
then otherwise vested. The portion of an Award forfeited shall be a
fraction, the denominator of which is the total number of months of
any Restricted Period (determined at date of grant) applicable to the
Award (rounded up to the nearest whole month) and the numerator of
which is the number of months of such Restricted Period remaining
(rounded up to the nearest whole month) as of the termination of
employment.
Unless the Committee directs the acceleration of the payment of that
portion of an Award of Phantom Units or Restricted Stock that is not
automatically forfeited as provided above upon the Participant's
termination of employment, such Phantom Units and Restricted Stock
shall be payable or issued, as the case may be, at the end of the
Restricted Period applicable to such Awards, but only to the extent
otherwise payable pursuant to the Award Agreement evidencing such
Phantom Units or Restricted Stock, e.g., the goals, if any, for such
Award are achieved. Any such Awards not payable or earned at the end
of such Restricted Period, as provided above, shall be forfeited at
such time.
Phantom Units and Restricted Stock upon which the Restricted Period
lapse as provided above shall be paid or issued to the Participant or,
in the case of death prior to such payment or issuance, to the
Participant's designated beneficiary, or in the absence of such
designation, to the person to whom the Participant's rights pass by
will or the laws of descent and distribution.
Options and Stock Appreciation Rights which are or become exercisable
at the time of a Participant's termination of employment with the
Company (i) by reason of Disability or Retirement or by the Company
for any reason other than Cause, may be exercised by the Participant
within three years following such termination of employment and (ii)
for any
-10-
<PAGE> 11
reason other than Cause, death or a reason specified in (i), may be
exercised by the Participant within three months following such
termination, but, in either event, not after the expiration of the
period of the Option or Stock Appreciation Right. Options and Stock
Appreciation Rights which are or become exercisable at the time of a
Participant's termination of employment with the Company by reason of
death, may be exercised by the Participant's designated beneficiary,
or in the absence of such designation, by the person to whom the
Participant's rights pass by will or the laws of descent and
distribution at any time within three years after the Participant's
death but not after the expiration of the period of the Option or
Stock Appreciation Right. Options and Stock Appreciation Rights that
do not become exercisable as provided above, or that are not otherwise
vested, shall be immediately forfeited on termination.
In the event of a Participant's termination of employment with the
Company for any reason other than as provided above, all Awards not
otherwise vested or earned as of the date of such termination of
employment shall be immediately forfeited on termination.
Notwithstanding the foregoing however, the Committee may determine
that termination of employment by reasons of any other special
circumstances not set forth above shall not terminate an Award or a
portion thereof.
XII. AWARD AGREEMENT
Each employee granted an Award pursuant to the Plan shall sign an
Award Agreement which signifies the offer of the Award by the Company
and the acceptance of the Award by the employee in accordance with the
terms of the Award and the provisions of the Plan. Each Award
Agreement shall reflect the terms and conditions of the Award.
XIII. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of a change in the capitalization of SFER due to a stock
split, stock dividend, recapitalization, merger, consolidation,
combination or similar event, the aggregate shares subject to the Plan
and the terms of any existing Awards shall be adjusted by the
Committee to reflect such change.
XIV. PARACHUTE TAX PROVISION
To the extent that the acceleration of vesting or any payment,
distribution or issuance made to a participant under the Plan (a
"Benefit") would be subject to a golden parachute excise tax under
Section 4999(a) of the Code (a "Parachute Tax") such acceleration of
the Participant's Awards shall be reduced to the extent necessary so
that no portion thereof shall be subject to the Parachute Tax, but
only if, by reason of such reduction, the Participant's net after tax
benefit shall exceed the net after tax benefit if such reduction were
not made. The Participant may direct which Awards shall not be
accelerated for this purpose.
-11-
<PAGE> 12
XV. EMPLOYEE'S AGREEMENT
If, at the time of the exercise of any Option or Stock Appreciation
Right or Award of Restricted Stock or Bonus Stock, in the opinion of
counsel for the Company, it is necessary or desirable, in order to
comply with any then applicable laws or regulations relating to the
sale of securities, for the individual exercising the Option or Stock
Appreciation Right or receiving the Restricted Stock or Bonus Stock to
agree to hold any shares issued to the individual for investment and
without intention to resell or distribute the same and for the
individual to agree to dispose of such shares only in compliance with
such laws and regulations, the individual will, upon the request of
the Company, execute and deliver to the Company a further agreement to
such effect.
XVI. WITHHOLDING FOR TAXES
Any cash payment under the Plan shall be reduced by any amounts
required to be withheld or paid with respect thereto under all present
or future federal, state and local taxes and other laws and
regulations that may be in effect as of the date of each such payment
("Tax Amounts"). Any issuance of Common Stock pursuant to the
exercise of an Option or other distribution of Common Stock under the
Plan shall not be made until appropriate arrangements have been made
for the payment of any amounts that may be required to be withheld or
paid with respect thereto. Such arrangements may, at the discretion
of the Committee, include allowing the Participant to tender to the
Company shares of Common Stock owned by the Participant, or to request
the Company to withhold a portion of the shares of Common Stock being
acquired pursuant to the exercise or otherwise distributed to the
Participant, which have a Fair Market Value per share as of the date
of such Award exercise, tender or withholding that is not greater than
the sum of all Tax Amounts, together with payment of any remaining
portion of all Tax Amounts in cash or by check payable and acceptable
to the Company.
XVII. DESIGNATION OF BENEFICIARY
Each Participant to whom an Award has been made under this Plan may
designate a beneficiary or beneficiaries (which beneficiary may be an
entity other than a natural person) to exercise any rights or receive
any payment that under the terms of such Award may become exercisable
or payable on or after the Participant's death. At any time, and from
time to time, any such designation may be changed or canceled by the
Participant without the consent of any such beneficiary. Any such
designation, change or cancellation must be on a form provided for
that purpose by the Committee and shall not be effective until
received by the Committee. If no beneficiary has been named by a
deceased Participant, or the designated beneficiaries have predeceased
the Participant, the beneficiary shall be the Participant's estate.
If a Participant designates more than one beneficiary, any such
exercise or payment under this Plan shall be made in equal shares
unless the Participant has
-12-
<PAGE> 13
designated otherwise, in which case the exercise or payment shall be
made in the shares designated by the Participant.
XVIII. PREEMPTION BY APPLICABLE LAWS AND REGULATIONS
Anything in the Plan or any agreement entered into pursuant to the
Plan to the contrary notwithstanding, if, at any time specified herein
or therein for the making of any determination, the issuance or other
distribution of shares of Common Stock, the payment of consideration
to an employee as a result of the exercise of any Stock Appreciation
Right or Limited Right, or the payment of any Phantom Units, as the
case may be, any law, regulation or requirement of any governmental
authority having jurisdiction in the premises shall require either the
Company or the Participant (or the Participant's beneficiary), as the
case may be, to take any action in connection with any such
determination, the shares then to be issued or distributed, or such
payment, the issue or distribution of such shares or the making of
such determination or payment, as the case may be, shall be deferred
until such action shall have been taken.
XIX. EFFECTIVE DATE AND DURATION OF PLAN
This Plan shall become effective upon its approval by the Board of MRI
and shall continue until terminated by the Board.
XX. TERMINATION AND AMENDMENT
The Board may suspend, terminate, modify or amend the Plan at any time
or times; however, no suspension, termination, modification or
amendment of the Plan may terminate a Participant's existing Award or
materially adversely affect a Participant's rights under such Award.
XXI. MISCELLANEOUS
(a) Nothing contained in the Plan shall be construed as conferring
upon any employee the right to continue in the employ of the Company.
(b) An employee shall have no rights as a stockholder with respect
to shares covered by such employee's Option, Stock Appreciation Rights
or Restricted Stock award until the date of the issuance of shares to
the employee pursuant thereto. No adjustment will be made for
dividends or other distributions or rights for which the record date
is prior to the date of such issuance. An employee shall have no
rights as a stockholder with respect to any award of Phantom Units
under the Plan.
(c) Nothing contained in the Plan shall be construed as giving any
employee, such employee's beneficiaries or any other person any equity
or other interest of any kind in any
-13-
<PAGE> 14
assets of the Company or creating a trust of any kind or a fiduciary
relationship of any kind between the Company and any such person.
(d) Nothing contained in the Plan shall be construed to prevent
the Company from taking any corporate action that is deemed by the
Company to be appropriate or in its best interest, whether or not such
action would have an adverse effect on the Plan or any award made
under the Plan. No employee, beneficiary or other person shall have
any claim against the Company as a result of any such action.
(e) Neither an employee nor an employee's beneficiary shall have
the power or right to sell, exchange, pledge, transfer, assign or
otherwise encumber or dispose of such employee's or beneficiary's
interest arising under the Plan or in any Award received under the
Plan; nor shall such interest be subject to seizure for the payment of
an employee's or beneficiary's debts, judgments, alimony, or separate
maintenance or be transferable by operation of law in the event of an
employee's or beneficiary's bankruptcy or insolvency and to the extent
any such interest arising under the Plan or Award received under the
Plan is awarded to a spouse pursuant to any divorce proceeding, such
interest shall be deemed to be terminated and forfeited
notwithstanding any vesting provisions or other terms herein or in the
agreement evidencing such award.
(f) All rights and obligations under the Plan shall be governed
by, and the Plan shall be construed in accordance with, the laws of
the State of Delaware without regard to the principles of conflicts of
laws. Titles and headings to Sections herein are for purposes of
reference only, and shall in no way limit, define or otherwise affect
the meaning or interpretation of any provisions of the Plan.
-14-
<PAGE> 1
EXHIBIT 10.9
MONTEREY RESOURCES, INC.
SEVERANCE PROGRAM
This Severance Program (the "Program") is being adopted by Monterey
Resources, Inc. (the "Company") effective as of October 1, 1996. The Program
is designed, inter alia, to assure a degree of financial security to Eligible
Employees (as defined below) from the possible elimination of their jobs as a
result of a Change in Control (as defined below) and other appropriate events
and to provide benefits in connection with a limited program of terminations.
A. DEFINITIONS
1. "Acquiring Company" means any person or persons not affiliated
with or currently employed by SFER, the Company or its
Subsidiaries who become(s) the beneficial owner(s) of all or
substantially all of the stock of SFER, the Company or of 25%
or more of the fair market value of the assets of SFER, the
Company and its Subsidiaries in one or a series of related
transactions as a result of the execution of a definitive
purchase agreement with SFER, the Company or one of its
Subsidiaries.
2. "Base Salary" means the Eligible Employee's highest regular
rate of base salary during the 24-month period prior to the
date of termination of employment, excluding overtime, bonuses
and other compensation, computed on a weekly basis.
3. "Cause" means, with respect to termination of the employment of
an Eligible Employee by the Company or Subsidiary, (a) the
willful and continued failure by the Eligible Employee to
substantially perform his duties with the Company or Subsidiary
(other than any such failure resulting from his incapacity due
to physical or mental illness), (b) the willful engaging by the
Eligible Employee in conduct which is demonstrably and
materially injurious to the Company or Subsidiary, monetarily
or otherwise, or (c) the failure to relocate at the Company's
or Subsidiary's request to another locality of either the
Company or any Subsidiary in a substantially similar position
at substantially similar wages; provided, however, in no event
shall a failure to relocate in conjunction with or following a
Closing or Change in Control constitute Cause. For purposes of
this definition, no act, or failure to act, shall be deemed
"willful" unless done, or omitted to be done, by the Eligible
Employee not in good faith and without reasonable belief that
his action or omission was in the best interest of the Company
or Subsidiary.
<PAGE> 2
4. A "Change in Control" shall be deemed to have occurred if:
a. any "person," as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (other than any trustee
or other fiduciary holding securities under an
employee benefit plan of SFER or an affiliate thereof,
or any company owned, directly or indirectly, by the
stockholders of SFER or an affiliate thereof in
substantially the same proportions as their ownership
of stock of SFER), is or becomes the "Beneficial
Owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the
Company representing 25% or more of the combined
voting power of SFER's then outstanding securities;
b. during any period of two consecutive years (not
including any period prior to the effective date of
this provision), individuals who at the beginning of
such period constitute the Board of Directors of SFER
(the "Board"), and any new director (other than a
director designated by a person who has entered into
an agreement with SFER to effect a transaction
described in clause (a), (c) or (d) of this
definition) whose election by the Board or nomination
for election by SFER's stockholders was approved by a
vote of at least two-thirds (2/3) of the Directors
then still in office who either were Directors at the
beginning of the period or whose election or
nomination for election was previously so approved
(hereinafter referred to as "Continuing Directors"),
cease for any reason to constitute at least a majority
thereof;
c. the stockholders of SFER approve a merger or
consolidation of SFER with any other company other
than (i) a merger or consolidation which would result
in the voting securities of SFER outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted
into voting securities of the surviving entity) more
than 65% of the combined voting power of the voting
securities of SFER (or such surviving entity)
outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation
effected to implement a recapitalization of SFER (or
similar transaction) in which no "person" (as
hereinabove defined) acquires more than 25% of the
combined voting power of SFER's then outstanding
securities; or
d. the stockholders of SFER approve a plan of complete
liquidation of SFER or an agreement for the sale or
disposition by SFER or an agreement for the sale or
disposition by SFER of all or substantially all of
SFER's assets. For purposes of this clause (d), the
term "the sale or disposition by SFER of all or
substantially all of SFER's assets" shall mean a sale
or other disposition transaction or series of related
transaction involving assets of SFER or of any
-2-
<PAGE> 3
Subsidiary of SFER (including the stock of any
Subsidiary of SFER) in which the value of the assets
or stock being sold or otherwise disposed of (as
measured by the purchase price being paid therefore or
by such other method as the Board determines is
appropriate in a case where there is no readily
ascertainable purchase price) constitutes more than
two-thirds of the fair market value of SFER (as
defined below). For purposes of the preceding
sentence, the "fair market value of SFER" shall be the
aggregate market value of the Company's outstanding
common stock of SFER (on a fully diluted basis) plus
the aggregate market value of SFER's other outstanding
equity securities. The aggregate market value of
SFER's common stock shall be determined by multiplying
the number of shares of SFER's common stock (on a
fully diluted basis) outstanding on the date of the
execution and delivery of a definitive agreement with
respect to the transaction or series of related
transactions (the "Transaction Date") by the average
closing price for SFER's common stock for the ten
trading days immediately preceding the Transaction
Date. The aggregate market value of any other equity
securities of SFER shall be determined in a manner
similar to that prescribed in the immediately
preceding sentence for determining the aggregate
market value of SFER's common stock or by such other
method as the Board shall determine is appropriate.
However, notwithstanding anything in this clause (d)
to the contrary, a spinoff or distribution of the
stock of a Subsidiary to those persons who were
stockholders of SFER immediately prior to such spinoff
or distribution in substantially the same proportion
as their ownership of SFER stock immediately prior to
such spinoff or distribution shall not constitute a
"sale or disposition by SFER of all or substantially
all of SFER's assets."
e. If SFER ceases to own 80% of the combined voting power
of the then outstanding voting securities of the
Company, the term "Company" shall be substituted for
SFER as used in this definition of "Change of Control"
and all other appropriate places; provided, however,
as long as SFER owns 35% or more of the combined
voting power of the voting securities of the Company,
the above "Change in Control" definition shall be
applied separately with respect to SFER and with
respect to the Company as substituted for SFER in the
definition, and a Change in Control with respect to
either SFER or the Company in such situation shall be
a Change in Control for purposes of this Plan.
Notwithstanding anything herein to the contrary, a
distribution by SFER to its stockholders of its
interest in such voting securities of the Company
shall not constitute a Change in Control.
5. "Closing" means the event or events whereby all, or
substantially all of the stock of SFER or the Company or 25% or
more of the assets of SFER or the Company are
-3-
<PAGE> 4
conveyed or transferred to an Acquiring Company in one or a
series of related transactions.
6. "Committee" shall mean a committee comprised of R. Graham
Whaling, David B. Kilpatrick, and Lou E. Shuflin to be the
administrator regarding the application of the Program.
Subject to paragraph B.1, the members of the Committee may be
changed from time to time by the Board.
7. "Company" means Monterey Resources, Inc. or any successor
company.
8. "Constructive Termination" shall mean the actual termination or
resignation of an Eligible Employee from the Company and its
participating Subsidiaries or from the Acquiring Company and
its affiliates, as the case may be, occurring in conjunction
with or within 24 months after a Change in Control or Closing,
whichever is applicable, due to any of the following events:
a. The assignment of any duties materially and adversely
inconsistent with the position in the Company or
Subsidiary, as the case may be, held immediately prior
to the Closing or Change in Control, or a significant
adverse alteration in the nature or status of the
Eligible Employee's responsibilities or the conditions
of employment from those in effect immediately prior
to the Closing or Change in Control;
b. A reduction of 25% or more in the Eligible Employee's
total compensation consisting of Base Salary and the
Company's Incentive Compensation Plan, except for
comparable percentage reductions in total compensation
similarly affecting all management personnel of the
Company or, if applicable, the Acquiring Company or
all management personnel of any person in control of
the Acquiring Company, if applicable;
c. The discharge of the Eligible Employee in conjunction
with or after a Closing or Change in Control for
failure to relocate to a location outside the
metropolitan area in which his office is located
immediately prior to the Closing or Change in Control;
d. The failure to pay to the Eligible Employee any
portion of current compensation or to pay to the
Eligible Employee any portion of an installment of
deferred compensation under any deferred compensation
program of the Company or Subsidiary within seven days
of the date such compensation is due;
e. A 25% reduction in the overall level of benefits under
the Company's group life insurance, medical, health,
accident, disability and pension plans after a
-4-
<PAGE> 5
Closing or Change in Control, unless the employee is
compensated by an increase in Base Salary, or unless
there is a comparable percentage reduction affecting
all management employees of the Company or Acquiring
Company or persons in control of the Acquiring
Company, as the case may be; or
f. The failure to obtain a satisfactory agreement from an
Acquiring Company or any successor to the Company to
assume and agree to continue this Program.
9. "Credited Service" shall be the same as the "Service" for which
each employee is credited under the Company's 401(k) plan for
vesting purposes. A partial month of service shall be credited
as a full month.
10. "Eligible Employee" means any regular, full-time employee of
the Company or any of its participating Subsidiaries who (i) is
not a member of a unit that is covered by any collective
bargaining agreement with the Company or participating
Subsidiary, unless such bargaining agreement provides for the
participation of its members in this Program, and (ii) is
involuntarily terminated or constructively terminated, as
defined herein, from the Company or participating Subsidiary
other than for Cause, disability or death. Notwithstanding the
foregoing however, an Eligible Employee (i) who is offered, but
declines, a substantially comparable position, in the
metropolitan area in which his office is located, with either
the Company or a Subsidiary that has adopted this Program or
maintains its own formal severance program that covers at least
80% of its employees who would otherwise be Eligible Employees
hereunder if it adopted this Program, or (ii) who, after
commencement of payment or benefits under this Program, but
prior to having received the full amount of the Severance
Allowance or benefits for which he was qualified, obtains a
position with the Company or a Subsidiary (whether or not
substantially comparable to his former position) shall cease to
be an Eligible Employee and forfeit any right to any payment
and benefits or further payment and benefits hereunder.
Further, under no circumstances will an employee qualify as an
Eligible Employee if that employee is eligible to receive
benefits under any other formal severance program of the
Company or a Subsidiary; provided, however, the foregoing shall
not apply with respect to a termination that is in connection
with or following a Change in Control or Closing unless such
other program offers substantially comparable benefits.
11. "Severance Allowance" means the total Severance Allowance
available to an Eligible Employee pursuant to Section C1.
12. "SFER" means Santa Fe Energy Resources, Inc.
-5-
<PAGE> 6
13. "Subsidiary" means any corporation, partnership or other entity
of which, at the date of the Eligible Employee's termination of
employment, the Company owns (directly or indirectly) 50% or
more of the outstanding voting securities. A "participating
Subsidiary" means any Subsidiary that has adopted this Program
with the written consent of the Committee.
14. "Vacation" means the vacation amount as provided under the
Company's existing vacation policy. In the event an Eligible
Employee has a written agreement providing additional vacation
benefits, that agreement will govern.
B. IMPLEMENTATION AND AMENDMENT
1. Subject to amendment of the Program as provided below, this
Program shall continue in effect through December 31, 1996;
provided, however, that commencing on January 1, 1997, and each
January 1 thereafter, the Program shall automatically be
extended for one additional year unless, not later than
September 30 of the preceding year, the Board determines that
the Program shall not be so extended; and provided, further,
notwithstanding any provision herein to the contrary, that if a
Change in Control shall have occurred during the original or
extended term of this Program, this Program shall continue in
effect for a period of not less than 24 months beyond the month
in which such Change in Control occurred, during which time
Company is contractually bound to maintain the Program, and,
provided further the membership of the Committee cannot be
changed during the 24 months immediately following such Change
in Control, except with the written consent of a majority of
the members of the Committee.
2. The Company shall determine the date an Eligible Employee's
termination of employment will be effective. Unless such
termination was the result of Constructive Termination, the
Eligible Employee will agree to work until such date, or such
other date as is mutually agreed to by the Company and the
Eligible Employee. Failure to do so will result in forfeiture
of any Severance Allowance and other benefits due that Eligible
Employee under this Program.
3. No payments can be made under the terms of this Program unless
the Eligible Employee has first terminated employment from the
Company and its participating Subsidiaries or the Acquiring
Company and its affiliates, as the case may be. An Eligible
Employee's continued employment following a Closing or Change
in Control shall not be deemed to be consent to, or a waiver of
rights with respect to, any circumstance listed above for a
period of two years from the Closing or Change in Control.
-6-
<PAGE> 7
4. The adoption of this Program is entirely voluntary on the part
of the Company and is not intended nor shall it be construed as
creating a contract of employment between the Company or its
successors or any participating Subsidiary and any Eligible
Employee, nor be construed as a term of employment.
5. The Committee shall have the full discretionary authority to
administer the Program, to construe and interpret the Program,
to decide all questions of eligibility, to determine the
amount, manner and time of payment of any payments and benefits
hereunder and to make all other determinations deemed necessary
or advisable for the administration of the Program.
6. The Board, in its sole discretion, may amend the Program at any
time or times in such manner as it deems appropriate; provided,
however, no such amendment (or any part of an amendment, as the
case may be) made either (i) within six months prior to a
Change in Control or Closing or (ii) on or within 24 months
after a Change in Control or Closing shall be effective with
respect to any Eligible Employee to the extent such amendment
(or part thereof) would reduce the Severance Allowance or any
other benefit such Eligible Employee would have received under
the Program but for such amendment. Further, no amendment may
reduce or adversely affect any benefits already in pay status
under the Program at the date of such amendment. In addition,
the Committee may amend the Program, subject to the above
limitations; provided, however, that no such amendment by the
Committee may significantly increase the benefits or costs of
the Program.
C. SEVERANCE ALLOWANCE
1. The amount of Severance Allowance will be determined by the
following formula:
One week's Base Salary per 12 months of Credited
Service, plus one week's Base Salary per $4,000 of
annual Base Salary, plus one week's Base Salary for
each year of age above 40. The sum of the weeks and
fractional weeks will be rounded to the next highest
full week. One weeks' Base Salary will be computed by
dividing Base Salary by 52.
However, the minimum amount will be 8 weeks' Base
Salary and the maximum amount will be one year's Base
Salary.
a. The amount of the Severance Allowance shall be paid in
a lump sum as soon as practicable following
termination, unless the installment option is elected
by the Eligible Employee. Certain other benefits as
described in Section D, however, are continued for a
limited period as provided therein.
-or-
-7-
<PAGE> 8
b. At the election of the Eligible Employee (made prior
to termination), the amount of the Severance Allowance
shall be paid in equal monthly installments over a
period designated by the Eligible Employee, but not to
exceed 24 months, commencing after his or her date of
termination. Certain benefits as described in Section
D, however, are continued for a limited period as
provided therein.
2. If the terminated Eligible Employee is receiving a Severance
Allowance in monthly installments under option C1(b) and
subsequently accepts a job outside the Company's affiliated
group, the remaining balance will be paid in a lump sum at the
election of the Eligible Employee. Interest will not be paid
on any installment payments. Severance Allowance payments will
be subject to withholdings for all applicable taxes and
appropriate deductions for employee benefits.
3. In the event an Eligible Employee dies after the termination of
his employment and before having received the full amount of
the Severance Allowance for which the Eligible Employee was
qualified, the Eligible Employee's spouse or, if there is no
spouse, the beneficiary designated by the employee under the
Company-sponsored group term life insurance plan, may continue
to receive installment payments under C1(b) or in lieu thereof
may receive a lump sum payment of the remaining balance.
4. In no event shall the aggregate amounts paid pursuant to this
Program to any Eligible Employee exceed two times the Eligible
Employee's "annual compensation" (as defined in DOL Reg.
Section 2510.3-2(b)(2)) for the year immediately preceding
the termination of service.
5. Notwithstanding any other provisions of this Program to the
contrary, an Eligible Employee shall not be eligible to receive
a Severance Allowance or any other benefits under this Program
unless the Eligible Employee executes a release and waiver in a
form provided by the Company; provided, however, the foregoing
shall not apply to a termination of employment that is in
conjunction with or following a Change in Control. No
Severance Allowance or other benefits shall be due or payable
under this Program prior to the effectiveness of such release
and waiver, if applicable.
6. Further, and notwithstanding the foregoing provisions of this
Program, payments or benefits otherwise to be provided to an
Eligible Employee under this Program shall be reduced to the
extent necessary so that no portion thereof shall be subject to
the excise tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"), but only if, by reason
of such reduction, the Eligible Employee's net after tax
benefit shall exceed the net after tax benefit if such
reduction were not made.
-8-
<PAGE> 9
7. Notwithstanding the foregoing provisions of this Program, the
amount of any payment provided under this Program shall be
reduced by any similar payment made by the Company required by
any federal or state law with respect to such termination of
employment.
D. OTHER BENEFITS
All benefits under other employee welfare benefit plans maintained by
the Company and its Subsidiaries shall cease upon the date of
termination except as described below.
1. Whether the Severance Allowance is paid as a lump sum under
C1(a) or in installments under C1(b), effective on the day
following the date of termination, and for two years following
(the "Severance Period"), the Eligible Employee automatically
will continue to be covered by the group medical, dental and
employee life insurance plans in which he participates on the
date his employment terminates or in any successor plan thereto
for similarly situated active employees of the Company and its
affiliates; provided, however, that the amount of life
insurance shall not exceed two times the Eligible Employee's
annual base salary in effect on the date his employment
terminates (except in the case of an employee's "grandfathered"
benefit under a prior plan); and provided further, that the
Eligible Employee makes the employee contributions required, if
any, of similarly situated active employees for such coverage.
The Eligible Employee will be subject to any modifications to
these benefits that are generally applicable to such active
employees, but in no event shall the Company terminate such
benefits prior to the end of the Severance Period, except
should the Eligible Employee cease to make the employee
contributions as may be required hereunder. In the event there
cease to be any such active employees of the Company and its
affiliates during the Severance Period, the benefits shall
nonetheless continue for the remainder of the Severance Period
at the levels (and, if applicable, the active employee premium
cost) in effect immediately prior to such date. Any
contributory portion of an Eligible Employees "grandfathered"
life insurance benefit may be continued or terminated at the
Eligible Employee's choice. Medical and dental coverage will
be extended to include all eligible dependents during the
Severance Period, provided that such dependents were covered
under the Eligible Employee's medical and dental coverage on
the date of his termination.
2. Notwithstanding the above, coverage will cease when the
terminated Eligible Employee becomes covered under another
group health plan (other than one sponsored by the Company for
retirees) which does not contain any exclusion or limitation
with respect to any preexisting condition of such Eligible
Employee. If on the commencement of, during or immediately
following the end of the severance period provided hereunder
the terminated Eligible Employee is eligible and elects to
retire under the Retirement Plan, medical and life insurance
benefits will be provided to the retiree in accordance with the
terms of the Company's Group Health Benefits
-9-
<PAGE> 10
and Group Life Insurance Plans, as described in the Company's
Options Plus Benefits Handbook or similar publications and
benefit plan documents automatically beginning as of the end of
the severance period provided hereunder.
3. If an Eligible Employee does not qualify for group health and
life insurance as a retiree under the Company's Group Health
Benefits Plan or Group Life Insurance Plan, a conversion
privilege for employee life insurance and medical benefits will
be provided within 31 days of the date coverage ceases. No
conversion privilege is available for dental benefits.
4. The group medical and dental benefits provided herein are for
the purpose, in part, of providing at employer expense (other
than the employee charge, if any, for HMO and Hospital
Association coverage) "continuation coverage" after termination
of employment as required under the Consolidated Omnibus Budget
Reconciliation Act ("COBRA"). To the extent that COBRA
requires any benefits or rights in addition to those provided
for by this Program, the Company shall comply with such law and
notify the Eligible Employee or other persons of such rights.
However, to the extent this Program provides any greater rights
or benefits than those required by COBRA, the Eligible
Employees shall receive such greater rights or benefits under
this Program.
5. The above "other" welfare benefits will be payable under such
other plans and programs.
6. Accrued and earned vacation will be paid in a lump sum,
following termination.
E. OUTPLACEMENT COUNSELING
The Company may (but shall not be obligated to) provide, at times and
places specified, outplacement counseling to Eligible Employees
designated by the Company as terminated. The Company will have sole
discretion in selection of the outside vendor and services to be
provided.
F. CLAIM REVIEW PROCEDURE
1. All inquiries concerning claims under the Program shall be
submitted to the Company and shall be addressed as follows: Mr.
L. D. Riggs, 5201 Truxtun, Suite 100, Bakersfield, California
93309.
In the event that any claim for benefits is denied in whole or
in part, the Company shall notify the claimant in writing of
such denial and shall advise the claimant of his or her right
to a review thereof. Such written notice shall set forth, in a
manner calculated to be understood by the claimant, specific
reasons for such denial, specific
-10-
<PAGE> 11
references to the Program provisions on which such denial is
based, a description of any information or material necessary
for the claimant to perfect his or her claim, an explanation of
why such material is necessary and an explanation of the
Program's review procedure. Such written notice shall be given
to the claimant within a reasonable period of time after the
claim is filed with the Company.
2. Any person or his or her duly authorized representative, whose
claim for benefits is denied in whole or in part may appeal
from such denial by submitting to the company a request for a
review of the claim within 60 days after receiving written
notice of such denial from the Company. The Company shall give
the claimant an opportunity to review pertinent documents in
preparing his or her request of review.
3. The request for review must be in writing and shall be
addressed as follows: Mr. L. D. Riggs, 5201 Truxtun, Suite
100, Bakersfield, California 93309. The request for review
shall set forth all of the grounds upon which it is based, all
facts and support thereof and any other matters which the
claimant deems pertinent. The Company may require the claimant
to submit such additional facts, documents or other material as
the Company may deem necessary or appropriate in making its
review.
4. The Company shall act upon each request for review within 60
days after receipt thereof unless special circumstances require
further time for processing, but in no event shall the decision
on review be rendered more than 120 days after the Company
receives the request for review.
5. The Company shall give written notice of its decision to the
claimant. In the event that the Company confirms the denial of
application for benefits in whole or in part, such notice shall
set forth, in a manner calculated to be understood by the
claimant, the specific reasons for such denial and specific
references to the Program provisions on which the decision is
based.
G. ERISA REQUIREMENTS
The following paragraphs contain specific information required by the
Employee Retirement Income Security Act of 1974 (ERISA):
The name of the plan is Monterey Resources, Inc. Severance
Program. The Sponsor of the Program is:
Monterey Resources, Inc.
5201 Truxtun, Suite 100
Bakersfield, California 93309
-11-
<PAGE> 12
The Program is a welfare benefit severance plan under ERISA.
The Administrators of the Program are the members of the
Committee, which may be contacted as follows:
Monterey Severance Plan Committee
Monterey Resources, Inc.
5201 Truxtun, Suite 100
Bakersfield, California 93309
( ) _________________________
Mr. Terry L. Anderson, General Counsel, Monterey Resources, Inc., 5201
Truxtun, Suite 100, Bakersfield, California 93309 is designated as
agent for legal process.] Service of legal process may also be made
upon written request to the Plan Administrator.
The Company's Tax Identification Number (TIN) assigned by the Internal
Revenue Service is __________. The TIN for the Plan Administrator is
________________. The Program's plan identification number is
____________.
Severance Allowances are paid from the general assets of the Company.
The other benefits, if any, provided hereunder, i.e., continued
medical, dental or life insurance benefits, shall be payable under such
other plan or program. As a welfare benefits severance plan, the
benefits provided hereunder are not subject to the insurance provisions
of the Pension Benefit guaranty Corporation (PBGC).
You are entitled to certain rights and protections under the Employee
Retirement Income Security Act of 1974 (ERISA). ERISA provides that
all plan participants shall be entitled to:
Examine, without charge at the office of the Plan
Administrator, all plan documents and copies of all documents
filed by the plan with the U.S. Department of Labor, such as
detailed annual reports and plan descriptions.
Obtain copies of all plan documents and other plan information
upon written request to the Plan Administrator. A reasonable
charge may be made for the copies.
Receive a summary of the plan's annual report. The plan
administrator is required by law to furnish each Eligible
Employee with a copy of the summary annual report.
In addition to creating rights for plan participants, ERISA imposes
duties upon people who are responsible for the operation of the plan.
The people who operate your plan, called "fiduciaries" of the plan,
have the duty to do so prudently and in the interest of you and other
plan participants and beneficiaries. No one, including your employer
or any other person, may fire you or otherwise discriminate against you
in any way to prevent you from obtaining
-12-
<PAGE> 13
a benefit or exercising you rights under ERISA. If your claim for a
benefit is denied in whole or in part, you must receive a written
explanation of the reason for the denial. You have a right to have the
plan review and reconsider your claim. Under ERISA, there are steps
you can take to enforce the above rights. For instance, if you request
materials from the plan and do not receive them within 30 days, you may
file suit in a federal court. In such a case, the court may require
the Plan Administrator to provide the materials and pay you up to $100
a day until you receive the materials, unless the materials were not
sent because of reasons beyond the control of the administrator. If
you have a claim for benefits which is denied or ignored, in whole or
in part, you may file suit in a state or federal court. If its should
happen that plan fiduciaries misuse the plan's money, or if you are
discriminated against for asserting your rights, you may seek
assistance from the U.S. Department of Labor, or you may file suit in a
federal court. The court will decide who should pay court costs and
legal fees. If you are successful, the court may order the person you
have sued to pay these costs and fees. If you lose, the court may
order you to pay these costs and fees; for example, if its finds your
claim is frivolous.
If you have any questions about this statement or your rights under
ERISA, you should contact the Plan Administrator or the Area Office of the U.S.
Labor-Management Service Administration, Department of Labor.
-13-
<PAGE> 1
EXHIBIT 10.10
8/30/96
MONTEREY RESOURCES, INC.
SAVINGS INVESTMENT PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C> <C>
Section I Preamble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
Section II Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
Section III Employee Eligible to Participate . . . . . . . . . . . . . . . . . . . . III-1
Section IV Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
Section V Investment of Contributions . . . . . . . . . . . . . . . . . . . . . . . V-1
Section VI Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1
Section VII Withdrawals Prior to Termination of Employment . . . . . . . . . . . . . VII-1
Section VIII Distributions Other Than Withdrawals . . . . . . . . . . . . . . . . . . VIII-1
Section IX Death Benefits, Beneficiaries, Unclaimed Benefits . . . . . . . . . . . . IX-1
Section X Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1
Section XI Provisions Respecting the Company . . . . . . . . . . . . . . . . . . . . XI-1
Section XII Termination of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-1
Section XIII Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . XIII-1
Section XIV Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIV-1
Attachment A Investment Funds
</TABLE>
(i)
<PAGE> 3
SECTION I
PREAMBLE
1.1 Monterey Resources, Inc. (the "Company") hereby
establishes the Monterey Resources, Inc. Savings Investment Plan (the "Plan"),
to be effective as of the date the Company ceases to be a subsidiary of Santa
Fe Energy Resources, Inc. (the "Spinoff Date").
1.2 The effective date of the Plan for each Participating
Company shall be the date so specified in the resolution of that company which
adopts the Plan.
1.3 The Plan is established by spinning off the accounts
of all employees of the Company on the Spinoff Date under the Santa Fe Energy
Resources Savings Investment Plan (the "SFER Plan") as a separate plan and
continuing such spun-off plan as the Plan without interruption or change,
except as specifically provided herein.
I-1
<PAGE> 4
SECTION II
DEFINITIONS
When used in this Plan, the following terms shall have the
meanings set forth below unless a different meaning is plainly required by the
context:
2.1 "Accounts" shall mean a Participant's Deferred
Contributions Account, Employer Contributions Account, Rollover Account, and/or
Participant Contributions Account, if any.
2.2 "Affiliated Company" shall mean every corporation
(including the Company) which is a member of a controlled group of corporations
(within the meaning of Section 414(b) of the Code), which includes the Company.
"Affiliated Company" shall also mean any trade or business under common control
with an Affiliated Company within the meaning of Section 414(c) of the Code,
and any other entity required to be aggregated with the Company pursuant to
Section 414(m) or (o) of the Code. For purposes of Section 4.8, the
modification of Sections 414(b) and 414(c) of the Code by Section 415(h) of the
Code is incorporated.
2.3 "Annuity Starting Date" shall mean the first day of
the first period for which an amount is payable as an annuity, or in the case
of a benefit not payable in the form of an annuity, the first day on which all
events have occurred which entitle the Participant to such benefit.
2.4 "Beneficiary" shall mean any individual, trust or
other recipient entitled to receive benefits payable hereunder upon the death
of the Participant, as provided in Section 9.2 hereof.
2.5 "Break in Service" shall mean a 12 consecutive month
period during which an Employee remains unemployed by the Affiliated Companies,
which period shall commence with
II-1
<PAGE> 5
the date on which such Employee's employment with the Affiliated Companies is
terminated. The date on which employment is terminated shall be the earlier of
(1) the date on which the Employee quits, is discharged, retires or dies, or
(2) the first anniversary of the date on which a Leave of Absence commences;
provided, however, if an Employee is absent from service for more than 12
months due to her pregnancy, birth or adoption of his or her child or the
caring for such child following its birth or adoption, the 12-month period
following the first anniversary of the date such absence began shall not be
treated as a period of absence for Break in Service purposes. The Employee may
be required to furnish proof of the reason and duration of the absence. The
Plan shall be administered in accordance with the requirements of the Family
Medical Leave Act of 1993.
2.6 "Code" shall mean the Internal Revenue Code of 1986,
as amended.
2.7 "Company Stock" shall mean the common stock of the
Company.
2.8 "Compensation" shall mean the total of base salary or
base wages paid to a Participant by a Participating Company, and any elective
pre-tax salary deferrals made by the Participant with respect to the same under
this Plan and any plan which meets the requirements of Sections 125 and/or 129
of the Code, and shall exclude all other items of compensation including but
not limited to, overtime, bonuses, severance benefits, payments while on a
leave of absence other than for short-term illness, unused vacation pay,
business expense reimbursements, any income realized for federal income tax
purposes as a result of group life insurance, other employee benefit plans or
the grant or exercise of an option to acquire stock, payments made under any
long-term disability plan of a Participating Company, restricted stock, phantom
units and amounts deferred under a non-qualified salary deferral plan.
