<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1996
REGISTRATION NO. 333-12201
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MONTEREY RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
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<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>
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<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)
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Copies to:
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<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>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
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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. [ ]
The shares of Common Stock are not being registered for the purpose of
sales outside the United States.
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.
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<PAGE> 2
<TABLE>
<CAPTION>
EXHIBITS
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<S> <C>
*5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
10.1 -- Form of Conveyance and Contribution Agreement between Monterey
Resources, Inc. and Santa Fe Energy Resources, Inc.
*10.2 -- Form of 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.
*10.3 -- Form of Agreement Concerning Taxes and Tax Indemnification Upon Spin
Off, between Monterey Resources, Inc. and Santa Fe Energy Resources,
Inc.
*10.4 -- Form of Corporate Services Agreement between Monterey Resources, Inc.
and Santa Fe Energy Resources, Inc.
*10.5 -- Form of Registration Rights and Indemnification Agreement between
Monterey Resources, Inc. and Santa Fe Energy Resources, Inc.
*10.6 -- Form of Monterey Resources, Inc. Incentive Compensation Plan.
*10.7 -- Form of Monterey Resources, Inc. Incentive Stock Compensation Plan
for Key Employees.
*10.8 -- Form of Monterey Resources, Inc. Incentive Stock Compensation Plan
for Nonexecutive Employees.
*10.9 -- Form of Monterey Resources, Inc. Severance Program.
*10.10 -- Form of Monterey Resources, Inc. Savings Investment Plan.
*10.11 -- Form of Monterey Resources, Inc. Deferred Compensation Plan.
*10.12 -- Form of Monterey Resources, Inc. Employee Stock Ownership Plan.
*10.13 -- Form of Employment Agreement between Monterey Resources, Inc. and R.
Graham Whaling.
*10.14 -- Form of Employment Agreement between Monterey Resources, Inc. and
certain executive officers.
*11.1 -- Computation of Earnings per Common Share
*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.
</TABLE>
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* Previously filed.
(b) Financial Statement Schedules
Schedule VIII -- Valuation and Qualifying Accounts.
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 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,
II-3
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Houston, State of Texas, on November 12, 1996.
MONTEREY RESOURCES, INC.
By: /s/ R. GRAHAM WHALING
------------------------------------
R. Graham Whaling
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
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<CAPTION>
SIGNATURE TITLE DATE
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<S> <C> <C>
/s/ R. GRAHAM WHALING Chairman of the Board, November 12, 1996
- --------------------------------------------- Chief Executive Officer
R. Graham Whaling and Director (Principal
Executive and Financial
Officer)
/s/ SCOTT D. HEFLIN Controller November 12, 1996
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Scott D. Heflin
/s/ JAMES L. PAYNE* Director November 12, 1996
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James L. Payne
/s/ HUGH L. BOYT* Director November 12, 1996
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Hugh L. Boyt
/s/ CRAIG A. HUFF* Director November 12, 1996
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Craig A. Huff
/s/ MICHAEL A. MORPHY* Director November 12, 1996
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Michael A. Morphy
/s/ ROBERT F. VAGT* Director November 12, 1996
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Robert F. Vagt
/s/ ROBERT J. WASIELEWSKI* Director November 12, 1996
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Robert J. Wasielewski
*By: /s/ TERRY L. ANDERSON
- ---------------------------------------------
Terry L. Anderson
Attorney-in-fact
</TABLE>
II-5
<PAGE> 4
INDEX TO EXHIBITS
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<CAPTION>
EXHIBITS DESCRIPTION
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<S> <C>
*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.
*11.1 -- Computation of Earnings per Common Share.
*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.
</TABLE>
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* Previously filed.
<PAGE> 1
EXHIBIT 10.1
CONVEYANCE AND CONTRIBUTION AGREEMENT
This Conveyance and Contribution Agreement (this "Agreement"),
dated effective 7:00 a.m., Pacific Time, November 1, 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, payments, and other
obligations of Santa Fe relating to or arising out of the Subject Assets or the
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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 and operations;
(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, for each Policy, the
accounting for premiums, retrospectively-rated premiums, defense costs,
indemnity payments, deductibles, and retentions as appropriate under each such
Policy, and the distribution of Insurance Proceeds under each such Policy.
"Insurance Proceeds" means, for 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 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.
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"Insured Claims" means, for a Policy, those claims, losses,
liabilities, costs, and expenses that, individually or in the aggregate, are
covered by such 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
the limits of such Policy.
"IPO Date" means the closing date for the initial public
offering of the common stock of Monterey.
"New Credit Facility" means the note agreement described in
item 4 in Exhibit A.
"Olinda Property" is defined in Section 3.14.
"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, a governmental agency, an association or
any other entity.
"Policies" means insurance policies and contracts of indemnity
described in Exhibit G.
"Restriction" is defined in Section 3.5.
"Retained Liabilities" means (a) the liabilities, obligations,
and matters of Santa Fe described in Exhibit H and (b) all losses, costs,
expenses, fines, penalties, payments, and other obligations related to the
Excluded Assets.
"Santa Fe Group" is defined in Section 3.4(a).
"Santa Fe Liabilities" means all liabilities, costs, expenses,
fines, penalties, payments, and obligations of Santa Fe, other than the Assumed
Liabilities.
"Series G Notes" means the senior notes described in item 3 in
Exhibit A.
"Specific Conveyances" is defined in Section 3.6.
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"Series G Notes" means the senior notes described in item 3 in
Exhibit A.
"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 first
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:
(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 (collectively, the "Lands");
(b) "All right, title, and interest of Santa Fe in and to
(i) the estates created by the oil and gas leases (and the undivided
interests therein), operating rights, mineral servitudes, and fee,
mineral, royalty, and overriding interests of Santa Fe in the Business
Area, including those described in, or created by the instruments
described in, Exhibit D and (ii) the easements, permits, licenses,
rights-of-way, surface leases, and other surface rights held by Santa
Fe in the Business Area, including those described in, or created by
the instruments described in, Exhibit D (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
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 E;
(e) All right, title, and interest of Santa Fe in all
improvements, 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
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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, 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 other 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;
(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 F;
(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
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(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).
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 Interest
attached hereto as Exhibit I.
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:
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(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 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.
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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 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 RELEASE,
PROTECT, DEFEND, INDEMNIFY, AND HOLD HARMLESS SANTA FE AND ITS OFFICERS,
DIRECTORS, EMPLOYEES, AND REPRESENTATIVES (COLLECTIVELY, "SANTA FE GROUP") 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
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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 RELEASE,
PROTECT, DEFEND, INDEMNIFY, AND HOLD HARMLESS MONTEREY 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 EXCLUDED ASSETS, THE RETAINED LIABILITIES, OR THE SANTA FE 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.
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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 "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.
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3.8 Property Taxes and Transfer Fees. All (i) sales,
use, recording, and other similar property transfer fees and charges incurred
in transferring the Subject Assets to Monterey and (ii) 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
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
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such bonds. Monterrey 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.
(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, except,
in each case, as provided in Section 3.11(d) below. 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 and
the Subject Assets. Monterey shall pay such amounts within 15 days of
receiving Santa Fe's invoice.
(d) Claims After the Spin-Off Date. The Policies will
automatically cease and terminate with respect to the Business on the Spin-Off
Date for any occurrences after the Spin-Off Date. For each Insured Claim
asserted or arising after the Spin-Off Date that relates to occurrences prior
to the Spin-Off Date in connection with the Business, Santa Fe shall at the
time such claim is asserted be deemed to transfer, without need of further
documentation, to Monterey any and all rights of an insured party under the
applicable Policy with respect to such Insured Claim, specifically including
rights of indemnity and the right to be defended by or at the expense of the
insurer. The preceding sentence shall not, however, be deemed to constitute
(or to reflect) the assignment of any of the Policies to Monterey. Monterey
shall have the right to assert a claim under a Policy relating to an occurrence
prior to the Spin-Off Date in accordance with the terms of such Policy. Santa
Fe agrees not to amend, cancel, or terminate any Policy in a manner that
materially and adversely affects Monterey's right to assert a claim thereunder
that relates to an occurrence prior to the Spin-Off Date. Additionally, after
the Spin-Off Date, Santa Fe shall, to the extent reasonably practicable,
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assist Monterey in the recovery of any amounts to which Monterey is validly
entitled under any of the Policies on account of Insured Claims.
