<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
LONE STAR ENERGY PLANT OPERATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 4930 75-2421863
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
1817 WOOD STREET M. G. FORTADO, ESQ.
DALLAS, TEXAS 75201-5598 300 SOUTH ST. PAUL
(214) 573-3915 DALLAS, TEXAS 75201
(ADDRESS, INCLUDING ZIP CODE, AND (214) 670-2649
TELEPHONE NUMBER, INCLUDING (NAME, ADDRESS, INCLUDING ZIP CODE,
AREA CODE, OF REGISTRANT'S PRINCIPAL AND
EXECUTIVE OFFICE) TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
BRAD L. WHITLOCK, ESQ.
JACKSON & WALKER, L.L.P.
901 MAIN ST., SUITE 6000
DALLAS, TEXAS 75202
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this Registration Statement becomes effective and the
effective time of the proposed merger (the "Merger") of Enserch Exploration,
Inc. ("EEX") with and into the Registrant, pursuant to the Agreement and Plan
of Merger, dated as of September 10, 1996, attached as Annex A to the Proxy
Statement/Prospectus forming a part of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED(1) REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE(3)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value per share........ 126,943,698 shares $8.9375(2) $1,134,478,886(2) $113,947(2)
</TABLE>
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(1) This Registration Statement relates to (i) securities of the Registrant
issuable to holders of common stock of EEX in connection with the Merger
and (ii) the subsequent distribution by ENSERCH Corporation to its
shareholders of securities of the Registrant received by ENSERCH
Corporation in the Merger.
(2) Pursuant to Rule 457(f)(1), the registration fee was computed on the basis
of the market value of the EEX common stock to be converted in the Merger,
computed in accordance with Rule 457(c) on the basis of the average of the
high and low prices per share of such stock quoted on the New York Stock
Exchange Consolidated Transactions Tape on September 30, 1996.
(3) Does not include initial payment of $229,834 made in connection with the
filing of preliminary proxy materials of EEX.
----------------
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>
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING THE LOCATION IN THE PROXY STATEMENT/PROSPECTUS OF THE
INFORMATION REQUIRED BY PART I OF FORM S-4
<TABLE>
<CAPTION>
LOCATION IN JOINT PROXY
FORM S-4 ITEM STATEMENT/PROSPECTUS
------------- -----------------------
<S> <C>
A. INFORMATION ABOUT THE
TRANSACTION
1.Forepart of Registration
Statement and Outside Front Forepart of the Registration Statement;
Cover of Prospectus........... Cross-Reference Sheet; Outside Front Cover
Page
2.Inside Front and Outside Back
Cover Pages of Prospectus..... Table of Contents; Available Information;
Incorporation of Certain Documents by
Reference
3.Risk Factors, Ratio of Earnings
to Fixed Charges and Other Outside Front Cover Page; Summary; The
Information................... Merger; Risk Factors; The Plan of Merger;
Certain Information Regarding EEX; Certain
Information Regarding the Company
4.Terms of the Transaction....... Summary; The Meeting; The Merger; The Plan
of Merger; Description of Capital Stock;
Comparison of Shareholder Rights
5.Pro Forma Financial Summary; Pro Forma Combined Condensed
Information................... Financial Information
6.Material Contacts with the
Company Being Acquired........ Summary; Risk Factors; The Merger; The Plan
of Merger
7.Additional Information Required
for Reoffering by Persons and Summary; The Merger; Interests of Certain
Parties Deemed to be Persons In the Merger; Security Ownership
Underwriters.................. of Certain Beneficial Owners
8.Interests of Named Experts and
Counsel....................... Legal Matters
9.Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10.Information with Respect to S-3
Registrants................... Not Applicable
11.Incorporation of Certain
Information by Reference...... Not Applicable
12.Information with Respect to S-2
or S-3 Registrants............ Not Applicable
13.Incorporation of Certain
Information by Reference...... Not Applicable
14.Information with Respect to
Registrants Other Than S-3 or Business; Market Price Data and Dividend
S-2 Registrants............... Policy; Selected Financial and Operating
Data; Management's Discussion and Analysis
of Financial Condition and Results of
Operations
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15.Information with Respect to S-3 Incorporation of Certain Documents by
Companies..................... Reference
16.Information with Respect to S-2
or S-3 Companies.............. Not Applicable
17.Information with Respect to
Companies Other Than S-3 or S-
2 Companies................... Not Applicable
D. VOTING AND MANAGEMENT
INFORMATION
18.Information if Proxies,
Consents or Authorizations Are
to Be Solicited............... Summary; The Meeting; The Merger
19.Information if Proxies,
Consents or Authorizations are
not to be Solicited or in an
Exchange Offer................ Not Applicable
</TABLE>
<PAGE>
[LOGO OF ENSERCH EXPLORATION, INC.]
Dear Enserch Exploration, Inc. Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Enserch Exploration, Inc. ("EEX"), which will be held at 301 South Harwood
Street, Dallas, Texas, on November 15, 1996. The meeting will start at 3:00
p.m., local time.
At this important meeting, the holders of EEX common stock will be asked to
consider and vote upon proposals to approve (a) an Agreement and Plan of
Merger (the "Plan of Merger") pursuant to which EEX will merge (the "Merger")
with and into Lone Star Energy Plant Operations, Inc. ("LSEPO"), a Texas
corporation wholly owned by ENSERCH Corporation ("ENSERCH"), with LSEPO to be
the surviving corporation and the name of LSEPO to be changed to Enserch
Exploration, Inc. ("New EEX") and (b) the Revised and Amended 1996 Stock
Incentive Plan of EEX (the "Stock Plan"), which Stock Plan will be the stock
incentive plan of New EEX following the Merger. Following consummation of the
Merger, ENSERCH is to distribute to the holders of ENSERCH common stock, on a
pro rata basis, ENSERCH's entire interest in the capital stock of New EEX (the
"Distribution").
The accompanying Proxy Statement/Prospectus discusses the Merger, the
Distribution and the Stock Plan in detail. You are urged to read the Proxy
Statement/Prospectus and the Annexes thereto in their entirety.
THE BOARD OF DIRECTORS OF EEX BELIEVES THAT THE MERGER, THE DISTRIBUTION AND
THE STOCK PLAN ARE IN THE BEST INTERESTS OF EEX AND ITS SHAREHOLDERS AND
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE APPROVAL OF THE PLAN OF MERGER
(INCLUDING THE TRANSACTIONS CONTEMPLATED THEREIN) AND FOR THE STOCK PLAN. The
Board of Directors believes EEX has been undervalued in the financial markets
as a result of its majority ownership by ENSERCH and that the transactions
contemplated by the Plan of Merger will benefit the holders of EEX common
stock by allowing it to operate as an independent company and thereby
unlocking the value of EEX.
Approval of the Plan of Merger by the holders of EEX common stock is a
condition to the consummation of the Merger and the Distribution, and to the
proposed business combination of ENSERCH with Texas Utilities Company ("TUC").
If the Plan of Merger is approved by the holders of EEX common stock, the
Merger and the Distribution will be consummated only after all of the
conditions to the ENSERCH/TUC business combination, other than the Merger and
the Distribution, have been satisfied or waived.
Approval of the Plan of Merger will require the affirmative vote of the
holders of at least two-thirds of the outstanding shares of EEX common stock
and approval of the Stock Plan will require the affirmative vote of the
holders of at least a majority of the outstanding shares of EEX common stock.
Since ENSERCH beneficially owns approximately 83% of the outstanding common
stock of EEX and intends to vote in favor of the Merger and the Stock Plan,
approval of both proposals is assured.
Even if you plan to attend the meeting, we urge you to mark, sign and date
the enclosed proxy and return it promptly in the enclosed envelope. You have
the option to revoke it at any time, or to vote your shares personally on
request if you attend the meeting.
Sincerely,
F. S. Addy
Chairman and Chief Executive Officer
<PAGE>
ENSERCH EXPLORATION, INC.
ENERGY SQUARE II
4849 GREENVILLE AVENUE
DALLAS, TEXAS 75206
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 15, 1996
To the Shareholders of Enserch Exploration, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of Shareholders of Enserch
Exploration, Inc., a Texas corporation ("EEX"), will be held on November 15,
1996, commencing at 3:00 p.m., local time, at 301 South Harwood Street,
Dallas, Texas to consider and act upon the following matters which are
described in more detail in the accompanying Proxy Statement/Prospectus:
1. To consider and vote upon a proposal to approve (i) the Agreement and
Plan of Merger, dated as of September 10, 1996 (the "Plan of Merger"),
among EEX, Lone Star Energy Plant Operations, Inc., a Texas corporation
("LSEPO"), and ENSERCH Corporation, a Texas corporation, pursuant to which
EEX will merge with and into LSEPO (the "Merger"), LSEPO will be the
surviving corporation, the name of LSEPO will be changed to Enserch
Exploration, Inc. ("New EEX") and each outstanding share of EEX Common
Stock, par value $1.00 per share, will be converted into one share of
Common Stock of New EEX, par value $.01 per share, together with (ii) all
other transactions contemplated by the Plan of Merger. As used herein, the
term "Plan of Merger" includes all transactions contemplated therein.
2. To consider and vote upon a proposal to approve the Revised and
Amended 1996 Stock Incentive Plan of EEX (the "Stock Plan").
The close of business on October 4, 1996 has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at,
the meeting and any adjournments or postponements thereof. Holders of EEX
Common Stock are not entitled to dissenters' appraisal rights under the Texas
Business Corporation Act in respect of the Merger.
When the proxies are returned properly executed, the shares represented
thereby will be voted in accordance with the indicated instructions. However,
if no instructions have been specified on the returned proxy, the shares
represented thereby will be voted "FOR" approval of the Plan of Merger and
"FOR" approval of the Stock Plan. Any shareholder giving a proxy has the right
to revoke it at any time before it is voted by filing, with the Corporate
Secretary of EEX, either an instrument revoking the proxy or a duly executed
proxy bearing a later date. Proxies also may be revoked by attending the
meeting and voting in person.
By Order of the Board of Directors
ENSERCH EXPLORATION, INC.
MICHAEL G. FORTADO
Senior Vice President and Corporate
Secretary
October 7, 1996
YOUR VOTE IS IMPORTANT NO MATTER HOW LARGE OR SMALL YOUR HOLDINGS MAY BE. TO
ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE THE ENCLOSED PROXY
CARD, WHICH IS SOLICITED BY THE BOARD OF DIRECTORS OF EEX, SIGN EXACTLY AS
YOUR NAME APPEARS THEREON AND RETURN IMMEDIATELY.
<PAGE>
PROXY STATEMENT FOR
ENSERCH EXPLORATION, INC.
----------------
PROSPECTUS FOR
LONE STAR ENERGY PLANT OPERATIONS, INC.
This Proxy Statement/Prospectus is being furnished to holders of common
stock, par value $1.00 per share ("EEX Common Stock"), of Enserch Exploration,
Inc., a Texas corporation ("EEX"), in connection with the solicitation of
proxies by the Board of Directors of EEX for use at a special meeting of
shareholders of EEX (the "EEX Special Meeting") to be held on Friday, November
15, 1996, commencing at 3:00 p.m., local time, at 301 South Harwood Street,
Dallas, Texas, and at any adjournments or postponements thereof.
At the EEX Special Meeting, the shareholders of EEX will vote upon a
proposal to approve (i) the Agreement and Plan of Merger, dated as of
September 10, 1996 (the "Plan of Merger"), among EEX, Lone Star Energy Plant
Operations, Inc., a Texas corporation ("LSEPO"), and ENSERCH Corporation
("ENSERCH"), a Texas corporation that is currently the owner of approximately
83% of the outstanding shares of EEX Common Stock and the owner of all of the
outstanding shares of common stock of LSEPO, pursuant to which EEX will merge
with and into LSEPO (the "Merger"), and (ii) all other transactions
contemplated by the Plan of Merger. In the Merger, LSEPO's name will be
changed to Enserch Exploration, Inc. ("New EEX") and each outstanding share of
EEX Common Stock will be converted into one share of Common Stock, par value
$.01 per share, of New EEX ("New EEX Common Stock"). As used herein, the term
"Plan of Merger" includes all transactions contemplated therein. Holders of
EEX Common Stock do not have dissenters' appraisal rights in respect of the
Merger.
Subsequent to the Merger, ENSERCH is to distribute to the holders of its
Common Stock ("ENSERCH Common Stock"), on a pro rata basis, all of the
outstanding shares of New EEX Common Stock held by ENSERCH on the basis of
approximately 1.5 shares of New EEX Common Stock for each share of ENSERCH
Common Stock (the "Distribution"). The Merger and the Distribution are
conditions precedent to the consummation of the proposed business combination
of ENSERCH and Texas Utilities Company (the "EC/TUC Mergers"), and the Merger
and the Distribution will be consummated only after all of the conditions to
the EC/TUC Mergers, other than the Merger and the Distribution, have been
satisfied or waived.
This Proxy Statement/Prospectus also constitutes a prospectus of New EEX
with respect to (i) the issuance of shares of New EEX Common Stock in the
Merger upon conversion of outstanding shares of EEX Common Stock and (ii) the
subsequent distribution by ENSERCH of New EEX Common Stock to its
shareholders.
This Proxy Statement/Prospectus also relates to a proposal to be voted upon
at the EEX Special Meeting to approve the Revised and Amended 1996 Stock
Incentive Plan of EEX (the "Stock Plan"), which Stock Plan will be the stock
incentive plan of New EEX following the Merger. The shares of New EEX Common
Stock offered hereby have been approved for listing on the New York Stock
Exchange, Inc. (the "NYSE") under the symbol "EEX", subject to requisite
shareholder approval of the Merger and notice of issuance. FOR A DISCUSSION OF
CERTAIN CONSIDERATIONS REGARDING THE BUSINESSES AND OPERATIONS OF EEX AND
LSEPO THAT SHOULD BE EVALUATED BEFORE VOTING ON THE PROPOSALS DESCRIBED HEREIN
AT THE EEX SPECIAL MEETING, SEE "RISK FACTORS" AT PAGE 10.
----------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
This Proxy Statement/Prospectus and accompanying form of proxy are first
being mailed to shareholders of EEX on or about October 7, 1996.
The date of this Proxy Statement/Prospectus is October 7, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information..................................................... i
Incorporation of Certain Documents by Reference........................... i
Summary................................................................... 1
General................................................................. 1
The Parties............................................................. 2
LSEPO................................................................. 2
EEX................................................................... 2
Reasons for the Merger and the Distribution............................. 2
The EEX Special Meeting................................................. 3
Purpose of the Meeting................................................ 3
Date, Time and Place.................................................. 3
Record Date; Shares Entitled to Vote.................................. 3
Vote Required......................................................... 3
Recommendations of the Board of Directors............................... 4
Opinion of Investment Advisor........................................... 4
The Merger and the Plan of Merger....................................... 4
The Plan of Merger.................................................... 4
Conversion of EEX Common Stock into New EEX Common Stock.............. 4
Management and Operations of New EEX after the Merger and the Distri-
bution............................................................... 5
Effective Time of the Merger.......................................... 5
No Appraisal Rights................................................... 5
Hart-Scott-Rodino Matters............................................. 5
Selected Historical Financial Data of LSEPO............................. 6
Selected Historical Financial Data of EEX............................... 7
Selected Unaudited Pro Forma Financial Data of New EEX.................. 8
Pro Forma New EEX Capitalization........................................ 9
Comparative Per Share Data.............................................. 9
Risk Factors.............................................................. 10
Lack of ENSERCH Financial Support....................................... 10
Increase in Public Market Size.......................................... 10
Management of Independent Company....................................... 10
Uncertainties in Estimating Reserves and Future Net Cash Flows.......... 10
Reserve Replacement Uncertainties....................................... 11
Exploration, Development, Production and Selling Risks.................. 11
Operating Hazards....................................................... 11
Offshore Risks.......................................................... 12
Effects of Changes in Gas and Oil Prices and Volatility of Gas and Oil
Markets................................................................ 12
Government Regulation................................................... 12
Environmental Matters................................................... 12
Competition............................................................. 13
Shares Eligible for Future Sale......................................... 13
Limited Trading Market.................................................. 13
Certain Limitations on Changes in Control of New EEX.................... 13
Tax Assurance Agreement Restrictions.................................... 13
The EEX Special Meeting................................................... 15
Matters to be Considered at the EEX Special Meeting..................... 15
Board of Directors Recommendations...................................... 15
Voting at the EEX Special Meeting; Record Date.......................... 15
EEX Proxies............................................................. 15
Market Price Data and Dividend Policy..................................... 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
The Merger................................................................. 17
Background, Reasons for the Merger and the Distribution.................. 17
Effects of the Merger and the Distribution............................... 18
Conflicts of Interest of Certain Persons in the Merger................... 18
Certain Arrangements Regarding Management Following the Merger........... 19
Retention Bonus Arrangement.............................................. 19
Change-in-Control Agreements and Other Arrangements...................... 19
Recommendations of the Board of Directors................................ 20
Opinion of Investment Advisor............................................ 21
Accounting Treatment..................................................... 24
Certain Federal Income Tax Consequences.................................. 24
Federal Securities Laws Consequences..................................... 25
Listing on the New York Stock Exchange................................... 25
Regulatory Matters....................................................... 25
Interests of Certain Persons in the Merger................................. 26
Relationship between EEX and ENSERCH..................................... 26
The Plan of Merger......................................................... 29
The Merger............................................................... 29
Effective Time of the Merger............................................. 29
Manner and Basis of Converting Shares.................................... 30
Other Matters Affected by the Plan of Merger............................. 30
Business................................................................... 31
Business of LSEPO........................................................ 31
Business of EEX.......................................................... 32
Management................................................................. 34
Directors and Executive Officers......................................... 34
Executive Compensation................................................... 35
The Stock Plan........................................................... 36
Committees of the Board.................................................. 36
Compensation of New EEX Directors........................................ 37
Security Ownership of Certain Beneficial Owners............................ 37
Description of Capital Stock............................................... 38
General.................................................................. 38
New EEX Common Stock..................................................... 38
New EEX Preferred Stock.................................................. 38
New EEX Rights Agreement................................................. 39
Stock Ownership Restrictions............................................. 40
Anti-Takeover Provisions................................................. 41
Comparison of Shareholder Rights........................................... 42
Experts.................................................................... 42
Legal Matters.............................................................. 43
Certain Definitions........................................................ 44
Index of Financial Statements.............................................. F-1
</TABLE>
<TABLE>
<C> <S>
Annexes
A. Agreement and Plan of Merger
A-1. Agreement and Plan of Distribution
A-2. Revised and Amended 1996 Stock Incentive Plan
A-3. Tax Allocation Agreement
A-4. Tax Assurance Agreement
B. Fairness Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
C. Amended and Restated Articles of Incorporation of New EEX
D. Bylaws of New EEX
</TABLE>
<PAGE>
AVAILABLE INFORMATION
EEX is subject to the information requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). The reports, proxy statements and
other information filed by EEX with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission at Seven World Trade Center, 13th Floor,
New York, New York 10048, and Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. The Common Stock of EEX is listed
on the NYSE. Reports, proxy statements and other information concerning EEX
can also be inspected at the offices of the NYSE at 20 Broad Street, New York,
New York 10005. Certain of such materials filed by EEX are also available at
the SEC's site on the World Wide Web at http://www.sec.gov.
LSEPO has filed a Registration Statement with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
distribution of securities described herein (the "Registration Statement").
This Proxy Statement/Prospectus does not contain all of the information set
forth in or incorporated by reference in the Registration Statement. Copies of
the Registration Statement and the exhibits thereto are on file at the offices
of the Commission and may be obtained upon payment of a prescribed fee or may
be examined without charge at the public reference facility of the Commission
in Washington, D.C.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Proxy Statement/Prospectus as of the date
of filing, and subject in each case to information contained in this Proxy
Statement/Prospectus, are the following documents filed by EEX with the
Commission pursuant to the Exchange Act: (i) EEX Annual Report on Form 10-K
for the fiscal year ended December 31, 1995; (ii) EEX Quarterly Report on Form
10-Q for the quarter ended March 31, 1996; (iii) EEX Quarterly Report on Form
10-Q for the quarter ended June 30, 1996; (iv) EEX Current Report on Form 8-K
dated June 8, 1995; (v) EEX Current Report on Form 8-K dated April 13, 1996;
(vi) EEX Current Report on Form 8-K dated July 31, 1996; and (vii) EEX Proxy
Statement for the Annual Meeting of Shareholders held on May 14, 1996. All
documents filed by EEX pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date hereof and prior to the date of the Distribution
shall be deemed to be incorporated by reference herein and to be a part hereof
from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for all purposes to the extent that a
statement contained in this Proxy Statement/Prospectus modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
EEX will provide without charge to each person to whom a copy of this Proxy
Statement/Prospectus is delivered, upon the written or oral request of such
person, a copy of the documents incorporated in this Proxy
Statement/Prospectus by reference (other than exhibits to such documents
unless such exhibits are specifically incorporated by reference into the
information this Proxy Statement/Prospectus incorporates). Written or
telephone requests for such documents should be directed to M. G. Fortado,
Esq., Enserch Exploration, Inc., 300 S. St. Paul, Dallas, Texas 75201, (214)
670-2649.
i
<PAGE>
SUMMARY
The following is only a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus and does not purport to be complete. Reference
is made to, and this Summary is qualified in its entirety by, the more detailed
information contained elsewhere in this Proxy Statement/Prospectus. As used in
this Proxy Statement/Prospectus, the terms "EEX," "LSEPO" and "New EEX" refer
to such corporations, respectively, and, except where the context otherwise
requires, such entities and their respective predecessors and subsidiaries. All
information concerning EEX included in this Proxy Statement/Prospectus has been
furnished by EEX, and all information concerning LSEPO included in this Proxy
Statement/Prospectus has been furnished by LSEPO. Following the Merger, New EEX
will conduct substantially the same business as conducted by EEX and LSEPO
prior to the Merger, with certain changes. See "Business." References to the
business conducted by EEX or LSEPO, as the case may be, throughout this Proxy
Statement/Prospectus are meant to include the business to be conducted by New
EEX following the Merger, except where otherwise noted. Although LSEPO will be
the corporation that survives the Merger under the Texas Business Corporation
Act ("TBCA"), its name will be changed to Enserch Exploration, Inc. in the
Merger. Unless otherwise defined herein, capitalized terms used in this Summary
have the meanings ascribed to them elsewhere in this Proxy
Statement/Prospectus. Certain terms relating to the gas and oil industry are
defined in "Certain Definitions." Shareholders are urged to read this Proxy
Statement/Prospectus and the Annexes attached hereto in their entirety.
GENERAL
At the EEX Special Meeting, holders of EEX Common Stock will be asked to
consider and vote upon proposals to approve proposals related to (i) the Merger
of EEX with and into LSEPO pursuant to the terms of the Plan of Merger and (ii)
the Stock Plan, all as more particularly described herein. A copy of the Plan
of Merger is attached hereto as Annex A and the form of the Stock Plan, which
replaced the EEX 1994 Stock Incentive Plan (the "1994 Plan") subject to
shareholder approval of the Stock Plan, is attached hereto as Annex A-2. After
the Merger and related proposals have been approved by the requisite vote of
the EEX shareholders and all other conditions to the Merger have been satisfied
or waived, EEX will be merged with and into LSEPO. The Stock Plan will become
effective upon shareholder approval, regardless of whether the Merger is
consummated. If the Merger is consummated, options originally granted under the
1994 Plan to purchase EEX Common Stock will become options under the Stock Plan
to purchase New EEX Common Stock. See "Management--The Stock Plan."
As of September 10, 1996, approximately 125,936,000 shares of EEX Common
Stock were outstanding. Under the Plan of Merger, (i) each outstanding share of
EEX Common Stock will be converted into one share of New EEX Common Stock (the
"EEX Ratio") and (ii) the currently outstanding shares of LSEPO Common Stock,
par value $0.01 per share ("Old LSEPO Common Stock"), will be converted into a
number of shares of New EEX Common Stock determined by dividing $7 million by
the average of the closing sales prices of EEX Common Stock on the 15 trading
days preceding the fifth trading day prior to the effective time of the Merger
(the "LSEPO Ratio"). See "The Plan of Merger--Manner and Basis of Converting
Shares." At an assumed market price of $9.00 for EEX Common Stock, the LSEPO
Ratio would result in the Old LSEPO Common Stock being converted into
approximately 778,000 shares of New EEX Common Stock (approximately 0.6% of the
shares to be outstanding after the Merger). LSEPO will be the surviving
corporation of the Merger, in which its name will be changed to Enserch
Exploration, Inc.
Subsequent to the Merger, ENSERCH plans to distribute to the holders of
ENSERCH Common Stock, on a pro rata basis, all of the outstanding shares of New
EEX Common Stock held by ENSERCH. The Distribution is to be made pursuant to an
Agreement and Plan of Distribution (the "Distribution Agreement") to be entered
into among LSEPO, EEX, ENSERCH and TUC Holding Company, a Texas corporation
("Holding Company"), substantially in the form attached hereto as Annex A-1. In
the Distribution, ENSERCH is to distribute shares of New EEX Common Stock held
by it on the basis of approximately 1.5 shares of New EEX Common Stock for each
share of ENSERCH Common Stock, and cash is to be paid in lieu of fractional
shares. This Proxy Statement/Prospectus also covers the distribution of the New
EEX Common Stock to the holders of ENSERCH Common Stock in the Distribution and
will be provided to ENSERCH shareholders in connection therewith.
1
<PAGE>
THE PARTIES
LSEPO
LSEPO is currently a wholly owned subsidiary of Lone Star Energy Company, a
Texas corporation ("LSE"), which in turn is a wholly owned subsidiary of
ENSERCH. LSEPO operates and maintains, under long-term contracts, a 255
megawatt cogeneration facility located in Sweetwater, Texas, a 62 megawatt
cogeneration facility located in Buffalo, New York, and a 160 megawatt
cogeneration facility located in Bellingham, Washington. In order to obtain
direct control of LSEPO after the Merger, prior to the Merger ENSERCH will
merge LSE with and into itself, thus transferring to ENSERCH the 100% stock
interest in LSEPO now held by LSE. Although LSEPO will be the corporation that
survives the Merger under the TBCA, its name will be changed to Enserch
Exploration, Inc. in the Merger.
LSEPO's principal executive offices are located at 1817 Wood Street, Dallas,
Texas, 75201-5598, and its telephone number is (214) 573-3915.
The principal executive office of New EEX after the Merger will be located at
Energy Square II, 4849 Greenville Avenue, Suite 1500, Dallas, Texas 75206, and
its telephone number will be (214) 369-7893.
EEX
EEX, an approximately 83% beneficially owned subsidiary of ENSERCH, is an
independent energy company engaged in the exploration for and the development,
production and sale of natural gas and crude oil. The business of EEX has been
in existence since 1918. EEX is one of the largest independent exploration and
production companies in the United States, with a reserve base of approximately
1,792 Bcfe at January 1, 1996, as estimated by DeGolyer and MacNaughton,
independent petroleum consultants. Approximately 75% of these reserves on an
energy equivalent basis consist of natural gas. EEX has grown through
exploration, development and acquisition activities concentrated in major
production basins located offshore in the Gulf of Mexico and onshore in East
Texas, North Central Texas and the U.S. Gulf Coast.
EEX's principal executive offices are located at Energy Square II, 4849
Greenville Avenue, Suite 1500, Dallas, Texas 75206, and its telephone number is
(214) 369-7893.
REASONS FOR THE MERGER AND THE DISTRIBUTION
The Merger and the Distribution are conditions precedent to the consummation
of the EC/TUC Mergers as contemplated by the Amended and Restated Agreement and
Plan of Merger dated as of April 13, 1996 (the "EC/TUC Plan of Merger"), among
ENSERCH, Texas Utilities Company, a Texas corporation ("TUC"), and Holding
Company. The EC/TUC Plan of Merger contemplates that two wholly owned
subsidiaries of Holding Company will be merged with and into TUC and ENSERCH,
respectively, with holders of TUC and ENSERCH Common Stock receiving shares of
common stock of Holding Company.
Prior to the Distribution, EEX is to be merged with and into LSEPO. This step
is believed necessary to enable the Distribution to be tax-free to ENSERCH,
EEX, LSEPO and their respective shareholders.
The Boards of Directors of EEX and LSEPO (the "EEX Board" and the "LSEPO
Board," respectively) have approved the Plan of Merger and have recommended
that their respective shareholders vote "FOR" approval of the matters described
in this Proxy Statement/Prospectus. LSE, acting in its capacity as sole
shareholder of LSEPO, has approved the Plan of Merger by written consent.
Additionally, ENSERCH has informed EEX that it intends to vote all of the
shares of EEX Common Stock beneficially owned by ENSERCH (which constitutes
approximately 83% of the outstanding shares of EEX Common Stock) in favor of
the Plan of Merger, thus ensuring that the Plan of Merger will be approved by
the requisite shareholder vote.