Compensation shall be determined in accordance with the rules of Section 414(q)
of the Code, except that the term "family" shall include only the
II-2
<PAGE> 6
Participant's spouse and any lineal descendants who have not attained the age
of 19 before the close of the Plan Year.
For purposes of determining the Average Contribution
Percentage, however, Compensation shall mean the Employee's total pay from the
Participating Companies for purposes of Section 415 of the Code, plus any
elective deferrals excluded from his gross income pursuant to Sections 125, 129
or 402(g) of the Code.
Notwithstanding anything herein to the contrary, the amount of
annual compensation deemed to be "Compensation" with respect to any particular
Participant shall not in any event exceed $150,000 during any Plan Year,
subject to cost-of-living adjustments made thereto by the Secretary of the
Treasury or his delegate.
2.9 "Computation Period" means a period of 12 consecutive
months commencing on the date on which the Employee first completes (or,
following a Break in Service, again completes) an Hour of Service, and each
anniversary of such date.
2.10 "Deferred Contributions" shall mean contributions
made on behalf of a Participant pursuant to his election pursuant to Section
4.1 hereof.
2.11 "Deferred Contributions Account" shall mean that
portion of a Participant's interest in this Plan which is attributable to
Deferred Contributions made on his behalf hereunder and, if applicable, his SFP
Plan Deferred Contributions Account transferred to this Plan.
2.12 "Eligible Class" shall mean an Employee of a
Participating Company other than (1) a nonresident alien with no U.S. source
income, (2) a "leased employee" within the meaning of Section 414(n) of the
Code, or (3) an Employee who is included in a bargaining unit that has a
II-3
<PAGE> 7
collective bargaining agreement with the Participating Company, unless the
agreement provides for participating in the Plan by an Employee in such unit.
2.13 "Employee" shall mean any person whose wages from an
Affiliated Company are subject to withholding under Section 3402 of the Code,
and shall also include any "leased employee" within the meaning of Section
414(n) of the Code, except as otherwise permitted by the Code and regulations.
2.14 "Employer" shall mean a Participating Company, or any
successor organization which shall assume the obligations of this Plan with
respect to its Employees.
2.15 "Employer Contributions Account" shall mean that
portion of a Participant's interest in this Plan which is attributable to
Employer contributions made at any time hereunder, other than Deferred
Contributions made on his behalf pursuant Section 4.1 hereof, and, if
applicable, shall include his SFER Plan Employer Contributions Account
transferred to this Plan.
2.16 "Entry Date" shall mean the first day of each month.
2.17 "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
2.18 "Highly Compensated Employee" shall mean any Employee
who performs service for the Employer or an Affiliated Company during the
determination year and who, during the look-back year: (i) received
compensation from the Employer or an Affiliated Company in excess of $75,000
(as adjusted pursuant to section 415(d) of the Code); (ii) received
compensation from the Employer or an Affiliated Company in excess of $50,000
(as adjusted pursuant to section 415(d) of the Code) and was a member of the
top-paid group for such year; or (iii) was an officer of the Employer or an
Affiliated Company and received compensation during such year that is
II-4
<PAGE> 8
greater than 50% of the dollar limitation in effect under section 415(d)(1)(A)
of the Code. The term highly compensated employee also includes: (i)
employees who are both described in the preceding sentence if the term
'determination year' is substituted for the term 'look-back year' and the
employee is one of the 100 employees who received the most compensation from
the employer during the determination year; and (ii) employees who are 5%
owners at any time during the look-back year or determination year.
If no officer has satisfied the compensation requirement of
(iii) above during either a determination year or look-back year, the highest
paid officer for such year shall be treated as a highly compensated employee.
For this purpose, the determination year shall be the plan
year. The look-back year shall be the twelve-month period immediately
preceding the determination year.
A highly compensated former employee includes any employee who
separated from service (or was deemed to have separated) prior to the
determination year, performs no service for the employer during the
determination year, and was a highly compensated active employee for either the
separation year or any determination year ending on or after the employee's
55th birthday.
If an Employee is, during a determination year or look-back
year, a family member of either a 5 percent owner who is an active or former
employee or a highly compensated employee who is one of the 10 most highly
compensated employees ranked on the basis of compensation paid by the Employer
or an Affiliated Company during such year, then the family member and the 5
percent owner or top-ten highly compensated employee shall be aggregated. In
such case, the family member and 5 percent owner or top-ten highly compensated
employee shall be treated as a single employee receiving compensation and plan
contributions or benefits equal to the sum of such
II-5
<PAGE> 9
compensation and contributions or benefits of the family member and 5 percent
owner or top-ten highly compensated employee. For purposes of this section,
family member includes the spouse, lineal ascendants and descendants.
The determination of who is a highly compensated employee,
including the determinations of the number and identity of employees in the
top-paid group, the top 100 employees, the number of employees treated as
officers and the compensation that is considered, will be made in accordance
with section 414(q) of the Code and the regulations thereunder.
2.19 "Hours of Service" shall mean each hour for which an
Employee is paid, or entitled to payment, for the performance of duties for an
Affiliated Company.
2.20 "Named Fiduciary" shall mean the Plan Administrator.
2.21 "Normal Retirement Date" shall mean the Valuation
Date on or next following a Participant's 65th birthday (the "Normal Retirement
Age").
2.22 "Participant" shall mean an Employee who meets the
eligibility requirements set forth in Section III hereof and who has taken all
of the steps required for participation by said Section III and a former
Employee who has an Account under the Plan. Participant shall also include an
Employee who makes a rollover contribution to the Plan pursuant to Section 4.2.
2.23 "Participant Contributions Account" shall mean, if
applicable, that portion of a Participant's interest in this Plan which is
attributable to his SFER Plan Participant Contributions Account transferred to
this Plan. Any portion thereof attributable to Participant after-tax
contributions made prior to 1987 shall be separately accounted for under the
Account.
2.24 "Participating Company" shall mean each Affiliated
Company which has adopted this Plan pursuant to Section XIII.
II-6
<PAGE> 10
2.25 "Plan" shall mean the Monterey Resources, Inc.
Savings Investment Plan as set forth herein and all subsequent amendments
thereto.
2.26 "Plan Administrator" shall mean the Employee Benefits
Committee of at least three persons appointed by the Chief Executive Officer of
the Company to serve as Plan Administrator.
2.27 "Plan Year" shall mean the calendar year, which shall
also be the limitation year for purposes of Section 415 of the Code.
2.28 "Qualified Joint and Survivor Annuity" shall mean an
immediate annuity for the life of the Participant with a survivor annuity of
50% for the life of his spouse, as his contingent annuitant, as described in
Option 2 in Section 8.1.
2.29 "Retirement" shall mean a Participant terminates his
employment with all Affiliated Companies at a time when he is eligible to
commence receiving a vested annuity benefit under any qualified defined benefit
plan maintained by an Affiliated Company.
2.30 "Rollover Account" shall mean that portion of a
Participant's interest in this Plan which is attributable to a qualified
rollover contribution (within the meaning of Section 402 of the Code) made to
the Plan by the Participant.
2.31 "Total Disability" shall mean a Participant's
eligibility for benefits under the Company's Long-Term Disability Plan. Total
Disability shall be deemed to exist only when a written application has been
filed with the Employer or its designee by or on behalf of such Participant and
when such Total Disability is certified to the Employer or its designee by a
licensed physician approved by the Employer or his designee.
II-7
<PAGE> 11
2.32 "Trustee" shall mean the trustee under any trust
agreement established between the Company and the Trustee for the purpose of
holding assets of the Plan.
2.33 "Valuation Date" shall mean each business day of the
Plan Year.
2.34 "Year of Service" shall mean a Computation Period
during which an Employee is employed or deemed to be employed by an Affiliated
Company for the full Computation Period; provided, however, if a termination of
employment of such Employee shall occur, followed by the completion of an Hour
of Service prior to incurring a Break in Service, then the period commencing
with such termination of employment and extending to the date he again
completes an Hour of Service shall be credited for determining the Employee's
Years of Service; provided further, however, if an Employee is absent from
service due to her pregnancy, birth or adoption of his or her child or the
caring for such child following its birth or adoption, the Employee shall be
credited with the period of such maternity/paternity absence but not in excess
of 12 months. The Employee may be required to furnish proof of the reason and
duration of such absence.
All Years of Service (and fractional parts thereof), whether
or not continuous, shall be aggregated on the basis that 365 days of service
equals one full Year of Service; provided, however, any Years of Service (or
parts thereof) completed prior to becoming vested shall be disregarded if the
Employee incurs five or more consecutive Breaks in Service.
Each Employee's service prior to the effective date of the
Plan shall be the amount shown by the Employer's records (or the SFER Plan) as
of that date. Further, prior service with a predecessor employer or an
acquired business before the date such entity or business became an Affiliated
Company shall not be credited under the Plan except to the extent the President
of the Company provides otherwise in a nondiscriminatory manner.
II-8
<PAGE> 12
The singular form of any word shall include the plural and the
masculine gender shall include the feminine wherever necessary for the proper
interpretation of this Plan.
II-9
<PAGE> 13
SECTION III
EMPLOYEES ELIGIBLE TO PARTICIPATE
3.1 Each Employee who is a Participant on the Spinoff
Date shall continue as a Participant as of that date. Each other Employee or
future Employee of a Participating Company shall be eligible to become a
Participant as of the first Entry Date on or immediately following the date he
completes an Hour of Service, or on any subsequent Entry Date, provided he is
in the Eligible Class on such Entry Date.
3.2 In the event a former Employee is rehired and again
becomes a member of the Eligible Class, or an Employee transfers into the
Eligible Class, he shall be eligible to participate in the Plan as of his date
of rehire or transfer into the Eligible Class, as the case may be, or as of any
future Entry Date thereafter, provided he is in the Eligible Class on such
future Entry Date.
3.3 Participating Companies shall notify all Employees in
the Eligible Class of their eligibility to participate and shall give them an
opportunity to become Participants.
3.4 To become a Participant, an Employee must meet the
above requirements of this Section and execute and deliver to the Participating
Company in accordance with procedures established by the Plan Administrator a
written election form indicating his desire to have a portion of his
Compensation contributed to the Plan as Deferred Contributions. He must
specify his chosen rate of Deferred Contributions and authorize the
Participating Company to make regular payroll reductions of such Deferred
Contributions. In addition, the Employee must make an investment election as
described in Section V hereof. No Employee shall become a Participant until he
has met the above requirements. Elections shall be processed by the
Participating Companies, in accordance
III-1
<PAGE> 14
with procedures established by the Plan Administrator, as soon as reasonably
practicable after their receipt.
III-2
<PAGE> 15
SECTION IV
CONTRIBUTIONS
4.1 Each Employee who is eligible to participate in the
Plan must, in order to participate, elect to have his Compensation reduced each
payroll period by either (x) a whole percentage (not to exceed 12%) or (y) a
dollar amount equal to the maximum dollar amount permitted by Section 402(g) of
the Code for such Plan Year divided by the number of payroll periods in the
Plan Year (or, upon a Participant's initial participation following his date of
hire or rehire, the number of payroll periods remaining in the Plan Year), but
not to exceed 12% of Compensation, and to have the amount by which his
Compensation is reduced contributed to the Plan by his Employer on his behalf
as before-tax Deferred Contributions. No contributions may be made by a
Participant unless he is in the Eligible Class.
4.2 An Employee who is in the Eligible Class but elects
not to make contributions pursuant to Section 4.1 shall be eligible to make a
rollover contribution (including in the form of a "direct" rollover) to the
Plan by wire transfer or by check acceptable to the Plan Administrator,
provided such contribution satisfies the requirements of Section 402(a) of the
Code as being a 'qualified rollover,' and the Employee satisfies such other
administrative requirements concerning such rollover contributions as may be
required, including designating the investment fund(s) for such contribution.
Rollover contributions are not subject to a Company matching contribution.
4.3 Election forms shall be distributed by the Plan
Administrator to all eligible Employees. All elections shall apply to
Compensation to be received after the election becomes effective. Any eligible
Employee who fails to return a properly completed election form in a timely
IV-1
<PAGE> 16
manner to the Plan Administrator shall be deemed to have elected to have all of
his Compensation included in his regular paycheck.
4.4 Participant Deferred Contributions shall be made by
means of payroll reductions and the amounts so withheld shall be paid as soon
as reasonably practicable without interest to the Trustee by the Participating
Companies and shall be credited to the Participant's Deferred Contributions
Account.
4.5 The Participating Companies shall make matching
Employer contributions to the Trustee hereunder on or as soon as reasonably
practicable following the end of each pay period in regard to their
Participants which shall be credited to the Participants' Employer
Contributions Accounts. The amount of the matching Employer contribution to be
made for any particular pay period with respect to any particular Participant
shall be equal to 100% of the Deferred Contributions, up to 4% of his
Compensation, actually made hereunder on behalf of such Participant for that
pay period.
In addition, the Company may, with respect to any Plan Year,
determine that an additional matching contribution (the "Employer Performance
Match Contribution") shall be made as of the end of such Plan Year to those
Participants who are Employees at the end of the Plan Year. The amount of such
Employer Performance Match Contribution made with respect to any Participant
shall equal the Bonus Percentage for such Plan Year multiplied by the aggregate
of the Employer matching contributions (as described in the immediately
preceding paragraph) made with respect to such Participant for such Plan Year,
with the Bonus Percentage being established by the Plan Administrator, in its
discretion, on a uniform basis for all affected Participants, but in no event
shall the Bonus Percentage for any Plan Year exceed 50%.
IV-2
<PAGE> 17
The Plan is intended to qualify as a profit sharing plan under
Section 401(a) of the Code; however, unless the Board directs, with respect to
any Plan Year, that contributions shall not be made in the absence of profits,
the above described contributions shall be made by the Employer in the absence
of current or accumulated earnings and profits provided the Plan will continue
to qualify as a profit sharing plan under Section 401(a)(27) of the Code. The
Employer matching contribution may be made in cash, Company Stock or any
contribution thereof as determined by the Company.
4.6 The Participant may elect to change his rate of
Deferred Contributions as of any payroll period (such changes shall be limited
to those percentages or amount described in Section 4.1) and may elect to
suspend his Deferred Contributions entirely as of any payroll period with each
such suspension being for three months. The Participant's election to suspend
or change his rate of contributions must be made by notice to the Participating
Company in the manner established by the Plan Administrator prior to the
processing cut-off date for such payroll period. If received after the cut-off
date, the election shall be processed by the Participating Company as soon as
reasonably practicable thereafter.
4.7 If the Participant elects to suspend his
contributions, he may elect to resume Deferred Contributions as of any payroll
period that is three or more months after the effective date of such
suspension. An election to resume contributions must notify the Participating
Company and/or the Administrator and such request will be processed as soon as
reasonably practicable after its receipt.
IV-3
<PAGE> 18
4.8 I. Excess Deferrals.
(a) A Participant's Deferred Contributions shall in no
event exceed $9,500 for the 1996 taxable year of the Participant.
This dollar limitation shall be adjusted annually for years after 1996
as provided in Code Section 415(d) pursuant to regulations. The
adjusted limitation shall be effective as of January 1 of each
calendar year.
(b) In the event that the dollar limitation provided for
in (a) is exceeded, the Plan Administrator shall direct the Trustee to
distribute such excess amount, and any income (or loss) allocable to
such amount (as provided in (d) below), to the Participant not later
than the first April 15 following the close of the Participant's
taxable year.
(c) In the event that a Participant is also a participant
in (1) another qualified cash or deferred arrangement (as defined in
Code Section 401(k)), (2) a simplified employee pension (as defined in
Code Section 408(k)), or (3) a salary reduction arrangement (within
the meaning of Code Section 3121(a)(5)(D)) and the elective deferrals,
as defined in Code Section 402(g)(3), made under such other
arrangement(s) and this Plan cumulatively exceed $9,500 (or such
amount adjusted annually as provided in Code Section 415(d) pursuant
to regulations) for such Participant's taxable year, the Participant
may, not later than March 1 following the close of his taxable year,
notify the Plan Administrator in writing of such excess and request
that his 401(k) contributions under this Plan be reduced by an amount
specified by the Participant. Such amount shall then be distributed
in the same manner as provided in (b).
(d) The income (or loss) allocable to returnable excess
deferrals for a Plan Year shall be determined by the Plan
Administrator in a reasonable manner and need not include
IV-4
<PAGE> 19
any gain or loss for the period between the end of the Plan Year and
the date of distribution. Income includes all earnings and
appreciation, including such items as interest, dividends, rent,
royalties, gains from the sale of property, appreciation in the value
of stocks, bonds, annuity and life insurance contracts, and other
property, without regard to whether such appreciation has been
realized.
Unless the Plan Administrator elects otherwise for a Plan
Year, the income (or loss) allocable to returnable contributions for
the Plan Year shall be determined by multiplying the income (or loss)
for the Plan Year allocable to employee contributions, matching
contributions, and amounts treated as matching contributions
(whichever is applicable) by a fraction. The numerator of the
fraction shall be the amount of returnable contributions made on
behalf of the employee for the Plan Year. The denominator of the
fraction shall be the total account balance of the employee
attributable to employee contributions, matching contributions and
amounts treated as matching contributions as of the end of the Plan
Year, reduced by the gain allocable to such total amount for the Plan
Year and increased by the loss allocable to such total amount for the
Plan Year.
II. Actual Deferral Percentage.
For purposes of this Section, Actual Deferral Percentage
("ADP") means, with respect to the Highly Compensated Employee group and
Non-Highly Compensated Employee group for a Plan Year, the average of the
ratios, calculated separately for each member in such group, of the amount of
Deferred Contributions allocated to each Participant's Deferred Contribution
Account (unreduced by distributions made pursuant to I(b) and (d) above) for
such Plan Year, to such Participant's Section 415 Compensation for such Plan
Year. In the case of a Highly Compensated
IV-5
<PAGE> 20
Employee who is either a 5% owner or one of the ten most highly compensated
employees, the ADP for the Family Member group (which is treated as one Highly
Compensated Employee) is the ADP determined by combining the elective
contributions, compensation and amounts treated as elective contributions of
all eligible Family Members. Except to the extent taken into account in the
preceding sentence, the contributions, compensation and amounts treated as
elective contributions of all Family Members are disregarded in determining the
ADP for the groups of Highly Compensated Employees and Non-Highly Compensated
Employees.
In the case of a Highly Compensated Employee whose ADP is
determined under the family aggregation rules, the ADP is reduced in accordance
with the "leveling" method described in the regulations and the excess
contributions for the family unit are allocated among the Family Members in
proportion to the contributions of each Family Member that have been combined.
For purposes of this Section 4.3, a Family Member is an Employee's spouse,
lineal ascendants or descendants or a spouse of such lineal ascendant or
descendent.
III. Actual Deferral Percentage Test.
(a) Maximum Annual Allocation: For each Plan Year, the
annual allocation derived from Deferred Contributions to a
Participant's Deferred Contribution Account shall satisfy one of the
following tests:
(1) The ADP for the Highly Compensated Employee
group shall not be more than the ADP of the Non-Highly
Compensated Employee group multiplied by 1.25, or
(2) The excess of the ADP for the Highly Compensated
Employee group over the ADP for the Non- Highly Compensated
Employee group shall not be more
IV-6
<PAGE> 21
than two percentage points. Additionally, the ADP for the
Highly Compensated Employee group shall not exceed the ADP for
the Non-Highly Compensated Employee group multiplied by two.
This alternative limitation test cannot be used to satisfy the
ADP test and the Actual Contribution Percentage test set forth
below except as otherwise provided by Treasury Regulation
Section 1.401(m)-2(b), the provisions of which are hereby
incorporated by reference.
(b) For the purposes of Sections II(a) and III, a Highly
Compensated Employee and a Non-Highly Compensated Employee shall
include any Employee eligible to make a Deferred Contribution, whether
or not such contribution was made.
(c) For the purposes of this Section, if two or more
plans which include cash or deferred arrangements are considered one
plan for the purposes of Code Section 401(a)(4) or 410(b), the cash or
deferred arrangements included in such plans shall be treated as one
arrangement. The aggregated plans must also satisfy Code Sections
401(a)(4) and 410(b) as though they were a single plan.
(d) For purposes of this Section, if a Highly Compensated
Employee is a member under two or more cash or deferred arrangements
of the Employer, all such cash or deferred arrangements (other than
those that may not be permissively aggregated as a single arrangement)
shall be treated as one cash or deferred arrangement for the purpose
of determining the deferral percentage with respect to such Highly
Compensated Employee.
IV-7
<PAGE> 22
IV. Adjustments As A Result of Actual Deferral Percentage
Test.
The amount of excess contributions for a Highly Compensated
Participant will be determined in the following manner: First, the actual
deferral ratio (ADR) of the Highly Compensated Participant with the highest ADR
is reduced to the extent the ADR of the Highly Compensated Participant with the
next highest ADR is reduced to the extent necessary to satisfy the actual
deferral percentage (ADP) test or cause such ratio to equal the ADR of the
Highly Compensated Participant with the next highest ratio. Second, this
process is repeated until the ADP test is satisfied. The amount of excess
contributions for a Highly Compensated Participant is then equal to the total
of elective and other contributions taken into account for the ADP test minus
the product of the employee's reduced deferral ratio as determined above and
the employee's compensation. In the case of a Highly Compensated Participant
whose ADR is determined under the family aggregation rules, the determination
of the amount of excess contributions shall be made as follows: The ADR is
reduced in accordance with the "leveling" method described above and the excess
contributions are allocated among the Family Members in proportion to the
contributions of each Family Member that have been combined.
The amount of excess contributions to be distributed shall be
reduced by excess deferrals previously distributed for the taxable year ending
in the same plan year and excess deferrals to be distributed for a taxable year
will be reduced by excess contributions previously distributed for the plan
year beginning in such taxable year. The distribution of excess contributions
will include the income allocable thereto. The income allocable to excess
contributions includes only income for the plan year for which the excess
contributions were made. Such correction shall be made on
IV-8
<PAGE> 23
or before the 15th day of the third month following the end of the Plan Year,
but in no event later than the close of the following Plan Year.
Nonelective contributions and Employer matching contributions
may be treated as elective contributions for purposes of the ADP test only if
(i) such contributions are nonforfeitable when made and are subject to the same
distribution restrictions that apply to elective contributions, (ii)
nonelective contributions and Employer matching contributions which may be
treated as elective contributions must satisfy these requirements without
regard to whether they are actually taken into account as elective
contributions, (iii) the amount of nonelective contributions, including those
qualified nonelective contributions treated as elective contributions for
purposes of the actual deferral percentage test, satisfies the requirements of
section 401(a)(4), (iv) the amount of nonelective contributions treated as
elective contributions for purposes of the actual deferral percentage test and
those qualified nonelective contributions treated as matching contributions for
purposes of the actual contribution percentage test, satisfies the requirement
of section 401(a)(4), and (v) the elective contribution is allocated to the
employees's account as of a date within that Plan Year, and (vi) the plan that
includes the cash or deferred arrangement and the plan or plans to which the
qualified nonelective contributions and qualified matching contributions are
made, could be aggregated for purposes of section 410(b) (other than the
average benefit percentage test).
In lieu of a corrective distribution, the Employer may make a
special contribution to the Employer Accounts of one or more groups of
Non-Highly Compensated Employees in a manner sufficient to satisfy one of the
tests set forth in Section III(a). Such contribution shall be fully vested,
separately accounted for and subject to the same restrictions on withdrawal as
apply to Deferred
IV-9
<PAGE> 24
Contributions, but no in-service hardship withdrawal shall be permitted with
respect to any such contribution.
V. Maximum Actual Contribution Percentage.
(a) The Actual Contribution Percentage ("ACP") for the
Highly Compensated Employee group shall not exceed the greater of:
(1) 125% of such percentage for the Non-Highly
Compensated Employee group; or
(2) the lesser of 200% of such percentage for the
Non-Highly Compensated Employee group, or such percentage for
the Non-Highly Compensated Employee group plus two percentage
points.
(b) For the purposes of this Section V and Section VI,
ACP for a Plan Year means, with respect to the Highly Compensated
Employee group and Non-Highly Compensated Employee group, the average
of the ratios (calculated separately for each member in each group)
of:
(1) the sum of the Employer matching
contributions contributed (and any employee after-tax
contributions) under the Plan on behalf of each such member
for such Plan Year; to
(2) the Participant's Section 415 Compensation
for such Plan Year.
(c) In the case of a Highly Compensated Employee who is
either a 5% owner or one of the ten most highly compensated employees,
the actual contribution ratio (ACR) for the family group (which is
treated as one Highly Compensated Employee) is the ACR determined by
combining the contributions and compensation of all eligible Family
IV-10
<PAGE> 25
Members. Except to the extent taken into account in the preceding
sentence, the contributions, compensation of all Family Members are
disregarded in determining the actual contribution percentages for the
groups of Highly Compensated Employees and Non-Highly Compensated
Employees. In all cases the determination and treatment of the ACP of
any participant shall satisfy such other requirements as may be
prescribed by the Secretary of the Treasury.
(d) For purposes of this Section, if two or more plans of
the Employer to which matching contributions, Employee contributions,
or elective deferrals are made are treated as one plan for purposes of
Code Section 410(b), such plans shall be treated as one plan for
purposes of this Section. In addition, if a Highly Compensated
Employee participates in two or more plans described in Code Section
401(a) or arrangements described in Code Section 401(k) which are
maintained by the Employer to which such contributions are made, all
such contributions shall be aggregated for purposes of this Section.
(e) For purposes hereof, Highly Compensated Employee and
Non-Highly Compensated Employee shall include any Employee eligible to
have matching contributions allocated to his account for the Plan
Year.
VI. Adjustments for Excessive ACP.
(a) In the event that the ACP for the Highly Compensated
Employee group exceeds the ACP for the Non-Highly Compensated Employee
group pursuant to Section V(a), the Plan Administrator (on or before
the 15th day of the third month following the end of the Plan Year,
but in no event later than the close of the following Plan Year) shall
direct the Trustee to proportionately distribute to the Highly
Compensated Employee group the
IV-11
<PAGE> 26
vested amount of "Excess Aggregate Contributions" (and any income
allocable to such contributions as provided in (d) of Section I and
forfeit such "Excess Aggregate Contributions" that are not vested
(including income or loss as determined under Section I). Employer
contributions and employee after-tax contributions shall be returned
pro rata as necessary to satisfy this Section. Such distribution or
forfeiture shall be made on behalf of the Highly Compensated Employee
group in the order of their ACP beginning with the highest of such
percentages. Forfeitures of "Excess Aggregate Contributions" shall
not be allocated to a Highly Compensated Employee whose contributions
are reduced pursuant to this Section.
In lieu of a corrective distribution, the Company may make a
special contribution to the Deferred Contribution Accounts of one or
more groups of Non-Highly Compensated Employees in a manner sufficient
to satisfy one of the tests set forth in Section V(a). Such
contribution shall be fully vested and subject to the same
restrictions on withdrawal as apply to Participant Deferred
Contributions but may not be withdrawn under the hardship rules.
(b) For the purposes of this Section, "Excess Aggregate
Contributions" means, with respect to any Plan Year, the excess of:
(1) the aggregate amount of contributions
pursuant to Sections VI(b)(1) and VI(c) actually made on
behalf of the Highly Compensated Employee group for such Plan
Year, over
(2) the maximum amount of such contributions
permitted under the limitations of Section VI(a).
IV-12
<PAGE> 27
(c) The amount of excess aggregate contributions for a
highly compensated employee under the Plan will be determined in the
following manner: First, the actual contribution ratio (ACR) of the
highly compensated employee with the highest ACR is reduced to the
extent necessary to satisfy the actual contribution percentage (ACP)
test or cause such ratio to equal the ACR of the highly compensated
employee with the next highest ratio. Second this process if repeated
until the ACP test is satisfied. The amount of excess aggregate
contributions for a highly compensated employee is then equal to the
total of employee, matching and other contributions taken into account
for the ACP test minus the product of the employee's contribution
ratio as determined above and the employee's compensation.
In the case of a highly compensated employee whose ACR is
determined under the family aggregation rules, the determination of
the amount of excess aggregate contributions shall be made as follows:
the ACR is reduced is accordance with the "leveling" method described
above and the excess aggregate contributions are allocated among the
family members in proportion to the contributions of each family
member that have been combined.
In the case of a highly compensated employee who is either a
5% owner or one of the ten most highly compensated employees and is
thereby subject to the family aggregation rules, the actual
contribution ratio (ACR) for the family group (which is treated as one
highly compensated employee) is the ACR determined by combining the
contributions and compensation of all eligible family members. Except
to the extent taken into account in the preceding sentence, the
contributions and compensation of all family members are
IV-13
<PAGE> 28
disregarded in determining the actual contribution percentages for the
groups of highly compensated employees and nonhighly compensated
employees.
The amount of excess aggregate contributions for a plan year
shall be determined only after first determining the excess
contributions that are treated as employee contributions due to
recharacterization.
(d) Notwithstanding anything in the Plan to the contrary,
an employer matching contribution may be distributed only if such
contribution is an excess aggregate contribution. It may not be
distributed merely because it relates to an excess deferral, an excess
contribution or an excess aggregate contribution that is distributed.
In such cases, when an election contribution is distributed to meet
the requirements of Code Section 401(k) the related matching
contribution shall be forfeited notwithstanding anything in the Plan
to the contrary.
To prevent the multiple use of the alternative methods of
compliance with the ADP test and the ACP test, the provision of
section 1.401(m)-2 of the regulations are hereby incorporated by
reference to determine if such multiple use exists. If, after the
applicable of such test, multiple use exists, the actual contributions
percentage shall be reduced as provided in section 1.401(m)-2(c) of
the regulations for all highly compensated employees in the Plan.
If the Plan Administrator determines that the limitations set
forth in this section (with or without restructuring) would be exceeded for the
Plan Year, then the Plan Administrator shall reduce to the Limitation
Percentage described in the foregoing table the percentage amount of Deferred
Contributions (or the total percentage amount of Employer matching
contributions) of each
IV-14
<PAGE> 29
eligible Highly Compensated Employee whose Deferred Contribution percentage is
more than the Limitation Percentage (or whose Employer matching contribution
percentage gives rise to a percentage in excess of the Limitation Percentage).
The Plan Administrator shall have the authority to establish a lower Limitation
Percentage if, in the discretion of the Plan Administrator, this would be
beneficial to the Plan by ensuring compliance with the safe-harbor provisions
of Sections 401(k)(3)(A) and 401(m)(2) of the Code. The reduced percentage for
each such Highly Compensated Employee shall be substituted for his actual
elected percentage and shall represent the percentage of his Compensation that
shall be paid into the Plan on his behalf. The amount of any reduction which
is necessary shall be included in the Participant's regular paycheck.
Notwithstanding the foregoing, in the event the Actual
Contribution Percentage is not satisfied at year-end, the Plan Administrator
(on or before the 15th day of the third month following the end of the Plan
Year, but in no event later than the close of the following Plan Year) shall
direct the Trustee to distribute to the Highly Compensated Employee group (or
forfeit, if nonvested), beginning with the Highly Compensated Employee with the
highest Average Contribution Percentage, the amount of "Excess Deferred
Contributions", as described in Section 401(k)(8)(B) of the Code, and/or
"Excess Aggregate Contributions", as described in Section 401(m)(6)(B) of the
Code, as the case may be, and any income (or loss) allocable to such excess
contributions as provided below, until the applicable test set forth above is
met.
Excess Aggregate Contributions shall be distributed from the
Participant Deferred Contribution Account and the Participant's Employer
Contribution Account (unless otherwise forfeitable under the terms of the Plan,
in which event such amount shall be forfeited from the Employer Contribution
Account) in proportion to the Deferred Contributions and Employer
IV-15
<PAGE> 30
Contributions allocated with respect to the Participant for the Plan Year.
Amounts of Employer Contributions forfeited by Highly Compensated Employees
under this Section 4.7 shall be treated as Annual Additions under Section 4.8
of the Plan and applied to reduce future Employer Contributions otherwise to be
made under the Plan.
The income (or loss) allocable to such excess contributions
shall equal the sum of the allocable gain (or loss) for the Plan Year and the
allocable gain (or loss) for the period between the end of the Plan Year and
the date of distribution (or forfeiture) as determined below. Income includes
all earnings and appreciation, including such items as interest, dividends,
rent, royalties, gains from the sale of property, appreciation in the value of
stocks, bonds, annuity and life insurance contracts, and other property,
without regard to whether such appreciation has been realized.
(1) The income (or loss) allocable to returnable
contributions (or forfeitable Employer matching amounts) for the Plan
Year is determined by multiplying the income (or loss) for the Plan
Year allocable to Participant contributions and Employer matching
contributions by a fraction, the numerator of which is the amount of
returnable contributions (or forfeitable matching amounts) made on
behalf of the Participant for the Plan Year and the denominator of
which is the total account balance of the Participant attributable to
Participant contributions and Employer matching contributions as of
the end of the Plan Year, reduced by the gain allocable to such total
amount for the Plan Year and increased by the loss allocable to such
total amount for the Plan Year.
(2) The allocable income (or loss) for the period between
the end of the Plan Year and distribution date is equal to 10% of the
income (or loss) allocable to returnable contributions (or forfeitable
Employer matching amounts) for the Plan Year (as calculated
IV-16
<PAGE> 31
under subparagraph (1) (above) multiplied by the number of calendar
months that have elapsed since the end of the Plan Year. For purposes
of determining the number of calendar months that have elapsed, a
distribution occurring on or before the fifteenth day of the month
will be treated as having been made on the last day of the preceding
month, and a distribution occurring after such fifteenth day will be
treated as having been made on the first day of the next month.
4.7 Notwithstanding anything contained herein to the
contrary, the total annual additions (as defined below) allocated to the
Accounts of a Participant for any Plan Year shall not exceed the lesser of (i)
$30,000, or, if greater, 1/4 of the dollar limitation in effect under Code
Section 415(b)(1)(A), or ((i) 25% of the Participant's Section 415 Compensation
(as defined below). Annual additions means the sum of the following amounts
credited to a Participants Accounts for the limitation year:
(a) employer contributions,
(b) employee contributions,
(c) forfeitures, and
(d) amounts allocated, after March 31, 1984, to an individual
medical account, as defined in section 415(1)(2) of the Code, which is
part of a pension or annuity plan maintained by the employer. Also
amounts derived from contributions paid or accrued after December 31,
1985, in taxable years ending after such date, which are attributable
to post-retirement medical benefits, allocated to the separate account
of a key employee, as defined in section 419A(d)(3) of the Code, under
a welfare benefit fund, as defined in section 419(e) of the Code,
maintained by the employer shall be treated as annual additional.
IV-17
<PAGE> 32
Section 415 Compensation means wages, salaries, and fees for
professional services and other amounts received (without regard to whether or
not an amount is paid in cash) for personal services actually rendered by the
employee in the course of employment with the employer maintaining the plan to
the extent that the amounts are includable in gross income (including, but not
limited to, commissions paid salesmen, compensation for services on the basis
of a percentage of profits, commissions on insurance premiums, tips, bonuses,
fringe benefits, reimbursements, and expense allowances), and excluding the
following:
(a) employer contributions to a plan of deferred
compensation which are not includable in the employee's gross income
for the taxable year in which contributed, or employer contributions
under a simplified employee pension plan to the extent such
contributions are deductible by the employee, or any distributions
from a plan of deferred compensation;
(b) amounts realized from the exercise of a non-qualified
stock option, or when restricted stock (or property ) held by the
employee either becomes freely transferable or is no longer subject to
a substantial risk of forfeiture;
(c) amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock option; and
(d) other amounts which received special tax benefits, or
contributions made by the employer (whether or not under a salary
reduction agreement) towards the purchase of an annuity described in
section 403(b) of the Internal Revenue Code (whether or not the
amounts are actually excludable from the gross income of the
employee).
IV-18
<PAGE> 33
For purposes of applying these limitations, compensation for a
limitation year is the compensation actually paid or includable in the
employee's gross income during such limitation year.
If, as a result of the allocation of forfeitures, a reasonable
error in estimating a Participant's compensation, a reasonable error in
determining the amount of 401(k) contributions that may be made by a
Participant, or such other facts and circumstances as the Commissioner
approves, the annual additions exceed the applicable limitations set forth
above, the unmatched 401(k) contributions of the Participant (plus any income
thereon) shall first be returned to the extent necessary, then the Employer
contributions for the Plan Year beginning first with matching contributions
which cause the excess (and the income thereon) shall be placed in a suspense
account and used to reduce Employer contributions for that Participant for the
next Plan Year (and succeeding Plan Years, as necessary) if that Participant is
covered by the Plan as of the end of the Plan Year. If the Participant is not
covered by the Plan as of the end of the Plan Year, the amount in the suspense
account shall be reallocated the next Plan Year to the remaining Participants
as additional Employer contributions, subject to the limits of this Section.
Notwithstanding the foregoing, contributions with respect to
any Participant may be further reduced to the extent necessary, as determined
by the Plan Administrator, to prevent disqualification of the Plan under
Section 415 of the Code, which imposes additional limitations on the benefits
payable to Participants who also may be participating in another tax-qualified
pension, profit-sharing, savings or stock bonus plan maintained by an
Affiliated Company.
If a Participant is at any time a participant in both a
defined benefit plan and a defined contribution plan maintained by an
Affiliated Company, the sum of the "defined benefit plan
IV-19
<PAGE> 34
fraction" and the "defined contribution plan fraction" for any Plan Year may
not exceed 1.0 and, if necessary, the annual benefit of the defined benefit
plan will be reduced first so that the sum of the fractions will not exceed
1.0; in no event will the annual benefit be decreased below the amount of the
accrued benefit to date. If additional reductions are required for the sum of
the fractions to equal 1.0, the reductions will then be made to the annual
additions (as defined in Section 415 of the Code) of the defined contribution
plans. For the purposes of applying the foregoing limitations, all defined
benefit plans and all defined contribution plans, whether or not terminated, of
an Affiliated Company are to be treated as one defined benefit plan and one
defined contribution plan, respectively; however, if defined contribution plans
are combined (or the combined limit is exceeded) and the annual addition is
required to be reduced, the annual addition to such other defined contribution
plans shall be reduced first.
Further, the provisions of Section 415 of the Code that may
not be applied in more than one manner are hereby incorporated by reference and
shall control over any provision in the Plan in conflict therewith.
IV-20
<PAGE> 35
SECTION V
INVESTMENT OF CONTRIBUTIONS
5.1 For the purpose of investing contributions under this
Plan, the Company shall establish one or more trusts or enter into one or more
group annuity contracts with one or more insurers, or may establish a
combination of one or more trusts or insurance contracts. The Plan
Administrator shall have the responsibility for selecting the investment funds
offered hereunder and may, from time-to-time, select substitute funds,
establish additional funds, or delete funds for the purpose of investing
amounts derived from contributions hereunder. Until changed as provided above,
contributions to the Plan shall be invested in the Investment Funds on
Attachment A to the Plan.
The Plan Administrator shall obtain descriptions of the
investment choices available for the purpose of informing Participants with
respect thereto. To the extent the Plan gives a Participant investment
discretion with respect to this Accounts, the selection of investment choices
is the sole responsibility of each Participant, and no Employee or
representative of the Company or any Participating Company is authorized to
make any recommendation to any Participant with respect to his investment
choices. If elected by the Participants, 100% of the Plan's assets may be
invested in Company Stock.
5.2 Prior to the date the Employee becomes a Participant
hereunder, he must make an investment election which will apply to the
investment of all his Deferred Contributions. If a Participant wishes to
utilize more than one Fund, he shall notify the Company in such manner
established by the Plan Administrator.