Notwithstanding the foregoing, Santa Fe does not assume any liability and shall
not incur any liability to Monterey or its affiliates in agreeing to transfer
its rights under any Policy or to provide 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 in transferring such rights or 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. If and
to the extent Santa Fe receives Insurance Proceeds that relate to Assumed
Liabilities asserted against any member of the Santa Fe Group, Santa Fe may
directly apply such Insurance Proceeds to such Assumed Liabilities without
distribution to Monterey. If and 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.
(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 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 Transaction Costs. Monterey shall pay and reimburse
Santa Fe for all out-of-pocket costs and expenses incurred by Santa Fe in
connection with the conveyance of the Subject Assets to Monterey, the initial
public offering of Monterey, and the Spin-Off, including those incurred for (i)
the consent solicitation of the holders of Santa Fe's 11% Senior Subordinated
Debentures due 2004 in connection with certain amendments to such debentures,
(ii) the exchange of the Series G Notes for the New Credit Facility, and (iii)
pursuit by Santa Fe of a ruling from the Internal Revenue Service regarding the
tax-free nature of the Spin-Off, including, in each case, all legal,
accounting, printing, underwriting, engraving, consulting, and other third
party charges and expenses.
3.14 Olinda Property.
(a) Purchase and Sale Agreement. Santa Fe is a party to
that certain Agreement for Purchase and Sale of Real Property and Escrow
Instructions with CWC, Inc., a California corporation, dba SUNCAL COMPANIES,
dated August 19, 1996 (the "Purchase and Sale Agreement"), pursuant to which
SUNCAL agreed to buy and Santa Fe agreed to sell certain real property and
other rights and interests in Orange County, California (the "Property") as
more particularly described in the Olinda Purchase Agreement.
(b) Transfer of Notes to Monterey. If the Close of
Escrow (as defined in the Olinda Purchase Agreement) occurs on or before August
1, 1997, Monterey shall purchase, and Santa Fe shall sell, any promissory notes
given by the buyer of the Property ("Buyer") as consideration for purchase of
the Property (collectively, the "Notes") along with all liens, security
interests, and other rights securing repayment of the Notes by Buyer
(collectively, the "Property Liens"), for a purchase price equal to aggregate
face value of the Notes (the "Note Purchase Price") if the total face value of
the Notes does not exceed $10,000,000. The closing of the purchas and sale of
the Notes shall occur in the offices of Santa Fe within 10 business days of the
date of the Closing of Escrow. At the closing, Monterey shall wire transfer the
Note Purchase Price to Santa Fe in immediately available funds and assume all
obligations in connection with the Olinda Property and the Notes, the Property
Liens and Santa Fe's remaining rights under the Olinda Purchase Agreement shall
be assigned to Monterey without any warranties or representations by Santa Fe.
On and after such closing, the defined term "Subject Assets" shall be deemed to
exclude, the Olinda Property for all purposes under this Agreement.
(c) Transfer of Property to Monterey. If the Close of
Escrow fails to occur on or before August 1, 1997, Monterey shall purchase, and
Santa Fe shall sell, the Property for a purchase price of $23,000,000 (the
"Property Purchase Price") on the terms provided in this Agreement. The closing
of the purchase and sale of the Property shall occur in the offices of Santa Fe
on or before August 15, 1997. At the closing, Monterey shall wire transfer the
Property Purchase Price to Santa Fe in immediately available funds and the
Property shall be conveyed and transferred to Monterey by a Specific Conveyance
as provided herein and Santa Fe's remaining rights under the Olinda Purchase
Agreement shall be assigned to Monterrey. On and after such closing, the
defined term "Subject Assets" shall be deemed to include, and the defined term
"Excluded Assets" shall be deemed to exclude the Olinda Property for all
purposes under this Agreement.
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<PAGE> 15
3.15 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.
3.16 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.
3.17 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.
3.18 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.
3.19 Construction of Agreement. In construing this
Agreement, the following principles shall be followed:
(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 and the exhibits, regardless of whether it appears
before or after the place in this Agreement or the exhibits 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.
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3.20 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.
3.21 Survival. This Agreement shall survive the execution
and delivery of the Specific Conveyances.
3.22 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.
3.23 Severability. If any provision of this Agreement is
held to be unenforceable or invalid, the remaining provisions of this Agreement
shall remain in full force and effect.
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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:
--------------------------------
Page 17
<PAGE> 18
LIST OF EXHIBITS
Exhibit A - Assumed Liabilities
Exhibit B - Businesses
Exhibit C - Excluded Assets
Exhibit D - Surface Interests, Leasehold Interests, Mineral
Interests, and Other Rights and Interests
Exhibit E - Contracts
Exhibit F - Certain Intangible Property Rights
Exhibit G - Insurance Policies
Exhibit H - Retained Liabilities
Exhibit I - Reservation of Production-Payment Interest
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Exhibit A
ASSUMED LIABILITIES
1. Series E Notes. Series E 10.23% Senior Notes due March 31, 1997 in
the principal amount of $35,000,000 issued by Santa Fe Energy
Resources, Inc. pursuant to the Note Agreement dated as of March 31,
1990 among Santa Fe Energy Resources, Inc. and the purchasers party
thereto (as amended, the "Note Agreement")
2. Series F Notes. Series F 10.23% Senior Notes due March 31, 1998 in
the principal amount of $35,000,000 issued by Santa Fe Energy
Resources, Inc. pursuant to the Note Agreement.
3. Series G Notes. Series G 10.61% Senior Notes due March 31, 2005 in the
principal amount of $175,000,000 issued by Santa Fe Energy Resources,
Inc. pursuant to the Note Agreement.
4. New Credit Facility. Repayment of the $16 million borrowed by Santa Fe
under the $75 million Credit Facility between Santa Fe Energy
Resources, Inc. and Monterey Resources, Inc., as borrowers, and The
Chase Manhattan Bank, as agent for the lenders that are parties to the
Credit Facility.
5. New Note Agreement. All obligations and liabilities of Santa Fe
under that certain Note Agreement among Monterey Resources, Inc., and
the purchasers party thereto pursuant to which Monterey Resources, Inc.
issued its 10.61% Senior Notes due March 31, 2005 in the principal
amount of $175,000,000.
6. Advisor's Fee. All amounts that become due by Santa Fe to Petrie
Parkman & Co., Inc. and Chase Securities Inc. under paragraphs 3 and
4 of that certain letter agreement, dated June 13, 1996, among Petrie
Parkman & Co., Inc., Chase Securities Inc., and Santa Fe Energy
Resources, Inc.
<PAGE> 20
7. Litigation. All liabilities and obligations of the Santa Fe Group in
connection with the following lawsuits, claims, proceedings, actions,
and disputes:
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Litigation Case No.
---------- --------
i. Insured cases
1. Brock, Jan 228972 SPC
2. Bullard, Curtis vs. SFER, Enron, Kelt & Geo Pet. BC 133530
3. Johnson, Chancy SPC 231573
4. Torgerson Leonard & Bonnie; Knapp, Palmer BC 153847
vs. SFEOP, SFPEC, Kelt, Geo & Marmac
ii. Uninsured cases.
1. Abulo, Fufo, et al. vs. Chevron et al. BC 112185
2. Arviso et al vs. "21" International Holdings BC 142247
(includes SFER)
(b) Environmental Matters
1. EPC Eastside Landfill CD-WU9508-06
2. National Railroad vs. BPI Int'l (Petro Lewis) 94-261 WMB
3. Operating Industries, Inc. (OII) CD-WU9508-07
4. Santa Fe Springs Waste Disposal, Inc. CD-WU9508-08
(c) Disputes and other claims
1. California Steam Service D-WU9508-03
2. Robinson Living Trust D-WU9508-04
</TABLE>
8. Retirement Plan for Hourly-Rated Employees. All liabilities and
obligations of Santa Fe under and pursuant to that certain Santa Fe
Energy Resources, Inc. Retirement Plan for Hourly-Rated Employees,
which plan is maintained pursuant to that certain collective bargaining
agreement dated as of February 1, 1996 (the "Union Contract") between
The Oil, Chemical and Atomic Workers International Union/AFL-CIO
("OCAW") and Santa Fe Energy Resources, Inc.
9. Defined Contribution Plan for Hourly-Rated Employees. All liabilities
and obligations of Santa Fe under and pursuant to that certain Santa Fe
Energy Resources, Inc. Defined Contribution Plan for Hourly-Rated
Employees, which plan is maintained pursuant to the Union Contract
between OCAW and Santa Fe Energy Resources, Inc.