2
<PAGE>
The EEX Board has approved the Plan of Merger and recommends that the
shareholders of EEX approve the Plan of Merger. The EEX Board approval was
principally based on the opinion of DLJ (as defined below) that the EEX Ratio
and the LSEPO Ratio taken together are fair, from a financial point of view, to
the public shareholders of EEX; the fact that because the value of LSEPO is
small compared to the value of EEX, the holders of EEX Common Stock will have
substantially the same ownership percentage in New EEX as they had in EEX; the
fact that after the Merger and the Distribution, New EEX will be an independent
company; and the fact that ENSERCH is bearing the costs of the Merger and the
Distribution and has agreed to indemnify New EEX against liabilities New EEX
may incur as a result of the operations of LSEPO prior to the Merger. The EEX
Board also considered that the Merger and the Distribution are conditions
precedent to the EC/TUC Mergers, which ENSERCH has agreed to take all
reasonable actions necessary to satisfy, and that the Merger and the
Distribution will not be consummated until the other conditions to the EC/TUC
Mergers have been satisfied or waived. The Merger is believed necessary for the
Distribution to be tax-free to ENSERCH, EEX, LSEPO and their respective
shareholders. See "The Merger--Certain Federal Income Tax Consequences."
For an expanded discussion of the reasons for the Merger and the Distribution
and other factors considered by the EEX Board, see "The Merger--Background,
Reasons for the Merger and the Distribution" and "--Recommendations of the
Board of Directors."
THE EEX SPECIAL MEETING
PURPOSE OF THE MEETING
The purpose of the EEX Special Meeting is to consider and vote upon proposals
to approve (i) the Plan of Merger and (ii) the Stock Plan.
Under the Plan of Merger, each outstanding share of EEX Common Stock will be
converted into one share of New EEX Common Stock. If the matters described in
the Proxy Statement/Prospectus are approved by the requisite shareholder vote
of EEX and the Merger is consummated, based on the number of shares of EEX
Common Stock outstanding on September 10, 1996, New EEX will issue
approximately 125,936,000 new shares of New EEX Common Stock to the former
holders of EEX Common Stock and the outstanding shares of Old LSEPO Common
Stock held by ENSERCH will be converted into approximately 778,000 shares of
New EEX Common Stock in accordance with the LSEPO Ratio. See "The Plan of
Merger--Manner and Basis of Converting Shares." In addition, New EEX will
reserve approximately 1,300,500 shares of New EEX Common Stock for issuance
upon exercise of outstanding options to acquire EEX Common Stock.
DATE, TIME AND PLACE
The EEX Special Meeting will be held on November 15, 1996, at 301 South
Harwood Street, Dallas, Texas at 3:00 p.m., local time.
RECORD DATE; SHARES ENTITLED TO VOTE
The EEX Board has established October 4, 1996, as the record date for the
determination of shareholders entitled to notice of and to vote at the EEX
Special Meeting. Only holders of record of EEX Common Stock at the close of
business on such date are entitled to vote at the EEX Special Meeting. On such
date, there were approximately 126,140,298 shares of EEX Common Stock
outstanding, each of which will be entitled to vote on each matter to be acted
upon or which may properly be brought before the EEX Special Meeting.
VOTE REQUIRED
The affirmative vote of the holders of at least two-thirds of the issued and
outstanding shares of EEX Common Stock is required to approve the Plan of
Merger and the affirmative vote of the holders of at least a majority of the
issued and outstanding shares of EEX Common Stock is required to approve the
Stock Plan. ENSERCH has informed EEX that it intends to vote all of the EEX
Common Stock beneficially
3
<PAGE>
owned by ENSERCH (which constitutes approximately 83% of the outstanding EEX
Common Stock) in favor of the Plan of Merger and the Stock Plan, thus ensuring
that the Plan of Merger and the Stock Plan will be approved by the requisite
shareholder votes. UNDER APPLICABLE TEXAS LAW, IN DETERMINING WHETHER THE
REQUISITE NUMBER OF AFFIRMATIVE VOTES HAS BEEN CAST ON EACH OF THE PROPOSALS,
ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS VOTES CAST
AGAINST EACH PROPOSAL.
For additional information concerning the EEX Special Meeting, see "The EEX
Special Meeting."
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
THE EEX BOARD HAS APPROVED THE PLAN OF MERGER AND RECOMMENDS THAT HOLDERS OF
EEX COMMON STOCK VOTE "FOR" APPROVAL OF THE PLAN OF MERGER. THE EEX BOARD HAS
ALSO APPROVED THE STOCK PLAN AND RECOMMENDS THAT HOLDERS OF EEX COMMON STOCK
VOTE "FOR" APPROVAL OF THE STOCK PLAN. SEE "THE MERGER--BACKGROUND REASONS FOR
THE MERGER AND THE DISTRIBUTION"; AND "--RECOMMENDATIONS OF THE BOARD OF
DIRECTORS."
OPINION OF INVESTMENT ADVISOR
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has delivered its
written opinion, dated September 10, 1996 (the "DLJ Opinion"), to the EEX Board
to the effect that the EEX Ratio and the LSEPO Ratio taken together are fair,
from a financial point of view, to the public shareholders of EEX. The form of
such opinion is attached hereto as Annex B. For a more detailed description of
the opinion and information regarding fees and expenses to be paid to DLJ by
EEX upon consummation of the Merger and DLJ's prior relationship with EEX, see
"The Merger--Opinion of Investment Advisor."
THE MERGER AND THE PLAN OF MERGER
THE PLAN OF MERGER
Pursuant to the Plan of Merger, at the Effective Time (as defined herein),
EEX will merge with and into LSEPO, and LSEPO shall continue as the surviving
corporation of the Merger, although it will change its name to Enserch
Exploration, Inc. in the Merger. Under the terms of the Plan of Merger, each
outstanding share of EEX Common Stock will be converted into one share of New
EEX Common Stock and the outstanding shares of Old LSEPO Common Stock held by
ENSERCH will be converted into shares of New EEX Common Stock in accordance
with the LSEPO Ratio. It is anticipated that the transaction will qualify as a
tax-free reorganization under the Internal Revenue Code of 1986 (the "Code").
For additional information on the conversion of shares of EEX Common Stock, see
"The Plan of Merger--Manner and Basis of Converting Shares."
The Plan of Merger contemplates that the Stock Plan will survive the Merger
and be the stock incentive plan of New EEX. Options granted by EEX under the
Stock Plan and outstanding at the Effective Time will become options to
purchase the same number of shares of New EEX Common Stock at the same exercise
price and otherwise on the same terms and conditions. For additional
information on the conversion of EEX Options, see "The Plan of Merger--Other
Matters Affected by the Plan of Merger."
CONVERSION OF EEX COMMON STOCK INTO NEW EEX COMMON STOCK
Certificates representing shares of EEX Common Stock will represent shares of
New EEX Common Stock after the Effective Time of the Merger. Accordingly,
holders of EEX Common Stock will not need to exchange their certificates
representing EEX Common Stock for certificates representing New EEX Common
Stock.
The EEX Common Stock is listed for trading on the NYSE. The New EEX Common
Stock to be issued in the Merger has been approved for listing on the NYSE,
subject to requisite shareholder approval of the Plan of Merger and notice of
issuance.
4
<PAGE>
MANAGEMENT AND OPERATIONS OF NEW EEX AFTER THE MERGER AND THE DISTRIBUTION
For a discussion of the management and operations of New EEX following the
Merger and the Distribution, see "The Merger--Certain Arrangements Regarding
Management Following the Merger" and "Management."
EFFECTIVE TIME OF THE MERGER
The Plan of Merger provides that the Merger will be consummated by the filing
with the Secretary of State of the State of Texas of articles of merger and
that the Merger will become effective thereafter at such time as a certificate
of merger is issued by the Secretary of State of the State of Texas (the
"Effective Time"). Assuming all conditions to the Merger contained in the Plan
of Merger are satisfied or waived prior thereto, it is anticipated that the
Effective Time of the Merger will be as soon as all conditions to the EC/TUC
Mergers are satisfied or waived, except for the Merger and the Distribution,
and that the Merger will occur prior to the Distribution and the EC/TUC
Mergers. The Merger and the Distribution will not occur if the EC/TUC Mergers
are not to occur.
NO APPRAISAL RIGHTS
Holders of EEX Common Stock are not entitled to dissenters' appraisal rights
under the TBCA in respect of the Merger.
HART-SCOTT-RODINO MATTERS
Shareholders whose holdings of New EEX Common Stock immediately following the
Distribution exceed $15 million may be subject to the filing requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. See "The
Mergers--Regulatory Matters."
5
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
OF LSEPO
The following selected historical financial data of LSEPO for each of the
three years in the period ended December 31, 1995 is derived from the financial
statements of LSEPO, which have been audited by Deloitte & Touche LLP,
independent public accountants, and are included elsewhere herein. The
historical financial data for the six months ended June 30, 1996 and 1995 is
unaudited and derived from the unaudited financial statements of LSEPO included
elsewhere herein; however, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation have been made. This information is not necessarily indicative of
LSEPO's future financial results and should be read in conjunction with the
historical financial statements of LSEPO and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of LSEPO and
"Unaudited Pro Forma Financial Information of New EEX" included elsewhere
herein. Results for interim periods do not necessarily indicate results for the
full year.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- ---------------
UNAUDITED UNAUDITED
------------ ----------------- ---------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Cogeneration operations
revenues (a)................. $ 6.0 $ 8.7 $10.7 $12.7 $16.5 $ 8.1 $ 6.0
Net income (loss)............. $ (.1) $ (.1) $ 1.1 $ .8 $ 1.4 $ .5 $ .2
Net income (loss) per share
(b).......................... $(.10) $(.14) $1.40 $1.05 $1.76 $ .58 $ .23
Weighted average shares
outstanding (b).............. .8 .8 .8 .8 .8 .8 .8
BALANCE SHEET DATA (at period
end)
Total assets.................. $ 1.1 $ 1.1 $ 4.3 $ 4.2 $10.1 $ 2.8 $ 5.3
Shareholder's equity
(deficiency)................. (.1) (.2) .9 1.7 3.1 2.2 3.3
</TABLE>
- --------
(a) Revenues include contract revenues and reimbursement of expenses incurred
on behalf of operating partnerships.
(b) The weighted average shares outstanding and the net income (loss) per share
are pro forma unaudited amounts reflecting an assumed number of shares of
EEX Common Stock into which the LSEPO Common Stock is to be converted in
the Merger.
6
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
OF EEX
The following selected historical financial data of EEX for each of the five
years in the period ended December 31, 1995 is derived from the consolidated
financial statements included in the EEX Annual Report on Form 10-K for the
year ended December 31, 1995, which have been audited by Deloitte & Touche LLP,
independent public accountants, and selected financial data also included in
the EEX Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated by reference herein. The historical financial data for the six
months ended June 30, 1996 and 1995 is unaudited and derived from the unaudited
consolidated financial information included in the EEX Quarterly Report on Form
10-Q for the quarter ended June 30, 1996; however, in the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation have been made. This information is not
necessarily indicative of EEX's future financial results and should be read in
conjunction with the historical financial statements of EEX and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
EEX included in such EEX Annual Report on Form 10-K and EEX Quarterly Report on
Form 10-Q and incorporated by reference herein and "Unaudited Pro Forma
Financial Information of New EEX" included elsewhere herein. Results for
interim periods do not necessarily indicate results for the full year.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ ------------------
UNAUDITED
------------------
1991 1992 1993 1994 1995 (A) 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Natural gas revenues... $ 123.5 $ 118.6 $ 146.4 $ 144.5 $ 157.3 $ 67.0 $ 111.9
Oil and condensate
revenues.............. 54.0 45.1 36.9 30.9 56.5 20.7 43.9
Natural gas liquids
revenues.............. 2.0 6.5 4.1 2.4 4.9 1.7 3.6
Other revenues......... 1.5 1.3 2.4 1.3 2.1 .2 .9
-------- -------- -------- -------- -------- -------- --------
Total revenues......... 181.0 171.5 189.8 179.1 220.8 89.6 160.3
Production and
operating expenses.... 35.1 29.6 31.4 31.7 48.7 20.1 38.6
Exploration............ 12.2 11.2 8.7 9.1 11.8 5.5 6.2
Depreciation and
amortization.......... 73.7 76.7 78.4 80.8 115.7 46.5 68.0
(Sale) write-down of
inactive pipeline..... -- 16.5 -- (7.5) -- -- --
Write-down of gas and
oil properties........ 53.1 -- 10.2 -- .9 -- --
General, administrative
and other............. 23.6 23.1 30.0 19.8 30.7 14.4 16.5
Taxes, other than
income taxes.......... 17.3 15.6 15.9 13.2 19.2 7.5 11.0
-------- -------- -------- -------- -------- -------- --------
Total expenses......... 215.0 172.7 174.6 147.1 227.0 94.0 140.3
Operating income
(loss)................ (34.0) (1.2) 15.2 32.0 (6.2) (4.4) 20.0
Other income (expense)-
net................... 6.0 -- -- (.3) .1 -- --
Interest income........ 3.2 3.7 2.0 .7 1.0 1.0 --
Interest and other
financing costs....... (20.0) (20.7) (30.6) (20.9) (14.6) (3.6) (11.8)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes.......... (44.8) (18.2) (13.4) 11.5 (19.7) (7.0) 8.2
Income taxes
(benefit)............. -- .4 (3.4) (.3) (7.2) (2.5) 2.8
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ (44.8) $ (18.6) $ (10.0) $ 11.8 $ (12.5) $ (4.5) $ 5.4
======== ======== ======== ======== ======== ======== ========
Pro Forma Information-
Change in Tax Status
(b)
Income (loss) before
income taxes.......... $ (44.8) $ (18.2) $ (13.4) $ 11.5
Income taxes
(benefit)............. (17.0) (6.4) (4.7) 4.0
-------- -------- -------- --------
Net income (loss)...... $ (27.8) $ (11.8) $ (8.7) $ 7.5
======== ======== ======== ========
Net income (loss) per
share (pro forma for
periods prior to
1995)................. $ (.26) $ (.11) $ (.08) $ .07 $ (.11) $ (.04) $ .04
Weighted average shares
outstanding........... 105.8 105.8 105.8 105.8 111.1 105.7 125.8
CASH FLOW DATA
Net cash provided by
operating activities.. $ 68.3 $ 85.2 $ 79.5 $ 61.7 $ 84.0 $ 37.8 $ 48.2
Net cash used in
investing activities.. (97.7) (58.7) (129.0) (108.8) (388.2) (350.6) (93.1)
Net cash provided by
(used in) financing
activities............ 29.2 (25.7) 48.9 47.0 305.5 316.7 45.1
BALANCE SHEET DATA (at
period end)
Property, plant and
equipment-net......... $1,056.2 $1,018.4 $1,046.4 $1,254.0 $1,670.6 $1,746.2 $1,696.1
Total assets........... 1,126.7 1,068.8 1,111.5 1,381.2 1,776.8 1,841.3 1,822.2
CAPITAL STRUCTURE (at
period end)
Capital lease
obligations (c)....... $ -- $ -- $ -- $ 155.9 $ 98.0 $ 153.9 $ 95.8
Long-term debt (c)..... 234.0 266.0 298.0 -- 160.0 350.0 222.0
Company-obligated
mandatorily redeemable
preferred securities
of subsidiary......... -- -- -- -- 150.0 150.0 150.0
Owners' equity......... 721.4 671.7 630.7 736.0 932.2 731.3 937.9
-------- -------- -------- -------- -------- -------- --------
Total.................. $ 955.4 $ 937.7 $ 928.7 $ 891.9 $1,340.2 $1,385.2 $1,405.7
======== ======== ======== ======== ======== ======== ========
</TABLE>
- -------
(a) 1995 includes results of DALEN Corporation since its acquisition by EEX on
June 8, 1995.
(b) Prior to 1995, most of EEX's operations were conducted through a
partnership, and the income or loss of the partnership was includable in
the tax returns of the individual partners. Pro forma income and per share
data for periods prior to 1995 include a pro forma provision for income
taxes on partnership operations based on the applicable federal statutory
tax rate.
(c) Including current portion.
7
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
OF NEW EEX
The following selected unaudited pro forma financial data of New EEX is
derived from the historical financial statements of EEX and LSEPO and gives
effect to the Merger. The balance sheet data is presented as if the Merger had
occurred on June 30, 1996, and the income statement data assumes the Merger
occurred at the beginning of each period presented. For purposes of financial
reporting, the Merger will be treated as a combination of entities under common
control. Accordingly, the assets and liabilities of EEX and LSEPO will be
recorded at their historical amounts. This information is not necessarily
indicative of the financial results that would have occurred had the Merger
been consummated on the indicated dates, or of New EEX's future financial
results, and should be read in conjunction with the historical financial
statements of EEX and LSEPO, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of EEX and LSEPO and "Unaudited Pro Forma
Financial Information of New EEX" included or incorporated by reference herein.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------- JUNE 30,
1993 1994 1995 (A) 1996
--------- --------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Natural gas revenues........... $ 146.4 $ 144.6 $ 157.3 $ 111.9
Oil and condensate revenues.... 36.9 30.9 56.5 43.9
Natural gas liquids revenues... 4.1 2.4 4.9 3.6
Cogeneration operations
revenues (b).................. 10.7 12.7 16.5 6.0
Other.......................... 2.4 1.3 2.2 .9
--------- --------- --------- ----------
Total revenues................. 200.5 191.9 237.4 166.3
Production and operating
expenses...................... 31.4 31.7 48.7 38.6
Exploration.................... 8.7 9.1 11.8 6.2
Depreciation and amortization.. 78.4 80.8 115.7 68.0
Sale of inactive pipeline...... -- (7.5) -- --
Write-down of gas and oil
properties.................... 10.2 -- .9 --
Cogeneration operations
expenses...................... 8.6 11.0 13.9 5.5
General, administrative and
other......................... 30.0 19.8 30.7 16.5
Taxes, other than income
taxes......................... 16.2 13.6 19.6 11.2
--------- --------- --------- ----------
Total expenses................. 183.5 158.5 241.3 146.0
Operating income (loss)........ 17.0 33.4 (3.9) 20.3
Other income (expense)-net..... -- (.3) .2 .1
Interest income................ 2.0 .7 1.0 --
Interest and other financing
costs......................... (30.5) (20.9) (14.7) (12.0)
--------- --------- --------- ----------
Income (loss) before income
taxes......................... (11.5) 12.9 (17.4) 8.4
Income taxes (benefit)......... (2.6) .3 (6.3) 2.9
--------- --------- --------- ----------
Net income (loss).............. $ (8.9) $ 12.6 $ (11.1) $ 5.5
========= ========= ========= ==========
Pro Forma Information-Change in
Tax Status (c)
Income (loss) before income
taxes......................... $ (11.5) $ 12.9
Income taxes (benefit)
(including income
taxes on partnership
operations)................... (3.9) 4.6
--------- ---------
Net income (loss).............. $ (7.6) $ 8.3
========= =========
Net income (loss) per share
(d)........................... $ (.07) $ .08 $ (.10) $ .04
Weighted average shares
outstanding (d)............... 106.6 106.6 111.9 126.6
BALANCE SHEET DATA (at period
end)
Property, plant and equipment-
net........................... $ 1,696.1
Total assets................... 1,827.8
CAPITAL STRUCTURE (at period
end)
Capital lease obligations (e).. $ 95.8
Long-term debt(e).............. 222.0
Company-obligated mandatorily
redeemable preferred
securities of subsidiary...... 150.0
Owners' equity................. 941.5
----------
Total.......................... $ 1,409.3
==========
</TABLE>
- --------
(a) 1995 includes results of DALEN Corporation since its acquisition by EEX on
June 8, 1995.
(b) Revenues include contract revenues and reimbursement of expenses incurred
on behalf of operating partnerships.
(c) Prior to 1995, most of EEX's operations were conducted through a
partnership, and the income or loss of the partnership was includable in
the tax returns of the individual partners. Pro forma income and per share
data for periods prior to 1995 include a pro forma provision for income
taxes on partnership operations based on the applicable federal statutory
tax rate.
(d) The weighted average shares outstanding and the net income (loss) per share
are based on historical EEX average shares plus 778,000 shares assumed to
be issued in the Merger.
(e) Includes current portion.
8
<PAGE>
PRO FORMA NEW EEX CAPITALIZATION
The capitalization of LSEPO and EEX at June 30, 1996 and the pro forma
capitalization of New EEX giving effect to the Merger are set forth below. See
"Unaudited Pro Forma Financial Information of New EEX" included elsewhere
herein.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------
LSEPO EEX NEW EEX
ACTUAL ACTUAL PRO FORMA
------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt
Bank revolving credit agreement............... $ -- $ 222,000 $ 222,000
Capital lease obligations (includes current
portion)..................................... -- 95,794 95,794
------ ---------- ----------
Total long-term debt....................... -- 317,794 317,794
------ ---------- ----------
Company-obligated mandatorily redeemable
preferred securities of subsidiary............ -- 150,000 150,000
------ ---------- ----------
Common shareholders' equity
Common stock and paid in capital,
200,000 shares authorized, outstanding:
778; 125,933; 126,711........................ 302 945,739 946,041
Retained earnings (deficit)................... 3,269 (7,145) (3,876)
Unamortized restricted stock compensation..... -- (654) (654)
------ ---------- ----------
Common shareholders' equity................ 3,571 937,940 941,511
------ ---------- ----------
Total capitalization....................... $3,571 $1,405,734 $1,409,305
====== ========== ==========
</TABLE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical, pro forma and equivalent
pro forma per share financial information for LSEPO, EEX and New EEX for the
year ended December 31, 1995 and as of and for the six months ended June 30,
1996. The following information should be read in conjunction with the
historical and pro forma financial information of LSEPO, EEX and New EEX
included or incorporated by reference elsewhere herein.
HISTORICAL AND PRO FORMA PER COMMON SHARE DATA OF LSEPO
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
LSEPO NEW EEX
---------- ---------
<S> <C> <C>
Year ended December 31, 1995
Earnings (loss) per common share.......................... $1.76 $(.10)
Six months ended June 30, 1996
Earnings per common share................................. .23 .04
As of June 30, 1996
Book value per common share............................... 4.59 7.43
HISTORICAL AND EQUIVALENT PRO FORMA PER COMMON SHARE DATA OF EEX
<CAPTION>
HISTORICAL PRO FORMA
EEX NEW EEX
---------- ---------
<S> <C> <C>
Year ended December 31, 1995
Loss per common share..................................... $(.11) $(.10)
Six months ended June 30, 1996
Earnings per common share................................. .04 .04
As of June 30, 1996
Book value per common share............................... 7.45 7.43
</TABLE>
Neither LSEPO nor EEX has declared or paid any dividends on its common stock
during the year ended December 31, 1995 or the six months ended June 30, 1996.
9
<PAGE>
RISK FACTORS
The following factors should be considered carefully by the shareholders of
EEX in connection with voting upon the Plan of Merger. This Proxy
Statement/Prospectus contains certain forward-looking statements and
information relating to New EEX that are based on the beliefs of LSEPO or EEX
management as well as assumptions made by and information currently available
to LSEPO or EEX management. When used in this document, the words
"anticipate," "believe," "estimate" and "expect" and similar expressions as
they relate to LSEPO, EEX, or LSEPO or EEX management, are intended to
identify forward-looking statements. Such statements reflect the current views
of LSEPO or EEX with respect to future events and are subject to certain
risks, uncertainties and assumptions, including the risk factors described in
this Proxy Statement/Prospectus. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. Neither LSEPO nor EEX intends to update these
forward-looking statements.
LACK OF ENSERCH FINANCIAL SUPPORT
ENSERCH has historically provided EEX with financial support, both through
guarantees of EEX financial obligations and through a formal borrowing
arrangement pursuant to which EEX may borrow up to $50 million at an annual
interest rate equal to the average rate of all loans EEX has outstanding under
its bank facilities or if no such loans are outstanding, the current one month
LIBOR rate plus the spread specified in EEX's bank facilities. Following the
Merger, aside from the arrangements set forth in the Distribution Agreement,
ENSERCH will not be providing any financial support to New EEX. New EEX
expects to maintain its unsecured line of credit from a bank group in an
amount and under terms currently available. No guarantee of ENSERCH will be
provided for this new line of credit. There can be no assurance that New EEX
will be able to obtain adequate financing with respect to its operations
following the Merger or, if it is so able, that such financing will be on
terms as favorable as those EEX received when it was affiliated with ENSERCH.
EEX is currently considering proposals to enter into a long-term leveraged
lease for up to $230,000,000 to refinance EEX's lease obligations to Enserch
Exploration Holdings, Inc. for its 60% interest in the facilities and
equipment in the Garden Banks facility. The proposed lease would have a term
of up to 15 years.
INCREASE IN PUBLIC MARKET SIZE
As of the date hereof, approximately 17% of the outstanding EEX Common Stock
is publicly held, and the balance is held by ENSERCH. Following the
Distribution, all of the outstanding New EEX Common Stock will be publicly
held. There is no way to predict what effect, if any, the expanded public
market will have on the price per share of New EEX Common Stock. It is
possible that as a result of the expanded public market, the price per share
of New EEX Common Stock could be lower than the historical price per share of
EEX Common Stock.
MANAGEMENT OF INDEPENDENT COMPANY
Neither LSEPO nor EEX has operated as an independent company. Both have
historically depended upon ENSERCH for management support. Following the
Merger, aside from the arrangements set forth in the Distribution Agreement,
ENSERCH will not be providing any management support to New EEX. See
"Management." EEX believes that most of EEX's current senior executives will
continue to serve New EEX after the Merger and the Distribution and that the
staffing is or will be in place to adequately manage EEX as an independent
company. However, there can be no guarantee that New EEX will be successfully
operated following the Merger. See "Management."
UNCERTAINTIES IN ESTIMATING RESERVES AND FUTURE NET CASH FLOWS
There are numerous uncertainties inherent in estimating quantities and
values of gas and oil reserves and in projecting future rates of production
and net revenues and the timing of development expenditures, including factors
involving reservoir engineering, pricing and both operating and regulatory
constraints. The reserve data
10
<PAGE>
included in this Proxy Statement/Prospectus represent estimates only and
should not be considered exact. Reserve assessment is a subjective process of
estimating the recovery from underground accumulations of natural gas and
other hydrocarbons that cannot be measured in an exact way. Accordingly,
reserve estimates are often different from the quantities of natural gas and
other hydrocarbons ultimately recovered. Any downward adjustment in reserve
estimates could adversely affect New EEX's future prospects and the market
value of its securities.
RESERVE REPLACEMENT UNCERTAINTIES
New EEX's gas and oil exploration, development and production operations
will involve numerous risks that could result in the failure to find new
reserves or fully produce existing reserves. New EEX's prospects for growth
and profitability will depend predominantly on its ability to replace present
reserves through exploration, development and acquisition. The rate of
production from gas and oil properties generally declines as reserves are
depleted. Without successful exploration and development activities or reserve
acquisitions, the proved reserves of New EEX will decline as gas and oil are
produced from its existing proved developed reserves. There can be no
assurance that New EEX's exploration, development and acquisition activities
will result in significant additional reserves or that New EEX will continue
to be able to drill productive wells at acceptable costs. While the gradual
depletion of producing reserves, the need for recompletion of wells that have
multiple reservoirs, and the need for workover of wells that develop
mechanical problems are neither unusual nor unexpected in the gas and oil
industry, the timing and extent of production declines and recompletion or
workover requirements for wells cannot be predicted with any certainty.
EXPLORATION, DEVELOPMENT, PRODUCTION AND SELLING RISKS
New EEX's operations will be subject to the risks and uncertainties
associated with finding, acquiring and developing gas and oil properties, and
producing, transporting and selling gas and oil. New EEX expects to incur
significant expenditures in connection with the identification and acquisition
of properties and the drilling and completion of wells. New EEX's operations
may be materially curtailed, delayed or cancelled as a result of numerous
factors, including accidents, title problems, weather conditions, compliance
with governmental requirements and shortages or delays in the delivery of
equipment. Drilling may involve unprofitable efforts, not only with respect to
dry wells, but also with respect to wells that are productive but do not
produce sufficient net revenues to return a profit after drilling, operating
and other costs. Completion of a well does not assure a profit on the
investment or recovery of drilling, completion and operating costs. Various
field operating conditions may adversely affect New EEX's production from
successful wells. Close well supervision and effective maintenance operations
can contribute to maximizing production rates over time, but production delays
and declines from normal field operating conditions cannot be eliminated and
can be expected to affect adversely revenue and cash flow levels to varying
degrees. Most wells can be expected to require recompletions or workovers
during their productive lives. In addition, New EEX's ability to sell its gas
and oil production is dependent on the availability and capacity of gas and
oil gathering systems, pipelines, and other forms of transportation. Federal
and state regulation of gas and oil production and transportation, general
economic conditions, quality of the hydrocarbons and changes in supply and
demand all could materially adversely affect New EEX's ability to sell its gas
and oil production.
OPERATING HAZARDS
New EEX's operations will be subject to the hazards inherent in the gas and
oil industry, including fires, explosions, blow-outs, equipment failures,
abnormally pressured formations and environmental accidents such as gas leaks,
oil spills, ruptures or discharges of toxic gasses, the occurrence of any of
which could result in substantial losses to New EEX due to injury or loss of
life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. In
accordance with customary industry practice, New EEX will maintain insurance
against some, but not all, of the hazards described above. There can be no
assurance
11
<PAGE>
that any insurance will be adequate to cover any losses or liabilities. EEX
cannot predict the continued availability of insurance, or availability at
commercially acceptable premium levels.