V-1
<PAGE> 36
All Employer contributions made by a Participating Company on
behalf of a Participant shall be automatically invested 100% in the Company
Stock Fund; provided, however, a Participant may at any time thereafter
redirect the investment thereof into one or more of the other Investment Funds.
5.3 A Participant may change his investment election with
respect to his future Deferred Contributions to be made under the Plan as of
the next Valuation Date. Such change shall be limited to the investment
choices described in Attachment A. The Participant's election to change his
investment election may be made in any manner provided by the Plan
Administrator. Elections shall be processed as soon as reasonably practicable
after receipt.
5.4 The value of a Participant's Accounts which are held
in an Investment Fund that is a mutual fund shall be determined as of each
Valuation Date based on the published value of a unit in such mutual fund as of
the applicable Valuation Date.
5.5 The value of a Participant's Accounts which are held
in the Company Stock Fund maintained hereunder shall be determined as of each
Valuation Date and shall be based upon the reported price of the Company Stock
at the close of business on that day. Any interfund transfers, withdrawals or
distributions from a Participant's Accounts which are held in the Company Stock
Fund shall be effected by deducting the appropriate number of shares of Company
Stock allocated to the Participant from the Company Stock Fund as of such
Valuation Date. The value of such shares of Company Stock determined in
accordance with this section in the event of an interfund transfer, or the
amount to be paid to the Participant in the event of a cash distribution,
withdrawal or the purchase of an annuity shall be the value of the Company
Stock on the date the Participant's account was liquidated to effect such
transfer or withdrawal. In the event of a
V-2
<PAGE> 37
distribution in kind, the number of shares deducted shall be distributed, with
any fractional shares converted to cash at the value determined in accordance
with this section.
5.6 If not received in the form of an Employer matching
contribution, shares of Company Stock shall be purchased by the Trustee acting
independently as to when such purchases are made, the number of shares to be
purchased, the prices to be paid and if the Company elects not to sell Company
Stock to the Trustee at such time, the broker, if any, employed to effect the
purchases. The Trustee shall vote the shares of Company Stock held in the
Company Stock Fund for the respective Accounts of the Participants under the
Plan in accordance with the directions of such Participants, provided such
directions are received by the Trustee at least five days before the date set
for the meeting at which such shares are to be voted. The Trustee shall vote
shares of Company Stock for which it has not received timely instructions on a
particular matter, as well as any shares held by the Trustee pending allocation
to the Participant's Company Stock Accounts, in the Trustee's discretion.
5.7 A Participant may elect to transfer all or a portion
of the value of his Accounts from one Fund to another. The Participant's
election to transfer must be made in accordance with procedures established by
the Plan Administrator. Any such change shall be made operative as soon as
practicable after the date such election is received.
5.8 Each Participant (or, in the event of his death, his
Beneficiary) shall have the right, to the extent of the number of shares of
Company Stock allocated to his Accounts in the Company Stock Fund,
respectively, to instruct the Trustee in writing as to the manner in which to
respond to a tender offer or exchange offer with respect to such shares. The
Plan Administrator shall use its best efforts timely to distribute or cause to
be distributed to each present or former Participant
V-3
<PAGE> 38
(or Beneficiary thereof) such information as will be distributed to
stockholders of the Company in connection with any such tender offer or
exchange offer. Upon timely receipt of such instructions, the Trustee shall
respond as instructed with respect to shares of such stock. The instructions
received by the Trustee from Participants shall be held by the Trustee in
confidence and shall not be divulged or released to any person, including
officers or employees of the Company or any Affiliated Company. If the Trustee
shall not receive timely instructions from a Participant (or Beneficiary
thereof) as to the manner in which to respond to such tender offer or exchange
offer, such Participant (or Beneficiary) shall be deemed to have instructed the
Trustee not to tender or exchange the Company Stock.
V-4
<PAGE> 39
SECTION VI
VESTING
6.1 The Participant's interest in his Deferred
Contributions Account, Rollover Account and Participant Contributions Account
shall be 100% vested in him at all times.
6.2 The Participant's interest in his Employer
Contributions Account shall become 100% vested in him at the earliest of the
following dates:
(a) The date of the Participant's death while employed by
an Affiliated Company;
(b) The date the Participant incurs a Total Disability
while employed by an Affiliated Company;
(c) The Participant's attainment of his Normal Retirement
Age while employed by an Affiliated Company;
(d) The date of the Participant's Retirement; or
(e) The date of complete cessation of Employer
contributions hereunder.
6.3 Prior to the date that the Participant's interest in
his Employer Contributions Account becomes fully vested in accordance with
Section 6.2, the Participant shall have a vested interest therein (subject to
Section 8.5) as determined in accordance with the following schedule:
VI-1
<PAGE> 40
<TABLE>
<CAPTION>
Number of Years Vested
of Service Percentage
---------- ----------
<S> <C>
Less than 1 year 0%
1 year but less than 2 years 20%
2 years but less than 3 years 40%
3 years but less than 4 years 60%
4 years but less than 5 years 80%
5 years or more 100%
</TABLE>
6.4 In the event a Participant ceases to be in the
Eligible Class but remains an Employee, the Participant shall have a vested
interest determined in his Employer Contributions Account as if the Participant
had remained an Employee in the Eligible Class.
6.5 No amendment to the vesting provisions or merger of
another plan into this Plan shall deprive a Participant of his nonforfeitable
right accrued under this Plan or any other plan to the date of any such
amendment or merger.
In the event of an amendment to the Plan or the merger of
another plan into this Plan which directly or indirectly affects the
computation of a Participant's nonforfeitable percentage under this Plan or
another plan, each Participant with at least three Years of Service may
irrevocably elect to have his nonforfeitable percentage computed under this
Plan without regard to such amendment or merger.
Such election may be made in writing to the Plan Administrator
any time after the adoption of any such amendment or merger, provided, however,
that the election period shall end no earlier than the latest of 60 days
following the date the amendment or merger is adopted or effective or the date
the Participant is given written notification of the amendment or merger by the
Company or Plan Administrator.
VI-2
<PAGE> 41
SECTION VII
WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT
7.1 Subject to the spousal consent requirements of
Section 7.5, a Participant who is an Employee may elect to withdraw an amount
equal to all or a specified portion of the value of (1) his Participant
Contributions Account, if any, and (2) provided he has previously withdrawn or
is currently withdrawing all of his Participant Contributions Account, his
Rollover Account, if any.
Each such withdrawal election must be made to the Company in
the manner established by the Plan Administrator and shall be processed as soon
as reasonably practicable. The total amount to be so withdrawn shall be that
specified in such notice and shall be made pro rata from the various Funds in
which such Account is invested. Amounts withdrawn from the Participant
Contributions Account shall be taken first from that portion of the Account
attributable to the Participant's pre-1987 contributions. Withdrawals shall be
payable only in cash, with the exception that a withdrawal from the Company
Stock Fund may be paid in cash or in whole shares (to the extent possible) as
elected by the Participant.
7.2 Subject to the spousal consent requirements of
Section 7.5, a Participant who is an Employee and who has previously withdrawn
or is currently withdrawing the maximum amount available (if any) to such
Participant under Section 7.1 may request a hardship withdrawal from his
Employer Contributions Account of an amount equal to a specified portion of (1)
the vested amount of his Employer Contributions Account and (2) provided the
Participant has previously withdrawn or is requesting to withdraw the maximum
amount permitted above with respect to his Employer Contributions Account, his
Deferred Contribution Account (but not including amounts
VII-1
<PAGE> 42
representing income which is credited to a Participant's Deferred Contributions
Account after December 31, 1988).
The Participant's request to make a hardship withdrawal must
be made in writing to the Plan Administrator. The basis for the Plan
Administrator consenting to or refusing to consent to the Participant's
withdrawal request shall be that of demonstrated "hardship." For purposes of
this Section 7.2 a "hardship" will exist only if there is an "immediate and
heavy financial need" of the Participant (as defined below) and a withdrawal
under this Section is necessary to satisfy such financial need. A financial
need shall not fail to qualify as immediate and heavy merely because such need
was reasonably foreseeable or voluntarily incurred by the Participant.
A withdrawal request will be deemed to be made on account of
an "immediate and heavy financial need" of the Participant if the request is on
account of:
(1) Expenses for medical care described in Section 213(d)
of the Code incurred by the Participant, the Participant's spouse, or
any dependents of the Participant (as defined in Section 152 of the
Code) or necessary for such persons to obtain such medical care;
(2) Purchase (excluding mortgage payments) of a principal
residence for the Participant;
(3) Payment of tuition, room and board expenses and
related educational fees for the next 12 months of post-secondary
education for the Participant, his spouse, children, or dependents;
(4) The need to prevent the eviction of the Participant
from his principal residence or foreclosure on the mortgage of the
Participant's principal residence; or
VII-2
<PAGE> 43
(5) Other "safe-harbor" definitions of deemed immediate
and heavy financial needs with respect to 401(k) contributions
promulgated by the Commissioner of Internal Revenue through the
publication of revenue rulings, notices, and other documents of
general applicability.
Moreover, a withdrawal will not be treated as necessary to
satisfy an immediate and heavy financial need of a Participant unless all of
the following requirements are satisfied:
(1) The Participant states in writing that the requested
withdrawal is not in excess of the amount of the immediate and heavy
financial need of the Participant;
(2) If a withdrawal is to be made from the Participant's
Deferred Contributions Account, the Participant has obtained all
distributions, other than 401(k) hardship distributions, and all
nontaxable loans concurrently available under all plans maintained by
the Affiliated Companies;
(3) If a withdrawal is to be made from the Participant's
Deferred Contributions Account, the Participant's contributions under
the Plan and all other plans of the employers (other than welfare
benefit plans) will be suspended for 12 months after receipt of the
hardship withdrawal and the Participant may not elect Deferred
Contributions for the Participant's taxable year immediately following
the taxable year of the hardship withdrawal in excess of the
applicable limit under Section 402(g) of the Code for such taxable
year less the amount of such Participant's Deferred Contributions for
the taxable year of the hardship withdrawal; and
(4) If a withdrawal is to be made from the Participant's
Employer Contribution Account, but not his Deferred Contributions
Account, the Participant's contributions to the
VII-3
<PAGE> 44
Plan will be suspended for a period of six months, unless the
Participant's aggregate period of participation in the Plan at the
time of such withdrawal equals or exceeds 60 months.
Each such withdrawal shall be processed as soon as reasonably
practicable and shall be given effect as of the applicable Valuation Date. The
total amount to be so withdrawn shall be that specified in such written notice
(which, with respect to a hardship withdrawal, may include any amounts
necessary to pay any taxes or penalties reasonably anticipated to result from
the withdrawal) and such withdrawal shall be made pro rata from the respective
investment Funds in which such Account is invested. Withdrawals shall be
payable only in cash, with the exception that a withdrawal from the Company
Stock Fund may be paid in cash or in whole shares (to the extent possible), as
elected by the Participant.
7.3 Subject to the spousal consent requirements of
Section 7.5, a Participant who is an Employee and age 59-1/2 or older may elect
to withdraw an amount equal to all or a specified portion of his vested
Accounts. Any such withdrawal shall be taken from his Accounts in the
following order: Participant Contributions Account, Rollover Account, Deferred
Contributions Account and last, the Employer Contributions Account; however,
unless the Participant's aggregate period of participation in the Plan (and
SFER Plan) at the time of any withdrawal from the Employer Contributions
Account equals or exceeds 60 months, the Participant's contributions to the
Plan will be suspended for a period of six months.
Each such withdrawal shall be processed as soon as reasonably
practicable and shall be given effect as of the applicable Valuation Date. The
total amount to be so withdrawn shall be that specified in such notice and such
withdrawal shall be made pro rata from the respective investment Funds in which
such Account is invested. If the value of an Account, as of the actual
VII-4
<PAGE> 45
date of withdrawal, is lower than the value upon which the Participant shall
have based his withdrawal election, the total amount to be so withdrawn shall
be limited to the value of the Participant's vested interest in such Account as
of the date of such withdrawal. Withdrawals shall be payable only in cash,
with the exception that a withdrawal from the Company Stock Fund may be paid in
cash or in whole shares (to the extent possible), as elected by the
Participant.
7.4 Amounts withdrawn by a Participant may not be
returned to this Plan. If a Participant has an outstanding Plan loan pursuant
to Section XIV, no withdrawal shall be permitted which would reduce the
Participant's vested interest in his Accounts that are security for such loan
below the outstanding principal balance of the loan plus any interest to be
accrued with respect to such loan.
7.5 If the Participant is married as of the date of any
withdrawal, no withdrawal shall be permitted unless the Participant's spouse
consents to such distribution as provided in Section 8.4.
VII-5
<PAGE> 46
SECTION VIII
DISTRIBUTIONS OTHER THAN WITHDRAWALS
8.1 Upon the Participant's separation from service
(within the meaning of Section 401(k) of the Code), other than by death, the
Participant shall receive a distribution of the vested value of his Accounts on
or as soon as reasonably practical following the later of his termination date
or Normal Retirement Date. Payment of the Participant's benefits shall be
effected by purchasing an annuity contract with the Participant's vested
Account balances, which provides for a straight life annuity, if the
Participant is not married, or a Qualified Joint and Survivor Annuity, if the
Participant is married, from an insurance company selected by the Plan
Administrator, unless the Participant elects, as provided below, to receive his
Accounts in one of the optional forms of payment. Any annuity contract
distributed pursuant to the Plan shall be nontransferrable.
The optional forms of payment available under the Plan are:
Option 1: Life Annuity -- a level monthly benefit
payable to the Participant for his lifetime.
Option 2: Joint and Survivor Annuity -- a reduced level
monthly benefit payable to the Participant for his lifetime and
following the Participant's death, 50% (or, if elected by the
Participant 75% or 100%) of such reduced monthly benefit payable to
his designated contingent annuitant, if then living, for his lifetime.
Option 3: Certain and Continuous Annuity -- a reduced
level monthly benefit payable to the Participant for his lifetime,
combined with a period certain of 5, 10 or 15 years (as selected by
the Participant); if the Participant dies prior to the end of the
designated
VIII-1
<PAGE> 47
period certain, such reduced monthly benefits shall continue to be
paid to the Participant's Beneficiary for the balance of such period
certain.
Option 4: Period Certain Installment -- a reduced level
monthly benefit paid to the Participant for a period certain of either
5, 10 or 15 years (as selected by the Participant) with payments
stopping at the end of the designated period certain; if the
Participant dies prior to the end of the designated period certain,
such reduced monthly benefits shall continue to be paid to the
Participant's Beneficiary for the balance of such period certain.
Option 5: Installment Refund Annuity -- a reduced level
monthly benefit payable to the Participant for his lifetime and in the
event of the death of the Participant prior to the receipt of an
amount equal to the net premium paid for such annuity contract, the
excess of the net premium over the amount received as of the
Participant's date of death will be paid to the Participant's
Beneficiary in a lump sum.
Option 6: Lump Sum -- all of the Participant's vested
Account balances paid in a single lump sum payment in cash; however,
an Account invested in the Company Stock Fund can be paid all in stock
or part in stock (whole shares only) and part in cash at the election
of the Participant.
Option 7: Combination -- a combination of Option 6 and
any one of Options 1 through 5.
The Plan Administrator shall furnish the Participants with general information
concerning the forms of payments available within a reasonable period prior to
their Annuity Starting Date. All optional annuity forms shall be the actuarial
equivalent of the single life annuity for the Participant.
VIII-2
<PAGE> 48
Upon the termination of his employment with all Affiliated
Companies prior to his Normal Retirement Date, a Participant may elect (subject
to Section 8.4 if married) in writing to receive a distribution of the vested
value of his Accounts in the automatic form or in any one of the optional
methods described above beginning as soon as reasonably practicable after a
specified Valuation Date preceding his Normal Retirement Date. Further, a
Participant who ceases to be an Employee may elect in writing to defer the
commencement of his benefits to any Valuation Date that is on or after his
Normal Retirement Date and before the April 1 following the calendar year in
which he reaches 70-1/2.
Notwithstanding the foregoing provisions of this Section 8.1
to the contrary however, if upon termination of employment with all Affiliated
Companies the vested value of the Participant's Accounts does not (and at the
time of any prior withdrawal did not) exceed $3,500, the payment of the
Participant's vested benefits shall be made automatically in a single lump sum
payment in cash and Company Stock to the extent then invested in the Company
Stock Fund under the Plan as soon as reasonably practicable following the date
of his termination of employment.
Unless the Participant elects otherwise, all distributions
shall be made or begin not later than the 60th day after the latest of the
close of the Plan Year in which (a) the Participant attains his Normal
Retirement Age, (b) occurs the 10th anniversary of the year in which the
Participant began participation in the Plan and (c) the Participant terminates
his employment with all Affiliated Companies.
Further, all distributions shall be made or commence by the
April 1 following the calendar year in which the Participant reaches age
70-1/2, regardless of whether the Participant has then terminated employment.
Such benefit shall be paid with respect to a terminated Participant in
VIII-3
<PAGE> 49
the applicable automatic annuity form described in Section 7.1, unless an
optional form is elected. With respect to a Participant who has not then
terminated employment, such required distribution shall be a single payment
based on the Participant's ending Account balances for the applicable
distribution year (as determined under Section 401(a)(9) of the Code) based on
his life expectancy (without a redetermination), less any withdrawals for such
year.
The provisions of Section 401(a)(9) of the Code, including
Reg. Section 1.401(a)(9)-2, are hereby incorporated by reference and shall
control over any Plan provision in conflict therewith.
8.2 The Plan Administrator shall furnish the following
information to the Participant within a reasonable period prior to the Annuity
Starting Date:
(a) a description or explanation, written in
non-technical language, of the terms and conditions of the Qualified
Joint and Survivor Annuity as well as the straight life annuity if not
married,
(b) the Participant's right to make, and the effect of,
an election to waive the automatic form of payment,
(c) the rights of the Participant's spouse concerning the
consent to any such election, and
(d) the right to make, and the effect of a revocation of
an election not to receive the automatic form.
8.3 If a Participant fails to make an election during the
election period, such Participant shall be deemed to have elected the Qualified
Joint and Survivor Annuity if he is married or the straight life annuity if he
is not married. The election period shall be the period of not more
VIII-4
<PAGE> 50
than 90 days and not less than 30 days prior to the Participant's Annuity
Starting Date. A Participant may revoke and remake his election any number of
times during the election period.
8.4 No election to waive the Qualified Joint and Survivor
Annuity made by a married Participant, other than an election of Option 2 with
his spouse as his contingent annuitant, shall be effective unless the
Participant's spouse consents in writing to such election, such election
designates a beneficiary (or a form of benefits) which may not be changed
without a new spousal consent and the spouse's consent acknowledges the effect
of such election on the spouse's right to benefits under the Plan and is
witnessed by a Plan representative or a notary public. The spousal consent
requirement shall not apply if it is established to the satisfaction of the
Plan Administrator that there is no spouse, the spouse cannot be located or due
to such other circumstances as may be permitted by Treasury regulations.
8.5 If the Participant's employment with all Affiliated
Companies is terminated prior to his being 100% vested in his Employer
Contributions Account, then that nonvested portion of his Employer
Contributions Account shall be forfeited as of the earlier of the date the
Participant receives a total distribution of his vested interest or the
Valuation Date coincident with or next following the date the Participant
incurs five consecutive Breaks in Service; however, if a Participant who incurs
a forfeiture again becomes an Employee prior to incurring five consecutive
Breaks in Service, he may reinstate the earlier forfeited amount (unadjusted
for any subsequent Trust earnings or losses) by repaying to the Plan in cash an
amount equal to the distribution prior to the earlier of incurring five
consecutive Breaks in Service or the fifth anniversary of the date he again
becomes an Employee. Any reinstated forfeited amounts shall be taken from
current forfeitures or special
VIII-5
<PAGE> 51
Employer contributions. Any amounts forfeited by Participants shall be used to
offset future Employer contributions under this Plan except as otherwise
provided in Section 12.3 hereof.
If either a distribution is made to a terminated Participant
from his Employer Contribution Account when he is less than 100% vested therein
and he is reemployed prior to incurring five consecutive Breaks in Service or a
withdrawal is made from the Employer Contribution Account pursuant to Section
7.2 or 7.3 by a Participant who is not 100% vested therein, the vested portion
of his Employer Contribution Account shall thereafter, until such time as he
may become 100% vested, be an amount ("X") determined by the formula: X = P
(AB + D) - D. For purposes of applying the formula: P is the vested
percentage at the relevant time; AB is the account balance at the relevant
time; and D is the amount of the distribution or withdrawal.
8.6 In addition to the foregoing distributions, all
Accounts of an affected Participant shall be distributed to him as soon as
administratively feasible after the disposition (1) of substantially all of the
assets (within the meaning of Code Section 409(d)(2) used by the Company or
Employer in the trade or business in which the Participant is employed if the
Participant continues employment with the corporation acquiring such assets, or
(2) of the Company's or an Employer's interest in a subsidiary (within the
meaning of Code Section 409(d)(3)) which employs the Participant if the
Participant continues employment with such subsidiary. However, an event shall
not be treated as described in (1) or (2) above unless the transferor
corporation continues to maintain the Plan after the disposition.
Further, all Accounts shall be distributed upon a termination
of the Plan without a "successor plan" as defined in Section 401(k) of the Code
and regulations thereunder.
VIII-6
<PAGE> 52
8.7 Direct Rollover Distributions. Notwithstanding any
provision of the Plan to the contrary that would otherwise limit a
distributee's election under this Section, a distributee may elect, at the time
and in the manner prescribed by the plan administrator, to have any portion of
an eligible rollover distribution paid directly to an eligible retirement plan
specified by the distributee in a direct rollover.
Eligible rollover distribution: An eligible rollover
distribution is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover distribution does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or
life expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated beneficiary,
or for a specified period of ten years or more; any distribution to the extent
such distribution is required under section 401(a)(9) of the Code; and the
portion of any distribution that is not includible in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
employer securities).
Eligible retirement plan: An eligible retirement plan is an
individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the distributee's
eligible rollover distribution. However, in the case of an eligible rollover
distribution to the surviving spouse, an eligible retirement plan is an
individual retirement account or individual retirement annuity.
Distributee: A distributee includes an employee or former
employee. In addition, the employee's or former employee's surviving spouse
and the employee's or former employee's
VIII-7
<PAGE> 53
spouse or former spouse who is the alternate payee under a qualified domestic
relations order, as defined in section 414(p) of the Code, are distributees
with regard to the interest of the spouse or former spouse.
Direct rollover: A direct rollover is a payment by the plan
to the eligible retirement plan specified by the distributee.
8.8 30-Day Waiver. If a distribution is one to which
sections 401(a)(11) and 417 of the Internal Revenue Code do not apply, such
distribution may commence less than 30 days after the notice required under
section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that:
(1) the plan administrator clearly informs the
participant that the participant has a right to a period of at least
30 days after receiving the notice to consider the decision of whether
or not to elect a distribution (and, if applicable, a particular
distribution option), and
(2) the participant, after receiving the notice,
affirmatively elects a distribution.
VIII-8
<PAGE> 54
SECTION IX
DEATH BENEFITS, BENEFICIARIES, UNCLAIMED BENEFITS
9.1 Upon the death of a vested Participant prior to his
Annuity Starting Date, a deceased Participant's vested Account balances shall
be applied to the purchase of a single life annuity contract for his
Beneficiary from an insurance company selected by the Plan Administrator unless
the Beneficiary elects one of the optional forms (other than the Qualified
Joint and Survivor Annuity) provided in Section 8.1. However, the
Participant's entire vested interest under the Plan must be distributed to his
Beneficiary within five years of his date of death unless his Beneficiary is
his spouse, in which event such spouse may elect to receive such death benefit
over her life (or a period not extending beyond the spouse's life expectancy)
with the benefits commencing as of any date specified by the spouse but not
later than the date on which the Participant would have reached age 70-1/2 had
he lived. And, if the Beneficiary is the Participant's estate (or a nonperson
such as a trust), the form of distribution shall be a single lump sum payment
and not the purchase of a single life annuity contract.
9.2 Except as provided below, the Participant shall have
the unrestricted right to designate the Beneficiary to receive the death
benefits to which he is entitled under the Plan and to change any such
designation. Each such designation for death benefits shall be evidenced by a
written instrument filed with the Plan Administrator and signed by the
Participant. However, if a Participant is married and wishes to designate a
Beneficiary other than his spouse, he must submit his spouse's written consent,
executed and witnessed by a Plan representative or a notary public, which
consent must acknowledge the affect of the consent on the spouse's right to
benefits under the Plan and be specific as to the form of payment elected and
the other Beneficiary designated, if
IX-1
<PAGE> 55
applicable. No change (other than a revocation) in such election may be made
by a married Participant without obtaining a new spousal consent as provided
below. If no such designation is on file with the Plan Administrator at the
time of the death of the Participant, or if for any reason such designation is
defective, then the Participant's spouse, if living, his children, if living,
or his estate, in that order of preference, shall be conclusively deemed to be
the Beneficiary designated to receive such benefit. A Participant's marriage
or divorce subsequent to making a written beneficiary designation shall
automatically revoke such prior designation.
The Plan Administrator shall provide each Participant, within
the applicable period for such Participant (as defined below), a written
explanation of the qualified preretirement survivor annuity provided in Section
9.1 above in such terms and in such a manner as would be comparable to the
explanation provided for meeting the requirements of Section 8.2 applicable to
a Qualified Joint and Survivor Annuity. The applicable period for a
Participant is whichever of the following periods ends last: (i) the period
beginning with the first day of the plan year in which the Participant attains
age 32 and ending with the close of the Plan Year preceding the Plan Year in
which the Participant attains age 35; or (ii) a reasonable period ending after
the individual becomes a Participant. Notwithstanding the foregoing, notice
must be provided within a reasonable period ending after separation of service
in case of a Participant who separates from service before attaining age 35.
Notwithstanding anything above in this Section 9.2 to the
contrary, a designation of a beneficiary other than the Participant's spouse by
a Participant who has not attained age 35 will not be valid unless the
Participant receives a written explanation of the qualified preretirement
survivor annuity provided by Section 9.1 in such terms as are comparable to the
explanation required
IX-2
<PAGE> 56
under Section 8.2. Further, the qualified preretirement survivor annuity
coverage of Section 9.1 will be automatically reinstated, i.e., the
Participant's spouse will automatically again become his sole beneficiary
entitled to the annuity provided in Section 9.1, as of the first day of the
Plan Year in which the Participant attains age 35 unless a new beneficiary
designation is filed by the Participant on or after such date, which new
designation complies in full with the above requirements of this Section 9.2
concerning spousal consent.
9.3 If benefits remain to be paid at a time when the Plan
Administrator is unable to locate the Participant or his Beneficiary, the Plan
Administrator shall cause the Participant's benefits to be forfeited. However,
such benefit shall be reinstated if a subsequent claim is made for the same.
9.4 Notwithstanding the foregoing provisions of this
Section IX, if, upon the death of a Participant prior to his Annuity Starting
Date, the vested value of his Accounts does not exceed $3,500, the payment of
the Participant's benefits shall be made to his Beneficiary in a single lump
sum in cash and Company Stock to the extent then invested in the same under the
Plan as soon as reasonably practicable after the monthly Valuation Date on or
next following the date of the Participant's death.
9.5 Upon the death of a Participant on or after his
Annuity Starting Date, the death benefit payable under the Plan, if any, shall
be determined by the form (and the terms) of benefit payment elected by the
Participant, with the remaining portion, if any, distributed as rapidly as
under the method of distribution in effect on his date of death.
IX-3
<PAGE> 57
SECTION X
ADMINISTRATION
10.1 The Plan shall be administered by the Plan
Administrator which shall also be the Named Fiduciary. The Plan Administrator
may delegate from time to time ministerial duties to employees of the
Participating Companies and, further, may delegate its fiduciary duties among
the members of the Plan Administrator. From time to time, the Chairman of the
Plan Administrator shall certify to the Trustee, the person or persons
designated by the Plan Administrator to give notifications, instructions or
advice to the Trustee. The Plan Administrator shall be entitled to rely upon
certificates of or communications from a Participating Company or from the
Trustee as to information pertinent to any calculation or determination under
the Plan. The Plan Administrator shall furnish to the Pension Committee of the
Board upon request appropriate reports with respect to the administration and
operation of the Plan and its trust.
10.2 Administrative Powers. The Plan Administrator shall
have full power and authority, within the limits provided by the Plan:
(a) To determine all questions arising concerning the
construction and interpretation of the Plan and in its administration,
including, but not by way of limitation, the determination of the
rights or eligibility under the Plan of Employees and Participants and
their Beneficiaries;
(b) To adopt such rules and regulations as it may deem
reasonably necessary for the proper and efficient administration of
the Plan consistent with its purposes;
(c) To enforce the Plan, in accordance with its terms; and
X-1
<PAGE> 58
(d) To do all other acts, in its judgment necessary or
desirable, for the proper and advantageous administration of the Plan.
The Plan Administrator shall act with or without a meeting by
the vote or concurrence of a majority of its members; but no member of the Plan
Administrator who is a Participant shall take part in any Plan Administrator
action or any matter that has particular reference to his own interest
hereunder. The Plan Administrator shall administer this Plan and discharge its
responsibilities hereunder in a uniform and nondiscriminatory manner as to all
Participants.
10.3 Information to be Provided to Participants and
Others. The Plan Administrator shall see that books of account are kept which
shall show all receipts and disbursements and a complete record of the
operation of the Plan, including records of the accounts of individual
Participants. At least once in each year, the Plan Administrator shall cause
to be furnished to each Participant a statement indicating on the basis of the
latest available information the status of the Participant's Account.
10.4 The Plan Administrator will direct the Trustee to
make investments pursuant to Section V hereof.
10.5 In any case where the provisions of this Plan require
the consent or approval by the Plan Administrator of an election or request
made by an Employee, Participant or Beneficiary in order to make such election
or request effective, the Plan Administrator shall act on such election or
request as promptly as shall be reasonable in the circumstances. In any case
where action by the Trustee is necessary in order to make operative an
effective election or request made by a Participant or Beneficiary, it shall be
the responsibility of the Plan Administrator to transmit such election or
request to the Trustee in writing and as promptly as shall be reasonable in the
circumstances. The
X-2
<PAGE> 59
Trustee shall not be obliged to take action with respect to any particular
election or request unless the Trustee shall have received the election or
request in such form and detail as shall reasonably be required by the Trustee.
10.6 Employment of Advisors and Staff. The Plan
Administrator may employ accountants, legal counsel, consultants, and any other
persons or organizations it deems necessary or proper to assist it in the
performance of its duties under the Plan.
10.7 Fiduciary Duties. The Plan Administrator shall
discharge its duties solely in the interest of the Participants and
Beneficiaries and for the exclusive purpose of providing benefits to
Participants and their Beneficiaries. They shall discharge their duties with
the care, skill, prudence and diligence under the circumstances then prevailing
that a prudent man acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with the like
aims.
10.8 Indemnification. Except as provided by law, the
Participating Companies, their directors, officers, employees and agents and
the Plan Administrator, or any of them, shall not incur any personal liability
for the breach of any responsibility, obligation or duty in connection with any
act done or omitted to be done in good faith in the management and
administration of the Plan and the investment and handling of the accounts and
shall be indemnified and held harmless by the Participating Companies from and
against any such personal liability including all expenses reasonably incurred
in its or their defense in case the Participating Companies fail to provide
such defense.
X-3
<PAGE> 60
SECTION XI
PROVISIONS RESPECTING THE COMPANY
11.1 Amendment of Plan. This Plan may be amended at any
time and from time to time by the Chief Executive Officer of the Company or
resolution of the Board of Directors of the Company; however, the Chief
Executive Officer of the Company may not amend the Plan in any manner which
would increase the level of Participating Company contributions. The Plan, as
amended, shall apply to the Participants and Participating Companies, unless a
Participating Company elects to withdraw from the Plan. Such power of
amendment shall under no circumstances include the right to reinvest or
otherwise transfer any interest in or to the accounts, or any income therefrom,
to any Participating Company; nor shall the power of amendment include the
right, in any way or to any extent, to divest any Participant of the interest
in his Accounts to which he would be entitled if he had terminated his service
immediately before such amendment, eliminate any "protected benefit" except as
otherwise permitted by Treasury Regulations or impose any Employer or Plan
Administrator consent on the exercise of a Participant's elections under the
Plan other than as permitted by Treasury Regulations; provided further that the
rights, duties or responsibilities of the Trustee shall not be substantially
changed without its written consent. Neither shall such power of amendment be
exercised in any way which would or could give to any Participant or
Beneficiary any right or thing of exchangeable value in advance of the receipt
of distributions hereunder. There shall be no merger or consolidation of part
or all of the Plan with, or any transfer of part or all of its assets or
liabilities to, any other plan or trust ("Other Plan") unless, pursuant to the
terms of such merger, consolidation or transfer, each Participant and
Beneficiary in the Plan whose interests are so merged, consolidated or
transferred into, with, or to the Other Plan would (if the Other Plan were
XI-1
<PAGE> 61
then terminated) receive a benefit immediately after such merger, consolidation
or transfer which would be equal to or greater than the benefit he would have
been entitled to receive immediately before such merger, consolidation or
transfer (if the Plan were then terminated). Notwithstanding the foregoing
provisions of this Section, this Plan may be amended in any manner whatsoever,
with prospective or retroactive effect, for the purpose of qualifying it under,
or complying with, any provision of the Code or ERISA.
11.2 California Law to Govern. This Plan shall be
construed and regulated and its validity and effect and the rights hereunder of
all parties interested shall at all times be determined, and this Plan shall be
administered, in accordance with the laws of the State of California, subject,
however, to applicable provisions of any federal law.
11.3 Intent. The Participating Companies intend that this
Plan, as amended from time to time, shall constitute a qualified plan under the
provisions of Sections 401(a), (k) and (m) of the Code. The Participating
Companies intend that this Plan shall continue to be maintained by them for the
above purposes indefinitely, subject, however, to the rights reserved to amend
and terminate the Plan as set forth herein. Nothing contained in this Plan
shall be construed as disqualifying any Employee of any Participating Company
from any benefits under any other plan or program to which such Employee would
be entitled in the absence of this Plan.
XI-2
<PAGE> 62
SECTION XII
TERMINATION OF PLAN
12.1 This Plan may be terminated as to all Participating
Companies on any date specified by the Company upon 10 days' advance written
notice of the termination to the Plan Administrator and the Participating
Companies. This Plan shall be terminated at any time as to any particular
Participating Company, for the following reasons:
(a) The Participating Company voluntarily terminates this
Plan;
(b) The final and total discontinuance of Participating
Company contributions hereunder;
(c) The legal dissolution, merger, consolidation or
reorganization of the Participating Company; or
(d) The date that Participating Company ceases to qualify
as an Affiliated Company.
Notwithstanding the foregoing, if any of the events described
above should occur but some or all of the Participants employed by a
Participating Company are transferred to another Participating Company
coincident with or immediately after the occurrence of such event, the Plan as
applied to those Participants will automatically continue in effect without a
termination thereof.
12.2 Except as provided for in Section XI hereof, each
Participant and the Beneficiary of each deceased Participant shall be vested
with all rights to any funds in his Accounts as of the date of such Plan
termination.
12.3 Any forfeitures which shall have occurred in
accordance with Section 9.3 hereof prior to the termination of this Plan but
which shall not have been applied to reduce Employer
XII-1
<PAGE> 63
contributions hereunder shall be distributed pro rata to those Participants who
were Employees of the Participating Company or Companies on the effective date
of the termination of this Plan.
12.4 In the event of a partial termination of this Plan,
the provisions of this Section XII shall apply to each Participant affected by
the partial termination.
XII-2
<PAGE> 64
SECTION XIII
MISCELLANEOUS PROVISIONS
13.1 This Plan is created for the exclusive benefit of
Employees of the Participating Companies and their Beneficiaries. If any
provision of this Plan is subject to more than one interpretation, then among
those interpretations which are possible, that one shall always be given to
this Plan and each and every one of its provisions which will be consistent
with this Plan being a qualified plan within the meaning of Section 401 of the
Code, and ERISA, or as they may be amended or replaced by any sections of the
federal law of like intent and purpose.
13.2 Except as provided by the terms of Section XI hereof,
no funds contributed hereunder or any assets of this Plan shall ever revert to,
or be used or enjoyed by, any Participating Company or any successor of any
Participating Company, nor shall any such funds or assets ever be used other
than for the benefit of the Participants or the Beneficiaries of such
Participants.
13.3 Any Affiliated Company may, with the consent of the
Chief Executive Officer of the Company, become a Participating Company in the
Plan by filing a duly certified copy of the resolution of its Board of
Directors adopting the Plan and executing and delivering such instruments and
taking such other action as may be necessary to put the Plan into effect with
respect to such Affiliated Company.
13.4 No right or interest of any Participant of the Plan
shall be assignable or transferable in whole or in part, either directly or by
operation of law or otherwise, including, but in no way limited to, execution,
levy, garnishment, attachment, pledge or bankruptcy, and no right or interest
of any Participant in the Plan shall be liable for or subject to any obligation
or liability of such Participant, including claims for alimony or the support
of any Participant's spouse.
XIII-1
<PAGE> 65
Notwithstanding any other provisions of this Plan, an
alternate payee under a qualified domestic relations order as determined in
accordance with Section 206 of ERISA shall be entitled, within 180 days from
the date the alternate payee receives written notification that the Company has
made such a determination, to elect to receive any benefits to which the
alternate payee is entitled payable in accordance with the distribution
provisions set forth in Section VIII of this Plan in full satisfaction of any
liability of the Plan to such person. Payment of the benefits from the
Alternate Payee's account shall be made or shall commence to be made as
established by court order which may provide for payment prior to the
Participant's attainment of his "earliest retirement age", or if not so
specified, as of the Valuation Date coincident with or next following the
Participant's Normal Retirement Date or actual retirement date, whichever is
later. An alternate payee may make investment elections pursuant to Section V
of the Plan but may make withdrawals pursuant to Section VII of the Plan.
13.5 Any person claiming entitlement to benefits in an
amount other than that received shall have the right after review and denial,
in whole or in part, of such claim by the Director -- Administration to a
review of such denial by the Plan Administrator. Such review shall be
initiated by the written request therefor by such person filed with the Plan
Administrator within 60 days after receipt by the person of the denial by the
Vice President- Employee Relations. The written request shall state the nature
of the claim, the facts in support thereof and the amount claimed, and may
include a demand for a personal hearing before the Plan Administrator as well
as for reasonable access to the pertinent data upon which denial of the claim
by the Vice President-Employee Relations was based, which demands shall not be
unreasonably denied. The Plan Administrator shall conduct its review of the
claim within 60 days after receipt of the written request
XIII-2
<PAGE> 66
of such person and furnish, within such time, to the claimant written notice of
its decision, including therein specific reasons and references to pertinent
Plan provisions upon which decision is based.
13.6 Copies of the Plan and any amendments thereto will be
on file at the principal office of each Employer where they may be examined by
any Participant or any other person entitled to benefits under the Plan.
13.7 If any person entitled to benefits under the Plan is
under a legal disability or, in the Plan Administrator's opinion, is
incapacitated in any way so as to be unable to manage his or her financial
affairs, the Plan Administrator may direct the payment of such benefits to such
person's legal representative or to a relative or friend of such person or such
person's benefit, or the Plan Administrator may direct the application of such
benefits for the benefit of such person in any manner which the Plan
Administrator may select that is permitted by federal law and is consistent
with the Plan. Any payments made in accordance with the foregoing provisions
of this section shall be a full and complete discharge of any liability for
such payments.