<PAGE> 21
Exhibit B
BUSINESSES
1. Predecessors of Santa Fe. The businesses and operations conducted in
the Business Area by the following companies:
o Chanslor - Canfield Midway Oil Company, Inc.
o Chanslor - Western Oil and Development Company, Inc.
o Santa Fe Energy Company
o Santa Fe Natural Resources, Inc.
o Santa Fe Energy Operating Partners, L.P.
o Santa Fe Energy Partners, L.P.
o Santa Fe Pacific Exploration Company
o Bravo Oil Company
o Coline Gasoline Corporation
o The Los Angeles Corporation
2. Other Businesses. The following businesses and operations conducted
in the Business Area by Santa Fe or its predecessors:
o oil, gas, and other minerals exploration and development
o oil and gas marketing, storage and transportation
o real estate management and development
o electrical power generation
<PAGE> 22
Exhibit C
EXCLUDED ASSETS
[Attached behind this page.]
<PAGE> 23
Exhibit D
SURFACE INTERESTS, LEASEHOLD INTERESTS, MINERAL INTERESTS,
AND OTHER RIGHTS AND INTERESTS
[Attached behind this page.]
<PAGE> 24
Exhibit E
CONTRACTS
[Attached behind this page.]
<PAGE> 25
Exhibit F
CERTAIN INTANGIBLE PROPERTY RIGHTS
1. NuCure, Inc.
1,739 shares of common stock of NuCure, Inc., a Delaware
corporation, certificate No. 54, par value $0.01.
2. Coalition Undertaking Remedial Efforts, Inc.
1,339 shares Coalition Undertaking Remedial Efforts, Inc., a
Delaware corporation, certificate No. 19, par value $0.01.
3. South Belridge Limited Partnership.
Santa Fe's general partnership interest in the South Belridge
Limited Partnership, a Texas limited partnership, formed under
Agreement of Limited Partnership dated October 31, 1990.
<PAGE> 26
Exhibit G
INSURANCE POLICIES
[Attached behind this page.]
<PAGE> 27
Exhibit H
RETAINED LIABILITIES
1. Retirement Plan. All liabilities and obligations under the Santa Fe
Retirement Income Plan that, as of the Spin-Off Date, are attributable
to those participants in the plan who are employees of Monterey.
2. Supplement Plan. All liabilities and obligations under the Santa Fe
Energy Resources, Inc. Supplemental Retirement Plan that, as of the
Spin-Off Date, are attributable to those participants in such plans who
are employees of Monterey.
3. Other Post-Employment Benefits. All liabilities and obligations for
other post-retirement benefits other than pensions attributable to
employees of Monterey who retire prior to the Spin-Off Date.
4. Tax Indemnity Agreement. All liabilities and obligations of Santa Fe
under the certain First Amended and Restated Spin-Off Tax
Indemnification Agreement, dated November 26, 1990, between Santa Fe
Energy Resources, Inc. and Santa Fe Pacific Corporation.
<PAGE> 28
Exhibit I
RESERVATION OF PRODUCTIONS--PAYMENT INTEREST
[Attached behind this page.]
<PAGE> 29
Exhibit I
RESERVATION OF PRODUCTION PAYMENT INTEREST
KERN COUNTY, CALIFORNIA
This Reservation of Production Payment Interest (this "Reservation")
sets forth the terms and conditions of the production payment reserved and
retained by Santa Fe Energy Resources, Inc., a Delaware corporation ("Santa
Fe"), in that certain Conveyance and Contribution Agreement, dated effective as
of the IPO Date (as defined therein), from Santa Fe to Monterey Resources,
Inc., a Delaware corporation ("Monterey), to which this Reservation is attached
as Exhibit I.
Reservation
Effective at 7:00 a.m., Pacific Time, as of the IPO Date (the "Effective
Time"), Santa Fe hereby RESERVES AND RETAINS, as a production payment, a
variable undivided percentage interest (the "Production Payment Percentage," as
hereinafter determined) in and to the Subject Interests and the Subject
Hydrocarbons as shall be required to cause Santa Fe to receive certain dollar
sums each month, as hereinafter provided, until the end of the Production
Payment Period (as hereinafter defined), subject to the provisions of this
Reservation (the "Production Payment Interest").
ARTICLE 1
DEFINED TERMS
In this Reservation, the following capitalized terms have the following
meanings:
1.1 "Action" means an action, arbitration, demand, inquiry,
investigation, suit, or other proceeding by or before (a) a court, agency, or
commission of Government; (b) an arbitrator or arbitral panel; or (c) any other
Person with authority to hear and decide such matters.
Reservation of Production Payment Interest
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1.2 "Affiliate" means, for a Person, another Person that (directly or
indirectly through one or more intermediaries) controls, is controlled by, or
is under common control with that Person. For purposes of this definition,
"control" refers to (a) the ownership, directly or indirectly, of more than
fifty percent (50%) of the voting shares of another Person or (b) the power to
direct the policies or management of another Person, whether through control of
voting shares, by contract, or otherwise.
1.3 "Agreed Rate" means a rate of interest equal to eight percent
(8%) per annum, compounded monthly.
1.4 "Applicable Law" means a Governmental law, statute, ordinance,
decree, requirement, order, judgment, rule, regulation, standard,
determination, license, or permit that governs or affects the Person, property,
or activity in question at the time in question, including federal laws that
govern ownership and operation of oil and gas leases, and the orders and
regulations of the Minerals Management Service, United States Department of the
Interior.
1.5 "Barrel" means 42 U.S. gallons.
1.6 "Btu" means British thermal unit.
1.7 "Costs and Risks of Operating the Subject Property" is defined in
Section 5.2.
1.8 "Demand" means an adverse demand or a threatened Action.
1.9 "Designated Event" is defined in Section 6.1.
1.10 "Effective Time" is defined in the Reservation Clause.
1.11 "Encumbrance" means a mortgage, lien, unpaid debt for which a
statutory lien may be asserted if the debt becomes delinquent, security
interest, pledge, charge, or other encumbrance.
1.12 "Equipment and Facilities" means wellheads, tanks, gathering
lines, fixtures, equipment, tangible personal property, goods, facilities,
supplies, inventory, fixtures, and improvements located
Reservation of Production Payment Interest
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on the Subject Property or used or held for use for the production, gathering,
treatment, processing, storage, disposal, or transportation on or from the
Subject Property of Hydrocarbons, water, or other substances produced with
them, including all accessions, additions, and attachments to other Equipment
and Facilities.
1.13 "Government" means an agency, board, bureau, commission, court,
department, government, or instrumentality of (a) the United States of America;
(b) a state, commonwealth, territory, Indian tribe, or possession of the United
States of America; or (c) a county, parish, municipality, district, or other
governmental subdivision or entity of, or in, a state of the United States of
America.
1.14 "Hydrocarbons" means natural gas, oil, condensate, natural gas
liquids, and other liquid and gaseous hydrocarbons produced from or allocated
to the Subject Property.
1.15 "Lands" is defined as part of the definition of "Subject
Property."
1.16 "MMBtu" means one million British thermal units (1,000,000 Btu)
and refers to the heating value of a quantity of natural gas.
1.17 "Monterey" is defined in the first grammatical paragraph of this
Reservation. The term includes Monterey's successors and assigns.
1.18 "Monterey's Make-Up Production" means, for the Subject Interests,
Hydrocarbons in excess of the quantity that Monterey is otherwise entitled to
produce and take during a Production Month, but that Monterey (or an Affiliate
of Monterey) lawfully produces and takes under a gas-balancing agreement, unit
agreement, or other similar contract (or under a statute or common-law
principle with a similar effect) to recover prior Third-Party Overproduction.
1.19 "Monterey's Nonconsent Production" means, for the Subject
Interests, Hydrocarbons that are relinquished to Monterey (or an Affiliate of
Monterey) by another Person during a
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Production Month, and are produced and taken by Monterey (or an Affiliate of
Monterey) under an operating agreement or other similar contract that provides
for the relinquishment of Hydrocarbons by Persons who elect not to participate
in a proposed operation or expenditure to Persons who do elect to participate
in the operation or expenditure.