OFFSHORE RISKS
EEX's offshore Gulf of Mexico gas and oil reserves include properties
located in water depths of 20 to 3,400 feet. Drilling operations offshore are
by their nature more difficult than drilling operations conducted on land.
EEX's deep water drilling requires the application of more advanced
technologies, involving a higher risk of mechanical failure and inevitably
resulting in significantly higher drilling costs. EEX operates deep water
wells which are completed utilizing subsea completion techniques that involve
the installation of subsea wellheads and the use of bundled flow lines to tie
back to production facilities. The installation of these subsea wellheads and
bundled flow lines requires the use of advanced remote installation mechanics.
Such operations involve a higher risk of encountering mechanical difficulties
and equipment failures that, if encountered, could result in significant cost
overruns. Furthermore, offshore operations require a significant amount of
time between the time gas or oil is discovered and the time the gas or oil is
actually marketed, increasing the market risk involved with such operations.
EFFECTS OF CHANGES IN GAS AND OIL PRICES AND VOLATILITY OF GAS AND OIL MARKETS
The revenues generated by New EEX's operations will be highly dependent upon
the prices of, and demand for, gas and oil and the costs of acquiring,
developing and producing reserves. Gas and oil prices have historically been
volatile and are likely to continue to be volatile in the future. Prices for
gas and oil are subject to fluctuations in response to relatively minor
changes in supply, market uncertainty and a variety of additional factors that
are beyond the control of New EEX, including economic conditions in the United
States and elsewhere, the world political situation as it affects OPEC, the
Middle East and other producing countries, the actions of OPEC, government
regulation and taxes, the level of consumer demand, the price and availability
of alternative fuels and overall economic development. New EEX will engage in
hedging activities with respect to some of its projected gas and oil
production through a variety of financial arrangements designed to protect
against price declines, including swaps, collars and futures agreements. To
the extent New EEX engages in such activities, it may be prevented from
realizing the benefits of price increases above the levels of the hedges and
protected from incurring the detriments of price decreases below the level of
the hedges. Because New EEX's reserve base will be approximately 75% natural
gas on an energy equivalent basis, it will be more sensitive to fluctuations
in the price of natural gas than to fluctuations in the price of oil.
Revenues, operating income and net income for New EEX will closely follow gas
and oil prices and production volumes. New EEX will follow the full cost
method of accounting for gas and oil properties. A decline in gas and oil
prices could cause a future write-down of capitalized costs and a non-cash
charge against income.
GOVERNMENT REGULATION
New EEX's business is subject to certain federal, state and local laws and
regulations relating to the drilling for and production of gas and oil, as
well as environmental and safety matters. Such laws and regulations have
generally become more stringent in recent years, often imposing greater
liability on an increasing number of parties. Because the requirements imposed
by such laws and regulations are frequently changed, EEX is unable to predict
the effect or cost of compliance with such requirements or their effects on
gas and oil use or prices.
ENVIRONMENTAL MATTERS
EEX believes that its properties and operations are in substantial
compliance with applicable environmental laws and regulations. The
construction and operation of facilities for drilling, transporting,
processing and storing gas and oil are subject to federal, state and local
environmental laws and regulations, including those that can impose
obligations to clean up hazardous substances at facilities EEX owns or
operates or to which it has sent wastes for disposal. In most instances, the
applicable regulatory requirements relate to water and air pollution control
and solid waste management measures. Environmental regulation can increase the
cost of planning,
12
<PAGE>
designing, installing and operating such facilities. Expenditures for
environmental control equipment and for remediation have not been significant
in relation to the results of operations of EEX. EEX believes, however, that
it is reasonably likely that the trend in environmental legislation and
regulations will continue to be toward stricter standards.
COMPETITION
The gas and oil industry is highly competitive in all its phases. New EEX
competes in the acquisition of properties, the search for and development of
reserves, the production and sale of gas and oil, and the securing of the
labor and equipment required to conduct operations. New EEX's competitors will
include major gas and oil companies, other independent gas and oil concerns
and individual producers and operators. Many of these competitors will have
financial and other resources that will substantially exceed those available
to New EEX. Gas and oil producers also compete with other industries that
supply energy and fuel.
SHARES ELIGIBLE FOR FUTURE SALE
New EEX will be authorized to issue additional equity and debt securities,
including shares of preferred stock. Under the current rules of the NYSE, New
EEX will not be permitted to issue shares of New EEX Common Stock equal to 20%
or more of the then outstanding shares in connection with any single future
transaction, other than a public sale for cash, without shareholder approval.
The future sale of a substantial number of shares of New EEX Common Stock or
preferred stock in the public market could adversely affect the shareholders'
equity interests in New EEX and the market price of the New EEX Common Stock,
and their interests in the assets, liabilities, results of operations and cash
flows of New EEX represented by the issued and outstanding shares of New EEX
Common Stock may be diluted. Future issuances of shares of New EEX Common
Stock will be subject to the provisions of the Tax Assurance Agreement (as
defined below). See "--Tax Assurance Agreement Restrictions."
LIMITED TRADING MARKET
Prior to the Merger, there has been no trading market for the LSEPO Common
Stock. Although the New EEX Common Stock will be listed for trading on the
NYSE, there can be no assurance that an active trading market for the New EEX
Common Stock will develop subsequent to the Merger. After the completion of
the Merger and the Distribution, the market price of the New EEX Common Stock
may be influenced by many factors, including the depth and liquidity of the
market for the New EEX Common Stock, investor perceptions of New EEX and
general economic and other conditions.
CERTAIN LIMITATIONS ON CHANGES IN CONTROL OF NEW EEX
The articles of incorporation and the bylaws of New EEX contain certain
provisions, including a "fair price" provision applicable to certain business
combinations, a provision prohibiting shareholder action by written consent,
and provisions limiting the ability of shareholders to call special
shareholder meetings, which are not found in the EEX articles of incorporation
or bylaws and which could have the effect of delaying, deferring or preventing
a change in control of New EEX, even if such a change would be favorable to
the interests of New EEX's shareholders, and of limiting the opportunity to
realize premiums over prevailing market prices for New EEX Common Stock in
connection therewith. New EEX's Shareholder Rights Agreement, which also has
no equivalent at EEX, could have the same effect. See "Description of Capital
Stock."
TAX ASSURANCE AGREEMENT RESTRICTIONS
In connection with the Distribution, ENSERCH and New EEX will enter into a
Tax Assurance Agreement, substantially in the form attached hereto as Annex A-
4 (the "Tax Assurance Agreement"), that is intended to protect the tax-free
status of the Distribution. In general and subject to certain exceptions, the
Tax Assurance Agreement would require that New EEX (i) for two years after the
Distribution, continue to own at least 50% of
13
<PAGE>
the fair market value of its properties at the time of the Distribution and
continue directly to own and operate the business that LSEPO operated
immediately prior to the Merger and (ii) for six months after the
Distribution, not authorize, facilitate or effect any transaction involving
(a) the acquisition by any person of outstanding New EEX Common Stock, the
issuance of shares of New EEX Common Stock (other than the grant of certain
stock options and the sale of certain convertible debt) or the repurchase of
New EEX Common Stock if the cumulative number of shares repurchased, issued or
acquired would exceed 3.0% of the number of shares of New EEX Common Stock
outstanding immediately prior to the Distribution or (b) the issuance of any
class or series of capital stock other than New EEX Common Stock or options,
rights, warrants or securities exercisable for or convertible into such stock.
As a result of the Tax Assurance Agreement, New EEX may be restricted with
respect to its operations for the two years following the Distribution. These
restrictions could impair New EEX's ability to take certain actions that would
be in its best interests and could have an adverse effect on its financial
condition or results of operations. Under a Tax Allocation Agreement
substantially in the form attached hereto as Annex A-3 (the "Tax Allocation
Agreement"), New EEX will be obligated to indemnify ENSERCH after the Merger
if a breach by New EEX of the Tax Assurance Agreement causes the Distribution
to be a taxable event and New EEX will bear a specified proportionate share of
certain tax liabilities that might arise from the Distribution for reasons
other than certain actions by ENSERCH. See "Interests of Certain Persons in
the Merger--Relationship between EEX and ENSERCH--Tax Agreements."
14
<PAGE>
THE EEX SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the holders of EEX
Common Stock in connection with the solicitation of proxies by the EEX Board
for use at the EEX Special Meeting to be held on November 15, 1996, at 301
South Harwood Street, Dallas, Texas, commencing at 3:00 p.m. local time, and
at any adjournments or postponements thereof.
ENSERCH has informed EEX that it intends to vote all of the EEX Common Stock
beneficially owned by ENSERCH (which constitutes approximately 83% of the
outstanding EEX Common Stock) in favor of approval of the Plan of Merger and
the Stock Plan, thus ensuring that the Plan of Merger and the Stock Plan will
be approved by the requisite shareholder votes.
MATTERS TO BE CONSIDERED AT THE EEX SPECIAL MEETING
At the EEX Special Meeting, holders of EEX Common Stock will consider and
vote upon approval of the Plan of Merger and the Stock Plan.
BOARD OF DIRECTORS RECOMMENDATIONS
THE EEX BOARD HAS APPROVED THE PLAN OF MERGER AND THE STOCK PLAN AND
RECOMMENDS THAT EEX'S SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MATTERS
SUBMITTED TO EEX SHAREHOLDERS AS DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS.
VOTING AT THE EEX SPECIAL MEETING; RECORD DATE
The EEX Board has established October 3, 1996, as the record date for the
determination of shareholders entitled to notice of and to vote at the EEX
Special Meeting. Only holders of record of EEX Common Stock at the close of
business on such date are entitled to vote at the EEX Special Meeting. On such
date, there were approximately 126,140,298 shares of EEX Common Stock
outstanding, each of which will be entitled to vote on each matter to be acted
upon or which may properly be brought before the EEX Special Meeting.
EEX PROXIES
Shares of EEX Common Stock represented by proxies received by EEX prior to
or at the EEX Special Meeting will be voted in accordance with the
instructions contained therein. Shares of EEX Common Stock represented by
proxies for which no instruction is given will be voted "FOR" approval of the
Plan of Merger and "FOR" approval of the Stock Plan.
Holders of EEX Common Stock are requested to complete, sign and date the
enclosed proxy card and promptly return it in the postage paid envelope
provided for this purpose in order to ensure that the shares are voted. Any
shareholder giving a proxy has the right to revoke it at any time before it is
voted by filing, with the Corporate Secretary of EEX, either an instrument
revoking the proxy or a duly executed proxy bearing a later date. Proxies also
may be revoked by attending the meeting and voting in person.
The EEX Board is aware of no matters to be presented at the EEX Special
Meeting other than those described in this Proxy Statement/Prospectus. If
other matters are properly brought before the EEX Special Meeting, it is the
intention of the persons named in the proxies to vote the shares to which
those proxies relate in accordance with their judgment.
15
<PAGE>
MARKET PRICE DATA AND DIVIDEND POLICY
There is no established trading market for New EEX Common Stock, although
the shares of New EEX Common Stock have been approved for listing on the NYSE,
subject to requisite shareholder approval of the Plan of Merger and notice of
issuance. EEX Common Stock began trading on the NYSE on January 3, 1995, under
the symbol "EEX." There were no trades in EEX Common Stock in any market prior
to that date. The following table sets forth for the periods indicated the
high and low sales prices of EEX Common Stock as reported on the NYSE
Consolidated Transactions Tape.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1995:
First Quarter................................................. $11 1/8 $ 9 3/8
Second Quarter................................................ 14 7/8 10 1/8
Third Quarter................................................. 14 3/4 10
Fourth Quarter................................................ 11 5/8 9 1/4
Fiscal Year Ending December 31, 1996:
First Quarter................................................. $12 $ 9
Second Quarter................................................ 11 3/8 9 5/8
Third Quarter................................................. 11 3/8 8 3/4
</TABLE>
On September 30, 1996, the reported last sale price per share for EEX Common
Stock on the NYSE was $9 1/8. On the day preceding the announcement of the
EC/TUC Mergers, the reported last sale price per share for EEX Common Stock on
the NYSE was $10.125. At September 30, 1996 there were 1,415 holders of record
of EEX Common Stock.
No dividends have been paid on EEX Common Stock and it is anticipated that
New EEX will not pay any cash dividends in the foreseeable future. It is
anticipated that New EEX will retain its earnings to support the growth of its
business. For example, New EEX will be engaged in several offshore development
projects that will require significant capital investment over the next
several years. Future cash dividends will depend on New EEX's earnings,
capital requirements, financial condition and other factors deemed relevant by
the New EEX Board.
16
<PAGE>
THE MERGER
BACKGROUND, REASONS FOR THE MERGER AND THE DISTRIBUTION
The Merger and the Distribution are conditions precedent to the consummation
of the transactions contemplated by the EC/TUC Plan of Merger. The EC/TUC Plan
of Merger contemplates that two wholly owned subsidiaries of Holding Company
will be merged with and into TUC and ENSERCH, respectively, with holders of
TUC and ENSERCH Common Stock receiving shares of common stock of Holding
Company.
In the negotiations between ENSERCH and TUC regarding the EC/TUC Plan of
Merger, TUC informed ENSERCH that it did not wish to engage in a transaction
involving the acquisition of the natural gas and oil exploration and
production business of EEX. TUC felt that because the risk profile of EEX's
business is different from the risk profile offered by TUC, an involvement in
EEX's business would not be attractive to TUC investors. Accordingly, ENSERCH
determined that, immediately preceding the consummation of the EC/TUC Mergers,
ENSERCH would distribute its equity in EEX to the holders of ENSERCH Common
Stock on a pro rata basis.
Prior to the Distribution, EEX is to be merged with and into LSEPO. This
step is believed necessary to enable the Distribution to be tax-free to
ENSERCH and its shareholders.
After the Merger and immediately prior to the EC/TUC Mergers, the shares of
New EEX Common Stock held by ENSERCH are to be distributed pro rata to the
holders of ENSERCH Common Stock. The Distribution also is conditioned upon (i)
the receipt by ENSERCH of a ruling from the IRS that the Distribution will
result in no taxable gain to ENSERCH or its shareholders and (ii) the absence
of any temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Distribution.
ENSERCH is not obligated to effect the Distribution if it determines in good
faith after the receipt of the written advice of outside counsel that the
Distribution would result in a substantive violation of the TBCA relating to
corporate distributions and Texas or federal laws relating to fraudulent
conveyances.
The terms of a Credit Agreement dated May 1, 1995, as amended, among EEX,
The Chase Manhattan Bank, N.A., as Administrative, Syndication, and Auction
Agent, and Citibank N.A. as Documentation Agent and currently 19 lenders (the
"Revolving Credit Agreement") prohibit the Merger unless EEX obtains the prior
consent of the lenders (the "Majority Lenders") holding at least 51% of the
outstanding aggregate principal amount of the Committed Loans (as defined
therein). Approximately $197 million in principal amount of the Committed
Loans is currently outstanding. EEX expects to obtain the consent of the
Majority Lenders to the Plan of Merger. Base Rate Loans (as defined therein)
are prepayable at any time at the full outstanding principal amount plus
accrued interest. Eurodollar Loans and Fixed Rate Loans (as each term is
defined therein) are prepayable at any time at the full outstanding principal
amount plus accrued interest, together with a yield maintenance premium.
The terms of a Note Agreement between ENSERCH and The Prudential Insurance
Company of America and certain of its affiliates (the "Prudential Note
Agreement") prohibit the Distribution in the absence of the consent of the
holders of the 9.06% adjusting rate senior notes of ENSERCH issued thereunder
(the "Prudential Notes"). Approximately $59 million in principal amount of
Prudential Notes is currently outstanding. ENSERCH expects to obtain the
consent of the holders of the Prudential Notes to the Plan of Merger and the
Distribution. The Prudential Notes are prepayable at any time at the full
outstanding principal amount plus accrued interest and a yield maintenance
premium.
After the Merger, ENSERCH's ownership of New EEX Common Stock will reflect
the 105,015,328 shares attributable to its current approximate 83% beneficial
interest in EEX and the approximately 778,000 additional shares attributable
to the value of its interest in LSEPO prior to the Merger. At June 30, 1996,
there were 69,202,131 shares of ENSERCH Common Stock outstanding; accordingly,
if the Distribution had been effected at that date, the holders of ENSERCH
Common Stock would have been entitled to receive approximately 1.5 shares of
New EEX Common Stock for each share of ENSERCH Common Stock owned. The actual
ratio will
17
<PAGE>
depend on the final determination of the number of shares of New EEX Common
Stock to be received by ENSERCH for its interest in LSEPO and the shares of
ENSERCH Common Stock outstanding at the record date for the Distribution. Cash
is to be distributed in lieu of fractional shares of New EEX Common Stock.
ENSERCH will instruct the transfer agent for ENSERCH Common Stock to determine
the number of whole and fractional shares of New EEX Common Stock allocable to
each holder of record of ENSERCH Common Stock on the record date of the
Distribution, to aggregate all such fractional shares into whole shares and to
sell the whole shares obtained thereby in the open market at then prevailing
prices on behalf of holders who otherwise would be entitled to receive
fractional share interests and to distribute to each such holder that holder's
ratable share of the total proceeds of the sale, after making appropriate
deductions of the amount required for Federal tax witholding purposes and
after deducting any applicable transfer taxes. ENSERCH will bear the brokerage
commissions and other costs incurred in connection with these sales.
EFFECTS OF THE MERGER AND THE DISTRIBUTION
Pursuant to the Plan of Merger, at the Effective Time, EEX will merge with
and into LSEPO, and LSEPO will continue as the surviving corporation of the
Merger, although it will change its name to Enserch Exploration, Inc. in the
Merger. Under the terms of the Plan of Merger, each outstanding share of EEX
Common Stock will be converted into one share of New EEX Common Stock and the
10 shares of Old LSEPO Common Stock will be converted into shares of New EEX
Common Stock in accordance with the LSEPO Ratio. No fractional shares of New
EEX Common Stock will be issued. It is anticipated that the transaction will
qualify as a tax-free reorganization under the Code. Following the Merger, the
separate existence of EEX will cease, and there will be no further trading of
EEX Common Stock. New EEX will succeed to all of the business, assets and
obligations of EEX. New EEX Common Stock has been approved for listing on the
NYSE, subject to requisite shareholder approval of the Merger and notice of
issuance.
Following the Merger, ENSERCH will distribute all shares of New EEX Common
Stock owned by it to holders of ENSERCH Common Stock on the basis of
approximately 1.5 shares of New EEX Common Stock for each share of ENSERCH
Common Stock. Following the Distribution, New EEX will no longer be
controlled, either directly or indirectly, by ENSERCH. Instead, the ownership
of New EEX will be widely dispersed among the public shareholders of EEX and
the shareholders of ENSERCH.
CONFLICTS OF INTEREST OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the EEX Board with respect to the Plan
of Merger, shareholders should be aware that certain executive officers of EEX
have certain interests in the Merger in addition to the interests of
shareholders of EEX generally. The EEX Board was aware of these interests and
considered them, among other matters, in approving the Plan of Merger.
Change-in-Control Agreements and Other Arrangements. Under change-in-control
agreements entered into by EEX with four of its executive officers, certain
benefits will become payable to such employees if their employment is
terminated following the approval of the Plan of Merger by the shareholders of
EEX. Under the Stock Plan, options held by executive officers will become
vested and nonforfeitable upon the approval of the Plan of Merger by the
shareholders of EEX, and the forfeiture provisions with respect to shares of
restricted stock held by officers and directors lapsed upon approval of the
Plan of Merger by the EEX Board. Two executive officers will enter into
retention bonus arrangements whereby New EEX will pay a cash bonus upon the
attainment of eighteen months of continuous employment. See "The Merger--
Change-in-Control Agreements and Other Arrangements."
Indemnification. In the Plan of Merger, ENSERCH has agreed, from and after
the Effective Time, to indemnify, defend and hold New EEX and its directors,
officers, agents, attorneys and affiliates harmless from and against all
damages, as defined, with respect to (i) a breach or nonperformance of any
representation, warranty or covenant of LSEPO or ENSERCH in the Plan of Merger
or in any agreement executed in connection with the transactions contemplated
thereunder; (ii) the assets owned by LSEPO at or prior to the Effective Time;
(iii) any regulatory or compliance violation of LSEPO occurring prior to the
Effective Time; (iv) any untrue
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statement or alleged untrue statement of any material fact contained in this
Proxy/Registration Statement, or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; but only in each case to the extent based upon information
with respect to ENSERCH or LSEPO furnished in writing by or on behalf of
ENSERCH or LSEPO expressly for use in the Proxy/Registration Statement; and
(v) any environmental claim with respect to any facility, site, location or
business (whether past or present and whether active or inactive) owned,
operated or leased by LSEPO or ENSERCH prior to the Effective Time.
CERTAIN ARRANGEMENTS REGARDING MANAGEMENT FOLLOWING THE MERGER
The Plan of Merger provides that (a) the number of directors of New EEX will
be a number equal to the sum of (i) the number of directors of EEX in office
at the Effective Time and (ii) the number of directors of LSEPO, minus one, in
office at the Effective Time, and (b) the Board of Directors of New EEX will
consist of (i) the individuals serving as directors of EEX at the Effective
Time and (ii) the individuals serving as directors of LSEPO at the Effective
Time. The individuals who become members of the New EEX Board by virtue of
being directors of LSEPO immediately prior to the Effective Time are expected
to resign from the New EEX Board shortly after the Effective Time, which will
result in four vacancies in the New EEX Board that the remaining members of
the New EEX Board may fill prior to the next annual meeting of shareholders of
New EEX. Messrs. F. S. Addy, D.W. Biegler, B. A. Bridgewater, Jr., G. J. Junco
and W. C. McCord, currently directors of EEX, have agreed to serve as members
of the New EEX Board of Directors following the Effective Time. Until changed
in accordance with the Bylaws of New EEX, the officers of EEX in office at the
Effective Time will be the officers of New EEX. For additional information on
the directors and executive officers of New EEX following the Effective Time,
see "Management."
RETENTION BONUS ARRANGEMENT
Effective upon the closing of the Merger, EEX has entered into retention
bonus arrangements with Messrs. Junco and Irani, who are expected to retain
positions with New EEX following the Merger. Under the arrangements, New EEX
will pay a cash bonus equal to 200% and 100%, respectively, of Mr. Junco's and
Mr. Irani's current annual salaries upon the attainment of eighteen months of
continuous employment following the Merger. The bonus payments will be payable
on a pro rated basis in the event that, on or prior to the bonus payment date,
the employee dies or becomes disabled, unless during such period they are
terminated for cause. For purposes of the retention bonus arrangements,
termination for cause means (i) an act or acts of dishonesty or material
violation of an employment policy by, or at the direction of, the employee;
(ii) willful failure or refusal of the employee to perform services as
properly required by New EEX; (iii) any action or failure to act on the part
of the employee which is intended to result in injury to the assets, business
or prospects of New EEX; or (iv) the employee's conviction of a felony. The
aggregate amounts of the retention bonus payments which may become payable
under these arrangements for Mr. Junco and Mr. Irani are $650,000 and
$210,000, respectively.
CHANGE-IN-CONTROL AGREEMENTS AND OTHER ARRANGEMENTS
EEX has entered into change-in-control agreements with four of its executive
officers: G. J. Junco, B. K. Irani, J. P. McCormick and M. A. McAdams.
The approval by the holders of EEX Common Stock of the Plan of Merger will
constitute a "change-in- control" pursuant to the change-in-control
agreements. The agreements generally provide for the payment of benefits to
the employee if within a certain time of a change in control such employee's
employment is terminated, except in the case of (i) death or retirement (other
than early retirement of the employee initiated by New EEX); (ii) termination
by EEX for cause or as a result of disability; or (iii) termination by the
employee other than for "good reason," which is defined to include an adverse
change in the employee's status or position, a reduction in the employee's
salary or benefits or the failure by a successor company to assume the
obligations under the change-in-control agreement.
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The benefit payable by New EEX in the event of a qualifying termination
following a change in control is a lump sum amount equal to the sum of (i) the
employee's accrued base salary, earned vacation time and benefits or awards
under benefit plans to the date of termination; (ii) the amount of the
employee's highest target bonus in the year in which the termination occurs or
in either of the two preceding years pro rated based on the number of days
elapsed in the year to the date of termination; (iii) an amount equal to a
multiple of the employee's "annual compensation" (but not in excess of the
annual compensation that would be earned up to normal retirement); and (iv)
the value of unexercised stock options that the employee, by giving notice to
New EEX, chooses not to retain. For purposes of clause (iii) in the preceding
sentence, (a) the applicable multiple is either three or two for each of the
executive officers and (b) "annual compensation" is defined to include the
individual's base pay plus target bonus.
The change-in-control agreements further provide for (i) a gross-up if the
benefits payable are taxed under Section 4999 of the Code; (ii) the
continuation of insurance programs until the earlier of three years after the
date of termination or the employee's normal retirement date; and (iii) the
assignment of club memberships.
If the employment of the EEX executive officers had been terminated as of
August 30, 1996, under circumstances giving rise to an entitlement to benefits
under the change-in-control agreements, the value of their multiple of annual
compensation and prorated bonus would have been as follows: G. J. Junco--
$1,592,500; B. K. Irani--$903,000; J. P. McCormick--$945,625; and M. A.
McAdams--$370,000.
In accordance with the provisions of the Stock Plan, upon the approval of
the Plan of Merger by the EEX shareholders, all outstanding unvested stock
options awarded prior to September 10, 1996, will automatically become vested
and each outstanding option will not be subject to forfeiture for any reason,
including the termination of the employment of the holder, prior to the
scheduled expiration of the option. Also in accordance with the provisions of
the Stock Plan, the restrictions on all outstanding shares of restricted stock
awarded prior to September 10, 1996, under the Stock Plan lapsed upon the
approval of the Plan of Merger by the EEX Board, with the result that all such
shares of EEX Common Stock are nonforfeitable and immediately transferable.
Under change-in-control provisions in the Stock Plan, all unvested options
granted under the Stock Plan will become fully exercisable upon approval of
the Merger by the shareholders of EEX. Messrs. Biegler, Junco, Fortado, Irani
and McCormick hold 31,250 options, 68,750 options, 1,750 options, 37,500
options and 20,000 options, respectively, which will be affected by such
provisions. In addition, Messrs. Biegler and Junco, who are executive officers
of EEX, were previously granted 25,000 shares and 35,000 shares, respectively,
of restricted EEX Common Stock under the Stock Plan. Under provisions of the
Stock Plan, the restrictions on those shares were lifted at the time the EEX
Board approved the Merger.
At the Effective Time of the Merger, each option that remains outstanding
under the Stock Plan will be converted to an option to purchase one share of
New EEX Common Stock. See "Management--The Stock Plan."
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The EEX Board has approved the Plan of Merger and the Stock Plan and
recommends that the EEX shareholders vote "FOR" approval of the matters
described in this Proxy Statement/Prospectus. ENSERCH has informed EEX that it
intends to vote all of the shares of EEX Common Stock beneficially owned by
ENSERCH (which constitutes approximately 83% of the outstanding EEX Common
Stock) in favor of the Plan of Merger and the Stock Plan, thus ensuring that
the Plan of Merger and the Stock Plan will be approved by the requisite
shareholder votes.
The EEX Board approved the Plan of Merger for the following reasons:
. EEX as an Independent Company. EEX management, as a result of their own
observations regarding the superior valuations accorded "pure play"
investments and from listening to the views of investors and financial
advisors, believe that EEX has been undervalued in the financial markets
as a result of its
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majority ownership by ENSERCH. New EEX will have balance sheet resources
that should enhance its ability to make acquisitions and develop its
prospects.
. Ownership Percentage. Because the value of LSEPO is small compared to
the value of EEX, the EEX Common Shareholders will have substantially
the same ownership percentage in New EEX as they had in EEX.
. Fairness Opinion. In the opinion of DLJ, the EEX Ratio and the LSEPO
Ratio taken together are fair, from a financial point of view, to the
public shareholders of EEX.
. Low Cost and Risk. ENSERCH is bearing all of the costs of the Merger and
the Distribution, thus allowing New EEX to become an independent company
without incurring investment banking, legal and similar expenses in
doing so. In addition, ENSERCH has agreed to indemnify New EEX against
liabilities New EEX may incur as a result of the operations of LSEPO
prior to the Merger, thus allowing EEX to consummate the Merger with
reduced risk with respect to historical operations of LSEPO.
The EEX Board also considered, among other things, the fact that the Merger
and the Distribution are conditions to the EC/TUC Mergers, which ENSERCH has
agreed to take all reasonable steps necessary to satisfy, and that ENSERCH
beneficially owned approximately 83% of the outstanding EEX Common Stock. The
Merger is believed necessary for the Distribution to be tax-free to ENSERCH
and its shareholders, and will not be consummated until the other conditions
to the EC/TUC Mergers have been satisfied or waived.
The interests of the public holders of EEX Common Stock were not separately
represented in establishing the terms of the Merger, and ENSERCH, EEX and
LSEPO did not formally negotiate the terms of the Merger or the Distribution
on an arm's length basis. No independent special committee of the EEX Board
was appointed to negotiate the terms of the Merger on behalf of EEX. Such
representation and negotiation might have caused the terms of the Merger to be
different in some respects from those described herein. Furthermore, other
circumstances exist that could give rise to a potential conflict of interest
between ENSERCH and the public holders of EEX Common Stock. The only directors
of EEX who are not officers of ENSERCH or EEX, B.A. Bridgewater and W. C.