13.8 None of the establishment of the Plan, any
modification thereof, the creation of any fund or account, or the payment of
any benefits shall be construed as giving to any Participant or other person
any legal or equitable right against the Employers, the Plan Administrator or
any Trustee except as provided herein. Under no circumstances shall the
maintenance of this Plan constitute a contract of employment or shall the terms
of employment of any Participant be modified or in any way affected hereby.
Accordingly, participation in the Plan will not give any Participant a right to
be retained in the employ of any Employer. Neither the Plan Administrator nor
any Employer in any way guarantees any assets of the Plan from loss or
depreciation or any payment to
XIII-3
<PAGE> 67
any person. The liability of the Plan Administrator or any Employer as to any
payment or distribution of benefits under the Plan is limited to the available
assets of the trust fund.
13.9 In any action or proceeding regarding any Plan
assets, any Plan benefits or the administration of the Plan, employees or
former employees of the Employers, their beneficiaries and any other person
claiming to have an interest in the Plan shall not be necessary parties and
shall not be entitled to any notice of process. Any final judgment which is
not appealed or appealable and which may be entered in any such action or
proceeding shall be binding and conclusive on the parties hereto and on all
persons having or claiming to have any interest in the Plan. To the extent
permitted by law, if a legal action is begun against the Plan Administrator, an
Employer, or any Trustee by or on behalf of any person and such action results
adversely to such persons, or if a legal action arises because of conflicting
claims to a Participant's or other person's benefit, the cost to the Employers,
the Plan Administrator, or the Trustee of defending the action will be charged
to the sums, if any, which were involved in the action or were payable to the
Participant or the other person concerned. Acceptance of participation in the
Plan shall constitute a release of the Company and the Plan Administrator, any
trustee and their agents from any and all liability and obligation not
involving willful misconduct or gross neglect to the extent permitted by
applicable law. Notwithstanding any other provisions of the Plan, if the Plan
Administrator is required by a final court order to distribute the benefits of
a Participant other than in a manner required under the Plan, then the Plan
Administrator shall cause the Participant's benefits to be distributed in a
manner consistent with such final court order. The Plan Administrator shall
not be required to comply with the requirements of a final court order in any
action in which the Plan Administrator, a Trustee, the Plan or the trust was
not a party.
XIII-4
<PAGE> 68
13.10 If any provisions of the Plan shall be held illegal
or invalid for any reason, such illegality shall not affect the remaining
provisions of the Plan, and the Plan shall be construed and enforced as if such
illegal and invalid provisions had never been set forth in the Plan.
13.11 Top Heavy Rules.
(a) If the Plan is or ever becomes "top-heavy" as
determined under subsection (b), the following special rules shall
apply.
(1) If the Plan is top-heavy for a Plan Year,
each Participant who is an Employee on the last day of the
Plan Year shall receive an allocation of Employer
contributions and forfeitures equal to the product of
a the Participant's compensation
during the Plan Year, and
b the lesser of 3% or the ratio of
Employer contributions plus Deferred Contributions to
compensation with respect to the Key Employee (as
defined in subsection (c)) whose ratio is highest for
the year.
For purposes of this Section, including the determination of a
Participant's allocation of Employer contributions under
Section IV if this Section applies, compensation shall mean
the total amount of wages, tips and other compensation shown
on an Employee's Form W-2 for the Year, but not to exceed
$150,000, as adjusted by the Treasury from time to time.
An Employee shall not fail to receive an allocation
pursuant to this subsection because (i) he fails to elect to
make Deferred Contributions for the Plan Year, (2) receives
compensation less than a stated amount or (3) completes less
than 1,000 Hours of Service.
XIII-5
<PAGE> 69
Notwithstanding any other provisions of the Plan, an
Employee shall not forfeit any allocations made pursuant to
this subsection because of a withdrawal of Deferred
Contributions.
If a Participant also participates in a defined
benefit plan maintained by the Employer or an Affiliated
Company which is top-heavy, the minimum allocation percentage
specified in this subsection shall be increased to 5% of
compensation. This sentence shall not apply to the extent
that the Participant participates in any other plan or plans
of the Employer or an Affiliated Company which provide that
the defined benefit minimum allocation or benefit applicable
to top-heavy plans will be provided by such other plan or
plans.
(2) All Employer-provided benefits shall become
fully vested upon completion of three Plan Years during which
the Participant completes 1,000 Hours of Service, and a person
who is not already a Participant shall become a Participant
upon the first day he meets all the eligibility requirements
of Section 3.1.
(b) This Plan is "top heavy", if, as of the last day of
the preceding Plan Year (the Determination Date) (or the initial Plan
Year for its year of establishment), the amount credited to the
Accounts of Key Employees (as defined in subsection (c)) exceeds 60%
of the amount credited to the Accounts of all Participants (except
former Key Employees). Notwithstanding the foregoing, the Plan shall
not be top heavy if, as of the Determination Date described above, it
is included in either a "required aggregation group" or a "permissive
aggregation group" which is not a "top heavy group." A required
aggregation group is each plan in which a Key Employee participates or
which allows such plan to meet the
XIII-6
<PAGE> 70
requirements of Code Section 401(a)(4) or 410. A permissive
aggregation group is the required aggregation group of plans plus any
other plan or plans of the Employer which, when considered as a group
with the required aggregation group, would continue to satisfy the
requirements of Code Section 401(a)(4) or 410. For purposes of
determining whether this Plan is top heavy, the aggregate
distributions (without interest thereon) made under the Plan to a
Participant during the 5-year period ending on the Determination Date
shall be taken into account if the Participant's account or benefit is
otherwise taken in account in determining whether the Plan is top
heavy. However, the accrued benefits of any Participants who have
performed no services for the Affiliated Companies during the
five-year test period shall be disregarded.
The accrued benefit of a nonkey employee shall be
determined under the method that uniformly applies to all defined
benefit plans of the employer or, if there is none, as if such benefit
accrued not more rapidly than the slowest accrual rate permitted under
the fractional rule of Code Section 411(b)(1)(C).
(c) A Participant shall be a "Key Employee" if, during
the Plan Year in question or any of the four preceding Plan Years, he
is:
(1) an officer of the Employer having annual
compensation greater than 50% of the Code Section 415(b)(1)(A)
limit for such Plan Year (but no more than fifty Employees or,
if less, the greater of three Employees or ten percent of all
Employees) shall be taken into account, as specified by the
Plan Administrator;
XIII-7
<PAGE> 71
(2) one of the ten Employees having compensation
in excess of the Code Section 415(c)(1)(A) limit for such Plan
Year and owning (or considered as owning within the meaning of
Section 318 of the Code) the largest interest in the Employer;
(3) 5% owner of the Employer; or
(4) 1% or more owner of the Employer having an
annual compensation from the Employer of more than $150,000.
Each Employee who is not a Key Employee shall be a nonkey employee.
(d) If, the Plan is top-heavy for a Plan Year, then for
purposes of computing the maximum additions described in Section 4.8,
the defined benefit plan fraction and the defined contribution plan
fraction shall be computed by substituting the number 1.0 for the
number 1.25.
The Employer may elect to disregard the preceding sentence if,
as of the last day of the preceding Plan Year, the amount credited to
the Accounts of Key Employees does not exceed 90% of the amount
credited to the Accounts of all Participants (except former Key
Employees).
If the Employer makes the election described in the preceding
sentence, the minimum allocation percentage specified in subsection
(a) shall be increased to 4% of compensation for all Participants and
7 1/2% for Participants who also participate in a defined benefit plan
maintained by the Employer or an Affiliated Company which is
top-heavy.
XIII-8
<PAGE> 72
SECTION XIV
LOANS
14.1 A Participant or beneficiary, who is a "party in
interest" as defined in ERISA Section 3(14), may borrow from the Plan, subject
to the following provisions of this Section XIV and to such additional
standards as the Plan Administrator may adopt, by making application to the
Plan Administrator. A Participant seeking a loan hereunder must submit a
written application (hereinafter referred to as the "completed application")
which shall (i) specify the terms pursuant to which the loan is requested to be
made, including the requested effective date, (ii) authorize the repayment of
the loan through payroll deductions, if applicable, and (iii) provide such
information and documentation as the Plan Administrator shall require. If the
Participant is married, his spouse must consent to such loan being secured by
the Participant's accrued benefit under the Plan as provided in this Section
XIV and such consent meets the requirements of Section 8.4.
14.2 Any loan to a Participant under this Section XIV
shall be subject to the following requirements:
(a) The loan may not exceed the lesser of $50,000 or 50%
of the value of the Participant's vested interest in his Accounts.
The maximum loan amount of $50,000 otherwise available to a
Participant is reduced by the excess, if any, of the highest
outstanding balance of Plan loans to the Participant during the
one-year period ending on the day before the loan is made over the
outstanding balance of loans from the Plan on the date when the loan
is made.
(b) The loan must be at least $1,000.
XIV-1
<PAGE> 73
(c) The loan shall provide for a fixed rate of interest
for the entire term of the loan. The applicable interest rate for
Plan loans shall be a reasonable rate equal to a commercially
comparable rate as established by the Plan Administrator consistent
with the provisions of Section 4975(d)(1) of the Code and other
applicable legal requirements.
(d) The loan shall be for a term not to exceed five years
except as provided below.
(e) Notwithstanding the five year limit in Section
14.2(d), any loan used to acquire or construct any dwelling unit
which, within a reasonable time, is to be used as the principal
residence of the Participant may be for a term of up to 15 years.
(f) The Plan Administrator shall establish standards in
accordance with ERISA and the Code and such rules as it deems
necessary which shall be uniformly applicable to all Participants
similarly situated and shall govern the Plan Administrator's approval
or disapproval of completed applications. The terms for each loan
shall be set solely in accordance with this Section and such standards
adopted by the Plan Administrator in accordance with Section 14.4.
Such standards may prescribe minimum repayment periods, a maximum and
minimum loan amount (within the limitations specified above), and
shall require spousal consent for loans to married Participants and
other relevant factors.
(g) The Plan Administrator shall establish rules
concerning the frequency with which loans may be made under the Plan.
Such rules, as changed from time to time, shall be applied in a
uniform and nondiscriminatory manner and shall be communicated in
writing to all eligible Participants.
XIV-2
<PAGE> 74
14.3 (a) Each loan shall be evidenced by a promissory
note executed by the person and payable to the Trustee, due and
payable in full not later than the earliest of: (i) a fixed maturity
date meeting the requirements of Section 14.2(d) above; (ii) the
person's death; or (iii) the time which the person ceases to be a
party in interest.
(b) The promissory note shall provide for the payment of
equal installments (by payroll periods not less frequently than
monthly) of principal and interest on the unpaid balance of principal
at the fixed annual rate set forth in Section 14.2(c) on the date the
note is executed. The note shall further provide, with respect to a
person who is an Employee, that the payments shall be through payroll
deductions.
(c) The promissory note shall evidence such additional
terms as are required by this Section 14.2 or by the Plan
Administrator.
14.4 The Plan Administrator shall, in accordance with its
established standards, review and approve or disapprove a completed application
as soon as practicable after its receipt thereof, and shall promptly notify the
applying person of such approval or disapproval.
14.5 Loans shall be funded by exhausting Accounts or
portions thereof in the following order:
(a) First, the Rollover Account;
(b) Second, the SFP Plan Employer Contributions Account;
(c) Third, the vested portion of the Employer
Contributions Account;
(d) Fourth, the Deferred Contributions Account; and
(e) Fifth, the Participant Contributions Account.
XIV-3
<PAGE> 75
14.6 Each loan shall be made only from the Accounts of the
borrowing Participant, shall be taken pro rata from the investment funds in
which such Accounts are invested, and shall be treated as a separate investment
of, and shall be allocated solely to, the Participant's Accounts from which the
Participant's loan was funded.
14.7 A person may elect to prepay the entire balance of
the loan at any time. A person may request a subsequent loan after full
repayment of a prior loan, subject to the maximum loan amount set forth in
Section 14.2(a) hereof. No partial prepayments will be permitted. All loan
repayments shall be transmitted by the Company or Participating Company to the
Trustee as soon as practicable after such amounts are withheld or received.
14.8 Each loan repayment of principal and interest will be
allocated to the Participant's Accounts in the same proportion from which the
loan was funded as provided in Section 14.5 hereof.
14.9 Repayment of any loan under the Plan shall be secured
by 50% of the present value of the Participant's entire vested interest in the
Plan.
14.10 If a Participant with an outstanding loan takes an
authorized leave of absence or incurs a temporary disability so the regular
monthly installment payments cannot be made on a payroll deduction basis, the
Participant will be required to make the regular payments of principal and
interest at the time and place established by the Plan Administrator.
14.11 If any time prior to the full repayment of a loan,
the Participant or Beneficiary should cease to be a party in interest, or the
Plan should terminate, or any event of default otherwise occurs under the
documents evidencing the loan; the unpaid balance owed by the Participant on
the loan shall be due and payable in full immediately without notice or demand.
If the Participant or
XIV-4
<PAGE> 76
Beneficiary does not repay the full amount of the unpaid balance within the
time established by the Plan Administrator, the Plan Administrator may take
whatever steps it deems necessary to collect the unpaid balance of the loan;
provided, however, in no event shall an "offset" to the Participant's Accounts
occur prior to the date the Participant would otherwise be entitled to a
distribution of his Deferred Contributions Account.
14.12 Notwithstanding anything to the contrary contained
herein, each loan shall be made only in accordance with the regulations and
rulings of the Internal Revenue Service and other applicable state or federal
laws. The Plan Administrator shall act in its sole discretion to ascertain
whether the requirement of such laws, regulations, and rulings have been met.
IN WITNESS WHEREOF, the Company and SFER have caused their
duly authorized officers to execute this Plan this
_____________________________, 1996, effective for all purposes as provided
above.
SANTA FE ENERGY RESOURCES, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
MONTEREY RESOURCES, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
XIV-5
<PAGE> 77
ATTACHMENT A
MONTEREY RESOURCES, INC.
SAVINGS INVESTMENT PLAN
INVESTMENT FUNDS
1. Putman Stable Value Fund (and certain guaranteed investment contracts
issued by the Travelers Insurance Company)
2. INVESCO Total Return Fund
3. Putman Fund for Growth and Income A
4. Putman S&P 500 Index Fund
5. Putman Voyager Fund A
6. Putman Overseas Growth Fund A
7. Putman New Opportunities Fund A
8. Company Stock Fund (which shall include SFER common stock in the
accounts spunoff to the Plan)
<PAGE> 1
EXHIBIT 10.11
MONTEREY RESOURCES, INC.
DEFERRED COMPENSATION PLAN
I. NAME AND PURPOSE
The name of this plan is the Monterey Resources, Inc. Deferred
Compensation Plan (the "Plan"). The purpose of the Plan is to provide certain
highly compensated employees of Monterey Resources, Inc. (the "Company") and
its Subsidiaries and the members of the Board of Directors of the Company with
the opportunity to defer compensation earned as an Eligible Employee or as a
director on an elective basis and, to also provide Highly Paid Employees the
opportunity to receive a Company matching contribution with respect to their
base compensation in excess of that which is covered under the Company's
Savings Plan.
II. EFFECTIVE DATE
The Plan shall become effective as of the date the Company is
spunoff by Santa Fe Energy Resources, Inc. (the "Spinoff Date").
III. DEFINITIONS
When used in this Plan, the following terms shall have the
meanings set forth below unless a different meaning is plainly required by the
context:
A. "Account" shall mean a Deferral Account, Excess
Account and/or Company Account, as the context requires.
B. "Board of Directors" shall mean the Board of
Directors of the Company.
C. "Code" shall mean the Internal Revenue Code of 1986,
as amended.
D. "Committee" shall mean the Employee Benefits
Committee of the Company.
E. "Company Account" shall mean a bookkeeping account
established by the Company to credit Company Matching Contributions on behalf
of a Highly Paid Employee pursuant to Section VI(C).
F. "Company Matching Contribution" shall mean an amount
equal to the product of (i) a Highly Paid Employee's Excess Contributions for
the year and (ii) the Company's actual regular matching contribution rate for
such year under the Savings Plan plus, if the Participant is entitled to
receive an Employer Bonus Contribution under the Savings Plan, the Bonus
Percentage thereunder.
<PAGE> 2
G. "Compensation" shall mean (1) all directors'
retainers and fees paid by the Company to a member of the Board of Directors
and (2) the rate of annual base salary payable to an Eligible Employee by the
Company or a Subsidiary.
H. "Deferral Account" shall mean a bookkeeping account
established by the Company to credit elective deferrals on behalf of a
Participant pursuant to Section VI(A).
I. "Eligible Employee" shall mean an employee of the
Company or a Subsidiary whose Compensation on a specified Entry Date exceeds
ten times the amount specified in Section 402(g)(1) of the Code as in effect on
such Entry Date; such term shall also include an employee who is a Highly Paid
Employee.
J. "Entry Date" shall mean the first day of each
calendar year; however, with respect to a director, the first day of the month
following his initial election as a member of the Board of Directors shall also
be an Entry Date and, with respect to a Highly Paid Employee for purposes of
making Excess Contributions, the Plan's effective date shall also be an Entry
Date.
K. "Excess Account" shall mean a bookkeeping account
established by the Company to credit Excess Contributions on behalf of a Highly
Paid Employee pursuant to Section VI(B).
L. "Excess Compensation" shall mean Compensation, after
reduction for any elective deferrals under this Plan that are credited to a
Participant's Deferral Account, in excess of the amount specified in Section
401(a)(17) of the Code as in effect on such Entry Date. In no event shall
compensation that is covered by the Savings Plan be Excess Compensation under
this Plan.
M. "Excess Contributions" shall mean the amount of
Excess Compensation deferred by a Highly Paid Employee for a year pursuant to
Section V.
N. "Highly Paid Employee" shall mean an Eligible
Employee who has Excess Compensation.
O. "Participant" shall mean a member of the Board of
Directors, an Eligible Employee or Highly Paid Employee who makes an election
to participate in the Plan.
P. "Payment Date" shall mean the date elected by a
Participant on which to receive distribution of his Account(s) established with
respect to a specified year.
Q. "Savings Plan" shall mean the Monterey Resources,
Inc. Savings Investment Plan.
R. "Subsidiary" shall mean any corporation in which the
Company owns directly or indirectly at least 50% of the voting stock.
-2-
<PAGE> 3
Throughout this Plan, words in the masculine gender shall
include the feminine and neuter genders, the plural shall include the singular
and the singular shall include the plural.
IV. PARTICIPANTS
Each member of the Board of Directors and each Eligible
Employee, including each Highly Paid Employee, shall be eligible to participate
in the Plan. A Highly Paid Employee shall be eligible to make an election with
respect to his Compensation or his Excess Compensation or both. In the event
that an employee makes an election to participate in the Plan for a particular
year believing such employee is an Eligible Employee (or Highly Paid Employee,
as the case may be), and it is subsequently determined that such employee's
Compensation at the Entry Date does not exceed ten times the amount specified
in Section 402(g)(1) (or, with respect to a Highly Paid Employee, Section
401(a)(17)) of the Code as adjusted for that year, any amounts deferred by such
employee under the Plan (or, if applicable, Excess Contributions made) for such
year shall be returned to the employee as soon as practicable and no further
deferrals (or Excess Contributions, as the case may be) shall be made for such
employee with respect to such year.
V. MANNER OF ELECTING DEFERRALS
An Eligible Employee, who has made an election under the
Savings Plan to contribute the maximum amount permitted under Section 402(g)(1)
of the Code for that year, may elect to defer all or a part of his or her
Compensation for a specified year by giving written notice to the Company
setting forth the Participant's election as to:
(a) the percentage (in multiples of 5% of Compensation,
up to 100% thereof) of the Participant's Compensation to be deferred
for such year; and
(b) the Payment Date, as described in Section VII(A), for
distribution of that year's Deferral Account. In addition, a Highly
Paid Employee, who has made an election under the Savings Plan to
contribute the maximum amount permitted under Section 402(g)(1) of the
Code for that year, may elect, either in lieu of or in addition to an
election made with respect to his Compensation, to defer part of his
Excess Compensation for such year (an "Excess Contribution") by giving
written notice to the Company setting forth the Participant's election
as to:
(x) the percentage (either 1%, 2%, 3% or 4%) of
the Participant's Excess Compensation to be deferred for such
year; and
(y) the Payment Date, as described in Section
VII(A), for distribution of that year's Matching Account and
Excess Account.
-3-
<PAGE> 4
If, however, during a year a Highly Paid Employee reduces his
election under the Savings Plan to less than the maximum amount permitted by
Section 402(g)(1) of the Code, the Participant shall automatically cease making
Excess Contributions hereunder.
In order to participate in the Plan for a specified year, a
Participant must deliver an executed deferred compensation election to the
Company, on the form prescribed by the Company for that purpose, prior to the
Entry Date for such year.
The elections described in this Section shall pertain only to
the year for which they are made and shall apply to all Compensation and/or
Excess Compensation, if applicable, payable for such year. If no election is
made for a year, no elective deferral of Compensation or Excess Compensation
will be made for such year. All elections shall be irrevocable except to the
extent the Committee, in its sole discretion, permits a Participant to
terminate or change a deferral election. Such termination or change shall be
effective only with respect to Compensation or Excess Compensation earned after
the date such termination or change of election is approved by the Committee.
VI. ACCOUNTS
A. Deferral Accounts. A separate Deferral Account shall
be established and maintained for each Eligible Employee who elects to be a
Participant for a year reflecting the amount of Compensation electively
deferred for that year by the Participant and the interest credited thereon as
provided in D. below. In the event two or more Deferral Accounts of a
Participant are to be paid on the same Payment Date, all such Deferral Accounts
shall be aggregated into a single Deferral Account for such Participant. At
the end of each month, an amount shall be credited to the appropriate Deferral
Account of each Participant to reflect the Compensation otherwise payable
during said month but deferred pursuant to the Plan by the Participant.
B. Excess Accounts. A separate Excess Account shall be
established and maintained for each Highly Paid Employee who elects to be a
Participant for a year reflecting the amount of Excess Compensation electively
deferred for that year by the Participant and the interest credited thereon as
provided in D. below. In the event two or more Excess Accounts of a
Participant are to be paid on the same Payment Date, all such Excess Accounts
shall be aggregated into a single Excess Account for such Participant. At the
end of each month, an amount shall be credited to the appropriate Excess
Account of each Participant to reflect the Excess Compensation otherwise
payable during said month but deferred pursuant to the Plan by the Participant.
C. Company Accounts. A separate Company Account shall
be established and maintained each year for each Highly Paid Employee who makes
an Excess Contribution such year reflecting the amount of Company Matching
Contributions credited on his behalf that year, if any, and the interest
credited thereon as provided in D. below. In the event two or more Company
Accounts of a Participant are to be paid on the same Payment Date, all such
Company Accounts shall be aggregated into a single Company Account for such
Participant. At the end of each month,
-4-
<PAGE> 5
an amount shall be credited to the appropriate Company Account of each
Participant who is a Highly Paid Employee to reflect the Company Matching
Contribution, if any, credited for said month on behalf of the Participant.
D. Interest. Each Account shall be credited with
interest as of the last day of each month based upon the balance in such
Account on such date after first reducing the Account balance to reflect any
distributions made during such month from such Account and before crediting to
the Account any new deferrals made or Company Matching Contributions credited,
as the case may be, for such month. Interest for each month shall be computed
by using the interest rate earned for such month by the Fixed Interest Fund (or
the equivalent thereof) of the Savings Plan.
E. Vesting. A Participant shall at all times be 100%
vested (possess a nonforfeitable interest) in his Participant and Excess
Accounts and shall be vested in his Company Accounts, if any, on any date to
the same extent that he is vested in his Employers Contributions Account under
the Savings Plan on such date.
VII. DISTRIBUTION OF ACCOUNTS
A. Elected Distribution Date. Except as provided below,
a Participant's Accounts shall be valued as of the end of the month coinciding
with or immediately preceding the Payment Date elected by the Participant with
respect to such Account and shall be paid in a single, lump-sum distribution
(by Company check) to the Participant as soon as is reasonably practicable
after such Payment Date.
Each year a Participant elects to defer Compensation and/or
Excess Compensation, the Participant shall elect (at the time of the deferral
and prior to the Entry Date) from among the following alternatives (to the
extent applicable) the Payment Date applicable with respect to his deferrals
for such year:
Option 1: January 1 of any specified year, but not later than
the January 1 on or next following (i) with respect to an Eligible
Employee, the later of the Participant's (a) 70th birthday or (b)
termination of his employment with the Company and its Subsidiaries
("Retirement") or (ii) the Participant's ceasing to be a director, as
the case may be;
Option 2: If an Eligible Employee, as soon as practicable after
the Participant's Retirement; or
Option 3: If an Eligible Employee, January 1 after the year in
which the Participant's Retirement occurs.
-5-
<PAGE> 6
B. Distributions Upon Death or Disability of
Participant. If a Participant dies or becomes disabled (i.e., is receiving
benefits under the Company's long-term disability plan or Social Security), the
Participant's Accounts shall be valued as of the end of the month in which the
Participant dies or becomes disabled, as the case may be, and shall be paid to
the Participant's estate, in the event of death, or to the Participant, in the
event of his disability, as the case may be, in a single lump-sum (by Company
check) as soon as is reasonably practicable after such date of death or
disability.
C. Early Termination of Employment. If a Participant
terminates employment (for reasons other than death or Disability) with the
Company and its Subsidiaries prior to attaining his early retirement date under
the Pension Plan, then notwithstanding his election of a later Payment Date to
the contrary, his Accounts shall be valued as of the end of the month
coinciding with or immediately preceding the date of such termination of
employment and, to the extent vested, shall be paid to the Participant in a
single lump-sum (by Company check) as soon as is reasonably practicable
thereafter. Any nonvested Company Account balances shall be immediately
forfeited on his termination of employment.
D. Hardship Distributions. In the event of an
unforeseen and immediate financial emergency of a Participant which is beyond
his control, the Committee may, in its sole discretion, upon a written request
of a Participant, direct the acceleration of such vested portion of the
Participant's Accounts as may be necessary to meet such emergency. The
Committee shall require the Participant to furnish the Committee with proof of
such emergency and the Participant's other financial resources as the Committee
may deem necessary to evaluate a Participant's written request for accelerated
payment.
VIII. PARTICIPANTS' RIGHTS
Establishment of the Plan shall not be construed to give any
Eligible Employee the right to be retained in the service of the Company or a
Subsidiary. A Participant shall not have any interest in the amounts credited
to his Accounts until such Accounts are distributed in accordance with the
Plan. With respect to amounts deferred or otherwise held in an Account for a
Participant, the Participant shall be an unsecured general creditor of the
Company.
IX. NON-ALIENABILITY AND NON-TRANSFERABILITY
No Participant may borrow against his Accounts; no Account
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, whether voluntary or involuntary. However, if a former spouse of a
Participant is awarded an interest in a Participant's Accounts through a
judgment or order of a court, the Committee may, in its sole discretion, direct
that the payment of such interest awarded to the former spouse be paid (valued
as of the end of the month that the Company received written notice of such
award) to the former spouse in a lump sum; thereafter, the Participant's
Accounts shall be reduced for all Plan purposes by the amount of any such
payment.
-6-
<PAGE> 7
X. STATEMENTS OF ACCOUNT
Statements will be sent to Participants as soon as practicable
after the end of each year as to the balance in their Accounts as of the end of
such year.
XI. ADMINISTRATION
The Committee shall have the authority to adopt rules and
regulations for carrying out the Plan and to interpret, construe and implement
the provisions thereof. Any decision or interpretation of any provision of the
Plan adopted by the Committee shall be final and conclusive. The individuals
serving as the Committee shall be fully indemnified (to the extent permitted by
law) by the Company for all claims, losses, damages or expenses incurred by
them for any act, omission or construction made in connection with the Plan.
The Committee is expressly authorized to direct at any time that the Accounts
of a Participant that are fully vested and payable at the same Payment Date be
aggregated for recordkeeping purposes.
XII. AMENDMENT AND TERMINATION
The Plan may, at any time, be amended, modified or terminated
by the Board of Directors. In addition, the Committee may amend or modify the
Plan provided that no such amendment or modification made by the Committee can
materially increase the obligations of the Company under the Plan. Any such
amendment, modification or termination requires the affirmative approval of a
majority of the members constituting a quorum and shall be evidenced by a
written resolution or other document signed by the Board of Directors or the
Committee, as the case may be. No amendment, modification or termination of
the Plan shall, without the consent of a Participant, adversely affect such
Participant's rights with respect to amounts accrued in his Accounts.
Notwithstanding anything in the Plan to the contrary, all Accounts shall become
immediately payable in full upon the termination of the Plan.
XIII. UNFUNDED STATUS OF THE PLAN
Except as provided below, any and all payments made to the
Participant pursuant to the Plan shall be made only from the general assets of
the Company. All Accounts under the Plan shall be for bookkeeping purposes
only and shall not represent a claim against specific assets of the Company.
Nothing contained in this Plan shall be deemed to create a trust of any kind or
create any fiduciary relationship between the Company and the Participant. The
Company, in its sole discretion, may establish a grantor trust to provide for
all or part of such Accounts, provided that the assets of such grantor trust at
all times remain subject to the claims of the general creditors of the Company.
-7-
<PAGE> 8
XIV. SFER PLAN TRANSFERRED ACCOUNTS
Effective with the corporate spinoff of the Company by Santa
Fe Energy Resources, Inc. ("SFER") the deferred accounts of any Eligible
Employee under a similar SFER deferred compensation plan were transferred from
such SFER plan to this Plan and such transferred accounts shall continue to be
held hereunder pursuant to the elections made by the Participants under the
SFER plan and shall be invested as provided in this Plan and paid pursuant to
the Participant's distribution election(s) made under the SFER plan. Further,
any deferral election made under such SFER plan with respect to compensation
otherwise to be earned by the Eligible Employee after the date of the corporate
spinoff shall be deemed to be a continuing election, without interruption or
change, under this Plan for the remainder of the year in which such corporate
spinoff occurs.
XV. GENERAL PROVISIONS
A. Notices. All notices to the Company hereunder shall
be delivered to the attention of the Secretary of the Company. Any notice or
filing required or permitted to be given to the Committee or the Company under
this Plan shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail, to the Company or the Committee, as appropriate,
at the principal office of the Company. Such notice shall be deemed given as
of the date of delivery or, if delivery is made by mail, as of the date shown
on the postmark or the receipt for registration or certification.
B. Controlling Law. Except to the extent superseded by
applicable federal law, the laws of the State Delaware shall be controlling in
all matters relating to the Plan.
C. Captions. The captions of Sections and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
or construction of any of its provisions.
D. Action by the Company. Any action required or
permitted by the Company under the Plan shall be by resolution of its Board of
Directors or any person or persons authorized by its Board of Directors with
respect to such matters.
E. Facility of Payment. Any amounts payable hereunder
to any person under legal disability or who, in the judgment of the Committee,
is unable to properly manage his financial affairs may be paid to the legal
representative of such person or may be applied for the benefit of such person
in any manner which the Committee may select.
F. Withholding of Taxes. The Company shall withhold
from such Compensation and Excess Compensation when deferred, or from deferred
compensation payments when made hereunder, as the case may be, any taxes
required to be withheld therefrom for federal, state or local government
purposes.
-8-
<PAGE> 9
G. Severability. Whenever possible, each provision of
the Plan shall be interpreted in such manner as to be effective and valid under
applicable law (including the Code), but if any provision of the Plan shall be
held to be prohibited by or invalid under applicable law, then (i) such
provision shall be deemed amended to, and to have contained from the outset
such language as shall be necessary to, accomplish the objectives of the
provision and (ii) all other provisions of the Plan shall remain in full force
and effect.
H. No Strict Construction. No rule of strict
construction shall be applied against the Company, the Committee, the Board of
Directors, or any other person in the interpretation of any of the terms of the
Plan or any rule or procedure established by the Committee.
I. Successors. The provisions of the Plan shall bind
and inure to the benefit of the Company and its successors and assigns. The
term "successors" as used herein shall include any corporation or other
business entity which shall by merger, consolidation, purchase or otherwise,
acquire all or substantially all of the business and assets of the Company and
successors of any such corporation or other business entity.
IN WITNESS WHEREOF, Monterey Resources, Inc. has caused this
amendment to be executed by its duly authorized officer this
__________________________________, 1996, effective for all purposes as of the
Spinoff Date.
MONTEREY RESOURCES, INC.
By:
------------------------------------
Title:
---------------------------------
-9-
<PAGE> 1
EXHIBIT 10.12
MONTEREY RESOURCES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- -----
<S> <C>
ARTICLE I
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
ARTICLE II
ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
2.1 ASSIGNMENT AND DESIGNATION OF ADMINISTRATIVE
AUTHORITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
2.2 ALLOCATION AND DELEGATION OF RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
2.3 POWERS AND DUTIES OF THE ADMINISTRATOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-2
2.4 RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3
2.5 AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3
2.6 APPOINTMENT OF ADVISORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-4
2.7 INFORMATION FROM EMPLOYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-4
2.8 PAYMENT OF EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-4
2.9 ACTIONS BY ADMINISTRATOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-4
2.10 CLAIMS PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-5
2.11 CLAIMS REVIEW PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-5
ARTICLE III
ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
3.1 CONDITIONS OF ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
3.2 EFFECT OF PARTICIPATION UPON THE ACCEPTANCE OF
ANY BENEFITS UNDER THIS PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
3.3 DETERMINATION OF ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
3.4 TERMINATION OF ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
3.5 OMISSION OF ELIGIBLE EMPLOYEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
3.6 INCLUSION OF INELIGIBLE EMPLOYEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
ARTICLE IV
CONTRIBUTION AND ALLOCATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
4.1 EMPLOYER'S CONTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES
AND EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
4.4 MAXIMUM ANNUAL ADDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-5
4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-9
4.6 DIRECTED DIVERSIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-10
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V
FUNDING AND INVESTMENT POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1
5.1 INVESTMENT POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1
5.2 APPLICATION OF CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1
ARTICLE VI
VALUATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1
6.1 VALUATION OF THE TRUST FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1
6.2 METHOD OF VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1
ARTICLE VII
VESTING DETERMINATION AND DISTRIBUTION OF BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-1
7.1 BENEFITS UPON RETIREMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-1
7.2 BENEFITS UPON DEATH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-1
7.3 BENEFITS UPON DISABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-2
7.4 BENEFITS UPON TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-2
7.5 DISTRIBUTION OF BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-4
7.6 HOW PLAN BENEFITS WILL BE DISTRIBUTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-6
7.7 DISTRIBUTION FOR MINOR BENEFICIARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-8
7.8 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN . . . . . . . . . . . . . . . . . . . . . . . . . . VII-8
7.9 PUT OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-8
7.10 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-10
7.111 PAYMENT OF DISTRIBUTION DIRECTLY TO
ELIGIBLE RETIREMENT PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-10
7.14 30-DAY WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-11
ARTICLE VIII
TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
8.1 BASIC RESPONSIBILITIES OF THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
8.2 VOTING COMPANY STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
ARTICLE IX
AMENDMENT, TERMINATIONS, AND MERGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1
9.1 AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1
9.2 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1
9.3 MERGER OR CONSOLIDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-2
ARTICLE X
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1
10.1 PARTICIPANT'S RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1
10.2 ALIENATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1
10.3 CONSTRUCTION OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
10.4 GENDER AND NUMBER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1
10.5 LEGAL ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-2
10.6 PROHIBITION AGAINST DIVERSION OF FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-2
10.7 BONDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-2
10.8 RECEIPT AND RELEASE FOR PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-3
10.9 ACTION BY THE EMPLOYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-3
10.10 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . X-3
10.11 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-3
10.12 APPROVAL BY INTERNAL REVENUE SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-3
10.13 UNIFORMITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-4
10.14 SECURITIES AND EXCHANGE COMMISSION APPROVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-4
10.15 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-4
10.16 CONTROLLING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-4
ARTICLE XI
PARTICIPATING EMPLOYERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1
11.1 ADOPTION BY OTHER EMPLOYERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1
11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1
11.3 DESIGNATION OF AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-2
11.4 EMPLOYEE TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-2
11.5 PARTICIPATING EMPLOYER'S CONTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-2
11.6 AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-2
11.7 DISCONTINUANCE OF PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-2
11.8 ADMINISTRATOR'S AUTHORITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3
11.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE . . . . . . . . . . . . . . . . . . . . . . . . XI-3
ARTICLE XII
TOP-HEAVY STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-1
12.1 ARTICLE CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-1
12.2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-1
12.3 TOP-HEAVY STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-2
12.4 TERMINATION OF TOP-HEAVY STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-3
12.5 EFFECT OF ARTICLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-3
</TABLE>
-iii-
<PAGE> 5
MONTEREY RESOURCES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
W I T N E S S E T H:
WHEREAS, the Company desires to recognize the contributions employees
of the Employers will make to the successful operation of its parent
corporation and to reward such contributions by means of an employee stock
ownership plan for those employees who qualify as Participants hereunder; and
WHEREAS, contributions to the Plan will be made by the Employers and
such contributions made to the Plan's trust will be invested primarily in
Company Stock;
NOW, THEREFORE, as of the Effective Date the Company hereby
establishes this Plan for the exclusive benefit of its Participants and their
Beneficiaries under the following terms:
<PAGE> 6
ARTICLE I
DEFINITIONS
1.1 "Act" means the Employee Retirement Income Security Act of
1974, as it may be amended from time to time.
1.2 "Administrator" means the person designated by the Chief
Executive Officer of the Company pursuant to Section 2.1 to administer the Plan
or, in the absence of any such designation, the Company.
1.3 "Affiliated Employer" means the Employer and any corporation
which is a member of a controlled group of corporations (as defined in Code
Section 414(b)) which include the Employer; any trade or business (whether or
not incorporated) which is under common control (as defined in Code Section
414(c)) with the Employer; any organization (whether or not incorporated) which
is a member of an affiliated service group (as defined in Code Section 414(m))
which includes the Employer; and any other entity required to be aggregated
with the Employer pursuant to Regulations under Code Section 414(o).
1.4 "Anniversary Date" means the last day of each Plan Year.
1.5 "Beneficiary" means the person to whom the share of a deceased
Participant's total account is payable, subject to the restrictions of Sections
7.2 and 7.6.
1.6 "Code" means the Internal Revenue Code of 1986, as amended or
replaced from time to time.
1.7 "Company" means Monterey Resources, Inc. (or its successor).
1.8 "Company Stock" means common stock issued by the Company which
is readily tradeable on an established securities market. If there is no
common stock which meets the foregoing requirement, the term "Company Stock"
means common stock issued by the Company having a combination of voting power
and dividend rights equal to or in excess of: (A) that class of common stock of
the Company having the greatest voting power, and (B) that class of stock of
the Company having the greatest dividend rights. Preferred stock shall be
deemed to be "Company Stock" if such stock is convertible at any time into
stock which constitutes "Company Stock" hereunder and if such conversion is at
a conversion price which (as of the date of the acquisition by the Trust) is
reasonable.
1.9 "Company Stock Account" means the account of a Participant
which is credited with the shares of Company Stock purchased and paid for by
the Trust Fund or contributed to the Trust Fund.