1.20 "Monterey's Overproduction" means, for the Subject Interests,
Hydrocarbons in excess of the quantity that Monterey is otherwise entitled to
take during a Production Month, but that Monterey (or an Affiliate of Monterey)
lawfully produces and takes under a gas-balancing agreement, unit agreement, or
other similar contract that is a Permitted Encumbrance (or under a statute or
common-law principle with a similar effect) as overproduction subject to being
recovered by another Person as Third-Party Make-Up Production.
1.21 "Net Revenue Interest" means, for the Subject Property,
Monterey's interest (expressed as a fraction or percentage) in and to the
Hydrocarbons in and under, and that may be produced and saved from or allocated
to the Subject Property net of Production Burdens that burden the Subject
Property.
1.22 To "Operate" the Subject Property (or other property) means to
perform operations necessary or useful to the ownership, maintenance, and
operation of the Subject Property (or other property) (or to cause them to be
performed), including (a) exploring and developing the Subject Property; (b)
drilling, testing, completing, equipping, and operating Wells on the Subject
Property; (c) installing, operating, maintaining, repairing, and replacing
Equipment and Facilities on or for the Subject Property; and (d) producing,
gathering, handling, treating, dehydrating, processing, storing, transporting,
and marketing Subject Hydrocarbons. "Operations" refers to such ownership and
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operations. When "operate" and "operations" are not capitalized, they shall
have their natural and ordinary meanings.
1.23 "Party" means Monterey or Santa Fe.
1.24 "Permitted Encumbrance" means, for the Subject Property,
the following:
(a) the Production Payment Interest;
(b) a contract, or other instrument or agreement described in
Exhibit A, insofar as it covers and affects the Subject Property;
(c) a division order terminable without penalty on no more than
thirty (30) days' notice, so long as the Net Revenue Interest reflected
in the division order is consistent with the Net Revenue Interest
stated in Exhibit A;
(d) an Encumbrance under an operating agreement, or another
contract that is of a type and nature customary in the oil and gas
industry and that, if entered into after the Effective Time, is
expressly subject and inferior to this Reservation, to secure payment of
an amount that is not delinquent or, if delinquent, is being contested
in good faith in the ordinary course of business;
(e) an Encumbrance under Applicable Law to secure a payment to
a mechanic, materialman, employee, contractor, or other Person that is
not delinquent or, if delinquent, is being contested in good faith in
the ordinary course of business;
(f) an Encumbrance under Applicable Law to secure Taxes that
are not delinquent or, if delinquent, are being contested in good faith
in the ordinary course of business;
(g) a surface or subsurface easement, right-of-way, servitude,
permit, lease, restriction, or other similar right or impediment that
does not interfere materially with the operation, value, or use of the
Subject Interest;
(h) an Encumbrance that Santa Fe consents to in writing; and
(i) a right reserved to or vested in a Government to control or
regulate a property in any manner, and each Applicable Law;
all to the extent, and only to the extent, that the Permitted Encumbrance is
otherwise enforceable against Monterey or the Subject Property, without
recognizing, expressly or by implication, any right
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or interest of, or the priority of any lien or security interest that
secures, any Third Party that such Third Party does not otherwise
lawfully possess or enjoy.
1.25 "Person" means a natural person, corporation, partnership, trust,
estate, joint stock company, association, or other legal person or entity.
1.26 "Primary Sum" is defined in Section 3.3(a).
1.27 "Production Burden" means a royalty interest, overriding royalty
interest, production payment interest, net profits interest, or other similar
interest that burdens, is measured by, or is payable out of the production of
Hydrocarbons, the value of Hydrocarbons, or proceeds of the sale or other
disposition of Hydrocarbons.
1.28 "Production Month" means a period during the Production Payment
Period from 7:00 a.m., Pacific Time, on the first day of a calendar month to
7:00 a.m., Pacific Time, on the first day of the next calendar month.
1.29 "Production Payment" means a payment made, or to be made, by
Monterey to Santa Fe on account of the Production Payment Interest, as further
defined in Section 2.2.
1.30 "Production Payment Interest" means the limited-term interest (in
the nature of an overriding royalty interest) reserved in this Reservation in
and to the Subject Hydrocarbons and the proceeds therefrom.
1.31 "Production Payment Percentage" means the percentage determined
each Production Month under Section 2.1.
1.32 "Production Payment Period" is defined in Section 3.3.
1.33 "Prudent Operator" means a Person that acts (a) as a reasonably
prudent operator would act in owning and operating its own property under the
same or similar circumstances; (b) in a good
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and workmanlike manner, in accordance with good engineering practice, and in
accordance with generally accepted industry practices and standards; (c) in
accordance with Applicable Law; and (d) without regard to the existence,
financial effect, or other effect of the Production Payment Interest.
1.34 "Reservation" is defined in the first grammatical paragraph of
this Reservation.
1.35 "Reservation Clause" means the second grammatical paragraph of
this Reservation.
1.36 "Santa Fe" is defined in the first grammatical paragraph of this
Reservation. The term includes Santa Fe's successors and assigns.
1.37 "Santa Fe Group" is defined in Section 5.3.
1.38 "Subject Interests" means:
(a) the undivided Working Interest and Net Revenue Interest
described in Exhibit A for the Subject Property; and
(b) all other rights, titles, and interests (of whatever kind
or character) of Monterey in and to, and that may be derived from, the
Subject Property, even if the size, nature, or other characteristics of
the Subject Interests are incorrectly or incompletely described in
Exhibit A.
"Subject Interests" includes enlargements of the Subject Interests that result
at any time from reversions (for example, at "payout" under a contract), the
discharge or removal of Encumbrances and Production Burdens, expiration of
"nonconsent" relinquishments, and other events.
1.39 "Subject Hydrocarbons" means the quantity of Hydrocarbons
produced and saved from the Subject Property during a Production Month, as
determined below:
(a) Monterey's Working Interest Share of Hydrocarbons produced
and saved from the Subject Property during the Production Month, (A)
excluding Hydrocarbons lost in production and (B) excluding Hydrocarbons
used by the operator, acting as a Prudent Operator, solely for
production operations on or for the benefit of the Subject Property,
such as Hydrocarbons so
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used for fuel, gas injection, pressure maintenance, or recycling or
repressuring operations; less
(b) Third-Party Make-Up Production, Third-Party Nonconsent
Production, and Third-Party Overproduction, but including Monterey's
Make-Up Production, Monterey's Nonconsent Production, and Monterey's
Overproduction.
1.40 "Subject Property" means:
(a) the "Lands"--the lands described in Exhibit A; and
(b) the "Units"--oil and gas pools, units, and communitized
areas that include any Lands, including Units formed by an agency of
Government, Units formed under an order, regulation, rule, approval,
decision, or order of an agency of Government, and Units formed by
voluntary agreement.
1.41 "Taxes" means taxes and assessments on or against, or measured
by, the value of the Subject Property, the value or volume of production from
or reserves in the Subject Property, or Operations on or in connection with the
Subject Property, including ad valorem taxes, property taxes, production taxes,
severance taxes, pipeline taxes, excise taxes, occupation taxes, windfall
profit taxes, sales and use taxes, and other similar taxes, but excluding
income taxes, transfer taxes, inheritance taxes, estate taxes, franchise taxes,
and other similar taxes. "Taxes" includes penalties and interest on overdue
Taxes.
1.42 "Third Party" means a Person other than a Party.
1.43 "Third-Party Make-Up Production" means, for the Subject
Interests, Hydrocarbons that Monterey is entitled to produce and take during a
Production Month, but that another Person, not an Affiliate of Monterey,
lawfully takes under a gas-balancing agreement, unit agreement, or other
similar contract that is a Permitted Encumbrance (or under a statute or
common-law principle with
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similar effect) to recover prior Monterey's Overproduction, but only if and to
the extent that the prior Monterey's Overproduction either (a) existed at the
Effective Time and was fully disclosed in writing to Santa Fe before the
Effective Time or (b) has occurred during the Production Payment Period. Gas
taken during the Production Payment Period by another Person to recover
Monterey's Overproduction, if any, that occurred during the period between the
Effective Time and the beginning of the Production Payment Period is not
Third-Party Make-Up Production.
1.44 "Third-Party Nonconsent Production" means, for the Subject
Interests, Hydrocarbons that are lawfully relinquished by Monterey and produced
and taken by another Person, not an Affiliate of Monterey, under an operating
agreement or other similar contract that is a Permitted Encumbrance and that
provides for the relinquishment of Hydrocarbons by Persons who elect not to
participate in a proposed operation or expenditure to Persons who do elect to
participate in the operation or expenditure, if and to the extent that Monterey
acted as a Prudent Operator in electing not to participate in a proposed
operation or expenditure.