McCord, are also members of the ENSERCH Board. F.S. Addy was a director of
ENSERCH until his resignation on September 10, 1996. Additionally, D.W.
Biegler is Chairman and Chief Executive Officer of both ENSERCH and LSEPO. It
is impossible to specify what impact, if any, these circumstances had upon the
terms of the Merger.
OPINION OF INVESTMENT ADVISOR
On June 18, 1996, DLJ was engaged by EEX to render an opinion to the Board
of Directors of EEX as to the fairness, from a financial point of view, to the
shareholders of EEX, other than ENSERCH (such shareholders, the "Public
Shareholders"), of the EEX Ratio and the LSEPO Ratio. On September 10, 1996,
DLJ delivered to the Board of Directors of EEX its written opinion (the "DLJ
Opinion") that, based upon and subject to the assumptions, limitations and
other matters set forth in such opinion, the EEX Ratio and LSEPO Ratio taken
together are fair, from a financial point of view, to the Public Shareholders.
THE FORM OF THE DLJ OPINION IS ATTACHED HERETO AS ANNEX B. PUBLIC
SHAREHOLDERS OF EEX COMMON STOCK ARE URGED TO READ THE DLJ OPINION IN ITS
ENTIRETY FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS
CONSIDERED AND LIMITS OF THE REVIEW MADE BY DLJ.
The DLJ Opinion was prepared for the EEX Board and is directed only to the
fairness of the EEX Ratio and LSEPO Ratio taken together, from a financial
point of view, to the Public Shareholders. The DLJ Opinion does not address
the fairness of the EEX Ratio or the LSEPO Ratio to ENSERCH or any other
person or persons, other than the Public Shareholders. The DLJ Opinion does
not constitute a recommendation to any Public Shareholder as to how to vote on
the Merger. DLJ did not make any recommendation as to the form or amount of
consideration to be paid by LSEPO pursuant to the transactions contemplated by
the Plan of Merger. Such
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consideration was determined by negotiations between LSEPO and EEX, which may
not be considered arm's length because of the relationships among the parties.
The DLJ Opinion does not constitute an opinion as to the prices at which New
EEX Common Stock will actually trade at any time. No restrictions or
limitations were imposed by EEX upon DLJ with respect to the investigation
made or the procedures followed by DLJ in rendering the DLJ Opinion.
In arriving at its opinion, DLJ reviewed the draft dated September 10, 1996,
of the Plan of Merger and the exhibits thereto and financial and other
information that was publicly available or furnished to DLJ by EEX and LSEPO,
including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
respective managements were certain financial projections of EEX for the
period beginning January 1, 1996, and ending December 31, 1996, prepared by
the management of EEX. Also included in the discussions with the respective
managements were their respective views as to the assumptions underlying
certain financial projections with respect to LSEPO for the period beginning
June 30, 1996 and ending December 31, 2007. DLJ also reviewed the operating
and management agreements between LSEPO and the respective owners of the three
cogeneration plants to which LSEPO provides its operating services. In
addition, DLJ compared certain financial and securities data of EEX with
various other companies whose securities are traded in public markets,
reviewed the historical stock prices and trading volumes of the EEX Common
Stock, and conducted such other financial studies, analyses and investigations
as DLJ deemed appropriate for purposes of its opinion.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to DLJ from public sources, that was provided to DLJ by EEX and LSEPO or its
representatives, or that was otherwise reviewed by DLJ. With respect to the
financial projections supplied to DLJ by EEX, for the period beginning January
1, 1996, and ending December 31, 1996, DLJ assumed that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of EEX as to the future operating
and financial performance of EEX. With respect to the assumptions underlying
the financial projections relating to LSEPO, DLJ assumed that such
assumptions, which have been reviewed with the managements of the Company and
LSEPO, reflect the best currently available estimates and judgments of the
respective managements of the companies as to the future operating and
financial performance of LSEPO. DLJ has not assumed any responsibility for
making an independent evaluation of the EEX's or LSEPO's assets or liabilities
or for making any independent verification of any of the information reviewed
by DLJ. DLJ relied as to certain legal matters on advice of counsel to EEX. In
addition, DLJ assumed the Merger qualifies as a tax-free reorganization under
the Code.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
DLJ as of, the date of the DLJ Opinion. Although subsequent developments may
affect its opinion, DLJ does not have any obligation to update, review or
reaffirm its opinion. DLJ's opinion does not address the underlying business
decision to engage in the Merger, nor does it address any potential
combination of ENSERCH and Holding Company or any potential spin-off of New
EEX from ENSERCH.
The following is a summary of the presentation made by DLJ to the EEX Board
at a meeting on September 10, 1996.
Comparable Public Company Analysis: DLJ compared selected historical
financial and operating data for the Company for the latest twelve month
("LTM") period ended June 30, 1996, to the corresponding data and ratios of
eight of its comparable peers. The companies included Anadarko Petroleum
Corp., Apache Corp., Louisiana Land and Exploration, Noble Affiliates, Oryx
Energy, Parker & Parsley Petroleum, Seagull Energy Corp., and Santa Fe Energy
Resources (collectively, the "EEX Peer Group"). The EEX multiple of equity
value plus long-term debt less working capital ("Enterprise Value") to LTM
earnings before interest, taxes, depreciation, depletion and amortization
("EBITDA") was 10.1x versus the EEX Peer Group average, high and low multiples
of 6.8x, 14.1x and 5.6x, respectively. The EEX multiple of equity value to LTM
cash flow from operations
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("CFFO") was 9.5x, versus the EEX Peer Group average, high and low multiples
of 5.6x, 13.2x and 4.2x respectively. The EEX multiple of Enterprise Value to
SEC PV-10 ratio was 102.1%, versus the EEX Peer Group average, high and low
ratios of 138.8%, 174.9% and 98.6%, respectively. The EEX multiple of
Enterprise Value to total proved reserves implied a $0.90 per Mcfe value,
versus the EEX Peer Group average, high and low values of $1.19, $1.74 and
$0.76, respectively.
Discounted Cash Flow Analysis: DLJ calculated the net present value of the
composite estimated after-tax cash flows of LSEPO attributable to the three
operating and maintenance agreements associated with LSEPO's power plant
operations. The after-tax cash flows were carried out to December 31, 2007, at
which point a terminal value was applied. Utilizing discount rates ranging
from 10% to 20% for the Sweetwater Plant, 12% to 28% for the Bellingham Plant
and 15% to 35% for the Buffalo Plant, the composite net present value of the
estimated future after-tax cash flows of LSEPO ranged from $10.4 million to
$6.0 million, with a median value of $7.9 million.
Pro Forma Merger Analysis: DLJ analyzed certain pro forma financial effects
of the Merger. In conducting the analysis, the financial and operating effects
of the Merger with LSEPO were compared to EEX's performance on a fiscal year
ended December 31, 1995, LTM period ended June 30, 1996, and a projected
fiscal year ended December 31, 1996 basis. For the fiscal year ended December
31, 1995, the Merger was found to be 1.0% accretive on a CFFO per share basis
and 11.6% accretive on an earnings per share ("EPS") basis. For the LTM period
ended June 30, 1996, the Merger was found to be 1.0% accretive on a CFFO per
share basis and 42.5% accretive on an EPS basis. For the fiscal year ended
December 31, 1996, the Merger was found to be 0.8% accretive on a CFFO per
share basis and 7.9% accretive on an EPS basis.
Contribution Analysis: DLJ reviewed the relative contributions of EEX, as a
stand-alone enterprise, and LSEPO, as a stand-alone enterprise. DLJ reviewed
LTM revenues, LTM EBITDA, LTM earnings before interest and taxes ("EBIT"), LTM
net income, book value of assets and book value of equity as of, and for the
period ended, June 30, 1996. DLJ estimated that EEX contributed 95.3% of LTM
revenues, 98.8% of LTM EBITDA, 91.0% of LTM EBIT, 99.7% of the book value of
assets and 99.7% of the book value of equity. EEX caused LTM operating results
to be a loss for the period.
The summary set forth above does not purport to be a complete description of
the analyses performed and factors considered by DLJ but describes, in summary
form, the principal elements of the presentation made by DLJ to the Board of
Directors of EEX on September 10, 1996. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Each of the analyses conducted by DLJ was
carried out in order to provide a different perspective on the transaction and
add to the total mix of information available. DLJ did not form a conclusion
as to whether any individual analysis, considered in isolation, supported or
failed to support an opinion as to fairness from a financial point of view.
Rather, in reaching its conclusion, DLJ considered the results of the analyses
in light of each other and ultimately reached its opinion based on the results
of all analyses taken as a whole. DLJ did not place particular reliance or
weight on any individual analysis, but instead concluded that its analyses,
taken as a whole, supported its determination. Accordingly, notwithstanding
the separate factors summarized above, DLJ believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. In
performing its analyses, DLJ made numerous assumptions with respect to
industry performance, business and economic conditions and other matters. The
analyses performed by DLJ are not necessarily indicative of actual value or
future results, which may be significantly more or less favorable than
suggested by such analyses.
DLJ is a nationally recognized investment banking firm that has substantial
experience in energy related businesses and is familiar with EEX, LSEPO and
their respective businesses. As part of its investment banking business, DLJ
is regularly engaged in the valuation of businesses and securities in
connection with mergers, acquisitions, underwritings, sales and distributions
of listed and unlisted securities, private placements and valuations for
estate, corporate and other purposes.
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Pursuant to the terms of the engagement letter dated August 7, 1996, EEX
agreed to pay DLJ $350,000 when DLJ was prepared to render its opinion,
regardless of the conclusion reached therein, and to reimburse DLJ for out-of-
pocket expenses (including reasonable fees and expenses of counsel) incurred
in connection with its engagement. EEX also has agreed to indemnify DLJ
against certain liabilities relating to or arising out of its engagement,
including certain liabilities under the federal securities laws.
In the ordinary course of business, DLJ actively trades debt and equity
securities of EEX for its own account and for the accounts of its customers
and, accordingly, may at any time hold a long or short position in such
securities.
ACCOUNTING TREATMENT
The Merger will be accounted for as a combination of companies under common
control for financial accounting purposes in accordance with generally
accepted accounting principles. Accordingly, the assets and liabilities of EEX
and LSEPO will be recorded at their historical amounts.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
LSEPO and EEX have received an opinion of special tax counsel, King &
Spalding, that the Merger will be tax-free under Section 368(a)(1)(A) of the
Code. Consequently, no gain or loss will be recognized for federal income tax
purposes either to LSEPO or EEX in connection with the Merger. In addition, no
gain or loss will be recognized under Section 354 of the Code to ENSERCH as
the sole shareholder of LSEPO or as the approximate 83% shareholder of EEX
upon the conversion of shares in either LSEPO or EEX into shares of New EEX
(except for any gain or loss recognized pursuant to the cash received by
ENSERCH in lieu of a fractional share of New EEX). Moreover, no gain or loss
will be recognized under Section 354 of the Code to the public shareholders of
EEX upon the conversion of EEX Common Stock shares into shares of New EEX
Common Stock.
The opinion of King & Spalding (the "Tax Opinion") is based upon the Code,
the regulations promulgated thereunder by the United States Treasury
Department, and interpretations of the Code and regulations by the courts and
the IRS, all as they exist and are in effect as of the date of this Proxy
Statement/Prospectus and all of which are subject to change at any time. Any
such change, which may or may not be retroactive, could alter the tax
consequences to LSEPO, ENSERCH or EEX and its public shareholders as described
in the Tax Opinion. The Tax Opinion is not binding on the IRS, and no ruling
from the IRS has been or will be requested in connection with the Merger. The
Tax Opinion is subject to certain representations by LSEPO, ENSERCH and EEX as
to the existence of numerous material facts and circumstances, as well as
certain assumptions. If such representations or assumptions are incorrect or
untrue in any material respect, the ability to rely on the Tax Opinion would
be jeopardized.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO SHAREHOLDERS WHO
RECEIVED THEIR EEX COMMON STOCK THROUGH THE EXERCISE OF EMPLOYEE STOCK OPTIONS
OR OTHERWISE AS COMPENSATION, WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES, OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER THE CODE. THIS
SUMMARY DOES NOT ADDRESS ANY STATE, LOCAL, OR FOREIGN TAX CONSEQUENCES. EEX
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL, AND FOREIGN LAWS, THE TAX BASIS AND HOLDING PERIOD
CONSEQUENCES TO EEX SHAREHOLDERS AND ANY CHANGES IN FEDERAL TAX LAWS THAT
OCCUR AFTER THE DATE OF THIS PROXY STATEMENT/PROSPECTUS.
Neither LSEPO nor EEX has requested or received an opinion of tax counsel
regarding the state income tax implications of the Merger. Management
believes, however, that the Merger will also be state income tax-free.
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FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of New EEX Common Stock received by EEX public shareholders in
connection with the Merger and by ENSERCH shareholders in connection with the
Distribution will be freely transferable under the federal securities laws,
except that shares of New EEX Common Stock received or held by persons who are
deemed to be "affiliates" (as such term is defined under the Securities Act)
of EEX prior to the Merger may be resold by them only in transactions
permitted by the resale provisions of Rule 145 promulgated under the
Securities Act (or Rule 144 in the case of such persons who become affiliates
of New EEX) or as otherwise permitted under the Securities Act. Persons who
may be deemed to be affiliates of EEX or New EEX generally include individuals
or entities that control, are controlled by, or are under common control with,
such party and may include certain directors and officers of such party as
well as principal shareholders of such party.
LISTING ON THE NEW YORK STOCK EXCHANGE
The New EEX Common Stock to be issued upon consummation of the Merger has
been approved for listing on the NYSE under the symbol "EEX," subject to
approval of the Merger by the shareholders of EEX and LSEPO and notice of
issuance.
REGULATORY MATTERS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and the Premerger Notification Rules promulgated thereunder,
require recipients of voting securities or assets in certain acquisitions to
submit premerger notification filings with the Department of Justice and
Federal Trade Commission and observe certain waiting periods prior to
obtaining beneficial ownership of such securities or assets.
Shareholders may be subject to the HSR Act filing and waiting requirements
if the total fair market value of their holdings of New EEX Common Stock
immediately after the Distribution will exceed $15 million. In determining
whether this $15 million threshold will be exceeded, shareholders must
aggregate the value of all shares of New EEX Common Stock to be received in
the Distribution or as an EEX shareholder in the Merger, including all shares
of New EEX Common Stock to be received by any parents, subsidiaries, or
certain affiliates under common control, and regardless of whether shares of
New EEX Common Stock are received in the Distribution solely as an ENSERCH
shareholder, in the Merger solely as a former EEX shareholder, or as both an
ENSERCH shareholder and former EEX shareholder.
Depending on the circumstances, one or more statutory or regulatory
exemptions may be available even where ENSERCH shareholders immediately after
the Distribution will hold New EEX Common Stock exceeding the $15 million
threshold. ENSERCH shareholders should consider carefully, with advice of
legal counsel, whether they might be subject to the HSR Act obligations in
connection with their acquisition of shares of New EEX Common Stock in the
Distribution.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
RELATIONSHIP BETWEEN EEX AND ENSERCH
Present Relationship--General. ENSERCH owns beneficially approximately 83%
of the outstanding EEX Common Stock, and immediately after the Merger will own
a slightly greater percentage of the New EEX Common Stock, enabling it to
elect all directors of EEX and New EEX, respectively. Through its ability to
elect all directors of EEX, ENSERCH has the ability to control all matters
relating to the management of EEX, the issuance of EEX Common Stock and other
securities of EEX and the payment of dividends on the EEX Common Stock.
ENSERCH also has the ability to control EEX's drilling, development, capital,
operating and acquisition expenditure plans. In addition, ENSERCH has
effective control over the outcome of all matters upon which EEX shareholders
vote. Certain of EEX's directors and officers are also directors and/or
officers of ENSERCH or its other subsidiaries.
Prior to December 30, 1994, EEX operated as Enserch Exploration Partners,
Ltd. ("EP"), a limited partnership of which ENSERCH and a subsidiary were the
general partners. On December 30, 1994, EEX acquired all of the partnership
interests of EP Operating Limited Partnership ("EPO"), the 99% owned operating
partnership of EP, and EP received EEX Common Stock. EPO was then merged into
EEX and thereafter EP was liquidated, and its partners received shares of EEX
Common Stock for their limited and general partnership interests in EP (the
"EEX Reorganization"). Certain affiliates of ENSERCH other than EEX
(collectively, the "ENSERCH Companies") also received EP's interest in and
assumed EP's obligations under certain equipment leases (the equipment was
simultaneously subleased to EEX) and assumed approximately $395 million
principal amount of EP's indebtedness, plus accrued interest.
In March 1995, EEX purchased the SACROC properties from ENSERCH, which
represented ENSERCH's only other domestic gas and oil property. The purchase
price of approximately $1.65 million cash included $1.25 million for the fair
market value of the properties, as estimated by D&M, and approximately $.4
million for the net book value of related assets acquired and liabilities
assumed.
In June 1995, EEX acquired all of the international gas and oil operations
of ENSERCH, which included concessions in Indonesia, Malaysia and Israel, for
$15.6 million, payable in 1,240,000 shares of EEX Common Stock and $2.6
million in cash, as adjusted. The purchase price included $13 million for the
fair market value of the properties, as estimated by D&M, and $2.6 million for
the net book value of the other assets acquired and liabilities assumed.
In September 1995, EEX sold 20,000,000 shares of EEX Common Stock through an
underwritten public offering. The offering reduced ENSERCH's ownership in EEX
from 99% to the current 83%.
EEX and ENSERCH Companies have in the past entered into significant
transactions and agreements incident to their respective businesses in
addition to those described above. Such transactions and agreements have
related to, among other things, the purchase and marketing of natural gas, the
financing of acquisition, development and sales activities of EEX and the
provision of certain corporate services. The terms of previous transactions
between EEX and the ENSERCH Companies were not established on an arm's-length
basis and involved conflicts of interest. A number of specific types of
transactions and relationships between EEX and any entity in which ENSERCH has
a direct or indirect interest are contemplated and permitted by Article Eleven
of the Restated Articles of Incorporation of EEX. The New EEX Amended and
Restated Articles of Incorporation will not contain a provision similar to
Article Eleven, because New EEX will not be affiliated with ENSERCH following
the Distribution.
The equipment and facilities used in developing and producing reserves in
EEX's Mississippi Canyon project and its Garden Banks project were financed
under lease agreements between certain financial institutions and EPO that
were guaranteed by ENSERCH. In connection with the EEX Reorganization, all
rights and obligations under the leases were assigned to and assumed by an
affiliate of ENSERCH, with EEX entering into sublease arrangements with the
affiliate for such equipment and facilities. The Mississippi Canyon sublease
26
<PAGE>
sublease had an initial term of five years, with EEX having an option to
purchase the subleased equipment at the end of the term. The Garden Banks
equipment is subleased under two subleases: one covers the floating production
facility, which had an initial term of 20 years, and the other covers the
subsea equipment, pipelines and the shallow-water production facility, which
had an initial term of 12 years. ENSERCH is endeavoring to sell its interests
in the leased equipment, subject to the terms of the existing subleases to
EEX, to an unaffiliated third party, but may not have effected the sale by the
time of the Distribution.
EEX and ENSERCH have entered into a letter agreement dated effective as of
January 1, 1995, to formalize borrowing arrangements between EEX and ENSERCH.
Funds may be drawn under the terms of the letter agreement until March 31,
1999, pursuant to certain limitations. The agreement provides for automatic
one year extensions beginning March 31, 1998, unless a cancellation notice has
been given by one of the parties. As of June 30, 1996, loans from EEX to
ENSERCH of $5.6 million were outstanding under this arrangement. EEX pays
interest on the daily net balance of loans from ENSERCH at a per annum rate
equal to the average rate of all loans EEX has outstanding under its bank
facilities or if no such loans are outstanding the current one month LIBOR
rate plus the spread specified in EEX's bank facilities. If the rate payable
by EEX under the letter agreement exceeds the rate specified by the formula in
EEX's Restated Articles of Incorporation, the rate calculated pursuant to the
Restated Articles of Incorporation will be charged. ENSERCH pays interest on
loans from EEX at the rate it would have to pay on one month commercial paper
as of the first day of the month in which the borrowing is outstanding. For
each entity, the interest rate on any overdue amounts is the applicable
interest rate plus 2% per annum. ENSERCH and EEX anticipate that this
arrangement will be terminated as of the date the Distribution is effected
(the "Distribution Date").
ENSERCH charges EEX for the general and administrative staff costs incurred
by ENSERCH in performing accounting, treasury, internal audit, income tax
planning and compliance, legal, information systems, human resources and other
functions for EEX. Costs are determined on a basis reasonably calculated to
reflect the actual costs of the services performed for EEX and may include
allocations based on such factors as net capital employed, the number of
employees or the percentage of time spent on projects or services. New EEX
will replace its dependency on ENSERCH with its own employees in those areas
after the Distribution.
Present Tax Sharing Agreement. EEX is, and until the Distribution will
continue to be, included in ENSERCH's consolidated federal income tax returns,
and EEX's federal income tax liability will therefore be included in the
consolidated federal income tax liability of ENSERCH and its subsidiaries for
the period ending with the Distribution. EEX and ENSERCH have entered into a
tax sharing agreement effective January 1, 1995 (the "Present Tax Sharing
Agreement") with respect to EEX's share of that tax liability. Pursuant to the
Present Tax Sharing Agreement, EEX and ENSERCH make payments between them
generally calculated so that the amount of taxes to be paid by EEX with
respect to any period will be determined as though EEX and its subsidiaries
filed a separate consolidated federal income tax return. Under certain
circumstances if the EEX separate consolidated group has a loss and that loss
reduces the income tax liability of other members of the ENSERCH consolidated
group, the EEX group will be entitled to a payment equal to the tax that would
otherwise be payable by the affected members of the ENSERCH consolidated
group. The Present Tax Sharing Agreement is attached to, and will largely be
superseded by, a Tax Allocation Agreement to be entered into by ENSERCH, New
EEX and TUC substantially in the form attached hereto as Annex A-3 (the "Tax
Allocation Agreement").
Pursuant to the Present Tax Sharing Agreement and the new Tax Allocation
Agreement, for all tax periods prior to the consummation of the Distribution,
ENSERCH is the exclusive agent for EEX and its subsidiaries for the
preparation and filing of consolidated federal income tax returns for the
ENSERCH consolidated group, and ENSERCH and EEX jointly will have the power to
contest or compromise any asserted tax adjustment or deficiency and to file,
litigate or compromise any claim for refund on behalf of consolidated group.
Each member of a consolidated group for federal income tax purposes is
severally liable for the federal income tax liability of each other member of
its consolidated group. Accordingly, each of EEX and its subsidiaries will
have several liability for the federal income tax liability of the ENSERCH
consolidated group,
27
<PAGE>
including that attributable to ENSERCH for all tax periods prior to the
consummation of the Distribution. Although EEX and its subsidiaries will
remain severally liable for the tax liability of the ENSERCH consolidated
group, the Tax Allocation Agreement allocates that tax liability among the
members of the group in accordance with the taxable income of each member of
the group.
Post-Distribution Arrangements. ENSERCH will continue to have certain
contractual relationships with, and performance bond and guarantee obligations
with respect to, New EEX after the Distribution has been consummated. The
Distribution Agreement will establish certain transitional and other
arrangements deemed necessary in connection with the Distribution, and, to
deal with various tax issues arising in connection with and after the
Distribution, New EEX will enter into a Tax Allocation Agreement and a Tax
Assurance Agreement with ENSERCH. Immediately prior to the Effective Time,
ENSERCH will make a capital contribution to LSEPO, or LSEPO will make a
distribution to ENSERCH, in an amount sufficient to cause LSEPO's working
capital to be $3.5 million. Following the Merger, ENSERCH will no longer fund
LSEPO's operations.
Set forth below is a summary of certain of the principal provisions of the
Distribution Agreement and the Tax Allocation Agreement and Tax Assurance
Agreement and a discussion of the performance bond and guarantee obligations
of ENSERCH. Such description does not purport to be complete and is qualified
in its entirety by reference to such agreements. The Distribution Agreement
and Tax Allocation and Tax Assurance Agreements are to be in substantially the
respective forms attached hereto as Annexes A-1, A-3 and A-4, respectively.
Distribution Agreement. As a condition to the consummation of the EC/TUC
Mergers and prior to the Merger, LSEPO, EEX and ENSERCH are to enter into the
Distribution Agreement, which is to set forth the intention of the parties to
separate the operations of New EEX from ENSERCH and its remaining subsidiaries
after the Distribution and to establish certain arrangements between New EEX
and ENSERCH deemed necessary in order to deal with various business, legal and
regulatory issues following the Distribution. Under the Distribution
Agreement, (i) existing contracts would continue in accordance with their
terms until amendment or termination as provided therein or as otherwise may
occur without violation thereof, (ii) services that have historically been
provided by ENSERCH or its other subsidiaries would be subject to
continuation, revision or termination in the discretion of the respective
parties, and (iii) performance bond obligations and guaranties executed by any
of ENSERCH or its other subsidiaries would continue in effect to the extent
the terms thereof are applicable and enforceable, until amended, modified or
terminated in conformity with the terms thereof.
The Distribution Agreement is expected to provide also that each of ENSERCH
and New EEX will agree to indemnify the other and its affiliates and their
respective directors, officers and employees from and against certain losses,
including losses arising out of (i) breaches of the provisions of the
Distribution Agreement and (ii) certain misstatements or omissions, or alleged
misstatements or omissions, in certain filings under the securities laws. The
Distribution Agreement allocates to ENSERCH responsibility for the payment of
fees and expenses incurred by the parties in connection with the Distribution.
Tax Agreements. After the consummation of the Merger, New EEX and ENSERCH
are expected to enter into the Tax Allocation Agreement, which is to take
effect at the time of the Distribution and provide that the allocation of tax
liabilities as between EEX and ENSERCH as in effect prior to the Distribution
will be honored in all material respects for periods up to and including the
effective time of the Distribution, with the EEX obligations having been
assumed by New EEX pursuant to the Merger. Such agreement is to further
provide for the payment of taxes, the preparation of returns, the allocation
of refunds and the handling of audits and tax controversies in relation to tax
periods of the ENSERCH group of companies ending with the Distribution. In
addition, pursuant to such agreement, New EEX and ENSERCH agree to indemnify
one another for liabilities for taxes that result to any person and which
arise from the Distribution in accordance with proportionate shares in the
amount of 36% for ENSERCH and 64% for New EEX, except that (i) New EEX will
indemnify ENSERCH against any such tax liabilities that result from a breach
by New EEX of the Tax Assurance Agreement (as described below) and (ii)
ENSERCH will indemnify New EEX against any such tax liabilities that result
from specified actions by ENSERCH. For periods subsequent to the Distribution,
New EEX will no
28
<PAGE>
longer be a member of the ENSERCH consolidated group. Tax liabilities of New
EEX in respect of such subsequent periods are not subject to such agreement.
To protect the tax-free status of the Distribution, the Plan of Merger and
the Distribution Agreement provide that New EEX and ENSERCH are to enter into
the Tax Assurance Agreement. In general and subject to certain exceptions, the
Tax Assurance Agreement would require that New EEX (i) for two years after the
Distribution, continue to own and utilize at least 50% of the fair market
value of its properties, determined both with reference to New EEX only and to
New EEX and its subsidiaries on a consolidated basis, at the time of the
Distribution and continue directly to own and operate the business that LSEPO
operated immediately prior to the Merger, and (ii) for six months after the
Distribution, not authorize, facilitate or effect any transaction involving
(a) the acquisition by any person of outstanding New EEX stock, the issuance
of shares of New EEX stock (other than the grant of certain stock options and
the sale of certain convertible debt) or the repurchase of New EEX stock,
unless, in each case in the aggregate or cumulatively, the number of shares of
New EEX Common Stock repurchased, issued or acquired would not exceed 3.0% of
the number of shares of New EEX Common Stock outstanding immediately prior to
the Distribution or (b) the issuance of any class or series of capital stock
of New EEX other than New EEX Common Stock or options, rights, warrants or
securities exercisable or convertible into such stock.
Performance Bond and Guarantee Obligations. ENSERCH has obligations under
guarantees and indemnity arrangements with respect to 39 performance bonds
issued on behalf of EEX and its subsidiaries, which obligations of ENSERCH
total approximately $9.4 million.
Major Contracts. EEX sells its gas and oil under long- and short-term
contracts. In 1995, Enserch Energy Services, Inc. ("EES"), the ENSERCH
natural-gas marketing subsidiary, was EEX's largest gas customer, purchasing
gas under two long-term variable-priced contracts. In addition, Lone Star Gas
Company, a division of ENSERCH, purchases gas from EEX under a fixed price
service contract expiring in 1997. In 1995, EES, Lone Star Gas Company and
other affiliates of ENSERCH purchased approximately 54% of EEX's natural gas
volumes for an aggregate of $86,718,000.