I-1
<PAGE> 7
1.10 "Compensation" means, with respect to any Participant, the
total basic compensation paid by the Employers to the Participant while an
Eligible Employee during the applicable Plan Year, including any elective
salary deferral amounts excluded from income pursuant to Section 125 or 402 of
the Code , plus overtime, shift differentials and bonuses (whether cash or
stock) paid pursuant to recurring bonus programs, but excluding any special or
extraordinary bonuses. A Participant's basic compensation is the regular rate
of pay specified for his position and does not include automobile allowances,
imputed income under any group term left insurance program, moving expense or
other reimbursements, fringe befits or any other items of compensation.
Compensation shall be determined in accordance with the rules of Section
414(g)(6) of the Code, except that the term "family" shall include only the
Participant's spouse and any lineal descendants who have not attained the age
of 19 before the close of the Plan Year.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, the annual
compensation of each Employee taken into account under the Plan shall not
exceed the "OBRA '93 Annual Compensation Limit." The "OBRA '93 Annual
Compensation Limit" is $150,000, as adjusted for increases in the cost of
living in accordance with Code Section 401(a)(17)(B). The cost of living
adjustment in effect for a calendar year applies to any period, not exceeding
12 months, over which compensation is determined ("Determination Period")
beginning in such calendar year. If a Determination Period consists of fewer
than 12 months, the "OBRA '93 Annual Compensation Limit" will be multiplied by
a fraction, the numerator of which is the number of months in the Determination
Period, and the denominator of which is 12. Any reference in this Plan to the
limitation under Code Section 401(a)(17) shall mean the "OBRA '93 Annual
Compensation Limit" set forth in this Section.
1.11 "Effective Date" means date the Company ceases to be a
subsidiary of Santa Fe Energy Resources, Inc.
1.12 "Eligible Employee" means any Employee of an Employer who (1)
is not (i) a Leased Employee or (ii) a nonresident alien with no U.S. source
income and (2) has satisfied the provisions of Section 3.1; provided, however,
Employees whose employment is governed by the terms of a collective bargaining
agreement between employee representatives and the Employer will not be
eligible to participate in this Plan unless such agreement expressly provides
for such coverage in this Plan.
1.13 "Employee" means any person who is an employee of the Employer
or an Affiliated Employer as defined in Code Section 3121(d). Employee shall
also include Leased Employees, except when they are not required to be treated
as employees for Plan purposes by the Code.
1.14 "Employer" means the Company and any Participating Employer
(as defined in Section 11.1) which shall adopt this Plan, and any successor
which shall maintain this Plan.
1.15 "Employer Contributions" means the Employer's contributions to
the Plan pursuant to Section 4.1(a).
I-2
<PAGE> 8
1.16 "ESOP" means an employee stock ownership plan that meets the
requirements of Code Section 409.
1.17 "Family Member" means an individual described in Code Section
414(q)(6)(B).
1.18 "Fiduciary" means any person who (a) exercises any
discretionary authority or discretionary control respecting management of the
Plan or exercises any authority or control respecting management or disposition
of its assets, (b) renders investment advice for a fee or other compensation,
direct or indirect, with respect to any monies or other property of the Plan or
has any authority or responsibility to do so, or (c) has any discretionary
authority or discretionary responsibility in the administration of the Plan.
1.19 "Forfeiture" means that portion of a Participant's Account
that is not Vested in accordance with the provisions of Section 7.4, on account
of the Participant's termination of employment before full vesting.
1.20 "Former Participant" means a person who has been a
Participant, but who has ceased to be a Participant for any reason. For
purposes of Section 1.26, a "Former Participant" shall be treated as a Highly
Compensated Participant if such "Former Participant" was a Highly Compensated
Participant when he separated from service with the Employer or was a Highly
Compensated Participant at any time after attaining age 55.
1.21 "415 Compensation" means compensation as defined in Section
4.4(e).
1.22 "Highly Compensated Employee" means any Employee or former
Employee who is a highly compensated employee as defined in Code Section 414(q)
and the Regulations thereunder. Generally, any Employee or former Employee is
considered a Highly Compensated Employee if such Employee or former Employee
performed services for the Employer during the "determination year" and is one
or more of the following groups:
(a) Employees who at any time during the "determination
year" or "look-back year" were "five percent owners" as defined in
Section 1.26(c).
(b) Employees who received "415 Compensation" during the
"look-back year" from the Employer in excess of $75,000. In
determining whether an individual has "415 Compensation" of more than
$75,000, "415 Compensation" from each employer required to be
aggregated under Code Sections 414(b), (c), (m) and (o) shall be taken
into account.
(c) Employees who received "415 Compensation" during the
"look-back year" from the Employer in excess of $50,000 and were in
the top-paid group of Employees for the Plan Year. An Employee is in
the top-paid group of Employees for any Plan Year if such Employee is
in the group consisting of the top 20% of the Employees when ranked on
the
I-3
<PAGE> 9
basis of "415 Compensation" paid during the Plan Year. In determining
whether an individual has "415 Compensation" of more than $50,000,
"415 Compensation" from each employer required to be aggregated under
Code Section 414(b), (c), (m) and (o) shall be taken into account.
(d) Employees who during the "look-back year" were
officers as defined in Section 1.26(a) and received "415 Compensation"
during the "look-back year" from the Employer greater than 50% of the
limit in effect under Code Section 415(b)(1)(A) for any such Plan
Year. The number of officers shall be limited to the lesser of (i) 50
employees; or (ii) the greater of 3 employees or 10% of all employees.
For the purpose of determining the number of officers, the following
Employees shall be excluded:
(1) Employees with less than six months of
service;
(2) Employees who normally work less than 17 1/2
hours per week;
(3) Employees who normally work less than six
months during a year; and
(4) Employees who have not yet attained age 21.
However, such Employees shall still be considered for the
purpose of identifying the particular Employees who are officers. If
the Employer does not have at least one officer whose annual "415
Compensation" is in excess of 50% of the Code Section 415(b)(1)(A)
limit, then the highest paid officer of the Employer will be treated
as a Highly Compensated Employee.
(e) Employees who are in the group consisting of the 100
Employees paid the greatest "415 Compensation" during the
"determination year" and are also described in (b), (c) or (d) above
when these paragraphs are modified to substitute "determination year"
for "look-back year."
The "look-back year" shall be the calendar year ending with or within
the Plan Year for which testing is being performed, and the "determination
year" (if applicable) shall be the period of time, if any, that extends beyond
the "look-back year" and ends on the last day of the Plan Year for which
testing is being performed (the "lag period"). If the "lag period" is less
than twelve months long, the threshold amounts specified in (b), (c), and (d)
above shall be prorated based upon the number of months in the "lag period."
For purposes of this Section, the determination of "415 Compensation"
shall be based only on "415 Compensation" which is actually paid and shall be
made by including amounts which are contributed by the Employer pursuant to a
salary reduction agreement and which are not includible in the gross income of
the Participant under Code Sections 125, 402(e)(3) or 402(g) and Employee
I-4
<PAGE> 10
contributions described in Code Section 414(h)(2) that are treated as Employer
contributions. Additionally, the dollar threshold amounts specified in (b) and
(c) above shall be adjusted at such time and in such manner as is provided in
Regulations. In the case of such an adjustment, the dollar limits which shall
be applied are those for the calendar year in which the "determination year" or
"look-back year" begins.
In determining who is a Highly Compensated Employee, Employees who are
non-resident aliens and who received no earned income (within the meaning of
Code Section 911(d)(2)) from the Employer constituting United States source
income within the meaning of Code Section 861(a)(3) shall not be treated as
Employees. Additionally, all Affiliated Employers shall be taken into account
as a single employer and Leased Employees within the meaning of Code Sections
414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased
Employees are covered by a plan described in Code Section 414(n)(5) and are not
covered in any qualified plan maintained by the Employer. The exclusion of
Leased Employees for this purpose shall be applied on a uniform and consistent
basis for all of the Employer's retirement plans
1.23 "Highly Compensated Participant" means any Highly Compensated
Employee who is eligible to participate in the Plan.
1.24 "Hour of Service" means (1) each hour for which an Employee is
directly or indirectly compensated or entitled to compensation by the Employer
or an Affiliated Employer for the performance of duties during the applicable
computation period; (2) each hour for which an Employee is directly or
indirectly compensated or entitled to compensation by the Employer or an
Affiliated Employer (irrespective of whether the employment relationship has
terminated) for reasons other than performance of duties (such as vacation,
holidays, sickness, jury duty, disability, lay-off, military duty, or leave of
absence) during the applicable computation period; and (3) each hour for which
back pay is awarded or agreed to by the Employer or Affiliated Employer without
regard to mitigation of damages. An Employee shall be credited with 95 Hours
of Service for each semimonthly period the Employee is credited with at least
one Hour of Service.
Notwithstanding the above, (i) no more than 501 Hours of Service are
required to be credited to an Employee on account of any single continuous
period during which the Employee performs no duties (whether or not such period
occurs in a single computation period); (ii) an hour for which an Employee is
directly or indirectly paid, or entitled to payment, on account of a period
during which no duties are performed is not required to be credited to the
Employee if such payment is made or due under a plan maintained solely for the
purpose of complying with applicable worker's compensation, or unemployment
compensation or disability insurance laws; and (iii) Hours of Service are not
required to be credited for a payment which solely reimburses an Employee for
medical or medically related expenses incurred by the Employee.
For purposes of this Section, a payment shall be deemed to be made by
or due from the Employer or Affiliated Employer regardless of whether such
payment is made by or due from the Employer directly, or indirectly through,
among others, a trust fund, or insurer, to which the
I-5
<PAGE> 11
Employer or Affiliated Employer contributes or pays premiums and regardless of
whether contributions made or due to the trust fund, insurer, or other entity
are for the benefit of particular Employees or are on behalf of a group of
Employees in the aggregate.
An Hour of Service must be counted for the purpose of determining a
Year of Service, a 1-Year Break in Service, and employment commencement date
(or reemployment commencement date). The provisions of Department of Labor
regulations 2530.200b-2(b) and (c) are incorporated herein by reference.
1.25 "Investment Manager" means an entity that (a) has the power to
manage, acquire, or dispose of Plan assets and (b) acknowledges fiduciary
responsibility to the Plan in writing. Such entity must be a person, firm, or
corporation registered as an investment adviser under the Investment Advisers
Act of 1940, a bank, or an insurance company.
1.26 "Key Employee" means an Employee as defined in Code Section
416(i) and the Regulations thereunder. Generally, any Employee or Former
Employee (as well as each of his Beneficiaries) is considered a Key Employee if
he, at any time during the Plan Year or any of the preceding four Plan Years,
has been included in one of the following categories:
(a) an officer of the Employer (as that term is defined
within the meaning of the Regulations under Code Section 416) having
annual "415 Compensation" greater than 50% of the amount in effect
under Code Section 415(b)(1)(A) for any such Plan Year;
(b) one of the ten Employees having annual "415
Compensation" from the Employer for a Plan Year greater than the
dollar limitation in effect under Code Section 415(c)(1)(A) for the
calendar year in which such Plan Year ends and owning (or considered
as owning within the meaning of Code Section 318) both more than
one-half percent interest and the largest interests in the Employer;
(c) a "five percent owner" of the Employer. "Five
percent owner" means any person who owns (or is considered as owning
within the meaning of Code Section 318) more than 5% of the
outstanding stock of the Employer or stock possessing more than 5% of
the total combined voting power of all stock of the Employer, or, in
the case of an unincorporated business, any person who owns more than
5% of the capital or profits interest in the Employer. In determining
percentage ownership hereunder, Employers that would otherwise be
aggregated under Code Sections 414(b), (c), (m) and (o) shall be
treated as separate employers; or
(d) a "one percent owner" of the Employer having an
annual "415 Compensation" from the Employer of more than $150,000.
"One percent owner" means any person who owns (or is considered as
owning within the meaning of Code Section 318) more than 1% of the
outstanding stock of the Employer or stock possessing more than 1% of
the total combined voting power of all stock of the Employer, or, in
the case of an unincorporated
I-6
<PAGE> 12
business, any person who owns more than 1% of the capital or profits
interest in the Employer. In determining percentage ownership
hereunder, Employers that would otherwise be aggregated under Code
Sections 414(b), (c), (m) and (o) shall be treated as separate
Employers. However, in determining whether an individual has "415
Compensation" of more than $150,000, "415 Compensation" from each
employer required to be aggregated under Code Sections 414(b), (c),
(m) and (o) shall be taken into account.
For purposes of this Section, the determination of "415 Compensation"
shall be based only on "415 Compensation" which is actually paid and shall be
made by including amounts which are contributed by the Employer pursuant to a
salary reduction agreement and which are not includible in the gross income of
the Participant under Code Sections 125, 402(e)(3), 402(h), 403(b) or 457, and
Employee contributions described in Code Section 414(h)(2) that are treated as
Employer contributions.
1.27 "Leased Employee" means any person who would be within the
meaning of Code Section 414(n)(2).
1.28 "Non-Highly Compensated Employee" means any Employee or former
Employee who is not a Highly Compensated Employee nor a Family Member.
1.29 "Non-Highly Compensated Participant" means any Participant or
Former Participant who is neither a Highly Compensated Participant nor a Family
Member.
1.30 "Non-Key Employee" means any Employee or former Employee (and
his Beneficiaries) who is not a Key Employee.
1.31 "Normal Retirement Age" means the later of the Participant's
65th birthday or the fifth anniversary of the date his participation in the
Plan commenced.
1.32 "1-Year Break in Service" means the applicable computation
period of 12 consecutive months during which an Employee fails to complete more
than 500 Hours of Service. Further, solely for the purpose of determining
whether a Participant has incurred a 1-Year Break in Service, Hours of Service
shall be recognized for "authorized leaves of absence" and "maternity and
paternity leaves of absence."
An Employee shall not be deemed to have incurred a 1-Year Break in
Service if he completes an Hour of Service within 12 months following the last
day of the month during which his employment terminated.
"Authorized leave of absence" means an unpaid, temporary cessation
from active employment with the Employer or Affiliated Employer pursuant to an
established nondiscriminatory policy, whether occasioned by illness, military
service, or any other reason.
I-7
<PAGE> 13
A "maternity or paternity leave of absence" means an absence from work
for any period by reason of the Employee's pregnancy, birth of the Employee's
child, placement of a child with the Employee in connection with the adoption
of such child, or any absence for the purpose of caring for such child for a
period immediately following such birth or placement. For this purpose, Hours
of Service shall be credited for the computation period in which the absence
from work begins, only if credit therefor is necessary to prevent the
Employees from incurring a 1-Year Break in Service, or, in any other case, in
the immediately following computation period.
1.33 "Other Investments Account" means the account of a Participant
which is credited with his share of the net gain (or loss) of the Plan,
Forfeitures and Employer Contributions and which is not invested in Company
Stock.
1.34 "Participant" means any Eligible Employee who participates in
the Plan pursuant to Section 3.1.
1.35 "Participant's Accounts" means the accounts established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan and Trust resulting from Employer Contributions, which
shall include the Company Stock Account and the Other Investment Account.
1.36 "Plan" means this instrument, including all amendments
thereto.
1.37 "Plan Year" means the calendar year, which shall also be the
limitation year for purposes of Code Section 415; provided, however, the
initial Plan Year shall be a short year beginning on the Effective Date.
1.38 "Regulation" means the Income Tax Regulations as promulgated
by the Secretary of the Treasury or his delegate, and as amended from time to
time.
1.39 "Retirement" means a Participant's ceasing to be an Employee
on or after reaching age 55 and completing 10 or more Years of Service.
1.40 "Top Heavy Plan" means a plan described in Article XII.
1.41 "Top Heavy Plan Year" means a Plan Year during which the Plan
is a Top Heavy Plan.
1.42 "Total and Permanent Disability" means, as determined by the
Administrator, a Participant's complete inability to substantially perform each
of the material duties of any gainful occupation for which the Participant is
reasonably qualified by reason of his education, training or experience, which
condition is reasonably expected to continue for an extended period of time.
I-8
<PAGE> 14
1.43 "Trust" means the trust established under the Trust Agreement
to hold and invest contributions made under the Plan and from which the Plan
benefits will be distributed.
1.44 "Trust Agreement" means the agreement entered into between the
Company and the Trustee establishing a trust to hold and invest contributions
made under the Plan and from which benefits will be distributed.
1.45 "Trust Fund" means the assets of the Plan and Trust as the
same shall exist from time to time.
1.46 "Trustee" means the person or entity named as trustee herein
or in any separate trust forming a part of this Plan, and any successors.
1.47 "Valuation Date" means each business day of each Plan Year.
1.48 "Vested" means the portion of a Participant's Account that is
nonforfeitable.
1.49 "Year of Service" means the computation period of 12
consecutive months, herein set forth, during which an Employee has at least
1,000 Hours of Service.
(a) For purposes of determining an Employee's eligibility
to participate in the Plan, the computation period shall be the 12
consecutive month period beginning on the date the Employee first
performs an Hour of Service for an Affiliated Employer; however,
succeeding eligibility periods after the initial eligibility period
shall be the Plan Year, and an Employee who is credited with 1,000 or
more Hours of Service in both the initial eligibility period and the
first Plan Year beginning prior to the anniversary of the Employee's
initial period shall be credited with two Years of Service for
eligibility purposes.
(b) For purposes of determining an Employee's vested
percentage under Section 7.4, the computation period shall be the Plan
Year. Notwithstanding the foregoing, for any short Plan Year, the
determination of whether an Employee has completed a Year of Service
shall be made in accordance with Department of Labor Regulation
2530.203-2(c).
(c) Years of Service recognized under the Company's
401(k) plan on the Effective Date shall be recognized under this Plan.
I-9
<PAGE> 15
ARTICLE II
ADMINISTRATION
2.1 ASSIGNMENT AND DESIGNATION OF ADMINISTRATIVE AUTHORITY
(a) The Chief Executive Officer of the Company ("CEO")
may appoint one or more persons to be the Administrator. Any person,
including, but not limited to, the Employees, shall be eligible to
serve as an Administrator. Any person so appointed shall signify his
acceptance by filing written acceptance with the Company. An
Administrator may resign by delivering his written resignation to the
Company or be removed by the CEO by delivery of written notice of
removal, to take effect at a date specified therein, or upon delivery
to the CEO if no date is specified.
(b) The CEO, upon the resignation or removal of an
appointed Administrator, may designate in writing a successor to this
position. If the CEO does not appoint an Administrator, the Company
will function as the Administrator.
(c) The CEO shall be empowered to appoint and remove an
appointed Administrator from time to time as it deems necessary for
the proper administration of the Plan to assure that the Plan is being
operated for the exclusive benefit of the Participants and their
Beneficiaries in accordance with the terms of the Plan, the Code, and
the Act.
(d) The CEO shall periodically review the performance of
the Administrator or other person to whom duties have been delegated
or allocated by it under the provisions of this Plan or pursuant to
procedures established hereunder. This requirement may be satisfied
by formal periodic review by the CEO or by a qualified person
specifically designated by the CEO, through day-to-day conduct and
evaluation, or through any other appropriate method.
(e) The Administrator will furnish Plan Fiduciaries and
Participants with notices and information statements when voting
rights must be exercised pursuant to Section 8.2.
2.2 ALLOCATION AND DELEGATION OF RESPONSIBILITIES
If more than one person is appointed as Administrator, the CEO may
designate the responsibilities of each Administrator as may be specified by the
CEO and accepted in writing by each Administrator. In the event that no such
delegation is made by the CEO, the Administrators may allocate the
responsibilities among themselves, in which event the Administrators shall
notify the CEO and the Trustee in writing of such action and specify the
responsibilities of each Administrator. The Trustee thereafter shall accept
and rely upon any documents executed by the appropriate Administrator until
such time as the CEO or the Administrators file with the Trustee a written
revocation of such designation.
II-1
<PAGE> 16
2.3 POWERS AND DUTIES OF THE ADMINISTRATOR
The primary responsibility of the Administrator is to administer the
Plan for the exclusive benefit of the Participants and their Beneficiaries,
subject to the specific terms of the Plan. The Administrator shall administer
the Plan in accordance with its terms and shall have the power to determine all
questions arising in connection with the administration, interpretation, and
application of the Plan. Any such determination by the Administrator shall be
conclusive and binding upon all persons. The Administrator may establish
procedures, correct any defect, supply any information, or reconcile any
inconsistency in such manner and to such extent as shall be deemed necessary or
advisable to carry out the purpose of the Plan; provided, however, that any
procedure, discretionary act, interpretation or construction shall be done in a
nondiscriminatory manner based upon uniform principles consistently applied and
shall be consistent with the intent that the Plan shall continue to be deemed a
qualified plan under the terms of Code Section 401(a), and shall comply with
the terms of the Act and all regulations issued pursuant thereto. The
Administrator shall have all powers necessary or appropriate to accomplish his
duties under this Plan.
The Administrator shall be charged with the duties of the general
administration of the Plan, including, but not limited to, the following:
(a) to determine all questions relating to the
eligibility of Employees to participate or remain a Participant
hereunder;
(b) to compute, certify, and direct the Trustee with
respect to the amount and the kind of benefits to which any
Participant shall be entitled hereunder;
(c) to authorize and direct the Trustee with respect to
all disbursements from the Trust;
(d) to maintain all necessary records for the
administration of the Plan;
(e) to interpret the provisions of the Plan and to make
and publish such rules for regulation of the Plan as are consistent
with the terms hereof;
(f) to determine the size and type of any contract to be
purchased from any insurer, and to designate the insurer from which
such contract shall be purchased;
(g) to compute and certify to the Employer from time to
time the sums of money necessary or desirable to be contributed to the
Trust Fund;
(h) to establish a "funding policy and method", i.e., it
shall consult with the Employer, and it shall determine whether the
Plan has a short range need for liquidity (e.g., to pay benefits) or
whether liquidity is a long range goal and investment growth (and
stability of same) is a more current need, or shall appoint a
qualified person to do so. Such "funding
II-2
<PAGE> 17
policy and method" shall be consistent with the objectives of this
Plan and with the requirements of Title I of the Act;
(i) to establish and communicate to Participants a
procedure and method to insure that each Participant will vote Company
Stock allocated to such Participant's Company Stock Account pursuant
to Section 8.2; and
(j) to assist any Participant regarding his rights,
benefits, or elections available under the Plan.
2.4 RECORDS AND REPORTS
The Administrator shall keep a record of all actions taken and shall
keep all other books of account, records, and other data that may be necessary
for proper administration of the Plan and shall be responsible for supplying
all information and reports to the Internal Revenue Service, Department of
Labor, Participants, Beneficiaries and others as required by law.
2.5 AUDIT
(a) If an audit of the Plan's records shall be required
by the Act and the regulations thereunder for any Plan Year, the
Administrator shall appoint an independent qualified public accountant
for that purpose. Such accountant shall, after an audit of the books
and records of the Plan in accordance with generally accepted auditing
standards, within a reasonable period after the close of the Plan
Year, furnish to the Administrator and the Trustee a report of his
audit setting forth his opinion as to whether each of the following
statements, schedules or lists, or any others that are required by
Section 103 of the Act or the Secretary of Labor to be filed with the
Plan's annual report, are presented fairly and in conformity with
generally accepted accounting principles applied consistently:
(1) statement of the assets and liabilities of
the Plan;
(2) statement of changes in net assets
available to the Plan;
(3) statement of receipts and disbursements, a
schedule of all assets held for investment purposes, a
schedule of all loans or fixed income obligations in default
at the close of the Plan Year;
(4) a list of all leases in default or
uncollectible during the Plan Year;
(5) the most recent annual statement of assets
and liabilities of any bank common or collective trust fund in
which Plan assets are invested or such information regarding
separate accounts or trusts with a bank or insurance company
as the Administrator deems necessary; and
II-3
<PAGE> 18
(6) a schedule of each transaction or series of
transactions involving an amount in excess of 5% of Plan
assets.
All auditing and accounting fees shall be an expense of and
may, at the election of the Administrator, be paid from the Trust
Fund.
(b) If some or all of the information necessary to enable
the Administrator to comply with Section 103 of the Act is maintained
by a bank, insurance company, or similar institution, regulated and
supervised and subject to periodic examination by a state or federal
agency, it shall transmit and certify the accuracy of that information
to the Administrator as provided in Section 103(b) of the Act within
120 days after the end of the Plan Year or such other date as may be
prescribed under regulations of the Secretary of Labor.
2.6 APPOINTMENT OF ADVISORS
The Administrator may appoint counsel, specialists, advisors, and
other persons as the Administrator deems necessary or desirable in connection
with the administration of this Plan.
2.7 INFORMATION FROM EMPLOYER
To enable the Administrator to perform his functions, the Employer
shall supply full and timely information to the Administrator on all matters
relating to the Compensation of all Participants, their Hours of Service, their
Years of Service, their retirement, death, disability, or termination of
employment, and such other pertinent facts as the Administrator may require;
and the Administrator shall advise the Trustee of such of the foregoing facts
as may be pertinent to the Trustee's duties under the Plan. The Administrator
may rely upon such information as is supplied by the Employer and shall have no
duty or responsibility to verify such information.
2.8 PAYMENT OF EXPENSES
All expenses of administration may be paid out of the Trust Fund
unless voluntarily paid by the Employer. Such expenses shall include any
expenses incident to the functioning of the Administrator, including, but not
limited to, fees of accountants, counsel, the Trustee and other specialists and
their agents, and other costs of administering the Plan and/or the Trust.
Until paid, the expenses shall constitute a liability of the Trust Fund.
However, the Employer may reimburse the Trust Fund for any administration
expense incurred. Any administration expense paid to the Trust Fund as a
reimbursement shall not be considered an Employer contribution.
2.9 ACTIONS BY ADMINISTRATOR
The Administrator shall hold meetings upon such notice and at such
time and places as it may from time to time determine. Notice to a member
shall not be required if waived in writing by that member. A majority of the
members of the Administrator duly appointed shall constitute a quorum
II-4
<PAGE> 19
for the transaction of business. All resolutions or other actions taken by the
Administrator at any meeting where a quorum is present shall be by vote of a
majority of those present at such meeting and entitled to vote. Resolutions
may be adopted or other action taken without a meeting upon written consent
signed by all of the Administrators.
2.10 CLAIMS PROCEDURE
Claims for benefits under the Plan must be filed with the
Administrator in writing. Written notice of the disposition of a claim shall
be furnished to the claimant within 90 days after the application is filed. In
the event the claim is denied, the reasons for the denial shall be specifically
set forth in the notice in language calculated to be understood by the
claimant, pertinent provisions of the Plan shall be cited, and, where
appropriate, an explanation as to how the claimant can perfect the claim will
be provided. In addition, the claimant shall be furnished with an explanation
of the Plan's claims review procedure.
2.11 CLAIMS REVIEW PROCEDURE
Any Employee, Former Employee, or Beneficiary of either, who has been
denied a benefit by a decision of the Administrator pursuant to Section 2.10
shall be entitled to request the Administrator to give further consideration to
his claim by filing with the Administrator (on a form which may be obtained
from the Administrator) a request for a hearing. Such request, together with a
written statement of the reasons why the claimant believes his claim should be
allowed, shall be filed with the Administrator no later than 60 days after
receipt of the written notification provided for in Section 2.10. The
Administrator shall then conduct a hearing within the next 60 days, at which
the claimant may be represented by an attorney or any other representative of
his choosing and at which the claimant shall have an opportunity to submit
written and oral evidence and arguments in support of his claim. At the
hearing (or prior thereto upon 5 business days written notice to the
Administrator) the claimant or his representative shall have an opportunity to
review all documents in the possession of the Administrator which are pertinent
to the claim at issue and its disallowance. Either the claimant or the
Administrator may cause a court reporter to attend the hearing and record the
proceedings. In such event, a complete written transcript of the proceedings
shall be furnished to both parties by the court reporter. The full expense of
any such court reporter and such transcripts shall be borne by the party
causing the court reporter to attend the hearing. A final decision as to the
allowance of the claim shall be made by the Administrator within 60 days of
receipt of the appeal (unless there has been an extension of 60 days due to
special circumstances, provided the delay and the special circumstances
occasioning it are communicated to the claimant within the 60 day period).
Such communication shall be written in a manner calculated to be understood by
the claimant and shall include specific reasons for the decision and specific
references to the pertinent Plan provisions on which the decision is based.
II-5
<PAGE> 20
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY
Each Employee who is an Eligible Employee on the Effective Date shall
automatically participate in the Plan commencing on the Effective Date. All
other Employees shall automatically become Participants as of the date they
become an Eligible Employee.
3.2 EFFECT OF PARTICIPATION UPON THE ACCEPTANCE OF ANY BENEFITS
UNDER THIS PLAN
An Eligible Employee shall automatically be bound by the terms and
conditions of the Plan and all amendments hereto.
3.3 DETERMINATION OF ELIGIBILITY
The Administrator shall determine the eligibility of each Employee for
participation in the Plan based upon information furnished by the Employer.
Such determination shall be conclusive and binding upon all persons, as long as
the same is made pursuant to the Plan and the Act. Such determination shall be
subject to review as provided for in Section 2.8 and 2.9.
3.4 TERMINATION OF ELIGIBILITY
In the event a Participant shall go from a classification of an
Eligible Employee to a noneligible Employee, such Former Participant shall
continue to vest in his interest in the Plan for each Year of Service completed
while a noneligible Employee, until such time as his Participant's Account
shall be forfeited or distributed pursuant to the terms of the Plan.
Additionally, his interest in the Plan shall continue to share in the
earnings/losses of the Trust Fund.
3.5 OMISSION OF ELIGIBLE EMPLOYEE
If, in any Plan Year, any Employee who should be included as a
Participant in the Plan is erroneously omitted and discovery of such omission
is not made until after a contribution by his Employer for the year has been
made, the Employer shall make a subsequent contribution with respect to the
omitted Employee in the amount which the Employer would have contributed with
respect to him had he not been omitted. Such contribution shall be made
regardless of whether or not it is deductible in whole or in part in any
taxable year under applicable provisions of the Code.
3.6 INCLUSION OF INELIGIBLE EMPLOYEE
If, in any Plan Year, any person who should not have been included as
a Participant in the Plan is erroneously included and discovery of such
incorrect inclusion is not made until after a
III-1
<PAGE> 21
contribution for the year has been made, the Employer shall not be entitled to
recover the contribution made with respect to the ineligible person regardless
of whether or not a deduction is allowable with respect to such contribution.
In such event, the amount contributed with respect to the ineligible person
shall constitute a Forfeiture for the Plan Year in which the discovery is made.
III-2
<PAGE> 22
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 EMPLOYER'S CONTRIBUTION
(a) Subject to paragraph (b) below and Section 4.4, each
Plan Year the Employer shall contribute to the Plan such amount, if
any, as the Board, in its sole discretion, may authorize for that Plan
Year.
(b) The Employer Contribution for any Plan Year shall not
exceed the maximum amount allowable as a deduction to the Employer
under the provisions of Code Section 404; provided however, to the
extent necessary to provide the top heavy minimum allocations, the
Employer shall make a contribution even if it exceeds the amount which
is deductible under Code Section 404.
4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION
Employer Contributions will be paid in cash and/or in Company Stock as
the Company's Board of Directors or its delegatees may from time to time
determine. Company Stock will be valued at its then fair market value. The
Employer Contribution with respect to a Plan Year will be paid to the Plan in
all events on or before the date required to make such contribution a deduction
on the Employer's federal income tax return for the year.
4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS
(a) The Administrator shall establish and maintain an
account in the name of each Participant to which the Administrator
shall credit as of each Valuation Date all amounts allocated to each
such Participant as set forth herein. However, the Administrator may
separately account for that portion of each Participant's Account
attributable to Top Heavy Plan Years.
(b) The Employer shall provide the Administrator with all
information required by the Administrator to make a proper allocation
of the Employer Contribution for each Plan Year. As soon as
reasonably practicable after the date of receipt by the Administrator
for such information, the Administrator shall allocate the Employer
Contribution to each eligible Participant (as provided below) in the
ratio that such Participant's Compensation for such year bears to the
aggregate Compensation of all Participants entitled to share in the
Employer Contribution for such year.
A Participant who is not an Employee on the last day of the
Plan Year shall not be eligible to share in the Employer Contribution
for that year, unless otherwise required pursuant to the "top heavy"
rules of Section 4.3(h).
IV-1
<PAGE> 23
(c) Stock dividends on Company Stock held in a
Participant's Company Stock Account shall be credited to his Company
Stock Account when paid. Cash dividends on Company Stock held in his
Company Stock Account may, in the sole discretion of the
Administrator, be credited to his Participants Other Investments
Account, reinvested in Company Stock or distributed to the
Participant.
Company Stock received by the Trust during a Plan Year with
respect to a contribution by the Employer for the preceding Plan Year
shall be allocated to the accounts of Participants as of the
Anniversary Date of such preceding Plan Year.
(d) As of each Valuation Date, before allocation of
Employer Contributions for such Plan Year, any earnings or losses (net
appreciation or net depreciation) of the Trust Fund shall be allocated
in the same proportion that each Participant's and Former
Participant's Other Investment Accounts (other than each Participant's
Company Stock Account) bear to the total of all Participants' and
Former Participants' Other Investment Accounts (other than
Participants' Company Stock Accounts) as of such date. Earnings or
losses include the increase (or decrease) in the fair market value of
assets of the Trust Fund (other than Company Stock in the
Participants' Company Stock Accounts) since the preceding Valuation
Date.
(e) The Administrator shall establish accounting
procedures for the purpose of making the allocations, valuations and
adjustments to Participants' Accounts provided for in this Section.
Should the Administrator determine that the strict application of its
accounting procedures shall not result in an equitable and
nondiscriminatory allocation among the Participants' Accounts, it may
modify its procedures for the purpose of achieving an equitable and
nondiscriminatory allocation in accordance with the general concepts
of the Plan and the provisions of this Section, provided, however,
that such adjustments to achieve equity shall not reduce the Vested
portion of a Participant's Account.
(f) Separate accounts shall be maintained for all
Participants. Such separate accounts shall not require a segregation
of the Plan assets and no Participant shall acquire any right to or
interest in any specific asset of the Trust as a result of the
allocations provided for in the Plan.
(g) As of each Anniversary Date any amounts which became
Forfeitures since the last Anniversary Date shall first be made
available to reinstate previously forfeited account balances of Former
Participants, if any. The remaining Forfeitures, if any, shall be
applied as an Employer Contribution for such year and shall reduce the
amount of Employer Contribution, if any, otherwise authorized for such
year.
(h) Minimum Allocations Required for Top Heavy Plan
Years: Notwithstanding the foregoing, for any Top Heavy Plan Year,
the sum of the Employer Contributions and Forfeitures allocated to the
Participant's Account for each Non-Key Employee shall be equal
IV-2
<PAGE> 24
to at least 3% of such Non-Key Employee's "415 Compensation" (reduced
by contributions and forfeitures, if any, allocated to each Non-Key
Employee in any defined contribution plan included with this plan in a
Required Aggregation Group). However, if (i) the sum of the Employer
Contributions and Forfeitures allocated to the Participant's Account
of each Key Employee for such Top Heavy Plan Year is less than 3% of
each Key Employee's "415 Compensation" and (ii) this Plan is not
required to be included in an Aggregation Group to enable a defined
benefit plan to meet the requirements of Code Sections 401(a)(4) or
410, the sum of the Employer Contributions and Forfeitures allocated
to the Participant's Account of each Non-Key Employee shall be equal
to the largest percentage allocated to the Participant's Account of
any Key Employee.
Except, however, no such minimum allocation shall be required
in this Plan for any Non-Key Employee who participates in another
defined contribution plan subject to Code Section 412 providing such
benefits included with this Plan in a Required Aggregation Group.
(i) For purposes of the minimum allocations set forth
above the percentage allocated to the Participant's Account of any Key
Employee shall be equal to the ratio of the sum of the Employer
Contributions allocated on behalf of such Key Employee divided by the
"415 Compensation" for such Key Employee.
(j) For any Top Heavy Plan Year, the minimum allocations
set forth above shall be allocated to the Participant's Account of all
Non-Key Employees who are Participants and who are employed by the
Employer on the last day of the Plan Year, including Non-Key Employees
who have (1) failed to complete a Year of Service; (2) declined to
make mandatory contributions (if required) or elective deferrals to
the Plan; and (3) been excluded from participation because of their
level of Compensation.
(k) In lieu of the above, in any Plan Year in which a
Non-Key Employee is a Participant in both this Plan and a defined
benefit pension plan included in a Required Aggregation Group which is
top heavy, the Employer shall not be required to provide such Non-Key
Employee with both the full separate defined benefit plan minimum
benefit and the full separate defined contribution plan minimum
allocation.
Therefore, for any Plan Year when the Plan is a Top Heavy
Plan, Non-Key Employees who are participating in this Plan and a
defined benefit plan maintained by the Employer shall receive a
minimum monthly accrued benefit in the defined benefit plan equal to
the product of (1) 1/12th of "415 Compensation" averaged over a five
consecutive "limitation years" (or actual "limitation years" if less)
which produce the highest average and (2) the lesser of (i) 2%
multiplied by Years of Service when the plan is top heavy or (ii) 20%.
IV-3
<PAGE> 25
(l) For the purposes of this Section, "415 Compensation"
shall be as defined in Section 4.4(e), and shall be limited to
$150,000 in all Plan Years (unless adjusted in such manner as
permitted under Code Section 401(a)(17).
(m) If a Former Participant is reemployed after five
consecutive 1-Year Breaks in Service, then separate accounts shall be
maintained as follows:
(1) one account for nonforfeitable benefits
attributable to pre-break service; and
(2) one account representing his status in the
Plan attributable to post-break service.
4.4 MAXIMUM ANNUAL ADDITIONS
(a) Notwithstanding the foregoing, the maximum "annual
additions" credited to a Participant's accounts for any "limitation
year" shall equal the lesser of: (1) $30,000 (or, if greater,
one-fourth of the dollar limitation in effect under Code Section
415(b)(1)(A)) or (2) 25% of the Participant's "415 Compensation" for
such "limitation year".
(b) For purposes of applying the limitations of Code
Section 415, "annual additions" means the sum credited to a
Participant's accounts for any "limitation year" of (1) Employer
Contributions, (2) Employee contributions, (3) Forfeitures, (4)
amounts allocated, after March 31, 1984, to an individual medical
account, as defined in Code Section 415(l)(2) which is part of a
pension or annuity plan maintained by the Employer and (5) amounts
derived from contributions paid or accrued after December 31, 1985, in
taxable years ending after such date, which are attributable to
post-retirement medical benefits allocated to the separate account of
a key employee (as defined in Code Section 419A(d)(3)) under a welfare
benefit plan (as defined in Code Section 419(e)) maintained by the
Employer. Except, however, the "415 Compensation" percentage
limitation referred to in paragraph (a)(2) above shall not apply to:
(1) any contribution for medical benefits (within the meaning of Code
Section 419A(f)(2)) after separation from service which is otherwise
treated as an "annual addition", or (2) any amount otherwise treated
as an "annual addition" under Code Section 415(l)(1).