1.45 "Third-Party Overproduction" means, for the Subject Interests,
Hydrocarbons that Monterey is entitled to produce and take during a Production
Month, but does not take, and that another Person, not an Affiliate of
Monterey, lawfully takes under a gas-balancing agreement, unit agreement, or
other similar contract (or under a statute or common-law principle with
similar effect) as overproduction subject to being recovered by Monterey as
Monterey's Make-Up Production, if and to the extent that Monterey acted as
Prudent Operator in permitting the overproduction to occur.
1.46 "Unit" is defined as part of the definition of "Subject Property."
1.47 "Well" means a gas well, oil well, condensate well, natural gas
well, water source well, injection well (for injection of water, recycling of
natural gas, injection of substances used in secon-
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dary and tertiary recovery operations, and injection of other substances), or
other well located (in each case) on the Subject Property, whether producing,
operating, shut in, or temporarily abandoned.
1.48 "Working Interest" means, for each Subject Interest, the
fractional share of the Costs and Risks of Operating the Subject Property that
Monterey is at any time obligated to pay and bear.
ARTICLE 2
THE PRODUCTION PAYMENT INTEREST
2.1 Production Payment Percentage. The Production Payment Percentage
for any Production Month shall be equal to 100% or such smaller percentage of
the Subject Hydrocarbons, and the proceeds received by Monterey from the sale
or other disposition thereof, which, when paid to and applied by Santa Fe each
month as provided herein, shall cause the amounts shown in Section 3.3(b), (c),
and (d) to be paid in full and shall, in addition, cause the unpaid balance of
the Primary Sum as of the end of such Production Month to equal the amount
shown in Schedule 1 as of the last day of each such Production Month.
2.2 Payment of Production Payments. So long as no Designated Event
has occurred and is continuing and Santa Fe has not exercised its right under
Section 6.2 to collect all proceeds from the sale or other disposition of the
Subject Hydrocarbons directly, (a) Monterey may collect all revenues from the
sale or other disposition of Subject Hydrocarbons; (b) such revenues shall be
held in trust by Monterey and not commingled with any other funds of Monterey;
and (c) on or before the thirtieth (30th) day after the end of each Production
Month, Monterey shall pay to Santa Fe the proceeds received from the sale or
other disposition of the Production Payment Percentage of the
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Subject Hydrocarbons for each such Production Month (each a "Production
Payment"), without offset or deduction, using the revenues held in trust.
2.3 Underpayment. The amount of each Production Payment shall be
deemed to have been applied as of the last day of each Production Month as
follows:
(a) first, to the amounts referred to in Section 3.3(d);
(b) second, to the amounts referred to in Section 3.3(b) and
(c); and
(c) third, to the reduction of the unpaid balance of the
Primary Sum.
If the amount of any Production Payment is insufficient to cover the full
amount specified in clause (a) and (b) above, then the unpaid balance of the
Primary Sum shall be increased by the amount of the deficiency.
2.4 Overpayment. If Monterey overpays any Production Payment,
inadvertently or otherwise, Santa Fe is not obligated to return the
overpayment. Instead, the overpayment will be treated as a prepayment of the
next Production Payment.
2.5 Royalties, Costs, and Risks. The Production Payment Interest
shall be free of, and Santa Fe shall never be liable, by virtue of its
ownership of the Production Payment Interest for paying or bearing (or for
suffering a reduction of a Production Payment on account of), (a) Production
Burdens (including lessor's royalty); (b) the Costs and Risks of Operating the
Subject Property; or (c) Taxes.
ARTICLE 3
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TERM
3.1 Term. The term of the Production Payment Interest begins at the
Effective Time and continues in full force and effect without interruption
until the Production Payment Interest is fully discharged and the Production
Payment Period ends. At the end of the Production Payment Period, the
Production Payment Interest shall automatically terminate and vest in Monterey.
3.2 Evidence of Termination. On termination of the Production
Payment Interest, Santa Fe shall execute, acknowledge, and deliver to Monterey
appropriate documents to evidence the termination, if (a) Monterey prepares and
tenders the documents to Santa Fe and (b) and Santa Fe's legal counsel approves
the documents.
3.3 Production Payment Period. The "Production Payment Period"
begins at 7:00 a.m., Pacific Time, on November 1, 1996, and continues without
interruption until Santa Fe has received Production Payments equal to:
(a) the original principal amount of $30,000,000 (the "Primary
Sum"); plus
(b) as additional principal, all amounts payable by Monterey to
an indemnified member of the Santa Fe Group; plus
(c) as additional principal, all costs and expenses paid or
incurred by Santa Fe in collecting Production Payments due under this
Reservation and in enforcing Santa Fe's rights under this Reservation,
including attorneys' fees and expenses and, if a lawsuit is filed, the
costs of court; plus
(d) interest on the principal amounts outstanding at any time,
at the Agreed Rate per annum, based on a 365- or 366-day year (as
appropriate), beginning on (and including) the day of the Effective
Time, through (but excluding) the day on which the Production Payment
Period ends.
ARTICLE 4
OPERATIONS
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4.1 Monterey's Obligations.
4.1.1 General Rule. From the Effective Time through the
termination of the Production Payment Period (including the period after the
Effective Time and before the beginning of the Production Payment Period),
Monterey shall perform the obligations under this Section (or cause them to be
performed).
4.1.2 Prudent Operator Standard. Some (but not all)
obligations under this Section are qualified by reference to a Prudent
Operator. Monterey shall not be liable to Santa Fe for failure to perform any
such obligation (a) if, or to the extent that, a Prudent Operator would not
have performed it, and (b) if Monterey promptly notifies Santa Fe in writing of
Monterey's nonperformance or limited performance. In a dispute about any such
action, however, the burden shall be on Monterey to show that it acted as
Prudent Operator.
4.1.3 The Obligations. The obligations of Monterey under
this Section are:
(a) Acting as a Prudent Operator, Monterey shall:
(1) Operate the Subject Property and continuously
produce Hydrocarbons from the Subject Property at rates not in
excess of the maximum efficient rates of flow for the Wells on
the Subject Property or the allowable rates of production under
Applicable Law, and not lower than the rates necessary to prevent
the migration of Hydrocarbons from the Subject Property and to
prevent or minimize the accrual of Third-Party Overproduction;
(2) provide all Wells and Equipment and Facilities that
are necessary or useful for the operation of the Subject
Property; keep the Wells and Equipment and Facilities in good and
effective working condition; and provide all maintenance,
repairs, replacements, additions and improvements needed for such
purpose;
(3) taking account of the resulting insurance proceeds,
if any, promptly redrill, rebuild, reconstruct, repair, restore,
or replace any Well or Equipment and Facilities that are lost or
damaged;
(4) protect the Subject Property against drainage,
including drainage by Monterey or an Affiliate of Monterey;
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(5) protect the Subject Property against unreasonable
diminution of its capacity to produce Hydrocarbons, by reworking,
cleaning, reconditioning, recompleting, and plugging back Wells;
(6) maintain in full force and effect, free of the risk
of cancellation, termination, or forfeiture, all permits,
licenses, easements, servitudes, and other rights necessary or
useful to Operate the Subject Property;
(7) timely and properly pay all rentals and other
discretionary payments due on the Subject Interests; and
(8) timely and properly perform and observe all
obligations with respect to the Subject Property and the Subject
Interests.
(b) Monterey shall punctually pay when due and in accordance
with Applicable Law and applicable instruments and agreements (including
applicable operating agreements) all applicable royalties and other
Production Burdens and all Costs and Risks of Operating the Subject
Property. (For purposes of this provision, royalties, costs, expenses,
and liabilities that are contested in good faith by appropriate legal
proceedings are due promptly after the final determination of the
contest.)
(c) Monterey shall render, report, and punctually pay all Taxes
before they become delinquent. (For purposes of this provision, Taxes
that are contested in good faith by appropriate legal proceedings are
due promptly after the final determination of the contest.)