THE PLAN OF MERGER
The following is a brief summary of the material provisions of the Plan of
Merger, the full text of which is attached hereto as Annex A. The following
discussion is qualified in its entirety by reference to the Plan of Merger.
THE MERGER
The Plan of Merger provides that, subject to the terms and conditions
thereof, at the Effective Time EEX will be merged with and into LSEPO, and the
separate corporate existence of EEX shall thereupon cease. LSEPO will be the
surviving corporation of the Merger and will continue to be governed by the
laws of the State of Texas, and the separate corporate existence of LSEPO with
all of its rights, privileges, powers and franchises will continue unaffected
by the Merger, except as set forth in the Plan of Merger. In the Merger, LSEPO
will change its name to Enserch Exploration, Inc. The Merger will have the
effect specified in the TBCA.
EFFECTIVE TIME OF THE MERGER
The Plan of Merger provides that the Merger will be consummated by the
filing with the Secretary of State of the State of Texas of articles of merger
and that the Merger will become effective thereafter at such time as a
certificate of merger is issued by the Secretary of State of the State of
Texas. It is anticipated that if the Plan of Merger, including the issuance of
New EEX Common Stock, is adopted and approved at the EEX Special Meeting, and
all other conditions to the Merger have been satisfied or waived, the
Effective Time will be when all conditions to the EC/TUC Mergers are satisfied
or waived, except for the Merger and the Distribution. The Merger will not
occur if the EC/TUC Mergers are not to occur.
29
<PAGE>
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time, each outstanding share of EEX Common Stock (other
than shares of EEX Common Stock held in the treasury of EEX, which shares will
be canceled at the Effective Time) will be converted into one share of New EEX
Common Stock, and the shares of Old LSEPO Common Stock will be converted into
a number of shares of New EEX Common Stock calculated in accordance with the
LSEPO Ratio. At a market price of $9.00 for EEX Common Stock, the LSEPO Ratio
would result in the Old LSEPO Common Stock being converted into approximately
778,000 shares of New EEX Common Stock (approximately 0.6% of the shares
outstanding after the Merger).
Holders of EEX Common Stock will not need to exchange their certificates
representing EEX Common Stock for certificates representing New EEX Common
Stock.
OTHER MATTERS AFFECTED BY THE PLAN OF MERGER
The Plan of Merger provides that EEX and LSEPO shall use all reasonable
efforts to take all actions as may be necessary or appropriate in order to
effect the Merger as promptly as practicable.
The Plan of Merger contemplates that the Stock Plan will survive the Merger
and be the stock incentive plan of New EEX. Options granted by EEX under the
Stock Plan (including options originally granted under the 1994 Plan) and
outstanding at the Effective Time will become options to purchase the same
number of shares of New EEX Common Stock at the same exercise price and
otherwise on the same terms and conditions.
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<PAGE>
BUSINESS
The following is a description of LSEPO and EEX and their respective
businesses. For more complete information regarding the business of EEX, refer
to the additional information contained in the EEX 1995 Annual Report on Form
10-K and the EEX 1996 Quarterly Reports on Form 10-Q for the quarters ending
March 31 and June 30, 1996, which are incorporated herein by reference. See
"Incorporation by Reference."
BUSINESS OF LSEPO
LSEPO provides operation and maintenance services (the "Plant Operations
Business"), under contract, to three cogeneration plants developed and owned,
in varying degrees, by Enserch Development Corporation ("EDC"), a wholly owned
subsidiary of ENSERCH. EDC and its subsidiaries and affiliates are engaged in
the development, ownership and operation of independent power projects in the
United States and overseas. EDC's principal U.S. plant sites include (i)
"Encogen One," a 255 megawatt cogeneration facility located in Sweetwater,
Texas, (ii) "Encogen Four," a 62 megawatt cogeneration facility located in
Buffalo, New York and (iii) "Encogen Northwest," a 160 megawatt cogeneration
facility located in Bellingham, Washington. EDC also carries on substantial
international business development efforts, currently centered in the Peoples'
Republic of China, Taiwan, Indonesia and India.
The "Encogen One" facility is owned by Encogen One Partners, Ltd. ("Encogen
One, L.P."). Enserch Development Corporation One, Inc., a wholly-owned
subsidiary of EDC, holds a one percent general partnership interest in Encogen
One, L.P. Two entities, each of which is unrelated to ENSERCH or any of its
subsidiaries or affiliates, each hold a 49.5 percent limited partnership
interest in Encogen One, L.P. The "Encogen Four" facility is owned by Encogen
Four Partners, L.P. ("Encogen Four, L.P."). EDC Four, Inc., a wholly-owned
subsidiary of EDC, holds a one percent general partnership interest in Encogen
Four, L.P. Ensat Cogeneration Company, a wholly-owned subsidiary of EDC, holds
a 47.5 percent limited partnership interest in Encogen Four, L.P. Unrelated
entities hold the remaining 51.5 percent limited partnership interest in
Encogen Four, L.P. The "Encogen Northwest" facility is owned by Encogen
Northwest, L.P. EDC Northwest Cogeneration, Inc., a wholly-owned subsidiary of
EDC, holds a one percent general partnership interest in Encogen Northwest,
L.P., while Ensat Northwest Cogeneration Company, a wholly-owned subsidiary of
ENSERCH, holds a 99 percent limited partnership interest in Encogen Northwest,
L.P.
LSEPO's Plant Operations Business is centered on the three cogeneration
plant locations:
Sweetwater. The "Encogen One" cogeneration facility in Sweetwater, Texas,
contains gas and steam turbine driven generators capable of producing 255
megawatts per hour of electricity at 345,000 volts. The electricity is sold to
Texas Utilities Electric Company. The facility also sequentially produces 170
MMBtu per hour of turbine exhaust gas at 1,000F, which is sold to United
States Gypsum Company for use in the drying process in its gypsum board
manufacturing facility. LSEPO operates and maintains the "Encogen One"
facility under the terms of an Operation and Maintenance Agreement ("O&M
Agreement") between LSE and Encogen One, L.P., dated November 25, 1987 and
amended on February 1, 1988. The O&M Agreements between LSEPO and the
respective limited partnerships that own the cogeneration facilities call for
payments to LSEPO on the basis of periodic fees and reimbursement of certain
costs. After the facility was completed in June, 1989, the O&M Agreement
required LSE to operate, maintain and repair the facility. LSE continued to
operate the "Encogen One" facility until December 15, 1995, when LSE assigned
the O&M Agreement for "Encogen One" to LSEPO.
Buffalo. The "Encogen Four" cogeneration facility in Buffalo, New York,
contains gas and steam turbine driven generators capable of producing 62
megawatts per hour of electricity at 115,000 volts, which is sold to Niagara
Mohawk Power Corporation. In addition, it produces 110,000 pounds per hour of
steam, which is being sold to Outokumpu American Brass, Inc. for process use
and space heating purposes in its brass manufacturing facility. LSEPO operates
and maintains the "Encogen Four" facility under the terms of an O&M Agreement
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<PAGE>
originally entered into by LSE and Encogen Four, L.P. on December 31, 1990 and
assigned to LSEPO on October 1, 1992.
Bellingham. The "Encogen Northwest" cogeneration facility is located in
Bellingham, Washington, and consists of gas and steam turbine generators
capable of producing 160 megawatts per hour of electricity at 115,000 volts.
The electricity is sold to Puget Sound Power & Light Company ("Puget"). In
addition, the facility produces approximately 130,000 pounds per hour of super
heated steam, which is sold to Georgia-Pacific Corporation ("Georgia-Pacific")
for process purposes at its pulp and paper mill and chemical plant. LSEPO
operates and maintains the "Encogen Northwest" facility under the terms of an
O&M Agreement originally entered into by LSE and Encogen Northwest, L.P. on
October 29, 1991, and assigned by LSE to LSEPO on October 23, 1992.
LSEPO has conducted substantial management and operational activities with
respect to the Plant Operations Business preceding the Distribution, including
starting and stopping all equipment, monitoring operating parameters of all
equipment, adjusting loads, flows, pressures, temperatures, electrical output,
and environmental emissions, and repairing all plant equipment such as pumps,
motors, valves, steam system, generation system, instrumentation, blowers, and
water purification plant equipment. LSEPO has also performed all services in
connection with the collection of income and the payment of expenses related
to the Plant Operations Business. In addition, officers of LSEPO have, prior
to Distribution, been actively involved in making significant decisions
regarding the business and in the overall supervision, direction and control
of LSEPO employees associated with the Plant Operations Business.
LSEPO employs approximately 75 full-time employees in connection with the
Plant Operations Business. LSE has provided management and operations staff to
LSEPO in connection with the Plant Operations Business. LSEPO will replace its
dependency on LSE with its own employees prior to or at the time of the
Distribution.
LSEPO employees perform all routine day-to-day activities associated with
the successful functioning of the Plant Operations Business. Certain
activities that require specialized expertise, tools, large work forces, or
are more economically out-sourced, however, are normally subcontracted. The
total out-sourced man hours represent less than 20 percent of the total man
hours required for operation of the Plant Operations Business.
LSEPO receives payments under the various O&M Agreements from the limited
partnerships that own the cogeneration plants. The limited partnerships are
owned, in varying degrees, by wholly-owned subsidiaries of EDC and ENSERCH.
The Distribution will not affect the O&M Agreements between LSEPO and the
respective limited partnerships. Therefore, LSEPO will continue to receive
payments from the various limited partnerships under the O&M Agreements after
the Distribution.
LSEPO is a party to lawsuits and claims arising in the ordinary course of
its business. LSEPO believes that all lawsuits and claims would not have a
material adverse effect on its financial condition.
BUSINESS OF EEX
EEX has been engaged in the exploration for and the development, production
and sale of natural gas and crude oil since 1918. EEX is one of the largest
independent exploration and production companies in the United States, with a
reserve base of 1,792 Bcfe at January 1, 1996, as estimated by DeGolyer and
MacNaughton ("D&M") independent petroleum consultants. Approximately 75% of
these reserves consist of natural gas. EEX has grown through exploration,
development and acquisition activities concentrated in major production basins
located offshore in the Gulf of Mexico and onshore in East Texas, North
Central Texas and the U.S. Gulf Coast.
On June 8, 1995, EEX acquired all of the capital stock of DALEN Corporation
("DALEN"), an independent gas and oil company engaged in the exploration for
and the development and production of natural gas and crude oil (the "DALEN
Acquisition"). Through the DALEN Acquisition, EEX acquired proved reserves
totaling 397 Bcfe at June 30, 1995, and other assets for cash of $340 million
and assumed DALEN's bank debt
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<PAGE>
of $115 million. The DALEN Acquisition was initially funded through EEX's
borrowings. DALEN's activities were oriented primarily toward natural gas and
were concentrated in selected major production regions, including the Gulf
Coast, the Gulf of Mexico, the Mid-Continent and the Rocky Mountains.
Substantially all of the Rocky Mountain assets (which includes approximately
150 Bcfe of reserves) have since been sold.
EEX sells its gas and oil under long and short-term contracts. In 1995,
Enserch Energy Services, Inc. ("EES"), the ENSERCH natural-gas marketing
subsidiary, was EEX's largest gas customer, purchasing gas under two long-term
variable-priced contracts. A division of ENSERCH, Lone Star Gas Company,
purchases gas under a long-term fixed-priced service contract. In 1995,
approximately 10% of EEX's natural-gas volumes was sold to Lone Star Gas
Company. The continuing maturity of gas markets is causing an evolution in the
gas marketing efforts of EEX. Unbundling of services by interstate pipelines,
deregulation efforts of many state regulatory bodies and the explosion of
financial instruments tied to gas markets have radically altered marketing
opportunities for producers. EEX believes that it can achieve the greatest
economic benefit from using the services of gas marketing organizations rather
than having its own large staff, while maintaining a core staff to ensure
market prices are being received.
Oil sales contracts are for one year or less, and prices generally are based
upon field posted prices.
EEX may utilize future contracts, commodity price swaps and other financial
instruments to reduce exposure of EEX's gas and oil production to price
volatility.
EEX's domestic activities are focused in four regions: the Gulf of Mexico;
East Texas; North Central Texas; and the Gulf Coast Region of Texas,
Louisiana, Mississippi and Alabama. The following table sets forth estimated
net proved reserves of EEX by region, as estimated by D&M, at January 1, 1996:
<TABLE>
<CAPTION>
OIL AND
NATURAL GAS
GAS LIQUIDS TOTAL
REGION (BCF) (MMBBLS) (BCFE)
------ ------- -------- -------
<S> <C> <C> <C>
Gulf of Mexico..................................... 127.6 36.4 346.0
East Texas......................................... 846.6 7.7 892.8
North Central Texas and other...................... 248.9 18.1 357.5
Gulf Coast......................................... 139.7 4.3 165.5
------- ---- -------
Total Domestic................................... 1,362.8 66.5 1,761.8
International...................................... -- 5.0 30.0
------- ---- -------
Total............................................ 1,362.8 71.5 1,791.8
======= ==== =======
</TABLE>
Developed and undeveloped lease acreage as of December 31, 1995, are set
forth below:
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
--------------- -------------------
GROSS NET(1) GROSS NET(1)
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Domestic
Offshore............................... 141,842 40,329 755,240 416,272
Onshore................................ 535,294 337,790 1,541,826 901,017
------- ------- --------- ---------
Total................................ 677,136 378,119 2,297,066 1,317,289
International............................ -- -- 2,489,567 618,637
------- ------- --------- ---------
Total................................ 677,136 378,119 4,786,633 1,935,926
======= ======= ========= =========
</TABLE>
- --------
(1) Represents the proportionate interest of EEX in the gross acres under
lease.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Following the Effective Time, the directors and executive officers of New
EEX are expected to be as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Chairman, Chief Executive Officer,
F. S. Addy................ 64 Director(1)(2)
President, Chief Operating Officer,
G. J. Junco............... 46 Director(1)(2)
D. W. Biegler............. 50 Director
B. A. Bridgewater, Jr. ... 62 Director(1)
W. C. McCord.............. 68 Director(1)
M. G. Fortado............. 52 Senior Vice President, General Counsel and Chief
Legal Officer, and Corporate Secretary(2)
B. K. Irani............... 45 Senior Vice President, Offshore and
International Division(2)
J. P. McCormick........... 54 Senior Vice President and Chief Financial
Officer(2)
M. A. McAdams............. 52 Senior Vice President, Human Resources and
Administration(2)
</TABLE>
- --------
(1) Messrs. Addy, Junco, Biegler, Bridgewater and McCord, who currently serve
as directors of EEX, have agreed to serve as members of the New EEX Board
following the Effective Time.
(2) Currently holds the same office in EEX.
Messrs. D. W. Biegler, G. R. Bryan, W. T. Satterwhite, M. E. Rescoe and D.
R. Long currently serve as directors of LSEPO. It is expected that Messrs.
Bryan, Satterwhite, Rescoe and Long, who will become directors of New EEX in
the Merger, will resign their directorships shortly after the Effective Time.
This will result in four vacancies on the New EEX Board, which the remaining
directors may fill prior to the next annual meeting of shareholders of New
EEX. See "The Merger--Certain Arrangements Regarding Management Following the
Merger" regarding provisions of the Plan of Merger providing for the
composition of the New EEX Board.
It is expected that the size of the Board of Directors will ultimately
consist of eight members, some of whom may not be determined by the Effective
Time. A Special Committee for Transition comprised of Directors from EEX
(Messrs. Addy and Bridgewater) and ENSERCH (Messrs. T. W. Luce, III and W.C.
McCord) was formed to study and recommend to their respective boards the
appropriate actions to cause a transition from the existing board of EEX to a
future board which meets the needs of a fully independent gas and oil
exploration and production company.
F.S. Addy was elected Chairman and Chief Executive Officer of EEX on
September 10, 1996, to serve on an interim basis until a permanent Chairman is
selected. A search is underway to find a person to fill the office of Chairman
and Chief Executive Officer for New EEX on a permanent basis. The Special
Committee for Transition is also involved in the search and selection process.
The new chairman is expected to also become a director of New EEX.
Mr. Addy is retired Executive Vice President, Chief Financial Officer, and
Director of Amoco Corporation, an international integrated oil and gas
company. Mr. Addy has been a Director of EEX since 1995 and was Chairman of
the EEX Compensation Committee and a member of the Audit Committee. He is a
Director of Baker, Fentress & Company and The Pierpont Funds. He was a
director of ENSERCH until September 10, 1996.
Mr. Junco has been President and Chief Operating Officer of EEX since its
formation in September 1994. He previously served as President and Chief
Operating Officer of Enserch Exploration Holdings, Inc. ("EEH"), the managing
general partner of EP, from January 1991 until 1995. He has been a director of
EEX since its formation in September 1994.
Mr. Biegler is Chairman and Chief Executive Officer of ENSERCH. Prior to his
election to his present position with ENSERCH in 1993, he served Lone Star Gas
Company, the utility division of ENSERCH, as President from 1985 and as
Chairman from 1989 and was elected President and Chief Operating Officer of
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ENSERCH in 1991. He previously served as Chairman and Chief Executive Officer
of EEH from 1992 until 1995. He also served as Chairman and Chief Executive
Officer of EEX until September 10, 1996. He is Chairman of the Nominating
Committee and a member of the Audit Committee of EEX. Mr. Biegler is a
Director of ENSERCH, EEX, LSEPO, Texas Commerce Bank National Association, and
Trinity Industries, Inc. He has been a Director of LSEPO since May 1992.
Mr. Bridgewater is Chairman, President and Chief Executive Officer, and
Director of Brown Group, Inc., a footwear company. Mr. Bridgewater has been a
Director of EEX since 1995 and serves as Chairman of its Audit Committee and
is a member of its Compensation Committee. He is a Director of ENSERCH,
Boatmen's Bancshares, Inc., FMC Corporation and McDonnell Douglas Corporation.
Mr. McCord is retired Chairman and Chief Executive Officer of the
Corporation. He is Chairman of the Compensation Committee and a member of the
Audit and Nominating Committees of EEX. Mr. McCord has been a Director of EEX
since September 1996 and a Director of ENSERCH since 1970. He is also a
Director of Lone Star Technologies, Inc. and Pool Energy Services Co.
Mr. Fortado has been Vice President and Corporate Secretary of EEX since its
formation in September 1994 and was designated Senior Vice President, General
Counsel and Chief Legal Officer in September 1996. He is Vice President and
Corporate Secretary of ENSERCH, having served as Corporate Secretary since
September 1971 and Vice President since May 1988.
Mr. Irani has been the Senior Vice President, Offshore and International
Division, since 1996. He had been Senior Vice President, Production and
Engineering Division, since 1995 and Vice President, Production and
Engineering Division, from 1994 to 1995. He also served as Vice President,
Production and Engineering, of EEH since 1988.
Mr. McCormick has been a Senior Vice President and Chief Financial Officer
since 1995. He served Lone Star Gas Company, a division of ENSERCH, as Senior
Vice President, Transmission, from 1993 to 1995 and as Senior Vice President,
Finance, from 1991 to 1993. Prior to joining Lone Star Gas Company, he
practiced public accounting for 26 years and was a partner in KPMG Peat
Marwick and KMG Main Hurdman and served in management positions in each firm.
Mr. McAdams, has been Senior Vice President, Human Resources and
Administration, since July 1996. He was Vice President, Employee Relations, of
Lone Star Gas Company from July 1990 to July 1996.
EXECUTIVE COMPENSATION
LSEPO has no executive officers or employees who have or will receive
compensation from LSEPO prior to the Effective Time. The following table sets
forth the current annual salary of the executive officers of EEX (whose annual
compensation from EEX exceeded $100,000 in 1995) who will be employed as
executive officers of New EEX.
<TABLE>
<CAPTION>
NAME SALARY
---- --------
<S> <C>
G. J. Junco........................................................ $325,000
B. K. Irani........................................................ 210,000
J. P. McCormick.................................................... 212,500
</TABLE>
In addition, Messrs. Junco, Irani and McCormick received performance bonuses
in 1996 for services to EEX in 1995 of $163,125, $81,755 and $57,642,
respectively.
Employee Benefit Plans. The executive officers of EEX have previously been
included in employee benefit plans of ENSERCH. LSEPO does not currently have
any employee benefit plans but the Stock Plan will become the stock incentive
plan of New EEX pursuant to the Plan of Merger. It is expected that New EEX
will adopt other employee benefit plans after the Effective Time.
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The pension plan sponsored by ENSERCH in which EEX and LSEPO participate
will be amended to provide for the transfer of plan assets and liabilities to
a retirement plan to be adopted by New EEX. At June 30, 1996, EEX had a
projected pension benefit obligation of $18.2 million and plan assets of $13.0
million. EEX had accrued $4.3 million of liability at that date. The remaining
$0.9 million will be accrued in accordance with applicable accounting
principles in the future. The comparable amounts for LSEPO were not
significant. The amount of assets to be transferred to a New EEX retirement
plan will be subject to applicable governmental regulations. Depending on the
terms of the retirement plan ultimately adopted by New EEX, applicable
regulations and interest rate and other assumptions, the amount transferred
may result in liabilities that are different from the current level of
liabilities.
New EEX will also assume unfunded liabilities under ENSERCH plans to provide
retiree medical benefits to certain present and former employees of New EEX's
predecessor companies. At June 30, 1996, the accumulated post retirement
medical benefit obligations for present and former EEX employees was $6.8, of
which $1.1 million had been accrued by EEX and the remaining $5.7 million will
be accrued in accordance with applicable accounting principles in the future.
The comparable amounts for LSEPO were insignificant.
THE STOCK PLAN
The Plan of Merger contemplates that the Stock Plan will survive the Merger
and be the stock incentive plan of New EEX. Options granted by EEX under the
Stock Plan (including Options originally granted under the 1994 Plan) and
outstanding at the Effective Time will become options to purchase the same
number of shares of New EEX Common Stock for the same exercise price and
otherwise on the same terms and conditions. The Stock Plan provides for the
issuance of stock options ("Options") to directors, officers and key employees
to purchase shares of New EEX Common Stock and the award to directors and
officers of shares that are subject to vesting based on the achievement of
performance criteria ("Restricted Stock"). Under the Stock Plan, (a) the
Option price may not be less than the fair market value of the shares on the
date of grant, (b) Options are exercisable in stages of 25% after one year to
100% after four years and (c) Options may not be exercised after ten years
from the date of grant. The 1994 Plan does not provide for awards of Options
and Restricted Stock to nonemployee directors, except pursuant to formula
grants. The Stock Plan provides for awards of Options and Restricted Stock to
nonemployee directors, but eliminates formula grants.
The Stock Plan covers a maximum of 4,000,000 shares of New EEX Common Stock,
subject to adjustment in the event of certain changes in the capital structure
of New EEX. Such shares may be authorized but unissued shares or shares held
in New EEX's treasury. If an Option or an award of Restricted Stock is
forfeited (where the forfeiting participant received no benefits of
ownership), expires or terminates before being exercised, the shares covered
thereby will be available for subsequent Option or Restricted Stock awards
within the maximum number stated above. The 1994 Plan covers a maximum of
2,000,000 shares of EEX Common Stock.
An award of Restricted Stock may be granted under the Stock Plan, either at
no cost to the recipient or for such cost as may be required by law or
otherwise as determined by the Compensation Committee of the EEX Board prior
to the Merger and the New EEX Board thereafter. The terms and conditions of
the Restricted Stock will be specified at the time of the grant. Restricted
Stock may not be disposed of by the recipient until the restrictions specified
in the award expire. The Compensation Committee will determine at the time of
the award what rights, if any, the person to whom an award of Restricted Stock
is made will have with respect to Restricted Stock during the restriction
period, including the right to vote the shares and the right to receive any
dividends or other distributions applicable to the shares. The performance
criteria for vesting Restricted Stock are the same under the 1994 Plan and the
Stock Plan.
The Plan of Merger provides that, New EEX will take such action as may be
necessary so that after the Effective Time, outstanding Options under the
Stock Plan (including Options originally granted under the 1994 Plan) to
purchase shares of EEX Common Stock shall be exercisable to purchase a number
of shares of New EEX Common Stock on a one-for-one basis. Currently, Messrs.
Junco, Biegler, Fortado, Irani, McCormick, McAdams and all EEX directors and
executive officers as a group hold 175,000, 35,000, 52,000, 115,000,
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70,000, 40,000 and 487,000 Options, respectively, under the Stock Plan. In
addition, Messrs. Junco, Fortado, Irani, McCormick, McAdams and all EEX
directors and officers as a group hold 25,000, 15,000, 20,000, 15,000, 10,000
and 85,000 shares of restricted stock, respectively, of EEX, which will be
converted into shares of New EEX Common Stock on a one-for-one basis.
COMMITTEES OF THE BOARD
The initial standing committees of the New EEX Board will be the Audit
Committee, Compensation Committee and Nominating Committee.
The New EEX Board will delegate to the Audit Committee the primary function
of oversight of the entire financial reporting and internal control processes
of New EEX, which includes meeting periodically with the independent and
internal auditors; reviewing annual financial statements and the independent
auditors' work and report thereon; reviewing the independent auditors' report
on internal controls and related matters; selecting and recommending to the
New EEX Board the appointment of the independent auditors, subject to the
ratification by shareholders; reviewing the letter of engagement and statement
of fees which pertain to the scope of the annual audit and certain special
audit and non-audit work which may be required or suggested by the independent
auditors; receiving and reviewing information pertaining to internal audits;
directing and supervising special investigations; and performing any other
functions deemed appropriate by the New EEX Board.
The function of the Compensation Committee is to establish, approve or
recommend to the New EEX Board, in those instances where its approval is
required, the compensation and major items related to compensation of
directors and of officers and other employees above a specified salary grade.
The Compensation Committee will also administer New EEX's stock option and
restricted stock plans.
The function of the Nominating Committee is to recommend to the New EEX
Board nominees for election to the New EEX Board.
COMPENSATION OF NEW EEX DIRECTORS
Directors will be compensated by an annual retainer fee of $20,000 plus
$1,200 for each board or committee meeting attended with a maximum of $1,800
if more than one meeting is held on the same day. In addition, a $2,400 per
annum fee will be paid for services on a board committee, with an additional
$1,200 per annum paid to the Chairman of a board committee. Directors who are
also officers of New EEX will not receive fees. Directors may elect, pursuant
to a Deferred Compensation Plan for Directors, to defer all or part of their
compensation each year. Deferred amounts, including any gain based upon the
experience of investments selected by the Director as provided in the plan,
will be distributed upon retirement from the board (or death) in a lump sum or
in equal annual installments over a 10-year period. A participant may elect a
lump sum payment of both principal and interest at any time reduced by a
forfeiture amount as provided in the plan. In addition, nonemployee Directors
will be eligible to receive additional awards of Restricted Stock and grants
of Options.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
It is expected that immediately after the Merger is effected, ENSERCH will
be the only beneficial owner of more than 5% of New EEX Common Stock. In the
Distribution, ENSERCH's entire interest in New EEX Common Stock will be
distributed pro rata to the holders of ENSERCH Common Stock. Neither ENSERCH
nor EEX has current data that would indicate with certainty the persons, if
any, who would become 5% beneficial owners of New EEX after giving effect to
the Merger and the Distribution.
In order to obtain direct control of LSEPO, ENSERCH will merge Lone Star
Energy Company ("LSE") with and into itself prior to the Merger, thus
transferring to ENSERCH the 100% stock interest in LSEPO now held by LSE. In
addition, prior to the Merger ENSERCH will cause Enserch Exploration Holdings,
Inc., a wholly owned subsidiary of ENSERCH ("Holdings"), to liquidate, thus
transferring the 11% of the outstanding shares of EEX Common Stock held by
Holdings to ENSERCH. As a result, ENSERCH will directly own approximately 83%
of the outstanding shares of EEX Common Stock.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description of the capital stock does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
more complete statements thereof set forth in LSEPO's Restated Articles of
Incorporation and its Bylaws, copies of which are attached hereto as Annexes C
and D, respectively, and which will become the Articles of Incorporation (the
"New EEX Articles") and Bylaws (the "New EEX Bylaws") of New EEX,
respectively, following the Merger. New EEX will be authorized by the New EEX
Articles to issue 400,000,000 shares of New EEX Common Stock and 10,000,000
shares of Preferred Stock, no par value per share ("New EEX Preferred Stock").
NEW EEX COMMON STOCK
Subject to the rights of the holders of any New EEX Preferred Stock that may
be outstanding from time to time and except as otherwise provided by law,
holders of New EEX Common Stock will be entitled to receive such dividends as
are declared by the New EEX Board from any funds legally available therefor,
to cast one vote for each share on all matters voted upon by shareholders,
including election of directors (cumulative voting being prohibited), and to
share ratably in assets available for distribution upon any liquidation.
Holders of New EEX Common Stock will have no preemptive rights and will not be
subject to any further call or assessment and the New EEX Common Stock is not
subject to redemption.
Generally, holders of New EEX Common Stock will be entitled to elect all
members of the New EEX Board and vote upon all matters put to a shareholder
vote. However, any New EEX Preferred Stock that may be issued in the future
may have voting rights. Cumulative voting for the election of directors is
prohibited by the New EEX Articles.
The New EEX Common Stock to be issued upon consummation of the Merger has
been approved for listing on the NYSE under the symbol "EEX" pending receipt
of requisite shareholder approval of the Merger and notice of issuance.