(c) For purposes of applying the limitations of Code
Section 415, the transfer of funds from one qualified plan to another
is not an "annual addition." In addition, the following are not
Employee contributions for the purposes of Section 4.4(b)(2): (1)
rollover contributions (as defined in Code Sections 402(a)(5),
403(a)(4), 403(b)(8) and 408(d)(3)); (2) repayments of loans made to a
Participant from the Plan; (3) repayments of distributions received by
an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (4)
repayments of distributions received by an Employee pursuant to Code
Section 411(a)(3)(D) (mandatory
IV-4
<PAGE> 26
contributions); and (5) Employee contributions to a simplified
employee pension excludable from gross income under Code Section
408(k)(6).
(d) If no more than one-third of the Employer
Contributions to this Plan for a Plan Year which are deductible under
Code Section 404(a)(9) are allocated to Highly Compensated Employees,
the limitations of paragraph (a) shall not apply to:
(1) Forfeitures of Company Stock which were
acquired with the proceeds of an Exempt Loan, or
(2) Employer Contributions to this Plan which are
deductible under Code Section 404(a)(9)(B) and charged against
the Participant's accounts.
(e) For purposes of applying the limitations of Code
Section 415, "415 Compensation" shall include the Participant's wages,
salaries, fees for professional services, and other amounts received
for personal services actually rendered in the course of employment
with an Employer maintaining the Plan (including, but not limited to,
commissions paid salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips,
bonuses, fringe benefits, and reimbursements or other expense
allowances under a nonaccountable plan (as described in Regulation
1.62-2(c)) for a Plan Year.
"415 Compensation" shall exclude (1)(A) contributions made by
the Employer to a plan of deferred compensation to the extent that,
before the application of the Code Section 415 limitations to the
Plan, the contributions are not includable in the gross income of the
Employee for the taxable year in which contributed, (B) Employer
contributions made on behalf of an Employee to a simplified employee
pension plan described in Code Section 408(k) to the extent such
contributions are excludable from the Employee's gross income, (C) any
distributions from a plan of deferred compensation; (2) amounts
realized from the exercise of a non-qualified stock option or when
restricted stock (or property) held by an Employee either becomes
freely transferable or is no longer subject to a substantial risk of
forfeiture; (3) amounts realized from the sale, exchange, or other
disposition of stock acquired under a qualified stock option; and (4)
other amounts that receive special tax benefits, such as premiums for
group term life insurance (but only to the extent that the premiums
are not includable in the gross income of the Employee), or
contributions made by the Employer (whether or not under a salary
reduction agreement) towards the purchase of any annuity contract
described in Code Section 403(b) (whether or not the contributions are
excludable from the gross income of the Employee). "415 Compensation"
shall be limited to $150,000 (unless adjusted in the same manner as
permitted under Code Section 415(d)).
(f) For purposes of applying the limitations of Code
Section 415, the "limitation year" shall be the Plan Year.
IV-5
<PAGE> 27
(g) The dollar limitation under Code Section 415(b)(1)(A)
stated in paragraph (a)(1) above shall be adjusted annually as
provided in Code Section 415(d) pursuant to the Regulations. The
adjusted limitation is effective as of January 1st of each calendar
year and is applicable to "limitation years" ending with or within
that calendar year.
(h) For the purpose of this Section, all qualified
defined benefit plans (whether terminated or not) ever maintained by
the Employer shall be treated as one defined benefit plan, and all
qualified defined contribution plans (whether terminated or not) ever
maintained by the Employer shall be treated as one defined
contribution plan.
(i) For the purpose of this Section, if the Employer is a
member of a controlled group of corporations, trades or businesses
under common control (as defined by Code Section 1563(a) or Code
Section 414(b) and (c) as modified by Code Section 415(h)), is a
member of an affiliated service group (as defined by Code Section
414(m)), or is a member of a group of entities required to be
aggregated pursuant to Regulations under Code Section 414(o), all
Employees of such Employers shall be considered to be employed by a
single Employer.
(j) For the purpose of this Section, if this Plan is a
Code Section 413(c) plan, all Employers of a Participant who maintain
this Plan will be considered to be a single Employer.
(k) (1) If a Participant participates in more than
one defined contribution plan maintained by the Employer which
have different Anniversary Dates, the maximum "annual
additions" under this Plan shall equal the maximum "annual
additions" for the "limitation year" minus any "annual
additions" previously credited to such Participant's accounts
under the other plan during the "limitation year."
(2) If a Participant participates in both a
defined contribution plan subject to Code Section 412 and a
defined contribution plan not subject to Code Section 412
maintained by the Employer which have the same Anniversary
Date, "annual additions" will be credited to the Participant's
accounts under the defined contribution plan subject to Code
Section 412 prior to crediting "annual additions" to the
Participant's accounts under the defined contribution plan not
subject to Code Section 412.
(3) If a Participant participates in more than
one defined contribution plan not subject to Code Section 412
maintained by the Employer which have the same Anniversary
Date, the maximum "annual additions" under this Plan shall
equal the product of (A) the maximum "annual additions" for
the "limitation year" minus any "annual additions" previously
credited under subparagraphs (1) or (2) above, multiplied by
(B) a fraction (i) the numerator of which is the "annual
additions" which would be credited to such Participant's
accounts under this Plan without
IV-6
<PAGE> 28
regard to the limitations of Code Section 415 and (ii) the
denominator of which is such "annual additions" for all plans
described in this subparagraph.
(l) If an Employee is (or has been) a Participant in one
or more defined benefit plans and one or more defined contribution
plans maintained by the Employer, the sum of the defined benefit plan
fraction and the defined contribution plan fraction for any
"limitation year" may not exceed 1.0.
(m) The defined benefit plan fraction for any "limitation
year" is a fraction, the numerator of which is the sum of the
Participant's projected annual benefits under all the defined benefit
plans (whether or not terminated) maintained by the Employer, and the
denominator of which is the lesser of 125 percent of the dollar
limitation determined for the "limitation year" under Code Sections
415(b) and (d) or 140 percent of the highest average compensation,
including any adjustments under Code Section 415(b).
Notwithstanding the above, if the Participant was a
Participant as of the first day of the first "limitation year"
beginning after December 31, 1986, in one or more defined benefit
plans maintained by the Employer which were in existence on May 6,
1986, the denominator of this fraction will not be less than 125
percent of the sum of the annual benefits under such plans which the
Participant had accrued as of the close of the last "limitation year"
beginning before January 1, 1987, disregarding any changes in the
terms and conditions of the plan after May 5, 1986. The preceding
sentence applies only if the defined benefit plans individually and in
the aggregate satisfied the requirements of Code Section 415 for all
"limitation years" beginning before January 1, 1987.
(n) The defined contribution plan fraction for any
"limitation year" is a fraction, the numerator of which is the sum of
the annual additions to the Participant's Account under all the
defined contribution plans (whether or not terminated) maintained by
the Employer for the current and all prior "limitation years"
(including the annual additions attributable to the Participant's
nondeductible Employee contributions to all defined benefit plans,
whether or not terminated, maintained by the Employer, and the annual
additions attributable to all welfare benefit funds, as defined in
Code Section 419(e), and individual medical accounts, as defined in
Code Section 415(l)(2), maintained by the Employer), and the
denominator of which is the sum of the maximum aggregate amounts for
the current and all prior "limitation years" of service with the
Employer (regardless of whether a defined contribution plan was
maintained by the Employer). The maximum aggregate amount in any
"limitation year" is the lesser of 125 percent of the dollar
limitation determined under Code Sections 415(b) and (d) in effect
under Code Section 415(c)(1)(A) or 35 percent of the Participant's
Compensation for such year.
If the Employee was a Participant as of the end of the first
day of the first "limitation year" beginning after December 31, 1986,
in one or more defined contribution plans maintained by the Employer
which were in existence on May 6, 1986, the numerator of this
IV-7
<PAGE> 29
fraction will be adjusted if the sum of this fraction and the defined
benefit fraction would otherwise exceed 1.0 under the terms of this
Plan. Under the adjustment, an amount equal to the product of (1) the
excess of the sum of the fractions over 1.0 times (2) the denominator
of this fraction, will be permanently subtracted from the numerator of
this fraction. The adjustment is calculated using the fractions as
they would be computed as of the end of the last "limitation year"
beginning before January 1, 1987, and disregarding any changes in the
terms and conditions of the Plan made after May 5, 1986, but using the
Code Section 415 limitation applicable to the first "limitation year"
beginning on or after January 1, 1987. The annual addition for any
"limitation year" beginning before January 1, 1987 shall not be
recomputed to treat all Employee contributions as annual additions.
(o) Notwithstanding the foregoing, for any "limitation
year" in which the Plan is a Top Heavy Plan, 100 percent shall be
substituted for 125 percent in paragraph (l) and (m) unless the extra
minimum allocation is being provided pursuant to Section 4.3(i).
However, for any "limitation year" in which the Plan is a Super Top
Heavy Plan, 100 percent shall be substituted for 125 percent in any
event.
(p) If the sum of the defined benefit plan fraction and
the defined contribution plan fraction shall exceed 1.0 in any
"limitation year" for any Participant in this Plan, the Administrator
shall limit, to the extent necessary, the "annual additions" to such
Participant's accounts for such "limitation year." If, after limiting
the "annual additions" to such Participant's accounts for the
"limitation year,"the sum of the defined benefit plan fraction and the
defined contribution plan fraction still exceed 1.0, the Administrator
shall then adjust the numerator of the defined benefit plan fraction
so that the sum of both fractions shall not exceed 1.0 in any
"limitation year" for such Participant.
(q) Notwithstanding anything contained in this Section to
the contrary, the limitations, adjustments and other requirements
prescribed in this Section shall at all times comply with the
provisions of Code Section 415 and the Regulations thereunder, the
terms of which are specifically incorporated herein by reference and
which to the extent they may not be applied in more than one manner
shall control over any provision in this Plan.
4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS
(a) If, as a result of the allocation of Forfeitures, a
reasonable error in estimating a Participant's Compensation or other
facts and circumstances to which Regulation 1.415-6(b)(6) shall be
applicable, the "annual additions" under this Plan would cause the
maximum "annual additions" to be exceeded for any Participant, the
Administrator shall (1) hold any "excess amount" remaining after the
return of any voluntary Employee contributions in a "Section 415
suspense account" (2) allocate and reallocate the "Section 415
suspense account" in the next "limitation year" (and succeeding
"limitation years" if necessary) to all Participants in the Plan
before any Employer or Employee contributions which would constitute
"annual additions" are made to the Plan for such
IV-8
<PAGE> 30
"limitation year" or (3) reduce Employer Contributions to the Plan for
such "limitation year" by the amount of the "Section 415 suspense
account" allocated and reallocated during such "limitation year".
Notwithstanding the foregoing, if the Company maintains another
defined contribution plan, the annual addition excess amount shall be
"cured" under such other plan first.
(b) For purposes of this Article, "excess amount" for any
Participant for a "limitation year" shall mean the excess, if any, of
(1) the "annual additions" which would be credited to his account
under the terms of the Plan without regard to the limitations of Code
Section 415 over (2) the maximum "annual additions" determined
pursuant to Section 415.
(c) For purposes of this Section, "Section 415 suspense
account" shall mean an unallocated account equal to the sum of "excess
amounts" for all Participants in the Plan during the "limitation
year". The "Section 415 suspense account" shall not share in any
earnings or losses of the Trust Fund.
(d) The Plan may not distribute "excess amounts" to
Participants or Former Participants.
4.6 DIRECTED DIVERSIFICATION
(a) Each "Qualified Participant" may elect within 90 days
after the close of each Plan Year during the "Qualified Election
Period" to direct the Administrator in writing to transfer in cash
(such election must be accompanied by an appropriate reinvestment
direction) 25 percent of the Participant's Company Stock Account (to
the extent such portion exceeds the amount to which a prior election
under this subparagraph applies) to the Employer's qualified 401(k)
plan, provided that such plan offers at least three investment
options, other than a Company stock fund, that qualify for
diversification purposes under Section 401(a)(28) of the Code. In the
case of the election year in which the Qualified Participant can make
his last election, the preceding sentence shall be applied by
substituting "50 percent" for "25 percent". If the "Qualified
Participant" elects to direct the Administrator to transfer and
reinvest his Company Stock Account, such direction shall be effective
no later than 180 days after the close of the Plan Year to which such
direction applies. In lieu of so directing the Administrator, the
"Qualified Participant" may elect a distribution of the portion of his
Company Stock Account covered by the election within 90 days after the
last day of the period during which the election can be made.
(b) For the purposes of this Section the following
definitions shall apply:
(1) "Qualified Participant" means any Participant
or Former Participant who has completed 10 Years of Service as
a Participant in this Plan and has attained age 55.
IV-9
<PAGE> 31
(2) "Qualified Election Period" means the five
Plan Year period beginning with the Plan Year after the Plan
Year in which the Participant attains age 55 (or, if later,
beginning with the Plan Year after the first Plan Year in
which the Participant first became a "Qualified Participant").
IV-10
<PAGE> 32
ARTICLE V
FUNDING AND INVESTMENT POLICY
5.1 INVESTMENT POLICY
(a) The Plan is designed to invest primarily in Company
Stock. In that regard, up to 100% of the Plan's asset may be invested
in Company Stock.
(b) With due regard to subparagraph (a) above, the
Administrator may direct the Trustee to invest funds under the Plan in
other property as described in the Trust Agreement or direct the
Trustee to hold such funds in cash or cash equivalents.
(c) The Plan may not obligate itself to acquire Company
Stock from a particular holder thereof at an indefinite time
determined upon the happening of an event such as the death of the
holder.
(d) The Plan may not obligate itself to acquire Company
Stock under a put option binding upon the Plan. However, at the time
a put option is exercised, the Plan may be given an option to assume
the rights and obligations of the Employer under a put option binding
upon the Employer.
(e) All purchases or sales of Company Stock and the price
of such purchases or sales shall be made as the Administrator
instructs the Trustee. All purchases of Company Stock shall be made
at a price which, in the judgment of the Administrator, does not
exceed the fair market value thereof. All sales of Company Stock
shall be made at a price which, in the judgment of the Administrator,
is not less than the fair market value thereof. The valuation rules
set forth in Article VI shall be applicable.
5.2 APPLICATION OF CASH
Employer Contributions received by the Trust Fund in cash may be
applied to purchase Company Stock in the open market or from the Company or any
other person, in the Trustee's discretion.
V-1
<PAGE> 33
ARTICLE VI
VALUATIONS
6.1 VALUATION OF THE TRUST FUND
The Administrator shall direct the Trustee, as of each Valuation Date
to determine the net worth of the assets comprising the Trust Fund as it exists
on the Valuation Date prior to taking into consideration any contribution to be
allocated for that Plan Year. In determining such net worth, the Trustee shall
value the assets comprising the Trust Fund at their fair market value as of the
Valuation Date and shall deduct all expenses for which the Trustee has not yet
obtained reimbursement from the Employer or the Trust Fund.
6.2 METHOD OF VALUATION
Valuations must be made in good faith and based on all relevant
factors for determining the fair market value of securities. In the case of a
transaction between a Plan and a disqualified person, value must be determined
as of the date of the transaction. For all other Plan purposes, value must be
determined as of the most recent Valuation Date under the Plan. Company Stock
not readily tradeable on an established securities market shall be valued by an
independent appraiser appointed by the Administrator meeting requirements
similar to the requirements of the Regulations prescribed under Code Section
170(a)(1).
VI-1
<PAGE> 34
ARTICLE VII
VESTING DETERMINATION AND DISTRIBUTION OF BENEFITS
7.1 BENEFITS UPON RETIREMENT
A Participant who terminates his employment due to his Retirement
shall be entitled to (100% vested in) the entire balance of his Participant's
Accounts, payment of which shall be made as provided in Section 7.5.
7.2 BENEFITS UPON DEATH
(a) Upon the death of a Participant before termination of
his employment, the Participant's Beneficiary shall be entitled to
(100% vested in) the entire balance of the Participant's Accounts.
(b) The Administrator may require such proper proof of
death and such evidence of the right of any person to receive payment
of the value of the account of a deceased Participant as the
Administrator may deem desirable. The Administrator's determination
of death and of the right of any person to receive payment shall be
conclusive.
(c) The Beneficiary of the death benefit payable pursuant
to this Section shall be the Participant's spouse; provided, however,
the Participant may designate a Beneficiary other than his spouse only
if:
(1) the spouse has waived her right to be the
Participant's Beneficiary, or
(2) the Participant has no spouse, or
(3) the spouse cannot be located.
In such event, the designation of a Beneficiary shall be made on a
form provided by the Administrator. A Participant may at any time
revoke his designation of a Beneficiary or change his Beneficiary by
filing written notice of such revocation or change with the
Administrator. However, the Participant's spouse must again consent
in writing to any such change or revocation unless the original
consent acknowledged that the spouse had the right to limit consent
only to a specific Beneficiary and that the spouse voluntarily elected
to relinquish such right. In the event no valid designation of
Beneficiary exists at the time of the Participant's death, the death
benefit shall be payable to his estate. In the event of a divorce,
such divorce shall automatically rescind any designation of such
former spouse as the Participant's Beneficiary under the Plan except
to the extent provided otherwise in a qualified domestic relations
order.
VII-1
<PAGE> 35
(d) Any consent by the Participant's spouse to waive any
rights to the death benefit must be in writing, must acknowledge the
effect of such waiver, and be witnessed by a Plan representative or a
notary public. Further, the spouse's consent must be irrevocable and
must acknowledge the specific nonspouse Beneficiary.
7.3 BENEFITS UPON DISABILITY
In the event a Participant's employment is terminated due to a Total
and Permanent Disability, such Participant shall be entitled to (100% vested
in) the entire balance of his Participant's Accounts, payment of which shall be
made as provided in Section 7.5.
7.4 BENEFITS UPON OTHER TERMINATION
(a) Each Participant whose employment is terminated for
any reason other than Total and Permanent Disability, Retirement, or
death shall be entitled to his Vested interest in the balance of his
Participant's Accounts, payment of which shall be made as provided in
Section 7.5.
(b) For purposes of this Section, a Participant's Vested
interest in Participant's Accounts shall be determined by such
Participant's Years of Service (for Vesting purposes) in accordance
with the following schedule:
<TABLE>
<CAPTION>
Years of Service Vested Interest
---------------- ---------------
<S> <C>
Less than 1 year 0%
1 year 20%
2 years 40%
3 years 60%
4 years 80%
5 years or more 100%
</TABLE>
(c) The computation of a Participant's nonforfeitable
percentage of his interest in the Plan shall not be reduced as the
result of any direct or indirect amendment to this Article. In the
event that the Plan is amended to change or modify any vesting
schedule, a Participant with a least three Years of Service as of the
expiration date of the election period may elect to have his
nonforfeitable percentage computed under the Plan without regard to
such amendment. If a Participant fails to make such election, then
such Participant shall be subject to the new vesting schedule. The
Participant's election period shall commence on the adoption date of
the amendment and shall end 60 days after the latest of:
(1) the adoption date of the amendment,
(2) the effective date of the amendment, or
VII-2
<PAGE> 36
(3) the date the Participant receives written
notice of the amendment from the Employer or Administrator.
(d) Paragraph (b) above not withstanding, a Participant
shall have a 100% Vested interest in his Participant's Accounts upon
attainment of his Normal Retirement Age as an Employee.
(e) (1) If any Former Participant shall be reemployed
by the Employer before a 1-Year Break in Service occurs, he
shall continue to participate in the Plan in the same manner
as if such termination had not occurred.
(2) If any Former Participant shall be reemployed
by the Employer before five consecutive 1-Year Breaks in
Service, and such Former Participant had received a
distribution of his entire Vested interest prior to his
reemployment, his forfeited account shall be reinstated only
if he repays the full amount distributed to him before the
earlier of five years after the first date on which the
Participant is subsequently reemployed by the Employer or the
close of the first period of five consecutive 1-Year Breaks in
Service commencing after the distribution. In the event the
Former Participant does repay the full amount distributed to
him, the forfeited portion of the Participant's Account must
be restored in full, unadjusted by any gains or losses
occurring subsequent to the Anniversary Date or other
Valuation Date preceding his termination. A Forfeiture shall
occur on the date the Participant receives full distribution
of his Vested interest.
(3) If any Former Participant is reemployed after
a 1-Year Break in Service has occurred, Years of Service shall
include Years of Service prior to his 1-Year Break in Service
subject to the following rules:
(i) If a Former Participant has a 1-Year
Break in Service, his pre-break and post-break
service shall be used for computing Years of Service
for eligibility and for vesting purposes only after
he has been employed for one Year of Service
following the date of his reemployment with the
Employer;
(ii) Any Former Participant who under the
Plan does not have a nonforfeitable right to any
interest in the Plan resulting from Employer
Contributions shall lose credits otherwise allowable
under (i) above if his consecutive 1-Year Breaks in
Service equal or exceed the greater of (A) five or
(B) the aggregate number of his pre-break Years of
Service;
(iii) After five consecutive 1-Year Breaks
in Service, a Former Participant's Vested account
balance attributable to pre-break service shall not
be increased as a result of post-break service;
VII-3
<PAGE> 37
(iv) If a Former Participant who has not
had his Years of Service before a 1-Year Break in
Service disregarded pursuant to (ii) above completes
one Year of Service for eligibility purposes
following his reemployment with the Employer, he
shall participate in the Plan retroactively from his
date of reemployment;
(v) If a Former Participant who has not
had his Years of Service before a 1-Year Break in
Service disregarded pursuant to (ii) above completes
one Year of Service for eligibility purposes
following his reemployment with the Employer (a
1-Year Break in Service previously occurred, but
employment had not terminated), he shall participate
in the Plan retroactively from his reemployment
commencement date.
7.5 DISTRIBUTION OF BENEFITS
(a) Subject to the further provisions of this Section
7.5, payment of a Participant's or Beneficiary's benefit hereunder
shall be made or begin as soon as administratively feasible after the
Participant's termination of employment with the Affiliated Employers
or death and shall be valued as of the actual date of distribution.
(b) If elected by the Participant (or his Beneficiary),
the Administrator shall direct the Trustee to distribute to the
Participant (or his Beneficiary) any amount to which he is entitled
under the Plan in one lump-sum payment. If no election is made,
payment shall be made as provided in paragraph (c) below.
(c) Subject to Sections 7.5(b) and (d), this Plan shall
distribute to a Participant (or his Beneficiary) his Vested account in
substantially equal (with respect to the Company Stock Account, in
terms of number of shares of Company Stock) annual installments over a
five year period. In the case of a Participant with an account
balance in the Plan in excess of $500,000, the five year period shall
be extended one additional year (but not more than five additional
years) for each $100,000 or fraction thereof by which such balance
exceeds $500,000. The dollar limits shall be adjusted at the same
time and in the same manner as provided in Code Section 415(d).
Distribution of the Participant's Account shall be made or begin,
subject to the consent requirement to paragraph (d) below if
applicable, not later than one year after the close of the Plan Year
(i) in which the Participant separates from service on account of
retirement on or after his Normal Retirement Age, Total and Permanent
Disability or death, or (ii) which is the fifth Plan Year following
the Plan Year in which the Participant otherwise separates from
service.
(d) Any distribution to a Participant who has a Vested
benefit which exceeds, or at the time of any prior distribution
exceeded, $3,500 shall require such Participant's consent if such
distribution commences prior to his Normal Retirement Age. With
regard to this required consent:
VII-4
<PAGE> 38
(1) The Participant must be informed of his right
to defer receipt of the distribution until his Normal
Retirement Age. If a Participant fails to consent, it shall
be deemed an election to defer the commencement of payment of
any benefit until his Normal Retirement Age. However, any
election to defer the receipt of benefits shall not apply with
respect to distributions which are required under Section
7.5(h).
(2) Subject to Section 7.13, notice of the rights
specified under this paragraph shall be provided no less than
30 days and no more than 90 days before the first day on which
all events have occurred which entitle the Participant to such
benefit.
(3) Written consent of the Participant to the
distribution must not be made before the Participant receives
the notice and must not be made more than 90 days before the
first day on which all events have occurred which entitle the
Participant to such benefit.
(4) No consent shall be valid if a significant
detriment is imposed under the Plan on any Participant who
does not consent to the distribution.
If, at the Valuation Date of a Participant's termination, the
value of a Participant's Vested benefit does not exceed $3,500 and has
never exceeded $3,500 at the time of any prior distribution, the
Administrator shall direct the Trustee to cause the entire Vested
benefit to be immediately paid to such Participant in a lump sum
without regard to the Participant's election.
(e) Notwithstanding anything herein to the contrary, cash
dividends on shares of Company Stock allocated to Participants'
Accounts and not reinvested in Company Stock may be paid to
Participants or their Beneficiaries, as determined in the sole
discretion of the Administrator, within 90 days after the close of the
Plan Year in which the dividend is paid.
(f) Except as limited by Sections 7.5 and 7.6, whenever
the Trustee is to make a distribution or to commence a series of
payments on a Valuation Date, the distribution or series of payments
may be made or begun on such date or as soon thereafter as is
practicable, but in no event later than 180 days after the Anniversary
Date for the Plan Year in which such Valuation Date falls. Except,
however, the payment of benefits shall begin not later than the 60th
day after the close of the Plan Year in which the latest of the
following events occurs:
(1) the date on which the Participant attains the
Normal Retirement Age specified herein,
(2) the 10th anniversary of the year in which the
Participant commenced participation in the Plan, or
VII-5
<PAGE> 39
(3) the date the Participant terminates his
service with the Employer.
(g) Any part of a Participant's benefit which is retained
in the Plan after the Valuation Date on which his participation ends
will continue to be treated as a Company Stock Account or as an Other
Investments Account as provided in Article IV. However, neither
account will be credited with any further Employer Contributions or
Forfeitures.
(h) Notwithstanding any provision in the Plan to the
contrary, the distribution of a Participant's benefits shall be made
in accordance with the following requirements and shall otherwise
comply with Code Section 401(a)(9) and the Regulations thereunder
(including Regulation Section 1.401(a)(9)-(2), the provisions of which
are incorporated herein by reference:
(1) A Participant's benefits shall be distributed
to him not later than April 1st of the calendar year following
the later of (i) the calendar year in which the Participant
attains age 70 1/2 or (ii) the calendar year in which the
Participant retires, provided, however, that this clause (ii)
shall not apply in the case of a Participant who is a "five
percent owner" at any time during the five Plan Year period
ending in the calendar year in which he attains age 70 1/2 or,
in the case of a Participant who becomes a "five percent
owner" during any subsequent Plan Year, clause (ii) shall no
longer apply and the required beginning date shall be the
April 1st of the calendar year following the calendar year in
which such subsequent Plan Year ends. Alternatively,
distributions to a Participant must begin no later than the
applicable April 1st as determined under the preceding
sentence and must be made over a period certain measured by
the life expectancy of the Participant (or the life
expectancies of the Participant and his designated
Beneficiary) in accordance with Regulations. Notwithstanding
the foregoing, clause (ii) above shall not apply to any
Participant unless the Participant had attained age 70 1/2
before January 1, 1988 and was not a "five percent owner" at
any time during the Plan Year ending with or within the
calendar year in which the Participant attained age 66 1/2 or
any subsequent Plan Year.
(2) Distributions to a Participant and his
Beneficiaries shall only be made in accordance with the
incidental death benefit requirements of Code Section
401(a)(9)(G) and the Regulations thereunder.
(i) For purposes of this Section, the life expectancy of
a Participant and a Participant's spouse may not be redetermined.
VII-6
<PAGE> 40
7.6 HOW PLAN BENEFITS WILL BE DISTRIBUTED
(a) Distribution of a Participant's benefit from his
Company Stock Account shall be made in whole shares of Company Stock,
unless the Participant elects to receive such distribution in cash,
with any fractional share paid in cash.
(b) Any balance in a Participant's Other Investments
Account will be distributed solely in cash.
(c) The Trustee will make distribution from the Trust
only on instructions from the Administrator.
(d) Notwithstanding anything contained herein to the
contrary, if the Employer's charter or by-laws restrict ownership of
substantially all shares of Company Stock to Employees and the Trust
Fund, as described in Code Section 409(h)(2), the Administrator, in
his sole discretion, may distribute a Participant's Account entirely
in cash or distribute entirely in Company Stock subject to a
requirement that such Company Stock may be resold to the Employer
pursuant to Section 7.9.
(e) Except as otherwise provided in Section 7.10, Company
Stock distributed by the Trustee may be restricted as to sale or
transfer by the by-laws or articles of incorporation of the Employer,
provided restrictions are applicable to all Company Stock of the same
class. If a Participant is required to offer the sale of his Company
Stock to the Employer before offering to sell his Company Stock to a
third party, in no event may the Employer pay a price less than that
offered to the distributee by another potential buyer making a bona
fide offer and in no event shall the Trustee pay a price less than the
fair market value of the Company Stock.
(f) Except as otherwise provided in this Article, a
Participant is not entitled to any payment, withdrawal or distribution
under the Plan during his participation. If any such partial
distribution is made, the Participant's benefit when computed will be
reduced by the amount of any such advance.
(g) Notwithstanding any provision in the Plan to the
contrary, distributions upon the death of a Participant shall be made
in accordance with the following requirements and shall otherwise
comply with Code Section 401(a)(9) and the Regulations thereunder. If
it is determined, pursuant to Regulations, that the distribution of a
Participant's interest has begun and the Participant dies before his
entire interest has been distributed to him, the remaining portion of
such interest shall be distributed at least as rapidly as under the
method of distribution selected pursuant to Section 7.5 as of his date
of death. If a Participant dies before he has begun to receive any
distributions of his interest under the Plan or before distributions
are deemed to have begun pursuant to Regulations, then his death
benefit shall
VII-7
<PAGE> 41
be distributed to his Beneficiaries by December 31st of the calendar
year in which the fifth anniversary of his date of death occurs.
However, in the event that the Participant's spouse
(determined as of the date of the Participant's death) is his
Beneficiary, then in lieu of the preceding rules, distributions must
be made over a period not extending beyond the life expectancy of the
spouse and must commence on or before the later of (1) December 31st
of the calendar year immediately following the calendar year in which
the Participant died; or (2) December 31st of the calendar year in
which the Participant would have attained 70 1/2. If the surviving
spouse dies before distributions to such spouse begin, then the 5-year
distribution requirement of this section shall apply as if the spouse
was the Participant.
(h) For purposes of this Section, the life expectancy of
a Participant and a Participant's spouse may not be redetermined.
7.7 DISTRIBUTION FOR MINOR BENEFICIARY
In the event a distribution is to be made to a minor, then the
Administrator may direct that such distribution be paid to the legal guardian,
or if none, to a parent of such Beneficiary, or to the custodian for such
Beneficiary under the Uniform Gift to Minors Act or Gift to Minors act, if such
is permitted by the laws of the state in which said Beneficiary resides. Such
a payment to the legal guardian, custodian or parent of a minor Beneficiary
shall fully discharge the Trustee, Employer, and Plan from further liability on
account thereof.
7.8 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN
In the event that all, or any portion, of the distribution payable to
a Participant or his Beneficiary hereunder shall, at the expiration of five
years after it shall become payable, remain unpaid solely by reason of the
inability of the Administrator, after sending a registered letter, return
receipt requested, to the last known address, and after further diligent
effort, to ascertain the whereabouts of such Participant or his Beneficiary,
the amount so distributable shall be treated as a Forfeiture pursuant to the
Plan. In the event a Participant or Beneficiary is located subsequent to his
benefit being reallocated, such benefit shall be restored.
7.9 PUT OPTION
(a) If Company Stock is not readily tradeable on an
established securities market, a Participant has a right to require
the Employer to repurchase the Company Stock distributed to such
Participant under a fair valuation formula. Such Stock shall be
subject to the following provisions of this Section.
(b) Company Stock which is subject to a trading
limitation when distributed, must be subject to a put option. For
purposes of this paragraph, a "trading limitation" on a
VII-8
<PAGE> 42
Company Stock is a restriction under any Federal or State securities
law or any regulation thereunder, or an agreement affecting the
Company Stock which would make the Company Stock not as freely
tradeable as stock not subject to such restriction.
(c) The put option must be exercisable only by a
Participant, by the Participant's donees, or by a person (including an
estate or its distributee) to whom the Company Stock passes by reason
of a Participant's death. (Under this paragraph, Participant means a
Participant or Former Participant and the Beneficiaries of the
Participant or Former Participant under the Plan.) The put option
must permit a Participant to put the Company Stock to the Employer.
Under no circumstances may the put option bind the Plan. However, it
shall grant the Plan an option to assume the rights and obligations of
the Employer at the time that the put option is exercised. If it is
known at the time a loan is made that Federal or state law will be
violated by the Employer's honoring such put option, the put option
must permit the Company Stock to be put, in a manner consistent with
such law, to a third party (e.g., an affiliate of the Employer or a
shareholder other than the Plan) that has substantial net worth at the
time the loan is made and whose net worth is reasonably expected to
remain substantial.
The put option shall commence as of the day following the date
the Company Stock is distributed to the Former Participant and end 60
days thereafter and if not exercised within such 60-day period, an
additional 60-day option shall commence on the first day of the fifth
month of the Plan Year next following the date the stock was
distributed to the Former Participant (or such other 60-day period as
provided in regulations promulgated by the Secretary of the Treasury).
However, in the case of Company Stock that is publicly traded without
restrictions when distributed but ceases to be so traded within either
of the 60-day periods described herein after distribution, the
Employer must notify each holder of such Company Stock in writing on
or before the tenth day after the date the Company Stock ceases to be
so traded that for the remainder of the applicable 60-day period the
Company Stock is subject to the put option. The number of days
between the tenth day and the date on which notice is actually given,
if later than the tenth day, must be added to the duration of the put
option. The notice must inform distributees of the terms of the put
options that they are to hold. The terms must satisfy the
requirements of this paragraph.
The put option is exercised by the holder notifying the
Employer in writing that the put option is being exercised; the notice
shall state the name and address of the holder and the number of
shares to be sold. The period during which a put option is
exercisable does not include any time when a distributee is unable to
exercise it because the party bound by the put option is prohibited
from honoring it by applicable Federal or state law. The price at
which a put option must be exercisable is the value of the Company
Stock determined in accordance with Section 6.2. Payment under the
put option involving a "Total Distribution" shall be paid in
substantially equal monthly, quarterly, semiannual or annual
installments over a period certain beginning not later than 30 days
after the exercise of the put option and not extending beyond 5 years.
The deferral of payment is reasonable if adequate security and
VII-9
<PAGE> 43
a reasonable interest rate on the unpaid amounts are provided. The
amount to be paid under the put option involving installment
distributions must be paid not later than 30 days after the exercise
of the put option. Payment under a put option must not be restricted
by the provisions of a loan or any other arrangement, including the
terms of the employer's articles of incorporation, unless so required
by applicable state law.
For purposes of this Section, "Total Distribution" means a
distribution to a Participant or Former Participant within one taxable
year of the entire Vested Participant's Account.
(d) An arrangement involving the Plan that creates a put
option must not provide for the issuance of put options other than as
provided under this Section. The Plan (and the Trust Fund) must not
otherwise obligate itself to acquire Company Stock from a particular
holder thereof at an indefinite time determined upon the happening of
an event such as the death of the holder.
7.10 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS
All rights and benefits, including elections, provided to a
Participant in this plan shall be subject to the rights afforded to any
"alternate payee" under a "qualified domestic relations order." Furthermore, a
distribution to an "alternate payee" shall be permitted if such distribution is
authorized by a "qualified domestic relations order,"even if the affected
Participant has not separated from service and has not reached the "earliest
retirement age" under the Plan. For purposes of this Section, "alternate
payee," "qualified domestic relations order" and "earliest retirement age"
shall have the meaning set forth under Code Section 414(p).
7.11 PAYMENT OF DISTRIBUTION DIRECTLY TO ELIGIBLE RETIREMENT PLAN
(a) Notwithstanding any provision of the Plan to the
contrary that would otherwise limit a Distributee's election under
this Section, a Distributee may elect, at the time and in the manner
prescribed by the Administrator, to have any portion of an Eligible
Rollover Distribution paid directly to an Eligible Retirement Plan
specified by the Distributee in a Direct Rollover.
(b) For purposes of this Section the following
definitions shall apply:
(1) "Eligible Rollover Distribution": An Eligible
Rollover Distribution is any distribution of all or any
portion of the balance to the credit of the Distributee,
except that an Eligible Rollover Distribution does not
include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the
Distributee or the joint lives (or joint life expectancies) of
the Distributee and the Distributee's designated
VII-10
<PAGE> 44
Beneficiary, or for a specified period of ten years or more;
any distribution to the extent such distribution is required
under Section 401(a)(9) of the Code; and the portion of any
distribution that is not includible in gross income
(determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
(2) "Eligible Retirement Plan": An Eligible
Retirement Plan is an individual retirement account described
in Section 408(a) of the Code, an individual retirement
annuity described in Section 408(b) of the Code, an annuity
plan described in Section 403(a) of the Code, or a qualified
trust described in Section 401(a) of the Code, that accepts
the Distributee's Eligible Rollover Distribution. However, in
the case of an Eligible Rollover Distribution to the surviving
spouse, an Eligible Retirement Plan is an individual
retirement account or individual retirement annuity.
(3) "Distributee": A Distributee includes an
Employee or former Employee. In addition, the Employee's or
former Employee's surviving spouse and the Employee's or
former Employee's spouse or former spouse who is the alternate
payee under a qualified domestic relations order, as defined
in Section 414(p) of the Code, are Distributees with regard to
the interest of the spouse or former spouse.
(4) "Direct Rollover": A Direct Rollover is a
payment by the Plan to the Eligible Retirement Plan specified
by the Distributee.
7.12 30-DAY WAIVER
If a distribution is one to which Sections 401(a)(11) and 417 of the
Code do not apply, such distribution may commence less than 30 days after the
notice required under Section 1.411(a)-11(c) of the Regulations is given,
provided that:
(1) the Plan Administrator clearly informs the
Participant that the Participant has a right to a period of at
least 30 days after receiving the notice to consider the
decision of whether or not to elect a distribution (and, if
applicable, a particular distribution option), and
(2) the Participant, after receiving the notice,
affirmatively elects a distribution.
VII-11
<PAGE> 45
ARTICLE VIII
TRUSTEE
8.1 BASIC RESPONSIBILITIES OF THE TRUSTEE
The Trustee shall have the following categories of responsibilities:
(a) The Trustee may invest up to 100% of the Trust Fund
in Company Stock.
(b) With respect to the Other Investments Account, the
Trustee shall invest such accounts as it determines.
(c) The Trustee shall pay benefits required under the
Plan to be paid to Participants, or, in the event of their death, to
their Beneficiaries.
(d) The Trustee shall maintain records of receipts and
disbursements, and furnish to the Employer and/or Administrator for
each Plan Year a written annual report according to Section 3.2 of
this Trust Agreement.
(e) If there shall be more than one Trustee, they shall
act by a majority of their number, but may authorize one or more of
them to sign papers on their behalf.
8.2 VOTING COMPANY STOCK
Each Participant or Beneficiary shall be entitled to direct the
Trustee as to the manner in which the Company Stock allocated to the Company
Stock Account of such Participant or Beneficiary is to be voted.