(d) For each adverse Demand and each adverse Action that
affects or pertains to, or reasonably may affect or pertain to, the
Subject Property, the Subject Hydrocarbons, the Production Payment
Interest, or the Production Payments, Monterey shall:
(1) promptly give Santa Fe written notice with
reasonably detailed information about the Demand or Action; and
(2) unless the Demand or Action was made or initiated by
or through Santa Fe, diligently take all steps that, in
Monterey's good-faith opinion, are necessary and proper to defend
against the Demand or Action, including hiring lawyers.
(e) Monterey shall keep the Subject Interests free and clear of
all Encumbrances, except the Permitted Encumbrances.
(f) Monterey shall not resign as operator of a Subject Property
operated by Monterey until a successor operator has been approved in
writing by Santa Fe and shall not vote for or otherwise act to designate
a Third Party as operator without Santa Fe's prior written approval.
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(g) Monterey shall give Santa Fe prompt written notice of each
default by Monterey or any other Person under each instrument or
agreement to which Monterey is a party, by which Monterey or its
properties are affected, or by which a Subject Property is affected, the
result of which (in any such case) is, or reasonably may be, to
interfere materially with the economic operation, value, or use of a
Subject Property.
4.2 Marketing of Hydrocarbons. During the Production Payment Period,
Monterey shall diligently and prudently market and sell the Subject
Hydrocarbons under sale contracts with normal and usual terms as to price and
other matters customary in the industry for Hydrocarbons of the same or similar
kind or quality produced in the area where the Subject Hydrocarbons are
produced, sell the Subject Hydrocarbons, subject to Santa Fe's prior written
consent on the terms and conditions of sale.
4.3 Abandonment of Wells and Subject Property. From the Effective
Time through the termination of the Production Payment Period, Monterey shall
not, without Santa Fe's prior written consent, abandon a Well now or hereafter
completed for the production of Hydrocarbons or surrender, abandon, release, or
relinquish the Subject Property, or any Subject Interest, except in the
following circumstances:
(a) If Monterey, acting as a Prudent Operator, reasonably
determines:
(1) that a Well has ceased to be capable of producing
Hydrocarbons in paying quantities and that it is not economically
feasible to restore the productivity of the Well by reworking,
reconditioning, deepening, sidetracking, plugging back, or
conducting other similar operations, then Monterey may abandon
the Well; or
(2) that no Well located on the Subject Property is
capable of producing Hydrocarbons in paying quantities and that
it is not economically feasible to restore the productivity of
the Subject Property by reworking, reconditioning, deepening,
sidetracking, plugging back, or conducting other similar
operations on a Well, or by drilling a new Well, then Monterey
may surrender, abandon, release, or relinquish the Subject
Property;
(b) Monterey may also abandon a Well or surrender, abandon,
release, or relinquish the Subject Property (1) if required by order of
Government or (2) if a proposal to do so is
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made under an operating agreement, unit agreement, or other similar
agreement; Monterey makes or responds to the proposal as a Prudent
Operator and in accordance with the conditions in Clause (a) or Clause
(b) above, as appropriate; and the affected parties vote or elect to do
so under the terms of the applicable agreement. Before abandoning a Well
or surrendering, abandoning, releasing, or relinquishing the Subject
Property, however, Monterey shall first give thirty days' written notice
to Santa Fe of its intention to do so. Santa Fe shall then have the
option, not the obligation, to elect to take Monterey's entire interest
in that Well or the Subject Property, free of cost, except for a payment
equal to the estimated net salvage value, if any, of that Well or the
Subject Property. If Santa Fe elects to take such interest, Monterey
shall promptly assign it to Santa Fe, free and clear of all Encumbrances
and Production Burdens, except those that burdened the applicable Well
or the Subject Property when Monterey acquired its interest therein.
4.4 Pooling and Unitization.
4.4.1 Limitation. From the Effective Time through the
termination of the Production Payment Period, Monterey shall not, without Santa
Fe's prior written consent or on order of Government, (a) unitize, pool,
communitize, or otherwise combine all or part of the Subject Property into a
new Unit or (b) dissolve, terminate, amend, or reconfigure any existing Unit.
4.4.2 Effect of Unitization. Subject to these restrictions, if
all or part of a Subject Property is included in an existing Unit or is put
into a new or amended Unit, the Subject Interest shall also be pooled,
unitized, communitized, or combined, and the term "Subject Hydrocarbons" shall
be understood to refer to appropriate categories of Hydrocarbons produced and
saved from, or attributable to, the Unit.
4.4.3 Filing Obligation. Promptly after each Unit is formed,
amended, reconfigured, or dissolved, Monterey shall file an instrument,
describing and designating (or amending, reconfiguring, or dissolving) the
Unit, with the Minerals Management Service, file the same instrument for
recordation with the county clerk, and provide a photocopy of the instrument to
Santa Fe.
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ARTICLE 5
SANTA FE'S LIABILITY
5.1 Nonpossessory Interest. The Production Payment Interest is a
nonpossessory interest. Santa Fe has no right, by virtue of owning the
Production Payment Interest, alone or in concert with others, to Operate the
Subject Property.
5.2 Costs and Risks of Operating the Subject Property. Santa Fe, by
virtue of its ownership of the Production Payment Interest, shall never be
liable for any cost, risk, liability, or obligation of Operating the Subject
Property or arising from or relating to the Operation of the Subject Property,
including any related (a) Demand or Action; (b) judgment, damages, fine,
penalty, or other award or remedy; (c) costs of compliance or noncompliance
with Applicable Laws (including environmental laws); (d) liability for the
proper or erroneous payment of the proceeds of the Subject Hydrocarbons to
Persons entitled to receive them; (e) liability to repay or refund the
Production Payments received by Santa Fe; or (f) liability to Monterey's
agents, employees, or contractors, or to any other Person for personal injury,
death, or property damage (collectively, the "Costs and Risks of Operating the
Subject Property").
5.3 Indemnity.
5.3.1 THE INDEMNITY. SUBJECT TO THE LIMITATIONS IN SECTION
5.3.2, MONTEREY AGREES TO, AND SHALL, RELEASE, INDEMNIFY, DEFEND, AND HOLD
HARMLESS SANTA FE, SANTA FE'S AFFILIATES, AND SANTA FE'S AND ITS AFFILIATES'
RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS (COLLECTIVELY, THE "SANTA
FE GROUP") FROM AND AGAINST ALL COSTS AND RISKS OF OPERATING THE SUBJECT
PROPERTY, WHICH, FOR PURPOSES OF THIS SECTION, INCLUDE ALL COSTS AND EXPENSES
OF DEFENDING THE
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SANTA FE GROUP AGAINST THE COSTS AND RISKS OF OPERATING THE SUBJECT PROPERTY
AND ENFORCING THE RIGHTS OF THE SANTA FE GROUP UNDER THIS SECTION.
5.3.2 SCOPE OF INDEMNITY. THE FOREGOING RELEASE, INDEMNITY,
DEFENSE, AND HOLD-HARMLESS AGREEMENT COVERS, EXTENDS, AND APPLIES TO EACH CLAIM
AGAINST A MEMBER OF THE SANTA FE GROUP FOR THE COSTS AND RISKS OF OPERATING THE
SUBJECT PROPERTY (AN "INDEMNITY CLAIM"), EVEN IF THE INDEMNITY CLAIM IS BASED,
IN WHOLE OR IN PART, ON THE ACTUAL OR ALLEGED SOLE, JOINT, OR COMPARATIVE
NEGLIGENCE, FAULT, OR STRICT LIABILITY OF SANTA FE OR ANY OTHER MEMBER OF THE
SANTA FE GROUP, BUT (B) DOES NOT PROTECT SANTA FE AGAINST THE COSTS AND RISKS
OF OPERATING THE SUBJECT PROPERTY TO WHICH SANTA FE MAY BE EXPOSED AS A PARTY
TO AN OPERATING AGREEMENT IF SANTA FE EXERCISES ITS RIGHT UNDER SECTION 4.3(B)
TO TAKE A DIRECT INTEREST IN ANY WELL, LEASE, OR OTHER SUBJECT PROPERTY.
5.3.3 Notice. If an Indemnity Claim is asserted in an Action
against a member of the Santa Fe Group, Santa Fe shall promptly notify
Monterey. Failure to notify Monterey will not relieve Monterey of its
obligations under this Section, except to the extent (and only to the extent)
that the failure materially prejudices Monterey's right to participate in the
defense of the Indemnity Claim.