The Transfer Agent and Registrar of New EEX Common Stock is Harris Trust
Company of New York, New York.
NEW EEX PREFERRED STOCK
New EEX Preferred Stock may be issued in one or more series as the New EEX
Board may from time to time determine. New EEX Common Stock will be subject
and subordinate to the rights (including voting rights), privileges and
preferences of any series of New EEX Preferred Stock to the extent set forth
in the resolutions adopted by the New EEX Board establishing such series. The
New EEX Board may establish series of New EEX Preferred Stock by fixing and
determining the designations, preferences, limitations and relative rights of
the shares of the series, subject to and within the limitations of the TBCA
and the New EEX Articles. At the time of the Distribution, there will be no
shares of preferred stock of New EEX outstanding, although 1,000,000 shares of
$200 Series A Junior Participating Preferred Stock have been reserved for
issuance upon the exercise of rights which will attach to the New EEX Common
Stock pursuant to the New EEX Rights Plan (as defined below).
Although New EEX has no current plans to issue New EEX Preferred Stock,
other than pursuant to the New EEX Rights Plan (see below), the issuance of
shares of New EEX Preferred Stock, or the issuance of rights to purchase such
shares, could be used to discourage an unsolicited acquisition proposal. For
example, a business combination could be impeded by the issuance of a series
of New EEX Preferred Stock containing class voting rights that would enable
the holder or holders of such series to block any such transaction.
Alternatively, a business combination could be facilitated by the issuance of
a series of New EEX Preferred Stock having sufficient voting rights to provide
a required percentage vote of the shareholders. In addition, under certain
circumstances the issuance of New EEX Preferred Stock could adversely affect
the voting power of the holders
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of New EEX Common Stock. Although the New EEX Board is required to make any
determination to issue any such stock based on its judgment as to the best
interests of the shareholders of New EEX, the New EEX Board could act in a
manner that would discourage an acquisition attempt or other transaction that
some, or a majority, of the shareholders might believe to be in their best
interests or in which shareholders might receive a premium for their stock
over prevailing market prices of such stock. The New EEX Board does not at
present intend to seek shareholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or applicable stock
exchange requirements. Future issuances of shares of New EEX Preferred Stock
will be subject to the provisions of the Tax Assurance Agreement.
NEW EEX RIGHTS AGREEMENT
There will be attached to each share of New EEX Common Stock one right (a
"Right") to purchase from New EEX a unit consisting of two-hundredths of a
share (a "Unit") of $200 Series A Junior Participating Preferred Stock,
without par value (the "Preferred Stock"), at a purchase price of $45 per
Unit, subject to adjustment in certain events (the "Purchase Price"). The
following description of the Rights (i) is a summary and does not purport to
be complete and (ii) gives effect to the consummation of the Distribution.
Reference is also made to the more detailed provisions of, and such
description is qualified in its entirety by reference to, the New EEX Rights
Agreement, a copy of which is filed with the Commission as an exhibit to the
Registration Statement of which this Proxy Statement/Prospectus is a part.
Initially, the Rights will be attached to all certificates representing
outstanding shares of New EEX Common Stock, including the shares of New EEX
Common Stock issued in the Distribution, and no separate certificates for the
Rights ("Rights Certificates") will be distributed. The Rights will separate
from the New EEX Common Stock and a "Distribution Date" will occur upon the
earlier of (i) ten days following a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 18% or more of the
outstanding shares of New EEX Common Stock other than as a result of the
Distribution (the date of the announcement being the "Stock Acquisition
Date"), or (ii) ten business days (or such later date as may be determined by
the New EEX Board before the Distribution Date occurs) following the
commencement of a tender offer or exchange offer that would result in a
person's becoming an Acquiring Person. Until the Distribution Date, (a) the
Rights will be evidenced by the certificates representing New EEX Common Stock
and will be transferred with and only with such certificates, (b) certificates
representing New EEX Common Stock will contain a notation incorporating the
New EEX Rights Agreement by reference and (c) the surrender for transfer of
any certificate for New EEX Common Stock will also constitute the transfer of
the Rights associated with the stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on September 10, 2006, unless earlier redeemed or
exchanged by New EEX as described below.
As soon as practicable after the Distribution Date, Rights Certificates will
be mailed to holders of record of New EEX Common Stock as of the close of
business on the Distribution Date and, from and after the Distribution Date,
the separate Rights Certificates alone will represent the Rights. All shares
of New EEX Common Stock issued prior to the Distribution Date will be issued
with Rights. Shares of New EEX Common Stock issued after the Distribution Date
in connection with certain employee benefit plans or upon conversion of
certain securities will be issued with Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring Person
(except pursuant to a tender or exchange offer for all outstanding shares of
New EEX Common Stock at a price and on terms that a majority of the directors
of New EEX who are not officers or employees of New EEX and who are not
representatives, nominees, affiliates or associates of the Acquiring Person
determines to be fair to and otherwise in the best interests of New EEX and
its shareholders (a "Permitted Offer")), each holder of a Right will
thereafter have the right to receive, upon exercise of such Right, a number of
shares of New EEX Common Stock (or, in certain circumstances, cash, property
or other securities of New EEX) having a Current Market Price (as defined in
the New EEX Rights Agreement) equal to two times the Purchase Price of the
Right. Notwithstanding the foregoing, following the occurrence of any Flip-In
Event, all Rights that are, or (under certain circumstances specified in
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the Rights Agreement) were, beneficially owned by any Acquiring Person (or by
certain related parties) will be null and void in the circumstances set forth
in the New EEX Rights Agreement. However, the Rights are not exercisable
following the occurrence of any Flip-In Event until such time as the Rights
are no longer redeemable by New EEX as set forth below.
In the event (a "Flip-Over Event") that, at any time on or after the Stock
Acquisition Date, (i) New EEX is acquired in a merger or other business
combination transaction (other than certain mergers that follow a Permitted
Offer), or (ii) 50% or more of New EEX's assets or earning power is sold or
transferred, each holder of a Right (except Rights that previously have become
void as set forth above) shall thereafter have the right to receive, upon
exercise, a number of shares of common stock of the acquiring company having a
Current Market Price equal to two times the Purchase Price of the Right. Flip-
In Events and Flip-Over Events are collectively referred to as "Triggering
Events."
The Purchase Price payable, and the number of Units of Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a
stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) if holders of the Preferred Stock are granted certain
rights or warrants to subscribe for Preferred Stock or certain convertible
securities at less than the current market price of the Preferred Stock, or
(iii) upon the distribution to holders of the Preferred Stock of evidences of
indebtedness, cash or assets (excluding regular quarterly cash dividends) or
of subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment
in cash will be made based on the market price of the Preferred Stock on the
last trading date prior to the date of exercise. Pursuant to the New EEX
Rights Agreement, New EEX reserves the right to require prior to the
occurrence of a Triggering Event that, upon any exercise of Rights, a number
of Rights be exercised so that only whole shares of Preferred Stock will be
issued.
At any time until ten days following the Stock Acquisition Date, New EEX may
redeem the Rights in whole, but not in part, at a price of $.01 per Right,
payable, at the option of New EEX, in cash, shares of New EEX Common Stock or
such other consideration as the New EEX Board may determine. Immediately upon
the effectiveness of the action of the New EEX Board ordering redemption of
the Rights, the Rights will terminate and the only right of the holders of
Rights will be to receive the $.01 redemption price.
The Rights will have certain anti-takeover effects. The Rights will cause
substantial dilution to any person or group that attempts to acquire New EEX
without the approval of the New EEX Board. As a result, the overall effect of
the Rights may be to render more difficult or discourage any attempt to
acquire New EEX even if such acquisition may be favorable to the interests of
New EEX shareholders. Because the New EEX Board can redeem the Rights or
approve a Permitted Offer, the Rights should not interfere with a merger or
other business combination approved by the New EEX Board. The Rights have been
distributed prior to consummation of the Distribution to protect New EEX's
shareholders from coercive or abusive takeover tactics and to give the New EEX
Board more negotiating leverage in dealing with prospective acquirors.
STOCK OWNERSHIP RESTRICTIONS
The Mineral Lands Leasing Act of 1920, as amended, provides that citizens of
another country, the laws, customs or regulations of which deny similar or
like privileges to citizens or corporations of the United States, shall not by
stock ownership, stock holding or stock control, own any interest in any gas,
oil or other lease acquired thereunder. LSEPO is not aware of any country to
which this restriction would be applicable. Nevertheless, the New EEX Bylaws
will contain provisions that restrict transfers of New EEX capital stock to,
and suspend voting, dividend and distribution rights of, any persons who would
cause New EEX to be disqualified under any applicable federal or state law
from owning or leasing interests in lands or leases or otherwise conducting
its business.
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ANTI-TAKEOVER PROVISIONS
The New EEX Bylaws contain provisions requiring that advance notice be
delivered to New EEX of any business to be brought by a shareholder before an
annual meeting of shareholders and providing for certain procedures to be
followed by shareholders in nominating persons for election to the New EEX
Board. Generally, such advance notice provisions provide that the shareholder
must give written notice to the Secretary of New EEX not less than 50 days nor
more than 75 days before the scheduled date of the annual meeting of
shareholders of New EEX. The notice must set forth specific information
regarding such shareholder and such business or director nominee, as described
in the New EEX Bylaws.
The New EEX Articles provide that the number of directors of New EEX shall
be fixed from time to time by the New EEX Board by the affirmative vote of not
less than a majority of the Continuing Directors (as defined below), but shall
not be less than three, subject to such rights to elect additional directors
under such circumstances as may be granted to holders of New EEX Preferred
Stock. The New EEX Articles further provide that directors shall be elected by
the affirmative vote of holders of a majority of the outstanding shares
entitled to vote in the election of directors. Subject to the rights to elect
directors under special circumstances that may be granted to holders of New
EEX Preferred Stock, directorships resulting from an increase in the number of
directors and any vacancies on the New EEX Board may be filled solely by the
affirmative vote of the majority of the Continuing Directors even though less
than a quorum. Under the New EEX Articles, any director may be removed from
office either for or without cause only by the affirmative vote of the holders
of not less than a majority of the shares entitled to vote in the election of
directors.
The New EEX Articles provide that any action required or permitted to be
taken by the shareholders of the Company must be effected at a duly called
annual or special meeting of such holders and may not be effected by any
consent in writing by such holders. Subject to such rights to call special
meetings of shareholders as may be granted to the holders of New EEX Preferred
Stock, special meetings of the shareholders may be called by the Chairman of
the New EEX Board, by the President, by not less than a majority of Continuing
Directors or by holders of not less than 50% of the outstanding shares
entitled to vote at the meeting. The New EEX Articles provide that the power
to alter, amend or repeal the bylaws or adopt new bylaws shall be vested in,
and shall require the approval of, the affirmative vote of not less than a
majority of the Continuing Directors; provided, however, that any bylaw or
amendment thereto adopted by the New EEX Board may be altered, amended,
suspended or repealed by a 66 2/3% vote of the shareholders entitled to vote
in the election of directors. No provision of the New EEX Bylaws which has
been altered, amended or adopted by shareholder vote may be altered, amended
or repealed, or a new Bylaw in lieu thereof be adopted, by vote of the board
of directors until two years shall have expired since such action by
shareholder vote. Under the New EEX Articles (i) a "Continuing Director" is a
director who is not an affiliate or associate of a Related Person (as defined
below) and was an EEX director prior to the time that the Related Person
became such and any successor director who is recommended by a majority of the
Continuing Directors and is not affiliated with a Related Person, and (ii) a
"Related Person" is any person or group that is the beneficial owner of not
less than 10% of the outstanding voting stock.
The New EEX Articles also contain a "fair price" provision that applies to
certain business combination transactions involving any Related Person. The
"fair price" provision requires the affirmative vote of the holders of (i) not
less than 80% of the voting stock of New EEX and (ii) not less than 50% of the
voting stock of New EEX not beneficially owned by the Related Person, to
approve certain transactions between the Related Person and New EEX or its
subsidiaries, including any merger, consolidation or share exchange, any sale,
lease, exchange, pledge or other disposition of assets of New EEX or its
subsidiaries having a fair market value of at least $5 million, any transfer
or issuance of securities of New EEX or any of its subsidiaries, any adoption
of a plan or proposal by New EEX of voluntary liquidation or dissolution of
New EEX, certain reclassifications of securities or recapitalizations of New
EEX or certain other transactions, in each case involving the Related Person.
This voting requirement will not apply to certain transactions, including (a)
any merger or consolidation within one year of the person being a Related
Person where the cash or fair market value of property to be received by the
holders of New EEX capital stock is not less than the highest price per share
paid by the Related
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<PAGE>
Person in acquiring any of its holdings, or (b) any transaction approved by
New EEX's continuing directors (as defined in the New EEX Articles). This
provision could have the effect of delaying or preventing a change in control
of New EEX in a transaction or series of transactions that did not satisfy the
"fair price" criteria.
Pursuant to Article Eleven of the New EEX Articles, the provisions of the
New EEX Articles relating to the Board of Directors, the limitation of actions
taken by written consent, the calling of special meetings, the amendment of
the New EEX Bylaws and the "fair price" provision may be amended only by the
affirmative vote of the holders of at least 75% of the aggregate voting power
of the outstanding capital stock of New EEX entitled to vote for the election
of directors. Amendments to Article Eleven of the New EEX Articles and to the
"fair price" provisions require, in addition, the affirmative vote of the
holders of not less than 50% of the aggregate voting power of the outstanding
capital stock of New EEX, excluding the vote of any shares owned by a Related
Person (such 50% voting requirement shall not be applicable if the amendment
is approved by the affirmative vote of the holders of not less than 90% of
such voting stock).
The foregoing provisions of the New EEX Articles and the New EEX Bylaws,
together with the New EEX Rights Agreement, could have the effect of delaying,
deferring or preventing a change in control of New EEX or the removal of
existing management, of deterring potential acquirors from making an offer to
shareholders of New EEX and of limiting any opportunity to realize premiums
over prevailing market prices for New EEX Common Stock in connection
therewith. This could be the case notwithstanding that a majority of New EEX's
shareholders might benefit from such a change in control or offer.
COMPARISON OF SHAREHOLDER RIGHTS
If the Merger is consummated, holders of EEX Common Stock will become
holders of New EEX Common Stock, and their rights will be governed by the New
EEX Articles and the New EEX Bylaws rather than EEX's Articles and Bylaws. The
differences in rights of holders of New EEX Common Stock from the rights of
holders of EEX Common Stock are set forth below. The summary does not purport
to be an exhaustive list or a detailed description of the provisions discussed
and is qualified in its entirety by reference to the full text of the New EEX
Articles and the New EEX Bylaws attached hereto as Annexes C and D. See also
"Available Information." Because both LSEPO and EEX are incorporated under the
TBCA, the consummation of the Merger will not affect the rights of EEX
shareholders to the extent such rights are determined by state law.
Voting Power. Holders of EEX Common Stock will own substantially the same
percentage of outstanding New EEX Common Stock and will continue to be
entitled to one vote per share on each matter submitted to a vote at a meeting
of shareholders. However, as a result of the Distribution the New EEX Common
Stock will be more widely held than the EEX Common Stock, which was 83%
beneficially owned by ENSERCH.
Anti-Takeover Provisions. New EEX will have a number of provisions in the
New EEX Articles and the New EEX Bylaws and will be subject to the Rights
Agreement, which could have the effect of delaying, deferring or preventing a
change in control of New EEX or the removal of existing management, of
deterring potential acquirors from making an offer to shareholders of New EEX
and of limiting any opportunity to realize premiums over prevailing market
prices for New EEX Common Stock in connection therewith. EEX does not have any
such provisions in its Restated Articles of Incorporation and is not subject
to a Rights Agreement.
EXPERTS
The financial statements of LSEPO included herein have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements included in the EEX 1995 Annual Report on Form 10-
K, incorporated herein by reference, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report included
42
<PAGE>
in such EEX 1995 Annual Report on Form 10-K, and have been incorporated herein
by reference in reliance upon such report given upon the authority of that
firm as experts in accounting and auditing.
With respect to the unaudited interim financial information included in the
EEX March 31, 1996 and June 30, 1996 Quarterly Reports on Form 10-Q
incorporated herein by reference, Deloitte & Touche LLP has applied limited
procedures in accordance with professional standards for a review of such
information. However, as stated in their reports included in the EEX March 31,
1996 and June 30, 1996 Quarterly Reports on Form10-Q, they did not audit and
they do not express an opinion on that interim financial information. Deloitte
& Touche LLP is not subject to the liability provisions of Section 11 of the
Securities Act for their reports on such unaudited interim financial
information because those reports are not "reports" or a "part" of the
Registration Statement prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Securities Act.
The audited consolidated financial statements of DALEN and its subsidiaries
included in the EEX Form 8-K dated June 8, 1995 incorporated herein by
reference, to the extent and for the period indicated in their report, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and have been incorporated
herein by reference in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report. Reference is made to said
report, which includes an explanatory paragraph with respect to the change in
method of accounting for income taxes as of January 1, 1993 as discussed in
Note 2 to the DALEN Financial Statements incorporated herein by reference.
The estimates of the reserves of gas and oil of EEX made by DeGolyer and
MacNaughton, independent petroleum consultants, have been incorporated herein
by reference in reliance upon such estimates given upon such firm's authority
as experts with respect to the matters contained herein.
LEGAL MATTERS
The validity of the securities to be issued in the Merger will be passed
upon for LSEPO by Jackson & Walker, L.L.P., 901 Main Street, Suite 6000,
Dallas, Texas 75202. Certain United States federal income taxation matters in
connection with the Merger will be passed upon by King and Spalding, special
tax counsel to EEX.
43
<PAGE>
CERTAIN DEFINITIONS
Amplitude Anomaly--A change in seismic reflection signal strength of a
specific geologic layer, especially if attributable to an accumulation of
hydrocarbons, sometimes called a "bright spot".
Areal--Pertaining to area.
Barrel or Bbl--The unit of volume measurement used for petroleum products.
One barrel = 42 U.S. gallons.
MBbls: thousand barrels
MMBbls: million barrels
Basin--A synclinal structure in the subsurface, once the bed of a
prehistoric sea. Regarded as a good prospect for gas and oil exploration.
Behind Pipe--Oil and gas reservoirs penetrated by wells but not perforated
which therefore remain behind the pipe.
Block--Numerical designation of a specific location in an offshore area, or,
an onshore acreage "block".
Btu--British thermal unit, the quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.
MMBtu: million Btus
Condensate--A hydrocarbon mixture that becomes liquid and separates from
natural gas when the gas is subject to the production process; similar to
crude oil.
Confirmation Well--A well drilled to validate an initial discovery.
Cubic Foot--The amount of natural gas that occupies one cubic foot under
standard temperature and pressure conditions; standard volume measurement for
natural gas.
Mcf: thousand cubic feet
MMcf: million cubic feet
Bcf: billion cubic feet
Tcf: trillion cubic feet
Cubic Foot of Natural Gas Equivalent--The amount of oil, condensate or
natural gas liquids necessary to equal an amount of natural gas based on a
conversion ratio of one Bbl of oil, condensate or natural gas liquids to six
Mcf of gas.
Mcfe: thousand cubic feet of natural gas equivalent
MMcfe: million cubic feet of natural gas equivalent
Bcfe: billion cubic feet of natural gas equivalent
Tcfe: trillion cubic feet of natural gas equivalent
Development Drilling--The drilling and drilling-related activities
undertaken to recover gas and oil after initial discovery.
Development Well--A well drilled into a reservoir of gas or oil that
contains proved reserves.
Exploitation--The development of an existing producing area in order to
increase production, usually characterized by the drilling of infill
development wells and the reworking of oil wells.
44
<PAGE>
Exploratory Well--A well drilled into a previously untested geologic
structure or formation to determine the presence of gas or oil.
Gross Acres/Gross Wells--Total acreage or total wells in which a company
holds varying interests.
Leasehold--Property or acreage offered under contract for the exploration
and production of gas, oil or other minerals.
NGL--Natural gas liquids.
Net Acres/Net Wells--Proportionate company interest in gross acres or gross
wells.
Operator--The individual or company responsible for the exploration and
production of a gas or oil well or lease. The operator typically holds the
largest working interest in the well or lease.
Overriding Royalty Interest--A royalty interest created from the working
interest which entitles the holder to a specific fractional share of gross gas
or oil production.
Proved Reserves--Reserves which can be estimated with reasonable certainty
to be recoverable under current economic conditions.
Proved Developed/Undeveloped Reserves--Proved reserves which are expected to
be recovered from existing wells (including reserves behind pipe).
Production--The phase of the petroleum industry that deals with bringing the
gas and well fluids to the surface, separating them and storing, gauging and
otherwise preparing the product for the pipeline. Also, the amount of gas or
oil produced in a given period.
Productive Wells--Either producing wells or wells capable of commercial
production, although currently shut-in.
Recompletion--A workover in which a previously productive formation or
interval is abandoned and a different interval is completed for production.
Reserves--Amount of gas or oil believed to be economically recoverable under
existing conditions.
Royalty--Mineral owner's share of the gross gas or oil production on his
property.
Spudded--The beginning of the actual drilling of a well, which involves
using a spudding bit to drill down several hundred feet to accommodate the
surface pipe.
Standardized Measure of Discounted Future Net Cash Flows After Tax--Net
present value of the estimated future revenue stream for proved gas and oil
reserves using current period prices plus contractual escalations, less future
costs to develop and produce the reserves, discounted at the prescribed 10%
rate and adjusted for income-tax effects.
3-D Seismic--Three-dimensional, computer-aided imaging of underground
formations based on acoustical data.
2-D Seismic--Two-dimensional, computer-aided imaging of underground
formations based on acoustical data.
Working Interest--A share of the ownership in drilling and production of gas
and oil.
Workover--One or more of a variety of remedial operations on a producing
well to restore or increase production by reconditioning or stimulating the
reservoir or by a recompletion.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Financial Information of New EEX...................... F-2
Unaudited Condensed Pro Forma Balance Sheet as of June 30, 1996......... F-3
Unaudited Pro Forma Statements of Operations for the Six Months Ended
June 30, 1996 and the Years Ended December 31, 1995, 1994 and 1993..... F-4
Notes to Unaudited Pro Forma Financial Statements....................... F-8
Financial Information of Lone Star Energy Plant Operations, Inc.
Selected Financial Data................................................. F-9
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-10
Independent Auditors' Report............................................ F-11
Statements of Income and Retained Earnings for each of the Three Years
in the Period Ended December 31, 1995 and (Unaudited) for the Six
Months Ended June 30, 1995 and 1996 ................................... F-12
Statements of Cash Flows for each of the Three Years in the Period Ended
December 31, 1995 and (Unaudited) for the Six Months Ended June 30,
1995 and 1996.......................................................... F-13
Balance Sheets as of December 31, 1994 and 1995 and (Unaudited) June 30,
1996................................................................... F-14
Notes to Financial Statements........................................... F-15
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
OF NEW EEX
The following unaudited pro forma financial statements give effect to the
Merger. The unaudited condensed pro forma balance sheet as of June 30, 1996 is
presented as if the Merger had occurred on that date. The unaudited pro forma
statements of operations for each of the three years in the period ended
December 31, 1995 and the six months ended June 30, 1996 assume that the
Merger occurred at the beginning of each period presented. For purposes of
financial reporting, the Merger will be treated as a combination of entities
under common control. Accordingly, the assets and liabilities of EEX and LSEPO
will be recorded at their historical amounts.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements of EEX and LSEPO and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
EEX and LSEPO included or incorporated by reference herein. The unaudited pro
forma statements of operations are not necessarily indicative of the financial
results that would have occurred had the Merger been consummated on the
indicated dates, nor are they necessarily indicative of future financial
results.
On June 8, 1995, EEX acquired all of the capital stock of DALEN Corporation
("Dalen"). The acquisition was accounted for as a purchase. See Note (d) to
the Unaudited Pro Forma Financial Statements for a summary of pro forma
results of operations of New EEX reflecting the DALEN acquisition.
F-2
<PAGE>
NEW EEX
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
EEX LSEPO ADJUSTMENTS NEW EEX
---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash........................ $ 1,838 $ 35 $-- $ 1,873
Accounts receivable-trade... 67,994 3,967 -- 71,961
Accounts receivable-
affiliates................. 10,834 -- -- 10,834
Temporary advances-ENSERCH
Companies (net)............ 5,573 590 301 (a) 6,464
Other....................... 14,316 166 -- 14,482
---------- ------ ---- ----------
Total..................... 100,555 4,758 301 105,614
---------- ------ ---- ----------
Net Property, Plant and
Equipment.................... 1,696,055 70 -- 1,696,125
---------- ------ ---- ----------
Other Assets.................. 25,609 454 -- 26,063
---------- ------ ---- ----------
Total..................... $1,822,219 $5,282 $301 $1,827,802
========== ====== ==== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable-trade...... $ 87,454 $ 235 $-- $ 87,689
Accounts payable-
affiliates................. 4,080 -- -- 4,080
Current portion of capital
lease obligations.......... 3,859 -- -- 3,859
Other....................... 17,118 1,324 -- 18,442
---------- ------ ---- ----------
Total..................... 112,511 1,559 -- 114,070
---------- ------ ---- ----------
Bank Revolving Credit
Agreement.................... 222,000 -- -- 222,000
---------- ------ ---- ----------
Capital Lease Obligations..... 91,935 -- -- 91,935
---------- ------ ---- ----------
Deferred Income Taxes......... 276,194 -- -- 276,194
---------- ------ ---- ----------
Other Liabilities............. 31,639 453 -- 32,092
---------- ------ ---- ----------
Company-Obligated Mandatorily
Redeemable Preferred
Securities of Subsidiary..... 150,000 -- -- 150,000
---------- ------ ---- ----------
Shareholders' Equity
Common stock and paid in
capital.................... 945,739 1 301 (a) 946,041
Retained earnings
(deficit).................. (7,145) 3,269 -- (3,876)
Unamortized restricted stock
compensation............... (654) -- -- (654)
---------- ------ ---- ----------
Shareholders' equity........ 937,940 3,270 301 941,511
---------- ------ ---- ----------
Total..................... $1,822,219 $5,282 $301 $1,827,802
========== ====== ==== ==========
Pro Forma Shares of common
stock outstanding (b)........ 125,933 778 126,711
========== ====== ==========
</TABLE>
See Notes.
F-3
<PAGE>
NEW EEX
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
EEX LSEPO NEW EEX
-------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Natural gas................ $ 111,880 $ -- $ 111,880
Oil and condensate......... 43,933 -- 43,933
Natural gas liquids........ 3,651 -- 3,651
Cogeneration operations.... -- 5,993 5,993
Other...................... 883 -- 883
-------------- ------------ --------------
Total.................... 160, 347 5,993 166,340
-------------- ------------ --------------
Cost and Expenses
Production and operating... 38,618 -- 38,618
Exploration................ 6,168 -- 6,168
Depreciation and
amortization.............. 68,032 7 68,039
Cogeneration operations.... -- 5,465 5,465
General, administrative and
other..................... 16,512 -- 16,512
Taxes, other than income
taxes..................... 10,973 201 11,174
-------------- ------------ --------------
Total.................... 140,303 5,673 145,976
-------------- ------------ --------------
Operating Income............. 20,044 320 20,364
Other Income (Expense)-Net... (52) 168 116
Interest and Other Financing
Costs....................... (11,861) (168) (12,029)
-------------- ------------ --------------
Income Before Income Taxes... 8,131 320 8,451
Income Taxes................. 2,774 138 2,912
-------------- ------------ --------------
Net Income................... $ 5,357 $ 182 $ 5,539
============== ============ ==============
Net Income Per Share......... $ .04 $ .23 $ .04
============== ============ ==============
Pro Forma Weighted Average
Shares Outstanding (b)...... 125,848 778 126,626
============== ============ ==============
</TABLE>
See Notes.
F-4
<PAGE>
NEW EEX
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
EEX LSEPO NEW EEX (D)
-------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Natural gas.............. $ 157,308 $ -- $ 157,308
Oil and condensate....... 56,525 -- 56,525
Natural gas liquids...... 4,859 -- 4,859
Cogeneration operations.. -- 16,507 16,507
Other.................... 2,159 -- 2,159
-------------- ------------- --------------
Total.................. 220,851 16,507 237,358
-------------- ------------- --------------
Cost and Expenses
Production and
operating............... 48,695 -- 48,695
Exploration.............. 11,848 -- 11,848
Depreciation and
amortization............ 115,685 14 115,699
Write-down of non-U.S.
gas and oil properties.. 929 -- 929
Cogeneration operations.. -- 13,877 13,877
General, administrative
and other............... 30,658 -- 30,658
Taxes, other than income
taxes................... 19,189 367 19,556
-------------- ------------- --------------
Total.................. 227,004 14,258 241,262
-------------- ------------- --------------
Operating Income (Loss).... (6,153) 2,249 (3,904)
Other Income (Expense)-
Net....................... 64 97 161
Interest Income............ 1,027 -- 1,027
Interest and Other
Financing Costs........... (14,617) (105) (14,722)
-------------- ------------- --------------
Income (Loss) Before Income
Taxes..................... (19,679) 2,241 (17,438)
Income Taxes (Benefit)..... (7,177) 871 (6,306)
-------------- ------------- --------------
Net Income (Loss).......... $ (12,502) $ 1,370 $ (11,132)
============== ============= ==============
Net Income (Loss) Per
Share..................... $ (.11) $ 1.76 $ (.10)
============== ============= ==============
Pro Forma Weighted Average
Shares Outstanding (b).... 111,137 778 111,915
============== ============= ==============
</TABLE>
See Notes.