The Trustee shall notify each Participant or Beneficiary of each
tender or exchange offer and utilize its best efforts to distribute or cause to
be distributed to such Participant or Beneficiary in a timely manner all
information received by the Trustee as a recordholder of shares of Company
Stock in connection with any such tender or exchange offer. Each Participant
or Beneficiary shall have the right from time to time with respect to the
shares of Company stock allocated to his account, to instruct the Trustee in
writing as to the manner in which to respond to any tender or exchange offer
which shall be pending or which may be made in the future for all shares of
Company Stock or any portion thereof. A Participant's or Beneficiary's
instructions shall remain in force until superseded in writing by the
Participant or Beneficiary. The Trustee shall tender or exchange such shares
of Company Stock as and to the extent so instructed. Unless and until shares
of Company Stock are tendered or exchanged, the individual instructions
received by the Trustee from Participant or Beneficiaries shall be held in
strict confidence by the Trustee and shall not be divulged or released to any
person, including, but not limited to officers or Employees of the Employer, or
of any other Participating Employer; provided, however, that the Trustee shall
advise the Employer, at any time upon request, of the total number of shares
not subject to instructions to tender or exchange. The
VIII-1
<PAGE> 46
Trustee shall not make recommendations to Participants or Beneficiaries on
whether to instruct the Trustee to tender or exchange.
The Trustee shall not vote, sell, convey or transfer any allocated
shares of Company Stock for which no directions are timely received from
Participants or Beneficiaries pursuant to the immediately preceding paragraph.
VIII-2
<PAGE> 47
ARTICLE IX
AMENDMENT, TERMINATIONS, AND MERGERS
9.1 AMENDMENT
The Company shall have the right at any time to amend the Plan by
action of its Board of Directors. In addition, the Chief Executive Officer of
the Company shall have the authority to amend the Plan, provided such amendment
does not materially increase the Company's financial obligations hereunder or
are of a ministerial, administrative or technical compliance nature. However,
no such amendment shall authorize or permit any part of the Trust Fund (other
than such part as is required to pay taxes and administration expenses) to be
used for or diverted to purposes other than for the exclusive benefit of the
Participants or their Beneficiaries or estates; no such amendment shall cause
any reduction in the amount credited to the account of any Participant or cause
or permit any portion of the Trust Fund to revert to or become the property of
the Employer; and no such amendment which affects the rights, duties or
responsibilities of the Trustee and Administrator may be made without the
Trustee's and Administrator's written consent. The Trustee shall not be
required to execute any such amendment unless the Trust provisions contained
herein are as part of the Plan and the amendment affects the duties of the
Trustee hereunder.
For the purposes of this Section, a Plan amendment which has the
effect of (1) eliminating or reducing an early retirement benefit or a
retirement-type subsidy, (2) eliminating an optional form of benefit (as
provided in Regulations) or (3) restricting, directly or indirectly, the
benefit provided to any Participant prior to the amendment shall be treated as
reducing the amount credited to the account of a Participant except that an
amendment described in clause (2) above (other than an amendment having an
effect described in clause (1) above) shall not be treated as reducing the
amount credited to the account of a Participant to the extent so provided in
Regulations. Any Plan amendment which modifies distribution options in a
nondiscriminatory manner shall not be treated as reducing the amount credited
to the account of a Participant.
9.2 TERMINATION
The Board of Directors of the Company shall have the right at any time
to terminate the Plan by delivering to the Trustee and Administrator written
notice of such termination. Upon any termination (full or partial) or complete
discontinuance of contributions, all amounts credited to the affected
Participants' Accounts shall become 100% Vested and shall not thereafter be
subject to forfeiture and all unallocated amounts shall be allocated to the
accounts of all Participants in accordance with the provisions hereof. Upon
such termination of the Plan, the Employer, by written notice to the Trustee
and Administrator, may direct either:
(a) complete distribution of the assets in the Trust Fund
to the Participants in a manner consistent with the requirements of
Sections 7.5 and 7.6; or
IX-1
<PAGE> 48
(b) continuation of the Trust created by this agreement
and the distribution of benefits at such time and in such manner as
though the Plan had not been terminated.
9.3 MERGER OR CONSOLIDATION
This Plan may be merged or consolidated with, or its assets and/or
liabilities maybe transferred to any other Plan and Trust only if the benefits
which would be received by a Participant of this Plan, in the event of a
termination of the Plan immediately after such transfer, merger or
consolidation, are at least equal to the benefits the Participant would have
received if the Plan had terminated immediately before the transfer, merger or
consolidation.
IX-2
<PAGE> 49
ARTICLE X
MISCELLANEOUS
10.1 PARTICIPANT'S RIGHTS
This Plan shall not be deemed to constitute a contract between the
Employer and any Participant or to be a consideration or an inducement for the
employment of any Participant or Employee. Nothing contained in this Plan
shall be deemed to give any Participant or Employee the right to be retained in
the service of the Employer or to interfere with the right of the Employer to
discharge any Participant or Employee at any time regardless of the effect
which such discharge shall have upon him as a Participant of this Plan.
10.2 ALIENATION
(a) Subject to the exceptions provided below, no benefit
which shall be payable out of the Trust Fund to any person (including
a Participant or his Beneficiary) shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, or charge, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or charge the same shall be void;
and no such benefit shall be in any manner be liable for, or subject
to, the debts, contracts, liabilities, engagements, or torts of any
such person, nor shall it be subject to attachment or legal process
for or against such person, and the same shall not be recognized by
the Trustee, except to such extent as may be required by law.
(b) This provision shall not apply to a "qualified
domestic relations order" defined in Code Section 414(p), and those
other domestic relations orders permitted to be so treated by the
Administrator under the provisions of the Retirement Equity Act of
1984. The Administrator shall establish a written procedure to
determine the qualified status of domestic relations orders and to
administer distributions under such qualified orders. Further, to the
extent provided under a "qualified domestic relations order", (i) a
Former spouse of a Participant shall be treated as the spouse or
surviving spouse for all purposes under the Plan and (ii) the Plan may
include distribution prior to the Participant's attainment of his
"earliest retirement age."
10.3 CONSTRUCTION OF PLAN
This Plan shall be construed and enforced according to the Act and the
laws of the State of Delaware, other than its laws respecting choice of law, to
the extent not preempted by the Act.
10.4 GENDER AND NUMBER
Wherever any words are used herein in the masculine, feminine or
neuter gender, they shall be construed as though they were also used in another
gender in all cases where they would so apply,
X-1
<PAGE> 50
and whenever any words are used herein in the singular or plural form, they
shall be construed as though they were also used in the other form in all cases
where they would so apply.
10.5 LEGAL ACTION
In the event any claim, suit, or proceeding is brought regarding the
Trust and/or Plan established hereunder to which the Trustee or the
Administrator may be a party, and such claim suit, or proceeding is resolved in
favor of the Trustee or Administrator, they shall be entitled to be reimbursed
from the Company for any and all costs, attorney's fees, and other expenses
pertaining thereto incurred by them for which they shall have become liable.
10.6 PROHIBITION AGAINST DIVERSION OF FUNDS
(a) Except as provided below and otherwise specifically
permitted by law, it shall be impossible by operation of the Plan or
of the Trust, by termination of either, by power or revocation or
amendment, by the happening of any contingency, by collateral
arrangement or by any other means, for any part of the corpus or
income of any trust fund maintained pursuant to the Plan or any funds
contributed thereto to be used for, or diverted to, purposes other
than the exclusive benefit of Participants, Retired Participants, or
their Beneficiaries.
(b) In the event the Employer shall make an excessive
contribution under a mistake of fact pursuant to Section 403(c)(2)(A)
of the Act, the Employer may demand repayment of such excessive
contribution at any time within one year following the time of payment
and the Trustees shall return such amount to the Employer within the
one year period. Earnings of the Plan attributable to the excess
contributions may not be returned to the Employer but any losses
attributable thereto must reduce the amount so returned.
10.7 BONDING
Every Fiduciary, except a bank or an insurance company, unless
exempted by the Act and regulations thereunder, shall be bonded in an amount
not less than 10% of the amount of the funds such Fiduciary handles; provided,
however, that the minimum bond shall be $1,000 and the maximum bond, $500,000.
The amount of funds handled shall be determined at the beginning of each Plan
Year by the amount of funds handled by such person, group, or class to be
covered and their predecessors, if any, during the preceding Plan Year, or if
there is no preceding Plan Year, then by the amount of the funds to be handled
during the then current year. The bond shall provide protection to the Plan
against any loss by reason of acts of fraud or dishonesty by the Fiduciary
alone or in connivance with others. The surety shall be a corporate surety
company (as such term is used in Section 412(a)(2) of the Act), and the bond
shall be in a form approved by the Secretary of Labor. Notwithstanding
anything in the Plan to the contrary, the cost of such bonds shall be an
expense of and may, at the election of the Administrator, be paid from the
Trust Fund or by the Employer.
X-2
<PAGE> 51
10.8 RECEIPT AND RELEASE FOR PAYMENTS
Any payment to any Participant, his legal representative, Beneficiary,
or to any guardian or committee appointed for such Participant or Beneficiary
in accordance with the provisions of the Plan, shall, to the extent thereof, be
in full satisfaction of all claims hereunder against the Trustee and the
Employer, either of whom may require such Participant, legal representative,
Beneficiary, guardian or committee, as a condition precedent to such payment,
to execute a receipt and release thereof in such form as shall be determined by
the Trustee or Employer.
10.9 ACTION BY THE EMPLOYER
Whenever the Employer under the terms of the Plan is permitted or
required to do or perform any act or matter or thing, it shall be done and
performed by a person duly authorized by its legally constituted authority.
10.10 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY
The "named Fiduciaries" of this Plan are the Company and the
Administrator. The named Fiduciaries shall have only those specific powers,
duties, responsibilities, and obligations as are specifically given them under
the Plan. In general, the Company shall have the sole responsibility for
making the contributions provided for under Section 4.1; and shall have the
sole authority to appoint and remove the Trustee and the Administrator; to
formulate the Plan's "funding policy and method"; and to amend or terminate, in
whole or in part, the Plan. The Administrator shall have the sole
responsibility for the administration of the Plan, which responsibility is
specifically described in the Plan, including the acquisition, holding and/or
disposition of Company Stock and the entering into any Exempt Loans. The
Administrator shall also have the sole responsibility of management of the
assets of the Other Investments Account held under the Trust, except those
assets in such accounts, the management of which has been assigned to an
Investment Manager, who shall be solely responsible for the management of the
assets assigned to it, all as specifically provided in the Plan.
10.11 HEADINGS
The headings and subheadings of this Plan have been inserted for
convenience of reference and are to be ignored in any construction of the
provisions hereof.
10.12 APPROVAL BY INTERNAL REVENUE SERVICE
(a) Notwithstanding anything herein to the contrary,
contributions to this Plan are conditioned upon the initial
qualification of the Plan under Code Section 401. If the Plan
receives an adverse determination with respect to its initial
qualification, then the Plan may return such contributions to the
Employer within one year after such determination, provided the
application for the determination is made by the time prescribed by
law for filing the
X-3
<PAGE> 52
Employer's return for the taxable year in which the Plan was adopted,
or such later date as the Secretary of the Treasury may prescribe.
(b) Notwithstanding any provisions to the contrary,
except Sections 3.6 and 4.3(d), any contribution by the Employer to
the Trust Fund is conditioned upon the deductibility of the
contribution by the Employer under the Code and, to the extent any
such deduction is disallowed, the Employer may, within one year
following the disallowance of the deduction, demand repayment of such
disallowed contribution and the Trustee shall return such contribution
within one year following the disallowance of the deduction, demand
repayment of such disallowed contribution and the Trustee shall return
such contribution within one year following the disallowance.
Earnings of the Plan attributable to the excess contribution may not
be returned to the Employer, but any losses attributable thereto must
reduce the amount so returned.
10.13 UNIFORMITY
All provisions of this Plan shall be interpreted and applied in a
uniform, nondiscriminatory manner.
10.14 SECURITIES AND EXCHANGE COMMISSION APPROVAL
The Company may request an interpretative letter from the Securities
and Exchange Commission stating that the transfer of Company Stock contemplated
hereunder does not involve transactions requiring a registration of such
Company Stock under the Securities Act of 1933. In the event that a favorable
interpretative letter is not obtained, the Employer reserves the right to amend
the Plan and Trust retroactively to their Effective Dates in order to obtain a
favorable interpretative letter or to terminate the Plan.
10.15 INDEMNIFICATION
To the maximum extent permitted by law, neither the Employer, any of
its officers or directors, nor the Administrator shall be personally liable for
any action or inaction with respect to any duty or responsibility imposed upon
such person by the terms of the Plan, unless such action or inaction is
judicially determined to be a breach of that person's fiduciary responsibility
with respect to the Plan under any applicable law. The Employer may indemnify
or purchase insurance to underwrite indemnity for the Administrator and/or the
Employer's board of directors against any personal liability or expense except
for their own gross negligence.
10.16 CONTROLLING LAW
All legal questions pertaining to the Plan, all construction and all
Regulations shall be determined in accordance with the laws of the State of
Delaware and the United States. All contributions shall be deemed to have been
made under such laws. Notwithstanding anything in this
X-4
<PAGE> 53
Agreement to the contrary, the effective dates provided for herein for the
application of any Code Section to this Plan shall be extended in accordance
with any act of Congress or any effective Regulation, Ruling or other measure
of like import.
X-5
<PAGE> 54
ARTICLE XI
PARTICIPATING EMPLOYERS
11.1 ADOPTION BY OTHER EMPLOYERS
Notwithstanding anything herein to the contrary, with the consent of
the Company and Trustee, any other Affiliated Employer may adopt this Plan and
all of the provisions hereof, and participate herein and be known as a
Participating Employer, by a properly executed document evidencing said intent
and will of such Participating Employer.
11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS
(a) Each such Participating Employer shall be required to
use the same Trustee as provided in this Plan.
(b) The Trustee, unless directed otherwise by the
Administrator, shall commingle and hold as one Trust Fund all
contributions made by Participating Employers.
(c) The transfer of any Participant from or to an
Employer participating in this Plan, whether he be an Employee of the
Employer or a Participating Employer, shall not affect such
Participant's rights under the Plan, and all amounts credited to such
Participant's Account as well as his accumulated service time with the
transferor or predecessor, and his length of participation in the
Plan, shall continue to his credit.
(d) All rights and values forfeited by termination of
employment shall inure only to the benefit of the
Employee-Participants of the Participating Employer by which the
forfeiting Participant was employed, except if the Forfeiture is for
an Employee whose Employer is a member of an affiliated or controlled
group, then said Forfeiture shall be allocated, based on Compensation
to all Participant Accounts of Participating Employers who are members
of the affiliated or controlled group. Should an Employee of one
("First") Employer be transferred to an associated ("Second") Employer
(the Employer, an affiliate or subsidiary), such transfer shall not
cause his Account balance (generated while an Employee of "First"
Employer) in any manner or by any amount to be forfeited. Such
Employee's Participant Account balance for all purposes of the Plan,
including length of service, shall be considered as though he had
always been employed by the "Second" Employer and as such had received
contributions, forfeitures, earnings of losses, and appreciation or
depreciation in value of assets totaling amount so transferred.
(e) Any expenses of the Trust which are to be paid by the
Employer or borne by the Trust Fund shall be paid by each
Participating Employer in the same proportion that the total amount
standing to the credit of all Participants employed by such Employer
bears to the total standing to the credit of all Participants.
XI-1
<PAGE> 55
11.3 DESIGNATION OF AGENT
Each Participating Employer shall be deemed to be a part of this Plan;
provided, however, that with respect to all of its relations with the Trustee
and Administrator for the purpose of this Plan, each Participating Employer
shall be deemed to have designated irrevocably the Employer as its agent.
Unless the context of the Plan clearly indicates the contrary, the word
"Employer" shall be deemed to include each Participating Employer as related to
its adoption of the Plan.
11.4 EMPLOYEE TRANSFERS
It is anticipated that an Employee may be transferred between
Participating Employers, and in the event of any such transfer, the Employee
involved shall carry with him his accumulated service and eligibility. No such
transfer shall effect a termination of employment hereunder, and the
Participating Employer to which the Employee is transferred shall thereupon
become obligated hereunder with respect to such Employee in the same manner as
was the Participating Employer from whom the Employee was transferred.
11.5 PARTICIPATING EMPLOYER'S CONTRIBUTION
Any contribution or Forfeiture subject to allocation during each Plan
Year shall be allocated among all Participants of all Participating Employers
in accordance with the provisions of this Plan. On the basis of the
information furnished by the Administrator, the Trustee shall keep separate
books and records concerning the affairs of each Participating Employer
hereunder and as to the accounts and credits of the Employees of each
Participating Employer. The Trustee may, but need not, register contracts so
as to evidence that a particular Participating Employer is the interested
Employer hereunder, but in the event of an Employee transfer from one
Participating Employer to another, the employing Employer shall immediately
notify the Administrator will notify the Trustee thereof. Notwithstanding
anything herein seemingly to the contrary, the Plan shall constitute a "single"
Plan as to all Participating Employers and not a separate plan as to any such
Participating Employer.
11.6 AMENDMENT
Each amendment of this Plan shall be binding on each and every
Participating Employer and on the Trustee, unless its consent is necessary in
accordance with the terms of this Plan.
11.7 DISCONTINUANCE OF PARTICIPATION
Any Participating Employer shall be permitted to discontinue or revoke
its participation in the Plan. At the time of any such discontinuance or
revocation, satisfactory evidence thereof and of any applicable conditions
imposed shall be delivered to the Trustee. The Trustee shall thereafter
transfer, deliver and assign Trust Fund assets allocable to the Participants of
such Participating Employer or to such new Trustee as shall have been
designated by such Participating Employer, in
XI-2
<PAGE> 56
the event that it has established a separate pension plan for its Employees. If
no successor is designated, the Trustee shall retain such assets for the
Employees of said Participating Employer pursuant to the provisions of Article
VII hereof. In no such event shall any part of the corpus or income of the
Trust as it relates to such Participating Employer be used for or diverted for
purposes other than for the exclusive benefit of the Employees of such
Participating Employer.
11.8 ADMINISTRATOR'S AUTHORITY
The Administrator shall have authority to make any and all necessary
rules or regulations, binding upon all Participating Employers and all
Participants, to effectuate the purpose of this Article.
11.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE
If any Participating Employer is prevented in whole or in part from
making a contribution to the Trust Fund which it would otherwise have made
under the Plan by reason of having no current or accumulated earnings or
profits, or because such earnings or profits are less than the contribution
which it would otherwise have made, then, pursuant to Code Section
404(a)(3)(B), so much of the contribution which such Participating Employer was
so prevented from making may be made, for the benefit of the participating
employees of such Participating Employer, by the other Participating Employers
who are members of the same affiliated group within the meaning of Code Section
1504 to the extent of their current or accumulated earnings or profits, except
that such contribution by each such other Participating Employer shall be
limited to the proportion of its total current and accumulated earnings or
profits remaining after adjustment for its contribution to the Plan made
without regard to this paragraph which the total prevented contribution bears
to the total current and accumulated earnings or profits of all the
Participating Employers remaining after adjustment for all contributions made
to the Plan without regard to this paragraph.
XI-3
<PAGE> 57
ARTICLE XII
TOP-HEAVY STATUS
12.1 ARTICLE CONTROLS
Any Plan provisions to the contrary notwithstanding, the provisions of
this Article shall control to the extent required to cause the Plan to comply
with the requirements imposed under Code Section 416.
12.2 DEFINITIONS
For purposes of this Article, the following terms and phrases shall
have these respective meanings:
(a) Account Balance: As of any Valuation Date, the
aggregate amount credited to an individual's account or accounts under
a qualified defined contribution plan maintained by the Employer or an
Affiliated Employer (excluding employee contributions which were
deductible within the meaning of section 219 of the Code and rollover
or transfer contributions made after December 31, 1983 by or on behalf
of such individual to such plan from another qualified plan sponsored
by an entity other than the Employer or an Affiliated Employer),
increased by (1) the aggregate distributions made to such individual
from such plan during a five-year period ending on the Determination
Date and (2) the amount of any contributions due as of the
Determination Date immediately following such Valuation Date.
(b) Accrued Benefit: As of any Valuation Date, the
present value (computed on the basis of the Assumptions) of the
cumulative accrued benefit (excluding the portion thereof which is
attributable to employee contributions which were deductible pursuant
to section 219 of the Code, to rollover or transfer contributions made
after December 31, 1983 by or on behalf of such individual to such
plan from another qualified plan sponsored by an entity other than the
Employer or an Affiliated Employer, to proportional subsidies or to
ancillary benefits) of an individual under a qualified defined benefit
plan maintained by the Employer or an Affiliated Employer increased by
(1) the aggregate distributions made to such individual from such plan
during a five-year period ending on the Determination Date and (2) the
estimated benefit accrued by such individual between such Valuation
Date and the Determination Date immediately following such Valuation
Date. Solely for the purpose of determining top-heavy status, the
Accrued Benefit of an individual shall be determined under (1) the
method, if any, that uniformly applies for accrual purposes under all
qualified defined benefit plans maintained by the Employer or an
Affiliated Employer, or (2) if there is no such method, as if such
benefit accrued not more rapidly than under the slowest accrual rate
permitted under section 411(b)(1)(C) of the Code.
(c) Aggregation Group: The group of qualified plans
maintained by the Employer and each Affiliated Employer consisting of
(1) each plan in which a Key
XII-1
<PAGE> 58
Employee participates and each other plan which enables a plan in
which a Key Employee participates to meet the requirements of sections
401(a)(4) or 410 of the Code, or (2) each plan in which a Key Employee
participates, each other plan which enables a plan in which a Key
Employee participates to meet the requirements of sections 401(a)(4)
or 410 of the Code and any other plan which the Employer elects to
include as a part of such group; provided, however, that the Employer
may not elect to include a plan in such group if its inclusion would
cause the group to fail to meet the requirements of sections 401(a)(4)
or 410 of the Code.
(d) Assumptions: The interest rate and mortality
assumptions specified for top-heavy status determination purposes in
any defined benefit plan included in the Aggregation Group including
the Plan.
(e) Determination Date: For the first Plan Year of any
plan, the last day of such Plan Year and for each subsequent Plan Year
of such plan, the last day of the preceding Plan Year.
(f) Key Employee: A "key employee" as defined in section
416(i) of the Code and the Treasury Regulations thereunder.
(g) Plan Year: With respect to any plan, the annual
accounting period used by such plan for annual reporting purposes.
(h) Remuneration: Compensation within the meaning of
section 415(c)(3) of the Code, as limited by section 401(a)(17) of the
Code for Plan Years beginning after December 31, 1988.
(i) Valuation Date: With respect to any Plan Year of any
defined contribution plan, the most recent date within the
twelve-month period ending on a Determination Date as of which the
trust fund established under such plan was valued and the net income
(or loss) thereof allocated to participants' accounts. With respect
to any Plan Year of any defined benefit plan, the most recent date
within a twelve-month period ending on a Determination Date as of
which the plan assets were valued for purposes of computing plan costs
for purposes of the requirements imposed under section 412 of the
Code.
12.3 TOP-HEAVY STATUS
(a) The Plan shall be deemed to be top-heavy for a Plan
Year, if, as of the Determination Date for such Plan Year, (1) the sum
of Account Balances of Participants who are Key Employees exceeds 60%
of the sum of Account Balances of all Participants unless an
Aggregation Group including the Plan is not top-heavy or (2) an
Aggregation Group including the Plan is top-heavy. An Aggregation
Group shall be deemed to be top-heavy as of a Determination Date if
the sum (computed in accordance with section 416(g)(2)(B) of
XII-2
<PAGE> 59
the Code and the Treasury Regulations promulgated thereunder) of (1)
the Account Balances of Key Employees under all defined contribution
plans included in the Aggregation Group and (2) the Accrued Benefits
of Key Employees under all defined benefit plans included in the
Aggregation Group exceeds 60% of the sum of the Account Balances and
the Accrued Benefits of all individuals under such plans.
Notwithstanding the foregoing, the Account Balances and Accrued
Benefits of individuals who are not Key Employees in any Plan Year but
who were Key Employees in any prior Plan Year shall not be considered
in determining the top-heavy status of the Plan for such Plan Year.
Further, notwithstanding the foregoing, the Account Balances and
Accrued Benefits of individuals who have not performed services for
the Employer at any time during the five-year period ending on the
applicable Determination Date shall not be considered.
12.4 TERMINATION OF TOP-HEAVY STATUS
If the Plan has been deemed to be top-heavy for one or more Plan Years
and thereafter ceases to be top-heavy, the provisions of this Article shall
cease to apply to the Plan effective as of the Determination Date on which it
is determined to no longer be top-heavy.
12.5 EFFECT OF ARTICLE
Notwithstanding anything contained herein to the contrary, the
provisions of this Article shall automatically become inoperative and of no
effect to the extent not required by the Code or the Act.
IN WITNESS WHEREOF, this Plan has been executed this ______________,
1996, effective for all purposes as of the Effective Date.
MONTEREY RESOURCES, INC.
By:
-------------------------------
Name:
-------------------------------
Title:
-------------------------------
XII-3
<PAGE> 1
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as
of ______________, 1996 by and between Monterey Resources, Inc., a Delaware
corporation ("Company"), and R. Graham Whaling ("Employee").
WHEREAS, the Company employs Employee and desires to continue such
employment relationship and Employee desires to continue such employment;
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties, and agreements contained herein, and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. Employment. The Company hereby employs Employee, and Employee
hereby accepts employment by the Company, on the terms and conditions set forth
in this Agreement.
2. Term of Employment. Subject to the provisions for earlier
termination provided in the Agreement, the term of this Agreement (the "Term")
shall commence on the effective date of this Agreement as stated above and
shall terminate on December 31, 1999; provided, however, commencing on January
1, 1998 and on each January 1 thereafter, the term of this Agreement shall
automatically be extended one additional year unless, not later than September
30 of the preceding year, the Board of Directors of the Company (the "Board")
shall give written notice to Employee that the Term of the Agreement shall
cease to be so extended; provided, further, that if a Change in Control, as
defined in Section 6, shall have occurred during the original or extended Term
of this Agreement, the Term shall continue in effect for a period of not less
than 36 months beyond the date of such Change in Control. In no event,
however, shall the Term of this Agreement extend beyond the end of the calendar
month in which Employee's 65th birthday occurs. Notwithstanding any provision
of this Agreement to the contrary, termination of this Agreement shall not
alter or impair any rights of Employee (or Employee's estate or beneficiaries)
that have arisen under this Agreement prior to such termination.
3. Employee's Duties. During the Term of this Agreement,
Employee shall serve as the Chief Executive Officer of the Company, with such
customary duties and responsibilities as may from time to time be assigned to
him by the Board, provided that such duties are at all times consistent with
the duties of such position.
Employee agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company and, to the extent
necessary to discharge the duties and responsibilities assigned to Employee
hereunder, to use reasonable best efforts to perform faithfully and efficiently
such duties and responsibilities.
<PAGE> 2
4. Base Compensation. For services rendered by Employee under
this Agreement, the Company shall pay to Employee a base salary ("Base
Compensation") of $____________ per annum payable in accordance with the
Company's customary payroll practice for its executive officers. The amount of
Base Compensation shall be reviewed periodically and may be increased to
reflect inflation or such other adjustments as the Board may deem appropriate
but Base Compensation, as increased, may not be decreased thereafter.
5. Additional Benefits. In addition to the Base Compensation
provided for in Section 4 herein, Employee shall be entitled to receive all
fringe benefits and perquisites offered by the Company to its executive
officers, including, without limitation, participation in the Company's Annual
Incentive Compensation Plan and other incentive plans offered generally to key
employees, the various employee benefit plans or programs provided to the
employees of the Company in general, subject to the regular eligibility
requirements with respect to each of such benefit plans or programs, and such
other benefits or prerequisites as may be approved by the Board during the Term
of this Agreement. Nothing in this paragraph shall be deemed to prohibit the
Company from making any changes in any of the plans, programs or benefits
described in this Section 5, provided the change similarly affects all
executives of the Company similarly situated.
6. Change of Control.
For purposes of this Agreement, a "Change in Control" shall mean the
occurrence of one of the following events:
(i) any "person" (as such term is used in Section 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than a trustee or other fiduciary holding
securities under an employee benefit plan of Santa Fe Energy
Resources, Inc. ("SFER") or any affiliate, or any corporation owned,
directly or indirectly, by the stockholders of SFER in substantially
the same proportions as their ownership of stock of SFER, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly of securities of SFER
representing 25% or more of the combined voting power of SFER's then
outstanding securities;
(ii) during any period of two consecutive years (not
including any period prior to the execution of this Agreement),
individuals who at the beginning of such period constitute the Board
of Directors of SFER, and any new director (other than a director
designated by a person who has entered into an agreement with SFER to
effect a transaction described in clause (i), (iii) or (iv) of this
Section) whose election by the Board of Directors of SFER or
nomination for election by SFER's stockholders was approved by a vote
of at least two-thirds of the directors then still in office who
either were directors at the beginning of the period or whose election
or nomination for election was previously so approved (hereinafter
referred to as "Continuing Directors"), cease for any reason to
constitute at least a majority thereof;
-2-
<PAGE> 3
(iii) the stockholders of SFER approve a merger or
consolidation of SFER with any other corporation, other than (a) a
merger or consolidation which would result in the voting securities of
SFER outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 65% of the combined
voting power of the voting securities of SFER (or such surviving
entity) outstanding immediately after such merger or consolidation or
(b) a merger or consolidation effected to implement a recapitalization
of SFER (or similar transaction) in which no "person" (as hereinabove
defined) acquires more than 25% of the combined voting power of SFER's
then outstanding securities; or
(iv) the stockholders of SFER approve a plan of complete
liquidation of SFER or an agreement for the sale or disposition by
SFER of all or substantially all of SFER's assets. For purposes of
this clause (iv), the term "the sale or disposition by SFER of all or
substantially all of SFER's assets" shall mean a sale or other
disposition transaction or series of related transactions involving
assets of SFER or of any direct or indirect subsidiary of SFER
(including the stock of any direct or indirect subsidiary of SFER) in
which the value of the assets or stock being sold or otherwise
disposed of (as measured by the purchase price being paid therefor or
by such other method as the Board of Directors of SFER determines is
appropriate in a case where there is no readily ascertainable purchase
price) constitutes more than two-thirds of the "fair market value of
SFER" (as hereinafter defined). For purposes of the preceding
sentence, the "fair market value of SFER" shall be the aggregate
market value of SFER's outstanding common stock (on a fully diluted
basis) plus the aggregate market value of SFER's other outstanding
equity securities. The aggregate market value of SFER's common stock
shall be determined by multiplying the number of shares of SFER's
common stock (on a fully diluted basis) outstanding on the date of the
execution and delivery of a definitive agreement with respect to the
transaction or series of related transactions (the "Transaction Date")
by the average closing price for SFER's common stock for the ten
trading days immediately preceding the Transaction Date. The
aggregate market value of any other equity securities of SFER shall be
determined in a manner similar to that prescribed in the immediately
preceding sentence for determining the aggregate market value of
SFER's common stock or by such other method as the Board of Directors
of SFER shall determine is appropriate.
(v) If SFER ceases to own 80% of the combined voting
power of the then outstanding voting securities of the Company, the
term "Company" shall be substituted for SFER as used in this
definition of "Change in Control;" provided, however, as long as SFER
owns 35% or more of the combined voting power of the voting securities
of the Company, the above "Change in Control" definition shall be
applied separately with respect to SFER and with respect to the
Company as substituted for SFER in the definition, and a Change in
Control with respect to either SFER or the Company in such situation
shall be a Change in Control for purposes of this Plan.
Notwithstanding anything herein to the contrary, a distribution by
SFER to its stockholders of its interest in such voting securities of
the Company shall not constitute a Change in Control.
-3-
<PAGE> 4
7. Termination. This Agreement may be terminated prior to the
end of its Term as set forth below.
(a) Resignation. Employee may resign, including by
reason of retirement, his position at any time. In the event of such
resignation, except in the case of resignation for Good Reason (as
defined below) on or following a Change in Control, Employee shall not
be entitled to further compensation pursuant to this Agreement.
(b) Death. If Employee's employment is terminated due to
his death, this Agreement shall terminate and the Company shall have
no obligations to Employee or his legal representatives with respect
to this Agreement other than the payment of any Base Compensation and
vacation pay which had accrued hereunder at the date of Employee's
death.
(c) Discharge.
(i) The Company may terminate this Agreement and
Employee's employment for any reason deemed sufficient by the
Company upon notice as provided in Section 10. However, in
the event that Employee's employment is terminated during the
Term by the Company on or following a Change in Control and
for any reason other than his Misconduct (as defined in
Section 7(c)(ii) below) or Disability (as defined in Section
7(d)(i) below), then, subject to Sections 7(h) and (i): (A)
the Company shall pay in a lump sum in cash to Employee,
within 15 days of the Date of Termination, an amount equal to
the sum of (1) three times Employee's Base Compensation, and
(2) the maximum incentive award payable to Employee under the
Company's Annual Incentive Compensation Plan for such year in
lieu of any payment thereunder, assuming for purposes hereof
that all performance objectives for such year had been met at
the maximum level and that Employee is entitled to a full
award thereunder; (B) for the 36-month period after such Date
of Termination, the Company shall provide or arrange to
provide Employee (and Employee's dependents) with life,
disability, accident and group health insurance benefits
substantially similar to those which Employee (and Employee's
dependents) were receiving immediately prior to the Notice of
Termination, with the Employee charged a monthly premium(s)
for such coverage(s) that does not exceed the premium(s)
charged to an active employee for comparable coverage(s);
benefits otherwise receivable by Employee pursuant to this
clause (B) shall be reduced to the extent comparable benefits
are actually received by Employee (and Employee's dependents)
during the 36-month period following Employee's termination,
and any such benefits actually received by Employee shall be
reported to the Company (To the extent coverage and/or
benefits received under a self-insured health plan of the
Company are taxable to Employee, the Company shall make
Employee "whole" on a net after tax basis); (C) within 15 days
of the Date of Termination or, if later, the first date on
which such payment would not subject Employee to suit under
-4-
<PAGE> 5
Section 16(b) of the Securities Exchange Act of 1934, if
applicable, the Company shall pay to Employee in cancellation
of all outstanding stock-based awards that were granted to
Employee after the Change in Control and which are not vested
on the Date of Termination (collectively, "Awards"), a lump
sum amount in cash equal to the sum of the value (with respect
to an option or stock appreciation right, the "spread"; and
with respect to restricted stock or phantom stock, the value
of an unrestricted share) of all such nonvested Awards,
calculated, where applicable, as if all corporate performance
goals had been achieved (thus warranting full value of the
Award); and (D) the Company shall provide to Employee
outplacement services by a nationally recognized firm.
(ii) Notwithstanding the foregoing provisions of
this Section 7, in the event Employee is terminated because of
Misconduct, the Company shall have no compensation obligations
pursuant to this Agreement after the Date of Termination. As
used herein, "Misconduct" means (a) the willful and continued
failure by Employee to substantially perform his duties with
the Company (other than any such failure resulting from
Employee's incapacity due to physical or mental illness or any
such actual or anticipated failure after the issuance of a
Notice of Termination by Employee for Good Reason), after a
written demand for substantial performance is delivered to
Employee by the Board, which demand specifically identifies
the manner in which the Board believes that Employee has not
substantially performed his duties, or (b) the willful
engaging by Employee in conduct which is demonstrably and
materially injurious to the Company, monetarily or otherwise.
For purposes hereof, no act, or failure to act, on Employee's
part shall be deemed "willful" unless done, or omitted to be
done, by Employee not in good faith and without reasonable
belief that Employee's action or omission was in the best
interest of the Company. Notwithstanding the foregoing,
Employee shall not be deemed to have been terminated for
Misconduct unless and until there shall have been delivered to
Employee a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire
membership of the Board at a meeting of the Board called and
held for such purpose (after reasonable notice to Employee and
an opportunity for Employee, together with Employee's counsel,
to be heard before the Board), finding that in the good faith
opinion of the Board Employee was guilty of conduct set forth
above and specifying the particulars thereof in detail.
(d) Disability.
(i) If Employee shall have been absent from the
full-time performance of Employee's duties with the Company
for six consecutive months as a result of Employee's
incapacity due to physical or mental illness, as determined by
Employee's physician, and within 30 days after written Notice
of Termination is given by the Company Employee shall not have
returned to the full-time performance of Employee's duties,
Employee's employment may be terminated by the Company
-5-
<PAGE> 6
for "Disability" and Employee shall not be entitled to further
compensation pursuant to this Agreement.
(ii) If Employee fails during any period during
the Term to perform Employee's full-time duties with the
Company as a result of incapacity due to physical or mental
illness, as determined by Employee's physician, Employee shall
continue to receive his Base Compensation, together with all
compensation payable to Employee under the Company's Long Term
Disability Plan or other similar plan during such period until
this Agreement is terminated.
(e) Resignation for Good Reason. In the event of a
Change in Control, Employee shall be entitled to terminate his
employment for Good Reason as defined herein. If Employee terminates
his employment for Good Reason, Employee shall be entitled to the
compensation and benefits provided in Paragraph 7(c)(i) hereof. "Good
Reason" shall mean (1) the material breach of any of the Company's
obligations under this Agreement without Employee's express written
consent or (2) the occurrence of any of the following circumstances
without Employee's express written consent unless such breach or
circumstances are fully corrected prior to the Date of Termination
specified in the Notice of Termination pursuant to Subsections 7(e)
and 7(f), respectively, given in respect thereof:
(i) the assignment to Employee of any duties
inconsistent with the position in the Company that Employee
held immediately prior to the Change in Control, or a
significant adverse alteration in the nature or status of
Employee's office, title, responsibilities, including
reporting responsibilities, or the conditions of Employee's
employment from those in effect immediately prior to such
Change in Control or a failure to reelect Employee as Chairman
of the Board;
(ii) a reduction in Employee's Base Compensation;
(iii) the failure by the Company to pay to Employee
any portion of Employee's current compensation or to pay to
Employee any portion of an installment of deferred
compensation under any deferred compensation program of the
Company within seven days of the date such compensation is
due;
(iv) the failure by the Company to continue in
effect any compensation plan in which Employee participates
immediately prior to a Change in Control that is material to
Employee's total compensation unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has
been made with respect to such plan, or the failure by the
Company to continue Employee's participation therein (or in
such substitute or alternative plan) on a basis not materially
less favorable, both in terms of the amount of benefits
provided and the level of Employee's participation relative to
other participants, as existed at the time of the Change in
Control;
-6-
<PAGE> 7
(v) the failure by the Company to continue to
provide Employee with benefits substantially similar to those
enjoyed by Employee under any of the Company's life insurance,
medical, health and accident, or disability plans in which
Employee was participating at the time of the Change in
Control; the taking of any action by the Company which would
directly or indirectly materially reduce any of such benefits
or deprive Employee of any material fringe benefit enjoyed by
Employee at the time of the Change in Control, or the failure
by the Company to provide Employee with the number of paid
vacation days to which Employee is entitled on the basis of
years of service with the Company (and its predecessors) in
accordance with the Company's normal vacation policy in effect
at the time of the Change in Control;
(vi) the failure of the Company to obtain a
satisfactory agreement from any successor to assume and agree
to perform this Agreement, as contemplated in Section 12
hereof;
(vii) the relocation of the Company's principal
executive offices to a location outside the greater
Bakersfield, California area, or the Company's requiring
Employee to relocate anywhere other than the location of the
Company's principal executive offices, except for required
travel on the Company's business to an extent substantially
consistent with Employee's business travel obligations
immediately prior to the change in control of the Company;
(viii) the amendment, modification or repeal of any
provision of the Certificate of Incorporation, or the Bylaws
of the Company which was in effect immediately prior to such
Change in Control, if such amendment, modification or repeal
would materially adversely effect Employee's right to
indemnification by the Company; or
(ix) any purported termination of Employee's
employment that is not effected pursuant to a Notice of
Termination satisfying the requirements of Subsection (f)
hereof, which purported termination shall not be effective for
purposes of this Agreement.