5.3.4 Defense by Monterey. Monterey shall have the right, but
not the obligation, to assume the defense of the Indemnity Claim, by employing
lawyers and paying the costs and expenses of the defense.
5.3.5 Defense by Santa Fe. The member of the Santa Fe Group
being indemnified may employ its own lawyers and handle its own defense.
Monterey shall pay the reasonable costs and expenses of the lawyers and the
defense if any of the following statements is true: (a) Monterey authorized the
employment of the lawyers; (b) Monterey, after receipt of the notice of the
Action
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mentioned above, failed to employ lawyers reasonably satisfactory to the
indemnified member of the Santa Fe Group to conduct the defense; or (c) the
indemnified member of the Santa Fe Group, on advice of its lawyers, has
determined that it has claims or defenses that are different from the claims
and defenses available to Monterey. Otherwise, the indemnified member of the
Santa Fe Group shall pay such costs and expenses.
5.3.6 Settlement. If the indemnified member of the Santa Fe
Group settles an Indemnified Claim without Monterey's written consent (which
shall not be unreasonably withheld), Monterey shall be relieved of its
obligations under this Section with respect to the Indemnified Claim.
5.3.7 Survival. Monterey's obligations under this Section shall
survive the termination of the Production Payment Interest.
ARTICLE 6
RIGHTS AND REMEDIES OF SANTA FE
6.1 Designated Events. Each of the following is a "Designated
Event":
(a) Monterey fails to pay a Production Payment to Santa Fe
when due.
(b) Monterey fails to pay when due any other amount payable
under this Reservation to Santa Fe or a member of the Santa Fe Group,
and the failure is not cured within five (5) days after Santa Fe gives
written notice of the default in payment.
(c) Monterey fails to perform any other obligation of Monterey
under this Reservation, and the failure is not cured within thirty (30)
days after Santa Fe gives written notice of the default in performance.
(d) A material representation or warranty made by Monterey in
this Reservation proves to be materially incorrect.
(e) Monterey:
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(1) suffers the entry against it of a judgment, decree,
or order for relief by a court of competent jurisdiction in an
involuntary proceeding under a bankruptcy law, insolvency law, or
other similar law of any jurisdiction now or hereafter in effect,
including the federal Bankruptcy Code, as from time to time
amended, or has any such proceeding commenced against it that
remains undismissed for a period of thirty (30) days;
(2) commences a voluntary proceeding before a court of
competent jurisdiction under a bankruptcy law, insolvency law, or
other similar law of any jurisdiction now or hereafter in effect,
including the federal Bankruptcy Code, as from time to time
amended; applies for or consents to the entry of an order for
relief in an involuntary case under any such law; makes a general
assignment for the benefit of creditors; admits in writing its
inability to pay its debts as they become due; or takes corporate
action or other action to authorize any such acts;
(3) suffers the appointment of, or taking possession by,
a receiver, liquidator, trustee, assignee, custodian,
sequestrator, or similar officer of all or a substantial part of
its assets or any part of the Subject Interests in a proceeding
brought against, or initiated by, Monterey, and such appointment
or taking of possession is neither made ineffective nor
discharged within thirty (30) days after the action occurs; or
consents to, requests, or acquiesces in any such action; or
(4) suffers a writ or warrant of attachment or similar
process to be issued by a court against all or a substantial part
of its assets or any part of the Subject Interests, and the writ
or warrant or similar process is not stayed or released within
thirty (30) days after the issuance, entry, or levy thereof or
after any stay is vacated or set aside.
6.2 Remedies. So long as a Designated Event has occurred and is
continuing, Santa Fe, in addition to all other rights and remedies available in
law or in equity, may exercise any one or more of the following rights and
remedies (and the exercising of one such right or remedy shall not preclude the
exercise of any other):
(a) Santa Fe, on behalf of Monterey and at the cost and expense
of Monterey, may effect performance of the unperformed obligation (and
the costs and expenses, to the extent not reimbursed by Monterey, shall
be treated as additional principal under Section 3.3(c)).
(b) On notice to Monterey, Santa Fe may require all purchasers
of Subject Hydrocarbons to pay Santa Fe or any Person designated by
Santa Fe the proceeds of the sale or other disposition of the Subject
Hydrocarbons (and Monterey hereby irrevocably assigns such right to
Santa Fe for the Production Payment Period). On any demand by Santa Fe
during
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the Production Payment Period, each purchaser of Hydrocarbons is hereby
authorized and directed to pay Santa Fe all proceeds of Subject
Hydrocarbons.
(c) Santa Fe may apply to a court of competent jurisdiction for
the specific performance of the obligation; for the aid of the court in
the execution of any other right, power, or remedy provided by this
Reservation to Santa Fe; or for the appointment of a receiver for the
Subject Interests and Subject Hydrocarbons (but the appointment shall
not prejudice or affect Santa Fe's right to receive payment of all
Production Payments).
(d) If, and only if, Santa Fe is unable to exercise, or is
materially frustrated in the exercise of, the rights and remedies
provided in Clauses (a), (b), and (c) due to the action or inaction of
Monterey, then on notice to Monterey, Santa Fe or a Person designated by
Santa Fe may, for a reasonable time (as determined by Santa Fe),
exercise all rights of Monterey with respect to the Operation of the
Subject Property (including the right to enforce Monterey's rights under
operating agreements, transportation agreements, production sale
contracts, and other agreements), and use Equipment and Facilities owned
or operated by Monterey, free of any rent or other cost or risk, and
free of any bond or other security in favor of Monterey, all as Santa Fe
reasonably may deem necessary or appropriate.
6.3 Use of Proceeds. All proceeds realized by Santa Fe or a Person
designated by Santa Fe from the exercise of Santa Fe's rights and remedies
under Section 6.2 shall be applied, first, to pay Santa Fe all accrued
Production Payments; and, second, to reimburse Santa Fe or such other Person
for all costs and expenses (including reasonable attorneys' fees and costs of
court) incurred in exercising those rights and remedies.
6.4 Collection of Reimbursable Costs Through Production Payment.
Notwithstanding the right of Santa Fe to collect and apply proceeds under
Section 6.3 against the costs and expenses incurred by Santa Fe in exercising
its rights and remedies under this Reservation, those costs and expenses shall
constitute a demand obligation owing by Monterey to Santa Fe, shall bear
interest at the Agreed Rate, and, without prejudice to Santa Fe's right to
collect such sums directly from Monterey, shall be recoverable through
Production Payments, as provided in Section 3.3.
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6.5 No Liability. Santa Fe shall have no liability to Monterey
or any other Person for losses sustained by Monterey as a result of any
act or omission of Santa Fe, any trustee or receiver, or any Person
designated by Santa Fe under this Article 6.
6.6 Division Orders. Monterey shall execute all division
orders, transfer orders, letters in lieu of division orders and transfer
orders, and other documents reasonably requested by Santa Fe to
facilitate the exercise of the rights and remedies provided in this
Article 6.
6.7 Termination of Special Rights and Remedies. Santa Fe's
rights and remedies under this Article 6 shall cease to be exercisable
after all Designated Events have ceased to continue for thirty (30)
consecutive days, but without prejudice to Santa Fe's right to exercise
such rights and remedies upon the occurrence and continuation of any
future Designated Event.
ARTICLE 7
ASSIGNMENTS
7.1 Covenants Running with Subject Interests. The covenants of
Monterey in this Reservation are covenants running with the Subject Interests,
which bind Monterey and its successors and assigns and inure to the benefit of
Santa Fe and its successors and assigns.
7.2 Assignment of Subject Interests by Monterey. Monterey may not
sell, assign, farm out, convey, release, abandon, mortgage, pledge, create a
security interest in, or otherwise transfer or encumber any Subject Interest or
delegate Monterey's obligations under this Reservation without Santa Fe's prior
written consent, which consent shall not unreasonably be withheld. Subject to
that limitation, each sale, assignment, farmout agreement, Reservation,
instrument of release, mortgage, deed of trust, pledge agreement, financing
statement, and other instrument and agreement purporting
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to transfer or encumber the Subject Interest shall provide that the assignee,
transferee, mortgagee, or other such Person takes the Subject Interest subject
to the Production Payment Interest and assumes the obligations of Monterey
under this Reservation. Unless expressly released in writing by Santa Fe,
Monterey shall also remain liable for the performance of those obligations.