F-5
<PAGE>
NEW EEX
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
EEX LSEPO NEW EEX (D)
------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Natural gas.................... $ 144,550 $ -- $ 144,550
Oil and condensate............. 30,880 -- 30,880
Natural gas liquids............ 2,377 -- 2,377
Cogeneration operations........ -- 12,726 12,726
Other.......................... 1,333 -- 1,333
------------- ------------ -------------
Total........................ 179,140 12,726 191,866
------------- ------------ -------------
Cost and Expenses
Production and operating....... 31,667 -- 31,667
Exploration.................... 9,136 -- 9,136
Depreciation and amortization.. 80,819 12 80,831
Sale of inactive pipeline...... (7,551) -- (7,551)
Cogeneration operations........ -- 10,959 10,959
General, administrative and
other......................... 19,807 -- 19,807
Taxes, other than income
taxes......................... 13,233 352 13,585
------------- ------------ -------------
Total........................ 147,111 11,323 158,434
------------- ------------ -------------
Operating Income................. 32,029 1,403 33,432
Other Income (Expense)-Net....... (314) -- (314)
Interest Income.................. 671 -- 671
Interest and Other Financing
Costs........................... (20,919) -- (20,919)
------------- ------------ -------------
Income Before Income Taxes....... 11,467 1,403 12,870
Income Taxes (Benefit)........... (334) 590 256
------------- ------------ -------------
Net Income....................... $ 11,801 $ 813 $ 12,614
============= ============ =============
Pro Forma Information-Change in
Tax Status (c)
Income before income taxes..... $ 11,467 $ 1,403 $ 12,870
Income taxes (including income
taxes on partnership
operations)................... 3,990 590 4,580
------------- ------------ -------------
Net Income..................... $ 7,477 $ 813 $ 8,290
============= ============ =============
Net Income per Share........... $ .07 $ 1.05 $ .08
============= ============ =============
Pro Forma Weighted Average Shares
Outstanding (b)................. 105,821 778 106,599
============= ============ =============
</TABLE>
See Notes.
F-6
<PAGE>
NEW EEX
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
EEX LSEPO NEW EEX
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Natural gas..................... $ 146,355 $ -- $ 146,355
Oil and condensate.............. 36,863 -- 36,863
Natural gas liquids............. 4,148 -- 4,148
Cogeneration operations......... -- 10,662 10,662
Other........................... 2,430 -- 2,430
------------- ------------ -------------
Total......................... 189,796 10,662 200,458
------------- ------------ -------------
Cost and Expenses
Production and operating........ 31,404 -- 31,404
Exploration..................... 8,668 -- 8,668
Depreciation and amortization... 78,418 5 78,423
Write-down of non-U.S. gas and
oil properties................. 10,191 -- 10,191
Cogeneration operations......... -- 8,597 8,597
General, administrative and
other.......................... 29,980 -- 29,980
Taxes, other than income taxes.. 15,950 236 16,186
------------- ------------ -------------
Total......................... 174,611 8,838 183,449
------------- ------------ -------------
Operating Income.................. 15,185 1,824 17,009
Interest Income................... 2,041 -- 2,041
Interest and Other Financing
Costs............................ (30,584) -- (30,584)
------------- ------------ -------------
Income (Loss) Before Income
Taxes............................ (13,358) 1,824 (11,534)
Income Taxes (Benefit)............ (3,398) 734 (2,664)
------------- ------------ -------------
Net Income (Loss)................. $ (9,960) $ 1,090 $ (8,870)
============= ============ =============
Pro Forma Information-Change in
Tax Status (c)
Income (loss) before income
taxes.......................... $ (13,358) $ 1,824 $ (11,534)
Income taxes (benefit)
(including income taxes on
partnership operations)........ (4,666) 734 (3,932)
------------- ------------ -------------
Net income (loss)............... $ (8,692) $ 1,090 $ (7,602)
============= ============ =============
Net Income (Loss) Per Share....... $ (.08) $ 1.40 $ (.07)
============= ============ =============
Pro Forma Weighted Average Shares
Outstanding (b).................. 105,821 778 106,599
============= ============ =============
</TABLE>
See Notes.
F-7
<PAGE>
NEW EEX
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(a) Immediately prior to the Effective Time of the Merger, ENSERCH will make a
capital contribution to Lone Star Energy Plant Operations, Inc. ("LSEPO"),
or LSEPO will make a distribution to ENSERCH, in an amount sufficient to
cause LSEPO's working capital to be $3.5 million. Following the Merger,
ENSERCH will no longer fund LSEPO's operations.
(b) In the Merger each outstanding share of EEX Common Stock will be converted
into one share of New EEX Common Stock and the outstanding shares of LSEPO
will be converted into a number of shares of New EEX Common Stock
determined by dividing $7.0 million by the average of the closing sales
prices of EEX Common Stock on the 15 trading days preceding the fifth
trading day prior to the effective time of the Merger. An average market
price of EEX shares of $9.00 was assumed to determine the pro forma
converted shares outstanding and to compute pro forma earnings per share.
(c) For periods prior to 1995, except for international and SACROC operations,
EEX operated as a partnership, and the income or loss of the partnership
was includable in the tax returns of the individual partners. Accordingly,
no recognition was given to income taxes on partnership operations. EEX,
as a corporation, is a taxable entity. The statements of operations for
periods prior to 1995 include a pro forma provision for income taxes on
the partnership operations based on the applicable corporate federal
statutory rate.
(d) On June 8, 1995, EEX acquired all the capital stock of DALEN for cash of
$340 million and assumed DALEN's bank debt of $115 million. The
acquisition was accounted for as a purchase. The assets acquired and the
liabilities assumed were recorded at their estimated fair value.
Essentially all of the valuation adjustment was assigned to gas and oil
properties.
Following is a summary of pro forma results of operations of New EEX
assuming the DALEN acquisition had occurred at the beginning of the periods
presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.......................................... $ 285,682 $ 335,262
Operating Income (Loss)........................... (3,497) 54,380
Net Income (Loss)................................. (20,831) 24,493
Net Income (Loss) After Pro Forma Income Taxes on
Partnership Operations........................... (20,831) 20,169
Net Income (Loss) Per Share....................... (.19) .19
</TABLE>
F-8
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR
PERIOD ENDED
AS OF OR FOR YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ----------------
1991(A) 1992(A) 1993 1994 1995 1995(A) 1996(A)
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues(b)............. $6,000 $8,737 $10,662 $12,726 $16,507 $8,059 $5,993
Costs and Expenses...... 6,113 8,815 8,838 11,323 14,258 7,300 5,673
------ ------ ------- ------- ------- ------ ------
Operating Income
(Loss)................. (113) (78) 1,824 1,403 2,249 759 320
Other Income............ -- -- -- -- 97 -- 168
Interest and Other
Financing Costs........ -- -- -- -- (105) -- (168)
Income (Taxes) Benefit.. 39 (34) (734) (590) (871) (305) (138)
------ ------ ------- ------- ------- ------ ------
Net Income (Loss)....... (74) (112) 1,090 813 1,370 454 182
Net Income (Loss) Per
Share(c)............... $ (.10) $ (.14) $ 1.40 $ 1.05 $ 1.76 $ .58 $ .23
Weighted Average Shares
Outstanding(c)......... 778 778 778 778 778 778 778
BALANCE SHEET DATA
Total Assets............ $1,125 $1,092 $ 4,335 $ 4,212 $10,132 $2,809 $5,282
Shareholder's Equity
(Deficiency)........... (73) (185) 905 1,718 3,088 2,172 3,270
</TABLE>
- --------
(a) Information for these periods is unaudited. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the results of operations have been made.
(b) Revenues include contract revenues and reimbursement of expenses incurred
on behalf of operating partnerships.
(c) The weighted average shares outstanding and the net income (loss) per
share are unaudited pro forma amounts reflecting shares to be issued in
the merger of Enserch Exploration, Inc. with and into Lone Star Energy
Plant Operations, Inc.
F-9
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Lone Star Energy Plant Operations, Inc. ("LSEPO") has three agreements to
operate and maintain cogeneration plants. The agreements were initially
entered into by Lone Star Energy Company ("LSEC") and subsequently assigned to
LSEPO. The financial statements of LSEPO include the results of the three
operating and maintenance agreements for all years in a manner similar to a
pooling-of-interests since these activities were under the common control of
ENSERCH Corporation ("ENSERCH") and LSEC prior to the assignment of these
agreements to LSEPO.
In connection with the proposed merger of ENSERCH with TUC Holding Company,
ENSERCH plans to merge the operations of LSEPO and Enserch Exploration, Inc.
("EEX"), a company approximately 83% owned by ENSERCH. LSEPO will be the
surviving corporation of that merger (the "Merger"), in which its name will be
changed to Enserch Exploration, Inc. ("New EEX"). In the Merger each
outstanding share of EEX Common Stock will be converted into one share of New
EEX Common Stock and the outstanding shares of LSEPO will be converted into a
number of shares of New EEX Common Stock determined by dividing $7.0 million
by the average of the closing sales prices of EEX Common Stock on the 15
trading days preceding the fifth trading day prior to the effective time of
the Merger.
RESULTS OF OPERATIONS
Revenues include contract revenues and reimbursement of expenses incurred on
behalf of Encogen One Partners Ltd. ("Encogen One") and Encogen Four Partners,
L.P.
LSEPO had net income of $1.4 million in 1995, compared with $.8 million in
1994 and $1.1 million in 1993. Operating income for 1995 was $2.2 million
versus $1.4 million in 1994 and $1.8 million in 1993. LSEPO receives incentive
fees based on the Buffalo and Bellingham plants' availability. In 1995, the
Buffalo and Bellingham plants achieved 98.6% and 98.3% availability,
respectively, which resulted in total incentive fees of $1.1 million being
earned. In 1994 and 1993, incentive fees of $.7 million and $.5 million,
respectively, were earned.
LSEPO had net income of $182 thousand for the six months ended June 30, 1996
compared with $454 thousand for the same period in 1995. Operating income for
the first half of 1996 was $320 thousand versus $759 thousand for the first
half of 1995. The period to period reduction in operating income is largely
due to an increase in compensation expense in 1996 of $258 thousand and an
insurance premium refund of $128 thousand in 1995.
Other income in 1995 consists principally of interest due from Encogen One.
During 1995, LSEPO incurred extraordinary reimbursable maintenance expenses
for Encogen One, which deferred reimbursement of these expenses to LSEPO, as
allowed under the terms of the operating and maintenance agreement. ENSERCH
has financed this temporary working capital requirement for LSEPO, and
interest equal to the interest earned by LSEPO is payable to ENSERCH.
LIQUIDITY AND FINANCIAL RESOURCES
LSEPO has funded its activities through cash provided from operations and
through advances from ENSERCH. ENSERCH advances cash to LSEPO to meet its
working capital needs and LSEPO remits any excess cash to ENSERCH. Net cash
required by operating activities for 1995 totaled $2.4 million, compared with
cash provided of $1.4 million in 1994 and cash required of $2.2 million in
1993. Accounts receivable-trade at December 31, 1995 increased by $4.0 million
compared with the prior year end, largely as a result of higher receivables
from Encogen One for reimbursable expenses.
Net cash provided by operating activities in the first six months of 1996
totaled $4.2 million compared with $4.3 million for the same period in 1995.
Accounts receivable-trade and the non-current deferred receivable from Encogen
One Partners Ltd. decreased by $4.1 million and $1.4 million, respectively,
from year-end 1995 to June 30, 1996.
At June 30, 1996, LSEPO had total assets of $5.3 million and net assets of
$3.3 million, including working capital of $3.2 million. Immediately prior to
the Merger, ENSERCH will make a capital contribution to LSEPO, or LSEPO will
make a distribution to ENSERCH, in an amount sufficient to cause LSEPO's
working capital to be $3.5 million. Following the Merger, ENSERCH will no
longer fund LSEPO's operations.
F-10
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Lone Star Energy Plant
Operations, Inc. (the "Company") as of December 31, 1995 and 1994, and the
related statements of income and retained earnings and of cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995 and 1994,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
June 19, 1996
F-11
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues........................... $10,662 $12,726 $16,507 $ 8,059 $ 5,993
------- ------- ------- ------- -------
Costs and Expenses
Operating expenses............... 5,535 6,046 5,857 2,842 3,169
Maintenance expenses............. 3,062 4,913 8,020 4,268 2,296
Depreciation..................... 5 12 14 7 7
Payroll, ad valorem and other
taxes........................... 236 352 367 183 201
------- ------- ------- ------- -------
Total.......................... 8,838 11,323 14,258 7,300 5,673
------- ------- ------- ------- -------
Operating Income................... 1,824 1,403 2,249 759 320
Other Income....................... -- -- 97 -- 168
Interest and Other Financing
Costs............................. -- -- (105) -- (168)
------- ------- ------- ------- -------
Income before Income Taxes......... 1,824 1,403 2,241 759 320
Income Taxes....................... 734 590 871 305 138
------- ------- ------- ------- -------
Net Income......................... 1,090 813 1,370 454 182
Retained Earnings (Deficit),
Beginning of Period............... (186) 904 1,717 1,717 3,087
------- ------- ------- ------- -------
Retained Earnings, End of Period... $ 904 $ 1,717 $ 3,087 $ 2,171 $ 3,269
======= ======= ======= ======= =======
Unaudited Pro Forma Information
(Note 10)
Net Income Per Share............. $ 1.40 $ 1.05 $ 1.76 $ .58 $ .23
======= ======= ======= ======= =======
Average Common Shares Outstand-
ing............................. 778 778 778 778 778
======= ======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................ $ 1,090 $ 813 $ 1,370 $ 454 $ 182
Depreciation...................... 5 12 14 7 7
Deferred income taxes (benefit)... (9) (2) 1 -- --
Deferred receivable............... -- -- (1,887) -- 1,434
Other............................. (471) 191 (225) (225) 3
Changes in current operating
assets and liabilities
Accounts receivable............. (3,198) 94 (4,035) 4,045 4,114
Other current assets............ 58 (31) (24) 11 (100)
Accounts payable................ 44 353 913 (255) (1,113)
Deferred payable to ENSERCH..... -- -- 1,107 -- (204)
Other current liabilities....... 234 (16) 343 237 (142)
------- ------- ------- ------ -------
Net Cash Flows from (used for)
Operating Activities......... (2,247) 1,414 (2,423) 4,274 4,181
------- ------- ------- ------ -------
INVESTING ACTIVITIES
Additions of property, plant and
equipment........................ (5) (32) (4) (4) (2)
------- ------- ------- ------ -------
FINANCING ACTIVITIES
Increase (decrease) in non-current
portion of deferred payable to
ENSERCH.......................... -- -- 1,887 -- (1,434)
Change in working capital advances
payable to/receivable from
ENSERCH.......................... 2,352 (1,463) 524 (4,286) (2,729)
------- ------- ------- ------ -------
Net Cash Flows from (used for)
Financing Activities......... 2,352 (1,463) 2,411 (4,286) (4,163)
------- ------- ------- ------ -------
Net Increase (Decrease) in Cash..... 100 (81) (16) (16) 16
Cash at Beginning of Period......... 16 116 35 35 19
------- ------- ------- ------ -------
Cash at End of Period............... $ 116 $ 35 $ 19 $ 19 $ 35
======= ======= ======= ====== =======
</TABLE>
See Notes to Financial Statements.
F-13
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- (UNAUDITED)
1994 1995 JUNE 30, 1996
------ ------- -------------
(IN THOUSANDS, EXCEPT
SHARES)
ASSETS
<S> <C> <C> <C>
Current Assets
Cash............................................ $ 35 $ 19 $ 35
Accounts receivable--trade...................... 4,046 8,081 3,967
Advances receivable from ENSERCH................ -- -- 590
Other........................................... 42 66 166
------ ------- ------
Total current assets.......................... 4,123 8,166 4,758
------ ------- ------
Property, Plant and Equipment, net of accumulated
depreciation of $24, $38 and $41................. 85 75 70
------ ------- ------
Other Assets
Deferred receivable............................. -- 1,887 453
Other........................................... 4 4 1
------ ------- ------
Total other assets............................ 4 1,891 454
------ ------- ------
Total....................................... $4,212 $10,132 $5,282
====== ======= ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable--trade......................... $ 435 $ 1,348 $ 235
Working capital advances payable to ENSERCH..... 1,615 2,139 --
Current portion of deferred payable to ENSERCH.. -- 1,107 903
Other........................................... 220 563 421
------ ------- ------
Total current liabilities..................... 2,270 5,157 1,559
------ ------- ------
Other Liabilities
Deferred payable to ENSERCH..................... -- 1,887 453
Other........................................... 224 -- --
------ ------- ------
Total other liabilities....................... 224 1,887 453
------ ------- ------
Commitments and Contingent Liabilities (Note 9)
Common Shareholder's Equity
Common stock, $100 par value; authorized 1,000
shares, issued 10 shares (Note 10)............. 1 1 1
Retained earnings............................... 1,717 3,087 3,269
------ ------- ------
Common shareholder's equity................... 1,718 3,088 3,270
------ ------- ------
Total....................................... $4,212 $10,132 $5,282
====== ======= ======
</TABLE>
See Notes to Financial Statements.
F-14
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Lone Star Energy Plant Operations, Inc. ("LSEPO") is a wholly-owned
subsidiary of Lone Star Energy Company ("LSEC"), a wholly-owned subsidiary of
ENSERCH Corporation ("ENSERCH"). LSEPO has agreements to operate and maintain
three cogeneration plants, which are located in Sweetwater, Texas, in Buffalo,
New York, and in Bellingham, Washington. Each facility was developed by a
subsidiary of ENSERCH. LSEPO has fixed-cost operating and maintenance
agreements for providing labor and certain routine consumables at each plant,
with each of the agreements containing escalation provisions tied to
inflation. The agreements for the Buffalo and Bellingham plants also contain
bonus or penalty provisions based upon plant availability.
The Sweetwater plant produces 255 megawatts per hour of electricity at
345,000 volts. This electricity is sold to the local electric utility (Texas
Utilities Electric Company). The facility also produces sequentially up to 170
MMBtu's per hour of exhaust gas at 1,000 degrees fahrenheit which is sold to a
gypsum board manufacturing facility for use in its drying process. The
Sweetwater plant commenced commercial operation in June 1989. The initial term
of LSEPO's agreement expires in June 2001.
The Buffalo plant produces 62 megawatts per hour of electricity at 115,000
volts. This electricity is sold to the local electric utility (Niagara Mohawk
Power Company). The facility also produces up to 110,000 pounds per hour of
steam which is sold to a brass manufacturing facility for process use and
space heating purposes. The Buffalo plant commenced commercial operation in
May 1992. The initial term of LSEPO's agreement expires in March 2007.
The Bellingham plant produces 160 megawatts per hour of electricity at
115,000 volts. This electricity is sold to the local electric utility (Puget
Sound Power and Light Company). The facility also produces up to 130,000
pounds per hour of steam which is sold to a paper mill for process purposes.
The Bellingham plant commenced commercial operation in July 1993. The initial
term of LSEPO's agreement expires in June 2008.
2. BASIS OF PRESENTATION
Each of the three agreements LSEPO currently has to operate and maintain
cogeneration plants was initially entered into by LSEC and subsequently
assigned to LSEPO. The financial statements of LSEPO include the results of
the three operating and maintenance agreements for all years in a manner
similar to a pooling-of-interests since these activities were under the common
control of ENSERCH and LSEC prior to the assignment of these agreements to
LSEPO.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All dollar amounts in the notes to financial statements are stated in
thousands unless otherwise indicated. The preparation of financial statements
requires the use of significant estimates and assumptions by management;
actual results could differ from those estimates.
Revenues include contract revenues and reimbursement of expenses incurred on
behalf of Encogen One Partners Ltd. ("Encogen One") and Encogen Four Partners,
L.P.
Depreciation of property, plant and equipment is provided principally by the
straight-line method over the estimated service lives of the related assets.
During 1995, LSEPO incurred extraordinary reimbursable maintenance expenses
for Encogen One, which deferred reimbursement of these expenses to LSEPO, as
allowed under the terms of the operating and maintenance agreement. Encogen
One is charged interest at the prime rate plus one percent on the outstanding
F-15
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
balance. At December 31, 1995, $1.1 million of the deferred receivable is
included in accounts receivable--trade and $1.9 million is included in other
assets. The related interest income is included in other income in the income
statement. The advance from ENSERCH to fund the extraordinary reimbursable
maintenance expenses will not be needed for ongoing working capital and will
be repaid to ENSERCH when the receivable is collected by LSEPO. The deferred
receivable balances (both current and non-current) are offset by deferred
payable balances to ENSERCH of the same amounts. The interest expense in the
income statement represents the interest associated with the deferred payable
balances to ENSERCH.
4. RELATED PARTY TRANSACTIONS
In the ordinary course of business, LSEPO engages in various transactions
with ENSERCH and its affiliates. LSEPO is charged for direct and indirect
costs incurred by LSEC, ENSERCH and other affiliates that are associated with
LSEPO's business and operations, including general and administrative costs
incurred in the management of operations and in performing accounting,
treasury, internal audit, income tax planning and compliance, legal,
information systems, human resources and other functions. Charges are
determined on a basis that reasonably reflects the actual costs of services
performed for LSEPO and may include allocations based on such factors as the
percentage of time spent on projects or services, the number of employees or
net capital employed. LSEPO believes that the methods used are reasonable and
that allocated costs approximate costs that would have been incurred if LSEPO
had operated as an unaffiliated entity. Charges from LSEC, ENSERCH and other
affiliates were $916, $955 and $817 for 1993, 1994 and 1995, respectively.
ENSERCH advances cash to LSEPO to meet its working capital needs and LSEPO
remits any excess cash to ENSERCH. No interest is charged on these advances.
Immediately prior to the Merger, ENSERCH will make a capital contribution to
LSEPO, or LSEPO will make a distribution to ENSERCH, in an amount sufficient
to cause LSEPO's working capital to be $3.5 million. Following the Merger,
ENSERCH will no longer fund LSEPO's operations.
LSEPO has entered into agreements to operate and maintain three cogeneration
plants, in each of which indirect wholly-owned subsidiaries of ENSERCH hold
the general partner's interest (see Notes 1 and 8).
Pursuant to a contract entered into at closing of development, the ENSERCH
affiliate that developed the Bellingham cogeneration project receives an
annual operator surcharge fee of $4 million from Encogen Northwest, L.P. LSEPO
receives the payment and immediately remits it to the ENSERCH affiliate.
LSEPO and the ENSERCH affiliate holding the general partner's interest in
the Bellingham plant share incentive fees (or penalties) resulting from the
availability of that plant. LSEPO's share is approximately one third, and the
ENSERCH affiliate's share is approximately two thirds. LSEPO collects the
incentive fees, retains its share and remits the remainder to the ENSERCH
affiliate. Incentive fees earned by LSEPO for the availability of the
Bellingham plant were $.2 million, $.4 million and $.6 million in 1993, 1994
and 1995, respectively.
F-16
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
LSEPO's operations are included in ENSERCH's consolidated federal income tax
return. LSEPO makes tax payments to ENSERCH on the basis of a separate federal
income tax return.
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Provision (Benefit) for Income Taxes:
Current
Federal........................................... $ 599 $ 442 $ 741
State............................................. 144 150 129
------ ------ ------
Total........................................... 743 592 870
Deferred Federal.................................... (9) (2) 1
------ ------ ------
Total........................................... $ 734 $ 590 $ 871
====== ====== ======
Reconciliation of Income Taxes Computed at the
Federal Statutory Rate to Provision for Income
Taxes:
Income before income taxes.......................... $1,824 $1,403 $2,241
------ ------ ------
Income taxes computed at the federal statutory rate
of 35%............................................. 638 491 784
State taxes......................................... 94 98 84
Other--net.......................................... 2 1 3
------ ------ ------
Provision for income taxes........................ $ 734 $ 590 $ 871
====== ====== ======
</TABLE>
At December 31, 1995 and 1994, LSEPO had a deferred tax asset of $4,
included in other assets, due to property-related differences in the financial
accounting basis and income tax basis of LSEPO's assets.
6. EMPLOYEE BENEFIT PLANS
Substantially all personnel associated with LSEPO are covered by an ENSERCH
pension plan, and LSEPO receives an allocated portion of the plan expenses,
which is included in the amounts disclosed in Note 4. Medical, dental and
similar benefits are also provided under ENSERCH plans. In addition, ENSERCH
provides a voluntary contributory investment plan to substantially all
employees of LSEPO.
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The fair value of financial instruments, consisting primarily of cash,
accounts receivable and accounts payable, approximated carrying value at
December 31, 1995 and 1994.
8. MAJOR CUSTOMERS
LSEPO derives all of its revenues from three limited partnerships, in each
of which an ENSERCH affiliate holds the general partner's interest (see Notes
1 and 4).
The percentage of LSEPO's total revenues, excluding reimbursement of
expenses, from each of its three major customers is summarized below:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Encogen One Partners Ltd. (Sweetwater plant).............. 31% 28% 25%
Encogen Four Partners, L.P. (Buffalo plant)............... 38% 36% 35%
Encogen Northwest, L.P. (Bellingham plant)................ 31% 36% 40%
</TABLE>
F-17
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
9. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, LSEPO is involved in certain legal
proceedings. In the opinion of management, LSEPO will incur no liability from
pending claims or suits that is considered material for financial reporting
purposes.
10. PRO FORMA SHARES OUTSTANDING (UNAUDITED)
In connection with the proposed merger of ENSERCH with TUC Holding Company,
ENSERCH plans to merge the operations of LSEPO and Enserch Exploration, Inc.
("EEX"), a company approximately 83% owned by ENSERCH. LSEPO will be the
surviving corporation of that merger (the "Merger"), in which its name will be
changed to Enserch Exploration, Inc. ("New EEX"). In the Merger each
outstanding share of EEX Common Stock will be converted into one share of New
EEX Common Stock and the outstanding shares of LSEPO will be converted into a
number of shares of New EEX Common Stock determined by dividing $7.0 million
by the average of the closing sales prices of EEX Common Stock on the 15
trading days preceding the fifth trading day prior to the effective time of
the Merger. A market price of EEX shares of $9.00 was assumed to determine the
pro forma converted shares outstanding and to compute pro forma earnings per
share.