Notwithstanding anything in this Agreement to the contrary, if
Employee's employment with the Company terminates prior to, but within
six months of, the date on which a Change in Control occurs and it is
reasonably demonstrated by Employee that such termination of
employment was (i) by the Company in connection with or anticipation
of the Change in Control or (ii) by Employee under circumstances which
would have constituted Good Reason if the circumstances arose on or
after the Change in Control, then, for purposes of this Agreement,
Employee shall be deemed to have continued employment with the Company
until the date of the Change in Control and then terminated his
employment on such date for Good Reason.
-7-
<PAGE> 8
Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or
mental illness. Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstance
constituting Good Reason hereunder.
(f) Notice of Termination. On and after a Change in
Control, any purported termination of Employee's employment by the
Company or by Employee shall be communicated by written Notice of
Termination to the other party hereto in accordance with Section 10
hereof. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall set forth in reasonable detail the
reason for termination of Employee's employment, or in the case of
resignation for Good Reason, said notice must specify in reasonable
detail the basis for such resignation. No purported termination which
is not effected pursuant to this Section 7(f) shall be effective.
(g) Date of Termination, Etc. "Date of Termination"
shall mean the date specified in the Notice of Termination. Either
party may, within 15 days after any Notice of Termination is given,
provide notice to the other party pursuant to Section 10 hereof that a
dispute exists concerning the termination. Notwithstanding the
pendency of any such dispute, the Company will continue to pay
Employee his full compensation in effect when the notice giving rise
to the dispute was given (including, but not limited to, Base
Compensation) and continue Employee as a participant in all
compensation, benefit and insurance plans in which Employee was
participating when the notice giving rise to the dispute was given,
until the dispute is finally resolved in accordance with Section 16
hereof, but in no event past the expiration date of this Agreement.
(h) Mitigation. Employee shall not be required to
mitigate the amount of any payment provided for in this Section 7 by
seeking other employment or otherwise, nor shall the amount of any
payment or benefit provided for in this Agreement be reduced by any
compensation earned by Employee as a result of employment by another
employer, self-employment earnings, by retirement benefits, by offset
against any amount claimed to be owing by Employee to the Company, or
otherwise, except that any severance amounts otherwise payable to
Employee pursuant to a Company severance plan or policy for employees
in general shall reduce the amount otherwise payable pursuant to
Section 7(c)(i).
(i) Gross-Up of Parachute Payments.
(1) To provide Employee with adequate protection
in connection with his ongoing employment with the Company,
this Agreement provides Employee with various benefits in the
event of termination of Employee's employment with the
Company. If Employee's employment is terminated following a
"change in control" of the Company, within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), a portion of those benefits could be
characterized as "excess parachute payments" within the
meaning of Section 280G of the Code.
-8-
<PAGE> 9
The parties hereto acknowledge that the protections set forth
herein are important, and it is agreed that Employee should
not have to bear the burden of any excise tax that might be
levied under Section 4999 of the Code, in the event that a
portion of the benefits payable to Employee pursuant to this
Agreement are treated as an excess parachute payment. The
parties, therefore, have agreed as set forth herein.
(2) Anything in this Agreement to the contrary
notwithstanding, if it shall be determined that any payment or
distribution by the Company or any other person to or for the
benefit of Employee (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional
payments required hereunder (a "Payment") would be subject to
the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred by Employee with respect to
such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred
to as the "Excise Tax"), then the Company shall pay an
additional payment (a "Gross-Up Payment") in an amount such
that after payment by Employee of all taxes (including any
interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and
Excise Tax imposed upon the Gross-Up Payment, Employee retains
an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
(3) Subject to the provisions of subparagraph (4)
below, all determinations required to be made hereunder,
including whether and when a Gross-Up Payment is required and
the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by
an independent public accounting firm with a national
reputation that is selected by Employee (the "Accounting
Firm") which shall provide detailed supporting calculations
both to the Company and to Employee within 15 business days
after the receipt of notice from Employee that there has been
a Payment, or such earlier time as is requested by the
Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group
effecting the change in control of the Company, Employee shall
appoint another nationally recognized accounting firm to make
the determinations required hereunder (which accounting firm
shall then be referred to as the Accounting Firm hereunder).
All fees and expenses of the Accounting Firm shall be borne
solely by the Company. (The Company shall indemnify and hold
harmless Employee, on an after-tax basis, for any Excise Tax
or income tax (including interest and penalties with respect
thereto) imposed on Employee as a result of such payment of
fees and expenses.) Any Gross-Up Payment, as determined
pursuant hereto, shall be paid by the Company to Employee
within five days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no
Excise Tax is payable by Employee, it shall furnish Employee
and the Company with a written opinion that failure to report
-9-
<PAGE> 10
the Excise Tax on Employee's applicable federal income tax
return would not result in the imposition of a negligence or
similar penalty. Any determination by the Accounting Firm
shall be binding upon the Company and Employee. As a result
of uncertainty in the application of Section 4999 of the Code
at the time of the initial determination by the Accounting
Firm hereunder, it is possible that Gross-Up Payments may not
have been made by the Company which should have been made
("Underpayment"), consistent with the calculations required to
be made hereunder. If the Company exhausts its remedies
pursuant to subparagraph (4) below and Employee thereafter is
required to make a payment of any Excise Tax, the Accounting
Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by
the Company to or for the benefit of Employee.
(4) Employee shall notify the Company in writing
of any claim (including any threatened tax lien related to or
based upon any such claim) by the Internal Revenue Service
that, if successful, would require the payment by the Company
of the Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than 10 business days after
Employee is informed in writing of such claim (or threatened
lien) and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be
paid. Employee shall not pay such claim prior to the
expiration of the 30-day period following the date on which
Employee gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with
respect to such claim is due or such tax lien would be
imposed). If the Company notifies Employee in writing prior
to the expiration of such period that it desires to contest
such claim (or threatened lien), Employee shall:
(a) give the Company any information
reasonably requested by the Company relating to such
claim (or threatened lien);
(b) take such action in connection with
contesting such claim (or threatened lien) as the
Company shall reasonably request in writing from time
to time, including, without limitation, accepting
legal representation with respect to such claim by an
attorney reasonably selected by the Company;
(c) cooperate with the Company in good
faith in order effectively to contest such claim (or
threatened lien); and
(d) permit the Company to participate in
any proceedings relating to such claim (or threatened
lien);
provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional interest
and penalties) incurred in connection with
-10-
<PAGE> 11
such contest and shall indemnify and hold Employee harmless,
on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto)
imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing
provisions of this subparagraph (4), the Company shall control
all proceedings taken in connection with such contest and, at
its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may, at
its sole option, either direct Employee to pay the tax claimed
and sue for a refund or contest the claim in any permissible
manner, and Employee agrees to prosecute such contest to a
determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts,
as Employee shall determine (but in no event shall the Company
permit or direct Employee to allow a tax lien to be imposed on
Employee's property); provided, further, that if the Company
directs Employee to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to Employee,
on an interest-free basis, and shall indemnify and hold
Employee harmless on an after-tax basis, from any Excise Tax
or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect
to any imputed income with respect to such advance; and
further, provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year
of Employee with respect to which such contested amount is
claimed to be due is limited solely to such contested amount.
In addition, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and Employee shall be entitled to
settle or contest, as the case may be, any other issue raised
by the Internal Revenue Service or any other taxing authority.
(5) If, after the receipt by Employee of an
amount advanced by the Company pursuant to subparagraph (4),
Employee becomes entitled to receive any refund with respect
to such claim, Employee shall (subject to the Company's
complying with the requirements of subparagraph (4) above)
promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after
taxes applicable thereto). If after the receipt by Employee
of an amount advanced by the Company pursuant to subparagraph
(4) above, a determination is made that Employee shall not be
entitled to any refund with respect to such claim and the
Company does not notify Employee in writing of its intent to
contest such denial of refund prior to the expiration of 30
days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof, the
amount of Gross-Up Payment required to be paid.
(6) The Company hereby acknowledges that, as a
consequence of this full parachute tax gross-up to Employee
under this Agreement, any provision in a Company plan or
program that provides for a parachute payment, "cut-back" to
2.99,
-11-
<PAGE> 12
if such "cut-back" would result in the employee being in a
better net after-tax position, shall be inapplicable to
Employee.
8. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit Employee's continuing or future participation in any benefit,
bonus, incentive or other plan or program provided by the Company or any of its
affiliated companies and for which Employee may qualify, nor shall anything
herein limit or otherwise adversely affect such rights as Employee may have
under any stock option or other agreements with the Company or any of its
affiliated companies.
9. Assignability. The obligations of Employee hereunder are
personal and may not be assigned or delegated by him or transferred in any
manner whatsoever, nor are such obligations subject to involuntary alienation,
assignment or transfer. The Company shall have the right to assign this
Agreement and to delegate all rights, duties and obligations hereunder, either
in whole or in part, to any parent, affiliate, successor or subsidiary
organization or company of the Company, so long as the obligations of the
Company under this Agreement remain the obligations of the Company.
10. Notice. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed to
the Company at its principal office address, directed to the attention of the
Board with a copy to the Secretary of the Company, and to Employee at
Employee's residence address on the records of the Company or to such other
address as either party may have furnished to the other in writing in
accordance herewith except that notice of change of address shall be effective
only upon receipt.
11. Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
12. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle Employee to compensation from the Company in the same amount and
on the same terms as he would be entitled to hereunder if he terminated his
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used herein, the term "Company" shall
include any successor to its business and/or assets as aforesaid
-12-
<PAGE> 13
which executes and delivers the Agreement provided for in this Section 12 or
which otherwise becomes bound by all terms and provisions of this Agreement by
operation of law.
(b) This Agreement and all rights of Employee hereunder shall
inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts would be
payable to him hereunder if he had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to Employee's devisee, legatee, or other designee or, if there be no
such designee, to Employee's estate.
13. Indemnification. In consideration of the premises and of the
mutual agreements set forth in this Agreement, the parties hereto further agree
as follows:
1. The Company shall pay on behalf of Employee and
Employee's executors, administrators or assigns, any amount which
Employee is or becomes legally obligated to pay as a result of any
claim or claims made against Employee by reason of the fact that
Employee served as an employee, director and/or officer of the Company
or because of any actual or alleged breach of duty, neglect, error,
misstatement, misleading statement, omission or other act done, or
suffered or wrongfully attempted by Employee in Employee's capacity as
an employee, Director and/or Officer of the Company. The payments
that the Company will be obligated to make hereunder shall include
(without limitation) damages, judgments, settlements, costs and
expenses of investigation, costs and expenses of defense of legal
actions, claims and proceedings and appeals therefrom, and costs of
attachments and similar bonds; provided, however, that the Company
shall not be obligated to pay fines or other obligations or fees
imposed by law or otherwise that it is prohibited by applicable law
from paying as indemnity or for any other reason.
2. Costs and expenses (including, without limitation,
attorneys' fees) incurred by Employee in defending or investigating
any action, suit, proceeding or claim shall be paid by the Company in
advance of the final disposition of such matter upon receipt of a
written undertaking by or on behalf of Employee to repay any such
amounts if it is ultimately determined that Employee is not entitled
to indemnification under the terms of this Agreement.
3. If a claim under this Agreement is not paid by or on
behalf of the Company within ninety days after a written claim has
been received by the Company, Employee may at any time thereafter
bring suit against the Company to recover the unpaid amount of the
claim and, if successful in whole or in part, Employee shall also be
entitled to be paid the expense of prosecuting such claim.
4. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of
the rights of recovery of Employee, who shall execute all papers
required and shall do everything that may be necessary to secure such
-13-
<PAGE> 14
rights, including the execution of such documents necessary to
enable the Company effectively to bring suit to enforce such rights.
5. The Company shall not be liable under this Agreement
to make any payment in connection with any claim made against
Employee:
(a) for which payment is actually made to
Employee under an insurance policy maintained by the Company,
except in respect of any excess beyond the amount of payment
under such insurance;
(b) for which Employee is indemnified by the
Company otherwise than pursuant to this Agreement;
(c) based upon or attributable to Employee
gaining in fact any personal profit or advantage to which
Employee was not legally entitled;
(d) for an accounting of profits made from the
purchase or sale by Employee of securities of the Company
within the meaning of Section 16(b) of the Securities Exchange
Act of 1934 and amendments thereto; or
(e) brought about or contributed to by the
dishonesty of Employee; provided, however, that
notwithstanding the foregoing, Employee shall be protected
under this Agreement as to any claims upon which suit may be
brought alleging dishonesty on the part of Employee, unless a
judgment or other final adjudication thereof adverse to
Employee shall establish that Employee committed acts of
active and deliberate dishonesty with actual dishonest purpose
and intent, which acts were material to the cause of action so
adjudicated.
6. Employee, as a condition precedent to his right to be
indemnified under this Agreement, shall give to the Company notice in
writing as soon as practicable of any claim made against him for which
indemnity will or could be sought under this Agreement. Notice to the
Company shall be directed to the Company, 5201 Truxtun, Suite 100,
Bakersfield, California 93309, Attention: Secretary (or such other
address as the Company shall designate in writing to Employee).
Notice shall be deemed received if sent by prepaid mail properly
addressed, the date of such notice being the date postmarked. In
addition, Employee shall give the Company such information and
cooperation as it may reasonably require and as shall be within
Employee's power.
7. Nothing herein shall be deemed to diminish or
otherwise restrict Employee's right to indemnification under any
provision of the Certificate of Incorporation or Bylaws of the Company
or under Delaware law.
-14-
<PAGE> 15
14. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by Employee and such officer as may be
specifically authorized by the Board. No waiver by either party hereto at any
time of any breach by the other party hereto of, or in compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. This Agreement is an integration
of the parties agreement; no agreement or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of Delaware.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
16. Arbitration. Employee shall be permitted (but not required)
to elect that any dispute or controversy arising under or in connection with
this Agreement be settled by arbitration in Los Angeles, California, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. All legal fees and costs incurred by Employee in connection with
the resolution of any dispute or controversy under or in connection with this
Agreement shall be paid by the Company as bills for such services are presented
by Employee to the Company.
17. Prior Agreements. This Agreement shall replace in full any
prior agreement (written or oral) between SFER and Employee concerning
employment and benefits on or following a Change in Control and any such prior
agreement(s) are hereby terminated as of the effective date of this Agreement.
-15-
<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Agreement on
___________, 1996, effective for all purposes as provided above.
MONTEREY RESOURCES, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
EMPLOYEE
---------------------------------------
R. Graham Whaling
-16-
<PAGE> 1
EXHIBIT 10.14
Other than CEO
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as
of ______________, 1996 by and between Monterey Resources, Inc., a Delaware
corporation ("Company"), and _________________________ ("Employee").
WHEREAS, the Company employs Employee and desires to continue such
employment relationship and Employee desires to continue such employment;
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties, and agreements contained herein, and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. Employment. The Company hereby employs Employee, and Employee
hereby accepts employment by the Company, on the terms and conditions set forth
in this Agreement.
2. Term of Employment. Subject to the provisions for earlier
termination provided in the Agreement, the term of this Agreement (the "Term")
shall commence on the effective date of this Agreement as stated above and
shall terminate on December 31, 1999; provided, however, commencing on January
1, 1998 and on each January 1 thereafter, the term of this Agreement shall
automatically be extended one additional year unless, not later than September
30 of the preceding year, the Board of Directors of the Company (the "Board")
shall give written notice to Employee that the Term of the Agreement shall
cease to be so extended; provided, further, that if a Change in Control, as
defined in Section 6, shall have occurred during the original or extended Term
of this Agreement, the Term shall continue in effect for a period of not less
than 24 months beyond the date of such Change in Control. In no event,
however, shall the Term of this Agreement extend beyond the end of the calendar
month in which Employee's 65th birthday occurs. Notwithstanding any provision
of this Agreement to the contrary, termination of this Agreement shall not
alter or impair any rights of Employee (or Employee's estate or beneficiaries)
that have arisen under this Agreement prior to such termination.
3. Employee's Duties. During the Term of this Agreement,
Employee shall serve as the _________________________ of the Company, with such
customary duties and responsibilities as may from time to time be assigned to
him by the Chief Executive Officer of the Company, provided that such duties
are at all times consistent with the duties of such position.
Employee agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company and, to the extent
necessary to discharge the duties and responsibilities assigned to Employee
hereunder, to use reasonable best efforts to perform faithfully and efficiently
such duties and responsibilities.
<PAGE> 2
4. Base Compensation. For services rendered by Employee under
this Agreement, the Company shall pay to Employee a base salary ("Base
Compensation") of $____________ per annum payable in accordance with the
Company's customary payroll practice for its executive officers. The amount of
Base Compensation shall be reviewed periodically and may be increased to
reflect inflation or such other adjustments as the Board may deem appropriate
but Base Compensation, as increased, may not be decreased thereafter.
5. Additional Benefits. In addition to the Base Compensation
provided for in Section 4 herein, Employee shall be entitled to receive all
fringe benefits and perquisites offered by the Company to its executive
officers, including, without limitation, participation in the Company's Annual
Incentive Compensation Plan and other incentive plans offered generally to key
employees, the various employee benefit plans or programs provided to the
employees of the Company in general, subject to the regular eligibility
requirements with respect to each of such benefit plans or programs, and such
other benefits or prerequisites as may be approved by the Board during the Term
of this Agreement. Nothing in this paragraph shall be deemed to prohibit the
Company from making any changes in any of the plans, programs or benefits
described in this Section 5, provided the change similarly affects all
executives of the Company similarly situated.
6. Change of Control.
For purposes of this Agreement, a "Change in Control" shall mean the
occurrence of one of the following events:
(i) any "person" (as such term is used in Section 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than a trustee or other fiduciary holding
securities under an employee benefit plan of Santa Fe Energy
Resources, Inc. ("SFER") or any affiliate, or any corporation owned,
directly or indirectly, by the stockholders of SFER in substantially
the same proportions as their ownership of stock of SFER, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly of securities of SFER
representing 25% or more of the combined voting power of SFER's then
outstanding securities;
(ii) during any period of two consecutive years (not
including any period prior to the execution of this Agreement),
individuals who at the beginning of such period constitute the Board
of Directors of SFER, and any new director (other than a director
designated by a person who has entered into an agreement with SFER to
effect a transaction described in clause (i), (iii) or (iv) of this
Section) whose election by the Board of Directors of SFER or
nomination for election by SFER's stockholders was approved by a vote
of at least two-thirds of the directors then still in office who
either were directors at the beginning of the period or whose election
or nomination for election was previously so approved (hereinafter
referred to as "Continuing Directors"), cease for any reason to
constitute at least a majority thereof;
-2-
<PAGE> 3
(iii) the stockholders of SFER approve a merger or
consolidation of SFER with any other corporation, other than (a) a
merger or consolidation which would result in the voting securities of
SFER outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 65% of the combined
voting power of the voting securities of SFER (or such surviving
entity) outstanding immediately after such merger or consolidation or
(b) a merger or consolidation effected to implement a recapitalization
of SFER (or similar transaction) in which no "person" (as hereinabove
defined) acquires more than 25% of the combined voting power of SFER's
then outstanding securities; or
(iv) the stockholders of SFER approve a plan of complete
liquidation of SFER or an agreement for the sale or disposition by
SFER of all or substantially all of SFER's assets. For purposes of
this clause (iv), the term "the sale or disposition by SFER of all or
substantially all of SFER's assets" shall mean a sale or other
disposition transaction or series of related transactions involving
assets of SFER or of any direct or indirect subsidiary of SFER
(including the stock of any direct or indirect subsidiary of SFER) in
which the value of the assets or stock being sold or otherwise
disposed of (as measured by the purchase price being paid therefor or
by such other method as the Board of Directors of SFER determines is
appropriate in a case where there is no readily ascertainable purchase
price) constitutes more than two-thirds of the "fair market value of
SFER" (as hereinafter defined). For purposes of the preceding
sentence, the "fair market value of SFER" shall be the aggregate
market value of SFER's outstanding common stock (on a fully diluted
basis) plus the aggregate market value of SFER's other outstanding
equity securities. The aggregate market value of SFER's common stock
shall be determined by multiplying the number of shares of SFER's
common stock (on a fully diluted basis) outstanding on the date of the
execution and delivery of a definitive agreement with respect to the
transaction or series of related transactions (the "Transaction Date")
by the average closing price for SFER's common stock for the ten
trading days immediately preceding the Transaction Date. The
aggregate market value of any other equity securities of SFER shall be
determined in a manner similar to that prescribed in the immediately
preceding sentence for determining the aggregate market value of
SFER's common stock or by such other method as the Board of Directors
of SFER shall determine is appropriate.
(v) If SFER ceases to own 80% of the combined voting
power of the then outstanding voting securities of the Company, the
term "Company" shall be substituted for SFER as used in this
definition of "Change in Control;" provided, however, as long as SFER
owns 35% or more of the combined voting power of the voting securities
of the Company, the above "Change in Control" definition shall be
applied separately with respect to SFER and with respect to the
Company as substituted for SFER in the definition, and a Change in
Control with respect to either SFER or the Company in such situation
shall be a Change in Control for purposes of this Plan.
Notwithstanding anything herein to the contrary, a distribution by
SFER to its stockholders of its interest in such voting securities of
the Company shall not constitute a Change in Control.
-3-
<PAGE> 4
7. Termination. This Agreement may be terminated prior to the
end of its Term as set forth below.
(a) Resignation. Employee may resign, including by
reason of retirement, his position at any time. In the event of such
resignation, except in the case of resignation for Good Reason (as
defined below) on or following a Change in Control, Employee shall not
be entitled to further compensation pursuant to this Agreement.
(b) Death. If Employee's employment is terminated due to
his death, this Agreement shall terminate and the Company shall have
no obligations to Employee or his legal representatives with respect
to this Agreement other than the payment of any Base Compensation and
vacation pay which had accrued hereunder at the date of Employee's
death.
(c) Discharge.
(i) The Company may terminate this Agreement and
Employee's employment for any reason deemed sufficient by the
Company upon notice as provided in Section 10. However, in
the event that Employee's employment is terminated during the
Term by the Company on or following a Change in Control and
for any reason other than his Misconduct (as defined in
Section 7(c)(ii) below) or Disability (as defined in Section
7(d)(i) below), then, subject to Sections 7(h) and (i): (A)
the Company shall pay in a lump sum in cash to Employee,
within 15 days of the Date of Termination, an amount equal to
the sum of (1) two times Employee's Base Compensation, and (2)
the maximum incentive award payable to Employee under the
Company's Annual Incentive Compensation Plan for such year in
lieu of any payment thereunder, assuming for purposes hereof
that all performance objectives for such year had been met at
the maximum level and that Employee is entitled to a full
award thereunder; (B) for the 24-month period after such Date
of Termination, the Company shall provide or arrange to
provide Employee (and Employee's dependents) with life,
disability, accident and group health insurance benefits
substantially similar to those which Employee (and Employee's
dependents) were receiving immediately prior to the Notice of
Termination, with the Employee charged a monthly premium(s)
for such coverage(s) that does not exceed the premium(s)
charged to an active employee for comparable coverage(s);
benefits otherwise receivable by Employee pursuant to this
clause (B) shall be reduced to the extent comparable benefits
are actually received by Employee (and Employee's dependents)
during the 24-month period following Employee's termination,
and any such benefits actually received by Employee shall be
reported to the Company (To the extent coverage and/or
benefits received under a self-insured health plan of the
Company are taxable to Employee, the Company shall make
Employee "whole" on a net after tax basis); (C) within 15 days
of the Date of Termination or, if later, the first date on
which such payment would not subject Employee to suit under
-4-
<PAGE> 5
Section 16(b) of the Securities Exchange Act of 1934, if
applicable, the Company shall pay to Employee in cancellation
of all outstanding stock-based awards that were granted to
Employee after the Change in Control and which are not vested
on the Date of Termination (collectively, "Awards"), a lump
sum amount in cash equal to the sum of the value (with respect
to an option or stock appreciation right, the "spread"; and
with respect to restricted stock or phantom stock, the value
of an unrestricted share) of all such nonvested Awards,
calculated, where applicable, as if all corporate performance
goals had been achieved (thus warranting full value of the
Award); and (D) the Company shall provide to Employee
outplacement services by a nationally recognized firm.
(ii) Notwithstanding the foregoing provisions of
this Section 7, in the event Employee is terminated because of
Misconduct, the Company shall have no compensation obligations
pursuant to this Agreement after the Date of Termination. As
used herein, "Misconduct" means (a) the willful and continued
failure by Employee to substantially perform his duties with
the Company (other than any such failure resulting from
Employee's incapacity due to physical or mental illness or any
such actual or anticipated failure after the issuance of a
Notice of Termination by Employee for Good Reason), after a
written demand for substantial performance is delivered to
Employee by the Board, which demand specifically identifies
the manner in which the Board believes that Employee has not
substantially performed his duties, or (b) the willful
engaging by Employee in conduct which is demonstrably and
materially injurious to the Company, monetarily or otherwise.
For purposes hereof, no act, or failure to act, on Employee's
part shall be deemed "willful" unless done, or omitted to be
done, by Employee not in good faith and without reasonable
belief that Employee's action or omission was in the best
interest of the Company. Notwithstanding the foregoing,
Employee shall not be deemed to have been terminated for
Misconduct unless and until there shall have been delivered to
Employee a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire
membership of the Board at a meeting of the Board called and
held for such purpose (after reasonable notice to Employee and
an opportunity for Employee, together with Employee's counsel,
to be heard before the Board), finding that in the good faith
opinion of the Board Employee was guilty of conduct set forth
above and specifying the particulars thereof in detail.
(d) Disability.
(i) If Employee shall have been absent from the
full-time performance of Employee's duties with the Company
for six consecutive months as a result of Employee's
incapacity due to physical or mental illness, as determined by
Employee's physician, and within 30 days after written Notice
of Termination is given by the Company Employee shall not have
returned to the full-time performance of Employee's duties,
Employee's employment may be terminated by the Company
-5-
<PAGE> 6
for "Disability" and Employee shall not be entitled to further
compensation pursuant to this Agreement.
(ii) If Employee fails during any period during
the Term to perform Employee's full-time duties with the
Company as a result of incapacity due to physical or mental
illness, as determined by Employee's physician, Employee shall
continue to receive his Base Compensation, together with all
compensation payable to Employee under the Company's Long Term
Disability Plan or other similar plan during such period until
this Agreement is terminated.
(e) Resignation for Good Reason. In the event of a
Change in Control, Employee shall be entitled to terminate his
employment for Good Reason as defined herein. If Employee terminates
his employment for Good Reason, Employee shall be entitled to the
compensation and benefits provided in Paragraph 7(c)(i) hereof. "Good
Reason" shall mean (1) the material breach of any of the Company's
obligations under this Agreement without Employee's express written
consent or (2) the occurrence of any of the following circumstances
without Employee's express written consent unless such breach or
circumstances are fully corrected prior to the Date of Termination
specified in the Notice of Termination pursuant to Subsections 7(e)
and 7(f), respectively, given in respect thereof:
(i) the assignment to Employee of any duties
inconsistent with the position in the Company that Employee
held immediately prior to the Change in Control, or a
significant adverse alteration in the nature or status of
Employee's office, title, responsibilities, including
reporting responsibilities, or the conditions of Employee's
employment from those in effect immediately prior to such
Change in Control;
(ii) a reduction in Employee's Base Compensation;
(iii) the failure by the Company to pay to Employee
any portion of Employee's current compensation or to pay to
Employee any portion of an installment of deferred
compensation under any deferred compensation program of the
Company within seven days of the date such compensation is
due;
(iv) the failure by the Company to continue in
effect any compensation plan in which Employee participates
immediately prior to a Change in Control that is material to
Employee's total compensation unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has
been made with respect to such plan, or the failure by the
Company to continue Employee's participation therein (or in
such substitute or alternative plan) on a basis not materially
less favorable, both in terms of the amount of benefits
provided and the level of Employee's participation relative to
other participants, as existed at the time of the Change in
Control;
-6-
<PAGE> 7
(v) the failure by the Company to continue to
provide Employee with benefits substantially similar to those
enjoyed by Employee under any of the Company's life insurance,
medical, health and accident, or disability plans in which
Employee was participating at the time of the Change in
Control; the taking of any action by the Company which would
directly or indirectly materially reduce any of such benefits
or deprive Employee of any material fringe benefit enjoyed by
Employee at the time of the Change in Control, or the failure
by the Company to provide Employee with the number of paid
vacation days to which Employee is entitled on the basis of
years of service with the Company (and its predecessors) in
accordance with the Company's normal vacation policy in effect
at the time of the Change in Control;
(vi) the failure of the Company to obtain a
satisfactory agreement from any successor to assume and agree
to perform this Agreement, as contemplated in Section 12
hereof;
(vii) the relocation of the Company's principal
executive offices to a location outside the greater
Bakersfield, California area, or the Company's requiring
Employee to relocate anywhere other than the location of the
Company's principal executive offices, except for required
travel on the Company's business to an extent substantially
consistent with Employee's business travel obligations
immediately prior to the change in control of the Company;
(viii) the amendment, modification or repeal of any
provision of the Certificate of Incorporation, or the Bylaws
of the Company which was in effect immediately prior to such
Change in Control, if such amendment, modification or repeal
would materially adversely effect Employee's right to
indemnification by the Company; or
(ix) any purported termination of Employee's
employment that is not effected pursuant to a Notice of
Termination satisfying the requirements of Subsection (f)
hereof, which purported termination shall not be effective for
purposes of this Agreement.
Notwithstanding anything in this Agreement to the contrary, if
Employee's employment with the Company terminates prior to, but within
six months of, the date on which a Change in Control occurs and it is
reasonably demonstrated by Employee that such termination of
employment was (i) by the Company in connection with or anticipation
of the Change in Control or (ii) by Employee under circumstances which
would have constituted Good Reason if the circumstances arose on or
after the Change in Control, then, for purposes of this Agreement,
Employee shall be deemed to have continued employment with the Company
until the date of the Change in Control and then terminated his
employment on such date for Good Reason.
-7-
<PAGE> 8
Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or
mental illness. Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstance
constituting Good Reason hereunder.
(f) Notice of Termination. On and after a Change in
Control, any purported termination of Employee's employment by the
Company or by Employee shall be communicated by written Notice of
Termination to the other party hereto in accordance with Section 10
hereof. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall set forth in reasonable detail the
reason for termination of Employee's employment, or in the case of
resignation for Good Reason, said notice must specify in reasonable
detail the basis for such resignation. No purported termination which
is not effected pursuant to this Section 7(f) shall be effective.
(g) Date of Termination, Etc. "Date of Termination"
shall mean the date specified in the Notice of Termination. Either
party may, within 15 days after any Notice of Termination is given,
provide notice to the other party pursuant to Section 10 hereof that a
dispute exists concerning the termination. Notwithstanding the
pendency of any such dispute, the Company will continue to pay
Employee his full compensation in effect when the notice giving rise
to the dispute was given (including, but not limited to, Base
Compensation) and continue Employee as a participant in all
compensation, benefit and insurance plans in which Employee was
participating when the notice giving rise to the dispute was given,
until the dispute is finally resolved in accordance with Section 16
hereof, but in no event past the expiration date of this Agreement.
(h) Mitigation. Employee shall not be required to
mitigate the amount of any payment provided for in this Section 7 by
seeking other employment or otherwise, nor shall the amount of any
payment or benefit provided for in this Agreement be reduced by any
compensation earned by Employee as a result of employment by another
employer, self-employment earnings, by retirement benefits, by offset
against any amount claimed to be owing by Employee to the Company, or
otherwise, except that any severance amounts otherwise payable to
Employee pursuant to a Company severance plan or policy for employees
in general shall reduce the amount otherwise payable pursuant to
Section 7(c)(i).
(i) Parachute Payments. Notwithstanding any provision of
this Agreement to the contrary, in the event any payment to be made
and/or any benefits to be provided to or on behalf of Employee
pursuant to this Agreement would constitute an "excess parachute
payment", within the meaning of section 280G of the Internal Revenue
Code, the applicable payment and/or benefits otherwise due hereunder
shall be automatically reduced in whole or in part so that no such
payment or benefit hereunder constitutes such an excess parachute
payment, but only if by reason of such reduction, Employee's net after
tax benefit shall exceed Employee's net after tax benefit if such
reductions were not made. In the event of any such reduction,
Employee may elect which payments and/or benefits shall be reduced.
-8-
<PAGE> 9
The determination of whether any amount or benefit under this
Agreement would be such an excess parachute payment shall be made by
tax counsel selected by the Company and reasonably acceptable to
Employee. The costs of obtaining such determination shall be borne by
the Company.
8. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit Employee's continuing or future participation in any benefit,
bonus, incentive or other plan or program provided by the Company or any of its
affiliated companies and for which Employee may qualify, nor shall anything
herein limit or otherwise adversely affect such rights as Employee may have
under any stock option or other agreements with the Company or any of its
affiliated companies.
9. Assignability. The obligations of Employee hereunder are
personal and may not be assigned or delegated by him or transferred in any
manner whatsoever, nor are such obligations subject to involuntary alienation,
assignment or transfer. The Company shall have the right to assign this
Agreement and to delegate all rights, duties and obligations hereunder, either
in whole or in part, to any parent, affiliate, successor or subsidiary
organization or company of the Company, so long as the obligations of the
Company under this Agreement remain the obligations of the Company.
10. Notice. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed to
the Company at its principal office address, directed to the attention of the
Board with a copy to the Secretary of the Company, and to Employee at
Employee's residence address on the records of the Company or to such other
address as either party may have furnished to the other in writing in
accordance herewith except that notice of change of address shall be effective
only upon receipt.
11. Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
12. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle Employee to compensation from the Company in the same amount and
on the same terms as he would be entitled to hereunder if he terminated his
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used
-9-
<PAGE> 10
herein, the term "Company" shall include any successor to its business and/or
assets as aforesaid which executes and delivers the Agreement provided for in
this Section 12 or which otherwise becomes bound by all terms and provisions of
this Agreement by operation of law.
(b) This Agreement and all rights of Employee hereunder shall
inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts would be
payable to him hereunder if he had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to Employee's devisee, legatee, or other designee or, if there be no
such designee, to Employee's estate.
13. Indemnification. In consideration of the premises and of the
mutual agreements set forth in this Agreement, the parties hereto further agree
as follows:
1. The Company shall pay on behalf of Employee and
Employee's executors, administrators or assigns, any amount which
Employee is or becomes legally obligated to pay as a result of any
claim or claims made against Employee by reason of the fact that
Employee served as an employee, director and/or officer of the Company
or because of any actual or alleged breach of duty, neglect, error,
misstatement, misleading statement, omission or other act done, or
suffered or wrongfully attempted by Employee in Employee's capacity as
an employee, Director and/or Officer of the Company. The payments
that the Company will be obligated to make hereunder shall include
(without limitation) damages, judgments, settlements, costs and
expenses of investigation, costs and expenses of defense of legal
actions, claims and proceedings and appeals therefrom, and costs of
attachments and similar bonds; provided, however, that the Company
shall not be obligated to pay fines or other obligations or fees
imposed by law or otherwise that it is prohibited by applicable law
from paying as indemnity or for any other reason.
2. Costs and expenses (including, without limitation,
attorneys' fees) incurred by Employee in defending or investigating
any action, suit, proceeding or claim shall be paid by the Company in
advance of the final disposition of such matter upon receipt of a
written undertaking by or on behalf of Employee to repay any such
amounts if it is ultimately determined that Employee is not entitled
to indemnification under the terms of this Agreement.
3. If a claim under this Agreement is not paid by or on
behalf of the Company within ninety days after a written claim has
been received by the Company, Employee may at any time thereafter
bring suit against the Company to recover the unpaid amount of the
claim and, if successful in whole or in part, Employee shall also be
entitled to be paid the expense of prosecuting such claim.
4. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of
the rights of recovery of Employee, who
-10-
<PAGE> 11
shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to
enforce such rights.
5. The Company shall not be liable under this Agreement
to make any payment in connection with any claim made against
Employee:
(a) for which payment is actually made to
Employee under an insurance policy maintained by the Company,
except in respect of any excess beyond the amount of payment
under such insurance;
(b) for which Employee is indemnified by the
Company otherwise than pursuant to this Agreement;
(c) based upon or attributable to Employee
gaining in fact any personal profit or advantage to which
Employee was not legally entitled;
(d) for an accounting of profits made from the
purchase or sale by Employee of securities of the Company
within the meaning of Section 16(b) of the Securities Exchange
Act of 1934 and amendments thereto; or
(e) brought about or contributed to by the
dishonesty of Employee; provided, however, that
notwithstanding the foregoing, Employee shall be protected
under this Agreement as to any claims upon which suit may be
brought alleging dishonesty on the part of Employee, unless a
judgment or other final adjudication thereof adverse to
Employee shall establish that Employee committed acts of
active and deliberate dishonesty with actual dishonest purpose
and intent, which acts were material to the cause of action so
adjudicated.
6. Employee, as a condition precedent to his right to be
indemnified under this Agreement, shall give to the Company notice in
writing as soon as practicable of any claim made against him for which
indemnity will or could be sought under this Agreement. Notice to the
Company shall be directed to the Company, 5201 Truxtun, Suite 100,
Bakersfield, California 93309, Attention: Secretary (or such other
address as the Company shall designate in writing to Employee).
Notice shall be deemed received if sent by prepaid mail properly
addressed, the date of such notice being the date postmarked. In
addition, Employee shall give the Company such information and
cooperation as it may reasonably require and as shall be within
Employee's power.
7. Nothing herein shall be deemed to diminish or
otherwise restrict Employee's right to indemnification under any
provision of the Certificate of Incorporation or Bylaws of the Company
or under Delaware law.
-11-
<PAGE> 12
14. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by Employee and such officer as may be
specifically authorized by the Board. No waiver by either party hereto at any
time of any breach by the other party hereto of, or in compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. This Agreement is an integration
of the parties agreement; no agreement or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of Delaware.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
16. Arbitration. Employee shall be permitted (but not required)
to elect that any dispute or controversy arising under or in connection with
this Agreement be settled by arbitration in Los Angeles, California, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. All legal fees and costs incurred by Employee in connection with
the resolution of any dispute or controversy under or in connection with this
Agreement shall be paid by the Company as bills for such services are presented
by Employee to the Company.
-12-
<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this Agreement on
___________, 1996, effective for all purposes as provided above.
MONTEREY RESOURCES, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
EMPLOYEE
----------------------------------------
[Name]
-13-
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated September 17, 1996
relating to the financial statements of the Western Division of Santa Fe Energy
Resources, Inc., and of our report dated September 17, 1996 relating to the
balance sheet of Monterey Resources, Inc., which appear in such Prospectus. We
also consent to the references to us under the headings "Experts" and "Selected
Historical and Pro Forma Financial Information" in such Prospectus. However, it
should be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Historical and Pro Forma Financial Information."
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Houston, Texas
September 17, 1996
<PAGE> 1
[Ryder Scott Company Petroleum Engineers letterhead]
EXHIBIT 23.3
CONSENT OF RYDER SCOTT COMPANY
We hereby consent to the references to our firm in the Prospectus
constituting part of the Registration Statement on Form S-1 of Monterey
Resources, Inc.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
--------------------------------------
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
September 17, 1996