7.3 Assignment by Santa Fe. On thirty- (30-) days' prior written
notice to Monterey, Santa Fe may freely assign the Production Payment Interest,
but no change in ownership of the Production Payment Interest or the right to
receive Production Payments shall enlarge the obligations or diminish the
rights of Monterey.
7.4 Proper Notice of Transfer. Neither Party shall be obligated to
recognize any successor or assign of the other Party until thirty (30) days
after the receipt of a duly recorded instrument of transfer, a certified copy
of the instrument, or some other legally authenticated written evidence of the
transfer. Until such instrument, certified copy, or other evidence is received,
a Party may rely conclusively upon the authority of, and deal exclusively with,
the transferring Party.
ARTICLE 8
OTHER PROVISIONS
8.1 Notices. All notices required or permitted by this Reservation
shall be given in writing. Unless otherwise provided, each notice shall be
delivered by mail or by personal delivery. The Party giving the notice shall
pay all costs of giving the notice and shall bear the risk of nondelivery and
the burden of proving delivery. Each notice shall be effective when received by
the addressee. The addresses of the Parties for purposes of notice are the
addresses in the Conveyance and Contribution
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Agreement. A Party may change its address for purposes of notice to another
address within the continental United States by giving the other Party at least
fifteen (15) days' notice of the change.
8.2 CHOICE OF LAW. THIS RESERVATION SHALL BE CONSTRUED AND ENFORCED
UNDER THE LAWS OF CALIFORNIA, EXCLUDING LAWS, RULES, AND PRINCIPLES THAT
OTHERWISE REQUIRE REFERENCE TO THE LAWS OF ANOTHER JURISDICTION.
8.3 Integrated Agreement. This Reservation and the Purchase
Agreement are the final, complete, and exclusive expression of the agreements
of the Parties with respect to the matters covered by this Reservation and the
Conveyance and Contribution Agreement.
8.4 Amendment. This Reservation may not be amended, supplemented,
extended, or otherwise changed, except by a writing that refers to this
Reservation and is executed by the Parties.
8.5 Third-Party Beneficiaries. Except for the Third-Party members of
the Santa Fe Group, no Third Party is a beneficiary of this Reservation.
Nothing in this Reservation confers any interest, right, privilege, or remedy
on any Person, other than the Parties and the members of the Santa Fe Group.
8.6 Cumulative Rights. Except as otherwise provided in this
Reservation, the rights of a Party under this Reservation are cumulative of all
other rights, privileges, and remedies available to that Party at law, in
equity, or otherwise.
8.7 Waivers. No Party shall be deemed to have waived any right under
this Reservation, unless that waiver is in writing, refers to this Reservation,
and is executed by that Party. If a Party fails to insist on the strict
performance or observance by another Party of a provision of this Reservation,
that failure shall not be construed as a waiver by that Party of any right
under this
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Reservation. If a Party waives a right under this Reservation, that Party is
not bound in the future to waive any other right, whether similar or dissimilar
to the right that was waived or relinquished.
8.8 Construction. In construing this Reservation, the following
rules shall be followed:
(a) except for the boldfaced defined terms used in stating
definitions of defined terms, no consideration shall be given to the
captions of the Articles, Sections, Subsections, or Clauses of this
Reservation, which are inserted for convenience in locating the
provisions of this Reservation, and not as an aid in its construction;
(b) no consideration shall be given to the fact or presumption
that one Party had a greater or lesser hand in drafting this
Reservation;
(c) the word "include" and its syntactical variants mean
"include, but are not limited to," and corresponding syntactical
variants;
(d) examples shall not be deemed to limit, expressly or by
implication, the matter they illustrate;
(e) a defined term has its defined meaning throughout this
Reservation, regardless of whether the term appears before or after the
place in this Reservation where the term is defined;
(f) the plural includes the singular, and vice versa; and
(g) each exhibit, attachment, and schedule to this Reservation
is a part of this Reservation, but if there is any conflict or
inconsistency between the main body of this Reservation and any exhibit,
attachment, or schedule, the provisions of the main body of this
Reservation will prevail.
8.9 Further Assurances. Monterey shall, on reasonable request by
Santa Fe, (a) execute, acknowledge, and deliver such other instruments,
agreements, and documents and (b) do such other acts, as are reasonably
necessary or desirable to effect or to evidence the transactions contemplated
by this Reservation and to secure the Production Payment Interest to Santa Fe
and obtain all benefits of applicable recordation acts.
8.10 Time. Time is of the essence in the payment of each Production
Payment and the performance of each obligation under this Reservation.
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8.11 Attorneys' Fees. If one Party sues the other for a breach of this
Reservation, the prevailing Party in the resulting litigation shall be entitled
to receive, in addition to the amount in dispute and other remedies and
recoveries, reimbursement of reasonable attorneys' fees and costs of court.
8.12 Purchase Option. Monterey shall have the right and option to
purchase at any time the Production Payment Interest by paying in full the
amounts shown in Section 3.3(b), (c), and (d) and paying to Santa Fe the unpaid
balance of the Principal Sum at such time. Additionally, Monterey may purchase
part, but not all, of the Production Payment Interest at any time by paying in
full the amounts shown in Section 3.3(b), (c), and (d) and paying part of the
unpaid balance of the Principal Sum (in excess of amounts that would otherwise
then be paid under Article 2). If Monterey only purchases part of the
Production Payment Interest, Schedule 1 shall be revised by the Parties to show
the remaining balance of the Principal Sum equally amortized over the
Production Months remaining between the date of such partial payment and
September 1999.
8.13 Waiver of Right of Partition. Monterey and Santa Fe each waives
all rights to partition any Subject Interest.
8.14 Intentions of Parties.
8.14.1 Tax Characterization. The Parties further intend
that the Production Payment Interest shall be treated as a production payment,
not as a working interest, royalty interest, or other kind of interest, within
the meaning of the Internal Revenue Code of 1986, as amended, and the
applicable regulations and judicial authority, and all provisions of this
Reservation shall be construed and treated accordingly.
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8.14.2 No Partnership. It is not the intention of the
Parties to create, nor shall this Reservation be deemed or construed to create,
a mining partnership or other partnership, a joint venture, an association, a
trust, a relationship of agency, or any other similar business relationship. If
the Parties are deemed to constitute a partnership for federal income tax
purposes, however, the Parties elect to be excluded from the application of
Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as
amended, and agree not to take any position inconsistent with that election.
8.15 Filing and Recordation. Santa Fe may file counterparts of this
Reservation with the county clerk or other recording officer of Kern County,
California and with any other public office in which Santa Fe deems it
necessary or useful to file or record this Reservation.
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EXHIBITS
Exhibit A--The Subject Property and Subject Interests
Schedule
Schedule 1 - Monthly Balance of Primary Sum
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Exhibit A
THE SUBJECT PROPERTY AND SUBJECT INTERESTS
All of Santa Fe's right, title and interest in and to the S/2 NW, S/2 NE, NE
NE, SW of Section 21, Township 31S, Range 22E in Kern County, California which
is a part of a larger tract granted to Santa Fe Land Improvement Co. in that
certain Deed from I. Strassberger, et ux., dated January 09, 1917, and recorded
in Book 317, Page 458 in the Real Property Records of Kern County, California.
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SCHEDULE 1
<TABLE>
<CAPTION>
Production Month Balance
---------------- -------
<S> <C>
November 1996 29,166,667
December 1996 28,333,334
January 1997 27,500,001
February 1997 26,666,668
March 1997 25,833,335
April 1997 25,000,002
May 1997 24,166,669
June 1997 23,333,336
July 1997 22,500,003
August 1997 21,666,670
September 1997 20,833,337
October 1997 20,000,004
November 1997 19,166,671
December 1997 18,333,338
January 1998 17,500,005
February 1998 16,666,672
March 1998 15,833,339
</TABLE>
Schedule 1 / Reservation of Production Payment / Page 1
<PAGE> 59
<TABLE>
<S> <C>
April 1998 15,000,006
May 1998 14,166,673
June 1998 13,333,340
July 1998 12,500,007
August 1998 11,666,674
September 1998 10,833,341
October 1998 10,000,008
November 1998 9,166,675
December 1998 8,333,342
January 1999 7,500,009
February 1999 6,666,676
March 1999 5,833,343
April 1999 5,000,010
May 1999 4,166,677
June 1999 3,333,344
July 1999 2,500,011
August 1999 1,666,678
September 1999 833,345
</TABLE>
Schedule 1 / Reservation of Production Payment / Page 2