F-18
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
LONE STAR ENERGY PLANT OPERATIONS, INC.,
ENSERCH EXPLORATION, INC.,
AND
ENSERCH CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I CERTAIN DEFINITIONS....................................... A-1
ARTICLE II THE MERGER................................................ A-5
Section 2.1 The Merger................................................ A-5
Section 2.2 Effective Time of the Merger.............................. A-5
Section 2.3 Articles of Incorporation................................. A-5
Section 2.4 Bylaws.................................................... A-5
Section 2.5 Rights.................................................... A-6
Section 2.6 EEX Stock Plan............................................ A-6
Section 2.7 Directors and Officers.................................... A-6
Section 2.8 Effects of Merger......................................... A-6
ARTICLE III CONVERSION OF SHARES...................................... A-6
Section 3.1 Effect of Merger on Capital Stock......................... A-6
Section 3.2 Stock Certificates........................................ A-7
ARTICLE IV THE CLOSING............................................... A-7
Section 4.1 Closing................................................... A-7
ARTICLE V REPRESENTATIONS AND WARRANTIES OF ENSERCH AND LSEPO....... A-7
Section 5.1 Organization and Qualification............................ A-7
Section 5.2 Capitalization............................................ A-7
Authority; Non-Contravention; Statutory Approvals;
Section 5.3 Compliance................................................ A-8
Section 5.4 Financial Statements; Corporate Documents................. A-9
Absence of Certain Changes or Events; Absence of
Section 5.5 Undisclosed Liabilities................................... A-9
Section 5.6 Litigation................................................ A-9
Section 5.7 Registration Statement and Proxy Statement................ A-9
Section 5.8 Tax Matters............................................... A-10
Section 5.9 Employee Matters; ERISA................................... A-10
Section 5.10 Environmental Protection.................................. A-14
Section 5.11 Vote Required............................................. A-15
Section 5.12 Insurance................................................. A-15
Section 5.13 O&M Agreements............................................ A-15
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF EEX..................... A-15
Section 6.1 Organization and Qualification............................ A-15
Section 6.2 Subsidiaries.............................................. A-15
Section 6.3 Capitalization............................................ A-16
Section 6.4 Authority; Non-Contravention; Statutory Approvals......... A-16
Section 6.5 Reports and Financial Statements.......................... A-17
Absence of Certain Changes or Events; Absence of
Section 6.6 Undisclosed Liabilities................................... A-17
Section 6.7 Registration Statement and Proxy Statement................ A-18
Section 6.8 Tax Matters............................................... A-18
Section 6.9 Employee Matters; ERISA................................... A-18
Section 6.10 Environmental Matters..................................... A-22
Section 6.11 Vote Required............................................. A-22
Section 6.12 Insurance................................................. A-22
ARTICLE VII CONDUCT OF BUSINESS PENDING THE MERGER.................... A-22
Section 7.1 Ordinary Course of Business............................... A-22
ARTICLE VIII ADDITIONAL AGREEMENTS..................................... A-22
Section 8.1 Access to Information..................................... A-22
Section 8.2 Proxy Statement and Registration Statement................ A-23
Section 8.3 Shareholder Approval...................................... A-23
</TABLE>
A-i
<PAGE>
<TABLE>
<C> <S> <C>
Section 8.4 Directors' and Officers' Indemnification.................. A-24
Section 8.5 Public Announcements...................................... A-24
Section 8.6 Rule 145 Affiliates....................................... A-24
Section 8.7 Stock Option and Bonus Plans.............................. A-25
Section 8.8 No Solicitations.......................................... A-25
Section 8.9 Other Agreements.......................................... A-25
Section 8.10 Covenant to Satisfy Conditions............................ A-25
Section 8.11 Indemnification........................................... A-26
Section 8.12 Expenses.................................................. A-27
Section 8.13 Capital Contribution...................................... A-27
ARTICLE IX CONDITIONS................................................ A-27
Conditions to Each Party's Obligation to Effect the
Section 9.1 Merger.................................................... A-27
Section 9.2 Conditions to Obligation of EEX to Effect the Merger...... A-28
Section 9.3 Conditions to Obligation of LSEPO to Effect the Merger.... A-28
ARTICLE X TERMINATION, AMENDMENT AND WAIVER......................... A-29
Section 10.1 Termination............................................... A-29
Section 10.2 Effect of Termination..................................... A-29
Section 10.3 Amendment................................................. A-30
Section 10.4 Waiver.................................................... A-30
ARTICLE XI GENERAL PROVISIONS........................................ A-30
Section 11.1 Survival; Remedies Not Affected by Knowledge.............. A-30
Section 11.2 Notices................................................... A-30
Section 11.3 Miscellaneous............................................. A-31
Section 11.4 Interpretation............................................ A-31
Section 11.5 Counterparts; Effect...................................... A-31
Section 11.6 Parties in Interest....................................... A-31
Section 11.7 Specific Performance...................................... A-31
Section 11.8 Further Assurances........................................ A-32
</TABLE>
Annexes:
Annex A-1--Agreement and Plan of Distribution
Annex A-2--Revised and Amended 1996 Stock Incentive Plan
Annex A-3--Tax Allocation Agreement
Annex A-4--Tax Assurance Agreement
A-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of September 10, 1996 (this
"Agreement"), by and among (i) Lone Star Energy Plant Operations, Inc., a
corporation formed under the laws of the State of Texas ("LSEPO") whose
outstanding stock is beneficially wholly owned by ENSERCH Corporation, a
corporation formed under the laws of the State of Texas ("ENSERCH"), (ii)
Enserch Exploration, Inc., a corporation formed under the laws of the State of
Texas ("EEX") whose outstanding common stock is approximately 83% beneficially
owned by ENSERCH, and (iii) ENSERCH.
R E C I T A L S :
WHEREAS, the respective Boards of Directors of LSEPO, EEX and ENSERCH have
determined that it is advisable and in the best interests of their respective
corporations that EEX shall merge with and into LSEPO (the "Merger") and that
LSEPO shall be the surviving corporation of the Merger, in which the name of
LSEPO shall be changed to Enserch Exploration, Inc. ("New EEX"); and
WHEREAS, after the Merger, ENSERCH proposes to distribute all shares of New
EEX then owned by ENSERCH to the shareholders of ENSERCH (the "Distribution");
and
WHEREAS, for federal income tax purposes, it is intended that (i) the Merger
shall be a reorganization described in Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder
and (ii) the Distribution shall qualify as a tax-free distribution within the
meaning of Section 355 of the Code;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
Certain Definitions
As used in this Agreement, the following terms shall have the following
meanings:
"Articles of Merger" shall have the meaning set forth in Section 2.2.
"Business Day" shall mean any day other than a Saturday or Sunday on which
national banks are open for business in Dallas, Texas.
"Closing" and "Closing Date" shall have the meaning set forth in Section
4.1.
"Code" shall have the meaning set forth in the third recital paragraph
hereof.
"Disclosure Schedules" shall mean the EEX Disclosure Schedule and the LSEPO
Disclosure Schedule, collectively.
"Distribution" shall have the meaning set forth in the second recital
paragraph hereof.
"Distribution Agreement" shall mean an Agreement and Plan of Distribution to
be entered into among ENSERCH, EEX, LSEPO and Holding Company substantially in
the form attached hereto as Annex A-1.
"DLJ" shall mean Donaldson, Lufkin & Jenrette Securities Corporation.
"EC/TUC Merger" shall mean the merger of a wholly owned subsidiary of
Holding Company with and into TUC and the merger of a separate wholly owned
subsidiary of Holding Company with and into ENSERCH pursuant to the EC/TUC
Plan Merger.
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"EC/TUC Plan of Merger" shall mean an Amended and Restated Agreement and
Plan of Merger dated as of April 13, 1996, among ENSERCH, TUC and Holding
Company.
"EEX" shall have the meaning set forth in the first paragraph hereof.
"EEX Average Price" shall have the meaning set forth in Section 3.1(c).
"EEX Benefit Plan" shall have the meaning set forth in Section 6.9(a)(ii).
"EEX Common Stock" shall mean the common stock, par value $1.00 per share,
of EEX.
"EEX Disclosure Schedule" shall mean one or more schedules delivered by EEX
to LSEPO concurrently with the execution and delivery of this Agreement to
provide information in response to provisions hereof.
"EEX Material Adverse Effect" shall mean a material adverse effect on the
business, operations, properties, assets, condition (financial or otherwise),
prospects or results of operations of EEX or on the consummation of the
transactions contemplated by this Agreement.
"EEX Indemnitee" shall have the meaning set forth in Section 8.4(a).
"EEX Ratio" shall have the meaning set forth in Section 3.1(b).
"EEX Required Consents" shall have the meaning set forth in Section
6.4(b)(iii).
"EEX Required Statutory Approvals" shall have the meaning set forth in
Section 6.4(c).
"EEX SEC Reports" shall have the meaning set forth in Section 6.5(b).
"EEX Shareholders' Approval" shall have the meaning set forth in Section
6.11.
"EEX Special Meeting" shall have the meaning set forth in Section 8.3(a)(i).
"Effective Time" shall have the meaning set forth in Section 2.2.
"ENSERCH" shall have the meaning set forth in the first paragraph hereof.
"ENSERCH Common Stock" shall mean the common stock, par value currently
$4.45 per share, of ENSERCH.
"Environmental Claims" shall mean, with respect to any person, (a) any and
all administrative, regulatory or judicial actions, suits, demands, demand
letters, directives, claims, liens, investigations, proceedings or notices of
noncompliance or violation in writing by or from any person or entity
(including any Governmental Authority), or (b) any oral information provided
by a Governmental Authority that written action of the type described in the
foregoing clause is in process, which (in case of either (a) or (b)) alleges
potential liability (including potential liability for enforcement,
investigatory costs, cleanup costs, governmental response costs, removal
costs, remedial costs, natural resources damages, property damages, personal
injuries, or penalties) arising out of, based on or resulting from (A) the
presence, or Release or threatened Release into the environment, of any
Hazardous Materials at any location, whether or not owned, operated, leased or
managed by LSEPO or by EEX, (B) circumstances forming the basis of any
violation, or alleged violation, of any Environmental Law or (C) any and all
claims by any third party seeking damages, contribution, indemnification, cost
recovery, compensation or injunctive relief resulting from the presence or
Release of any Hazardous Materials.
"Environmental Laws" shall mean all federal, state and local laws, rules,
regulations and guidances relating to pollution or protection of human health
or the environment (including ambient air, surface water, groundwater,
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land surface or subsurface strata), including laws and regulations relating to
Releases or threatened Releases of Hazardous Materials or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials.
"Environmental Permits" shall have the meaning set forth in Section 5.10(b).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"GAAP" shall mean generally accepted accounting principles.
"Governmental Authority" shall mean any court, governmental or regulatory
body (including a stock exchange or other self-regulatory body) or authority,
domestic or foreign.
"Hazardous Materials" shall mean (a) any petroleum or petroleum products,
radioactive materials, asbestos in any form that is or could become friable,
urea formaldehyde foam insulation, and transformers or other equipment that
contain dielectric fluid containing polychlorinated biphenyls, (b) any
chemicals, materials or substances which are now defined as or included in the
definition of "hazardous substances", "hazardous wastes", "hazardous
materials", "extremely hazardous wastes", "restricted hazardous wastes",
"toxic substances", "toxic pollutants", or words of similar import, under any
Environmental Law and (c) any other chemical, material, substance or waste,
exposure to which is now prohibited, limited or regulated under any
Environmental Law in a jurisdiction in which LSEPO or EEX operates.
"Holding Company" shall mean TUC Holding Company, a Texas corporation owned
50% by TUC and 50% by ENSERCH.
"Indemnified Party" shall have the meaning set forth in Section 8.11(b)(i).
"Indemnifying Party" shall have the meaning set forth in Section 8.11(b)(i).
"IRS" means Internal Revenue Service.
"Joint Venture" shall mean, with respect to any person, any corporation or
other entity (including partnerships and other business associations and joint
ventures) in which such person or one or more of its Subsidiaries owns an
equity interest that is less than a majority of any class of the outstanding
voting securities or equity, other than equity interests held for passive
investment purposes that are less than 5% of any class of the outstanding
voting securities or equity.
"LSEPO" shall have the meaning set forth in the first paragraph hereof.
"LSEPO Benefit Plan" shall have the meaning set forth in Section 5.9(a)(ii).
"LSEPO Common Stock" shall mean the currently outstanding shares of common
stock of LSEPO, par value $.01 per share.
"LSEPO Disclosure Schedule" shall mean one or more schedules delivered by
LSEPO to EEX concurrently with the execution and delivery of this Agreement to
provide information in response to provisions hereof.
"LSEPO Financial Statements" shall have the meaning set forth in Section
5.4(a).
"LSEPO Material Adverse Effect" shall mean a material adverse effect on the
business, operations, properties, assets, condition (financial or otherwise),
prospects or results of operations of LSEPO or on the consummation of the
transactions contemplated by this Agreement.
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"LSEPO Ratio" shall have the meaning set forth in Section 3.1(c).
"LSEPO Required Statutory Approvals" shall have the meaning set forth in
Section 5.3(c).
"Merger" shall have the meaning set forth in the first recital paragraph
hereof.
"New EEX" shall have the meaning set forth in the first recital paragraph
hereof.
"New EEX Common Stock" shall mean the common stock of New EEX, par value
$0.01 per share, which shall be issued in the Merger.
"NYSE" shall mean the New York Stock Exchange, Inc.
"O&M Agreements" shall mean (i) Operation and Maintenance Agreement dated as
of February 1, 1988 between Encogen One Partners Ltd. and Lone Star Energy
Company, as assigned to LSEPO by Assignment of Contract dated December 15,
1995, (ii) Operation and Maintenance Agreement dated as of December 31, 1990
between Encogen Four Partners, L.P. and Lone Star Energy Company, as operator,
as assigned to LSEPO by Assignment of Contract dated October 1, 1992, and
(iii) Amended and Restated Operation and Maintenance Agreement dated as of
December 15, 1992 between Encogen Northwest, L.P. and LSEPO, as operator.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"person" shall mean any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, limited liability
company, corporation, company, institution, entity, party or Governmental
Authority.
"Proxy Statement" shall have the meaning set forth in Section 5.7(a)(ii).
"Proxy/Registration Statement" shall have the meaning set forth in Section
8.2(a)(i).
"Registration Statement" shall have the meaning set forth in Section
5.7(a)(i).
"Release" shall mean any release, spill, emission, leaking, injection,
deposit, disposal, discharge, dispersal, leaching or migration into the
atmosphere, soil, subsurface, surface water, groundwater or property.
"Representatives" shall have the meaning set forth in Section 8.1(a).
"Rights" shall mean rights to purchase LSEPO stock prior to the Merger and
New EEX stock after the Merger pursuant to the Rights Agreement dated as of
September 10, 1996 between LSEPO and Harris Trust Company of New York, as
Rights Agent (the "Rights Agreement").
"Ruling" shall have the meaning set forth in Section 9.1(g).
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stock Plan" shall have the meaning set forth in Section 2.6.
"Subsidiary" shall mean, with respect to any person, any corporation or
other entity (including partnerships and other business associations) in which
a person directly or indirectly owns at least a majority of the outstanding
voting securities or other equity interests having the power, under ordinary
circumstances, to elect a majority of the directors, or otherwise to direct
the management and policies, of such corporation or other entity.
"Surviving Corporation" shall have the meaning set forth in Section 2.1.
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"Takeover Proposal" shall mean any tender or exchange offer, proposal for a
merger, consolidation, share exchange or other business combination involving
LSEPO or EEX, or any proposal or offer to acquire in any manner a substantial
equity interest in, or a substantial portion of the assets of, LSEPO or EEX,
other than pursuant to the transactions contemplated by this Agreement.
"Taxes" shall mean any federal, state, county, local or foreign taxes,
charges, fees, levies or other assessments, including all net income, gross
income, sales and use, ad valorem, transfer, gains, profits, excise,
franchise, real and personal property, gross receipts, capital stock,
production, business and occupation, disability, employment, payroll, license,
estimated, stamp, custom duties, severance or withholding taxes or charges
imposed by any governmental entity, and includes any interest and penalties
(civil or criminal) on or additions to any such taxes, charges, fees, levies
or other assessments, and any expenses incurred in connection with the
determination, settlement or litigation of any liability for any of the
foregoing.
"Tax Return" shall mean any report, return or other information required to
be supplied to a governmental entity with respect to Taxes, including, where
permitted or required, combined or consolidated returns for any group of
entities that includes LSEPO or EEX.
"TBCA" shall mean the Texas Business Corporation Act, as amended.
"TUC" shall mean Texas Utilities Company, a Texas corporation.
"Third Party Claim" shall have the meaning set forth in Section 8.11(b)(i).
"Violation" shall have the meaning set forth in Section 5.3(b).
ARTICLE II
The Merger
Section 2.1 The Merger. Upon the terms and subject to the conditions of this
Agreement, EEX shall be merged with and into LSEPO in accordance with the
provisions of Sections 5.01 and 5.03 of the TBCA. The separate corporate
existence of EEX shall thereupon cease, and LSEPO shall be the surviving
corporation of the Merger (the "Surviving Corporation") and shall continue its
existence under the laws of the State of Texas, although the name of LSEPO as
the Surviving Corporation shall be changed to "Enserch Exploration, Inc." as
provided in Section 2.3.
Section 2.2 Effective Time of the Merger. The parties acknowledge that it is
their mutual desire and intent to consummate the Merger as soon as practicable
after the date hereof. Accordingly, the parties shall use all reasonable
efforts to bring about the satisfaction as soon as practicable of all the
conditions specified in Article IX and otherwise to effect the consummation of
the Merger as soon as practicable. Subject to the terms hereof, as soon as
practicable after all of the conditions set forth in Article IX shall have
been satisfied or waived, the parties hereto will cause the Merger to be
consummated by the filing with the Secretary of State of the State of Texas,
in accordance with the TBCA, of articles of merger (the "Articles of Merger")
in such form as is required by, and executed in accordance with, the relevant
provisions of the TBCA. The Merger shall become effective at such time (the
"Effective Time") as the Secretary of State of the State of Texas shall, upon
such filing of the Articles of Merger, issue a certificate of merger in
respect of the Merger.
Section 2.3 Articles of Incorporation. The Restated Articles of
Incorporation of LSEPO as in effect at the Effective Time shall be the
Articles of Incorporation of the Surviving Corporation until duly amended,
except that the name of the Surviving Corporation shall be changed to Enserch
Exploration, Inc. upon and by virtue of the filing of the Articles of Merger
in accordance with Section 2.2 and without any further act or deed.
Section 2.4 Bylaws. The Bylaws of LSEPO as in effect at the Effective Time
shall be the Bylaws of the Surviving Corporation, until duly amended.
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Section 2.5 Rights. The Rights Agreement shall survive the effectiveness the
Merger and the Rights shall be issued in respect of all shares of New EEX
Common Stock issued in the Merger upon conversion of EEX Common Stock or LSEPO
Common Stock.
Section 2.6 EEX Stock Plan. The EEX Stock Incentive Plan of 1994 (the "Stock
Plan") shall be amended and restated to provide in its entirety as set forth
in Annex A-2 hereto and, as so amended and restated, shall survive the Merger
and become the Revised and Amended 1996 Stock Incentive Plan of New EEX and
the provisions of Section 8.7 hereof shall be applicable thereto. Options
granted by EEX under the Stock Plan and outstanding at the Effective Time
shall become options to purchase the same number of shares of New EEX Common
Stock for the same exercise price and otherwise on the same terms and
conditions as provided in such options.
Section 2.7. Directors and Officers. Until changed pursuant to the Articles
of Incorporation and Bylaws of the Surviving Corporation, (a) the number of
Directors of the Surviving Corporation shall be a number equal to the sum of
(i) the number of directors of EEX in office at the Effective Time and (ii)
the number of directors of LSEPO, minus one, in office at the Effective Time,
and (b) the Board of Directors of the Surviving Corporation shall consist of
(i) the individuals serving as directors of EEX at the Effective Time and (ii)
the individuals serving as directors of LSEPO at the Effective Time. Until
changed pursuant to the Bylaws of the Surviving Corporation, the officers of
EEX in office at the Effective Time shall be the officers of the Surviving
Corporation.
Section 2.8 Effects of Merger. The Merger shall have the effects set forth
in this Agreement and Section 5.06 of the TBCA.
ARTICLE III
Conversion of Shares
Section 3.1 Effect of Merger on Capital Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of any holder of any
capital stock of LSEPO or EEX:
(a) Cancellation of Certain EEX Common Stock. Each share of EEX Common
Stock that is owned by LSEPO, owned or held in treasury by EEX, or owned by
any of EEX's Subsidiaries shall be canceled and cease to exist.
(b) Conversion of Certain EEX Common Stock. Each issued and outstanding
share of EEX Common Stock (other than shares of EEX Common Stock canceled
pursuant to Section 3.1(a)) shall be converted into one share of duly
authorized, validly issued, fully paid and nonassessable New EEX Common
Stock (and the accompanying Rights) (the "EEX Ratio"). Upon such
conversion, all such shares of EEX Common Stock shall be canceled and cease
to exist, and the holder of a certificate representing such shares shall
cease to have any rights with respect thereto, except the right to receive
the number of whole shares of New EEX Common Stock (and the accompanying
Rights) to be issued in consideration therefor.
(c) Conversion of LSEPO Common Stock. The 10 issued and outstanding
shares of LSEPO Common Stock (and the accompanying Rights) shall be
converted into the number of shares of duly authorized, validly issued,
fully paid and nonassessable New EEX Common Stock (and the accompanying
Rights) or fraction of a share (rounded to the nearest 1/1000th) (the
"LSEPO Ratio") equal to the quotient obtained by dividing $7,000,000 by the
average of the closing sales prices of EEX Common Stock on the New York
Stock Exchange Consolidated Transactions Tape on each of the 15 consecutive
trading days preceding the fifth trading day prior to the Effective Time
(the "EEX Average Price"). Upon such conversion, all such shares of LSEPO
Common Stock shall be canceled and cease to exist, and the holder of a
certificate representing such shares shall cease to have any rights with
respect thereto, except the right to receive the number of whole shares of
New EEX Common Stock (and the accompanying Rights) to be issued in
consideration therefor. No fractional shares of New EEX Common Stock shall
be issued in the Merger and,
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in lieu thereof, the holder of any LSEPO Common Stock that would have
otherwise been converted into a fractional share of New EEX Common Stock
shall be entitled to receive cash equal to such fraction times the EEX
Average Price.
Section 3.2 Stock Certificates.
(a) EEX Common Stock. The certificates evidencing the shares of EEX Common
Stock outstanding at the Effective Time shall evidence the same number of
shares of New EEX Common Stock immediately after the Effective Time, and it
shall not be necessary for holders of shares of EEX Common Stock to exchange
the certificates evidencing their shares for new certificates to evidence
their shares of New EEX Common Stock resulting from the Merger.
(b) LSEPO Common Stock. As soon as practicable after the Effective Time, the
holder of the LSEPO Common Stock converted into shares of New EEX Common Stock
in the Merger shall, upon surrender of the certificate(s) evidencing such
LSEPO Common Stock, be entitled to receive one or more certificates
representing the number of shares of New EEX Common Stock into which the
shares of LSEPO Common Stock have been converted pursuant to Section 3.1(c).
ARTICLE IV
The Closing
Section 4.1 Closing. The closing of the Merger (the "Closing") shall take
place at the place and time and on the date upon which LSEPO, EEX and ENSERCH
shall mutually agree (the "Closing Date").
ARTICLE V
Representations and Warranties of ENSERCH and LSEPO
LSEPO and ENSERCH jointly and severally represent and warrant to EEX as
follows:
Section 5.1 Organization and Qualification. Each of LSEPO and ENSERCH is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Texas. LSEPO has no Subsidiaries. LSEPO has all requisite
corporate power and authority, and is duly authorized by all necessary
regulatory approvals and orders, to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted, and is
duly qualified and in good standing to do business as a foreign corporation in
the States of New York and Washington and in each other jurisdiction in which
the nature of its business or the ownership or leasing of its assets and
properties makes such qualification necessary.
Section 5.2 Capitalization.
(a) As of the date hereof, the authorized capital stock of LSEPO consists of
1,000 shares of common stock, par value $.01 per share.
(b) As of the date hereof, 10 shares of LSEPO Common Stock are issued and
outstanding.
(c) All of the issued and outstanding shares of capital stock of LSEPO are
validly issued, fully paid and nonassessable and none of such stock was issued
in violation of preemptive rights.
(d) Except for the Rights, there are no outstanding subscriptions, options,
calls, contracts, voting trusts, proxies or other commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement, obligating LSEPO to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of the capital stock of LSEPO or
obligating LSEPO to grant, extend or enter into any such agreement or
commitment.
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Section 5.3 Authority; Non-Contravention; Statutory Approvals; Compliance.
(a) Authority.
(i) Each of LSEPO and ENSERCH has all requisite power and authority to
enter into this Agreement and, subject to the LSEPO Required Statutory
Approvals, to consummate the transactions contemplated hereby.
(ii) The execution and delivery of this Agreement and the consummation by
LSEPO of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of each of LSEPO and ENSERCH.
(iii) This Agreement has been duly and validly executed and delivered by
each of LSEPO and ENSERCH and, assuming the due authorization, execution
and delivery hereof by EEX, constitutes a valid and binding obligation of
LSEPO and ENSERCH, enforceable against each of them in accordance with its
terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or other similar laws affecting the
enforcement of creditors' rights generally, and except that the
availability of equitable remedies, including specific performance, may be
subject to the discretion of any court before which any proceedings may be
brought.
(b) Non-Contravention. The execution and delivery of this Agreement by LSEPO
and ENSERCH do not, and the consummation of the transactions contemplated
hereby will not, violate, conflict with or result in a breach of any provision
of, or constitute a default (with or without notice or lapse of time or both)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination, cancellation or acceleration of any
obligation or the loss of a material benefit under, or result in the creation
of any lien, security interest, charge or encumbrance upon any of the
properties or assets (any such violation, conflict, breach, default, right of
termination, cancellation or acceleration, loss or creation, a "Violation")
of, LSEPO or ENSERCH, under any provisions of
(i) the articles of incorporation, bylaws or similar governing documents
of LSEPO or ENSERCH, or
(ii) subject to obtaining the LSEPO Required Statutory Approvals, any
statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any Governmental Authority
applicable to LSEPO or ENSERCH or any of their respective properties or
assets, or
(iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which LSEPO or ENSERCH is now a
party or by which it or any of their respective properties or assets may be
bound or affected,
excluding from the foregoing clauses (ii) and (iii) such Violations as would
not, in the aggregate, reasonably likely have an LSEPO Material Adverse
Effect.
(c) Statutory Approvals. Except as set forth in Section 5.3(c) of the LSEPO
Disclosure Schedule, no declaration, filing or registration with, or notice to
or authorization, consent or approval of any Governmental Authority is
necessary for the execution and delivery of this Agreement by LSEPO or ENSERCH
or the consummation by LSEPO of the transactions contemplated hereby, the
failure to obtain, make or give which would reasonably likely have an LSEPO
Material Adverse Effect (the "LSEPO Required Statutory Approvals"), it being
understood that references in this Agreement to "obtaining" such LSEPO
Required Statutory Approvals shall mean making such declarations, filings or
registrations; giving such notice; obtaining such consents or approvals; and
having such waiting periods expire as are necessary to avoid a violation of
law.
(d) Compliance.
(i) Except as set forth in Sections 5.3(d) or 5.10 of the LSEPO
Disclosure Schedule, LSEPO is not in violation of or under investigation
with respect to, or has been given notice or been charged with any
violation of, any law, statute, order, rule, regulation, ordinance or
judgment (including any applicable environmental law, ordinance or
regulation) of any Governmental Authority, except for violations that do
not have, and, would not reasonably likely have, an LSEPO Material Adverse
Effect.
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(ii) Except as set forth in Sections 5.3(d) or 5.10 of the LSEPO
Disclosure Schedule, LSEPO has all permits, licenses, franchises and other
governmental authorizations, consents and approvals necessary to conduct
its business as currently conducted, except those the failure to obtain
which would not reasonably likely have an LSEPO Material Adverse Effect.
Section 5.4 Financial Statements; Corporate Documents.
(a) Section 5.4 of the LSEPO Disclosure Schedule contains: (a) an audited
balance sheet of LSEPO for the year ended December 31, 1995, and the related
audited statements of income, changes in shareholder's equity, and cash flow
for the fiscal year then ended, and (b) an unaudited balance sheet of LSEPO as
at June 30, 1996 and the related unaudited consolidated statements of income,
changes in shareholder's equity, and cash flow for the six months then ended,
including in each case the notes thereto (collectively, the "LSEPO Financial
Statements"). The LSEPO Financial Statements and notes fairly present the
financial condition and the results of operations, changes in shareholder's
equity, and cash flow of LSEPO as at the respective dates of and for the
periods referred to in such financial statements, all in accordance with GAAP,
subject, in the case of interim financial statements, to normal recurring
year-end adjustments (the effect of which will not, individually or in the
aggregate, have an LSEPO Material Adverse Effect) and the absence of notes
(that, if presented, would not differ materially from those included in the
LSEPO Financial Statements).
(b) True, accurate and complete copies of the Restated Articles of
Incorporation and Bylaws of LSEPO, as in effect on the date hereof, have been
delivered to EEX.
Section 5.5 Absence of Certain Changes or Events; Absence of Undisclosed
Liabilities.
(a) Except as set forth in Section 5.5 of the LSEPO Disclosure Schedule,
from December 31, 1995 through the date hereof LSEPO has conducted its
business only in the ordinary course of business consistent with past practice
and there has not been, and no fact or condition exists that would reasonably
likely have, an LSEPO Material Adverse Effect.
(b) LSEPO has no liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of a nature required by GAAP to be reflected in a
corporate balance sheet, except liabilities, obligations or contingencies (i)
that are accrued or reserved against in the consolidated financial statements
of LSEPO or reflected in the notes thereto for the year ended December 31,
1995, or (ii) that were incurred after December 31, 1995 in the ordinary
course of business and would not reasonably likely have an LSEPO Material
Adverse Effect.
Section 5.6 Litigation. Except as set forth in Sections 5.6 or 5.10 of the
LSEPO Disclosure Schedule, there are no claims, suits, actions or proceedings,
pending or, to the knowledge of LSEPO or ENSERCH, threatened, nor are there,
to the knowledge of LSEPO or ENSERCH, any investigations or reviews pending or
threatened against, relating to or affecting LSEPO, or judgments, decrees,
injunctions, rules or orders of any court, governmental department,
commission, agency, instrumentality or authority or any arbitrator applicable
to LSEPO, that would reasonably likely have an LSEPO Material Adverse Effect.
Section 5.7 Registration Statement and Proxy Statement.
(a) None of the information supplied or to be supplied by or on behalf of
LSEPO for inclusion or incorporation by reference in:
(i) the registration statement on Form S-4 to be filed with the SEC by
LSEPO in connection with the issuance of shares of capital stock of New EEX
in the Merger (the "Registration Statement") will, at the time the
Registration Statement becomes effective under the Securities Act, contain
any untrue statement of a material fact or omit to state any material fact
with respect to LSEPO required to be stated therein or necessary to make
the statements therein with respect to LSEPO not misleading, and
(ii) the proxy statement in definitive form relating to the meeting of
shareholders of EEX to be held in connection with the Merger and the
prospectus relating to the New EEX Common Stock to be issued in the
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Merger (the "Proxy Statement") will, at the date mailed to such
shareholders and, as the same may be amended or supplemented, at the time
of such meeting, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein
in light of the circumstances under which they are made, not misleading.
(b) Each of the Registration Statement and the Proxy Statement will comply
as to form in all material respects with the applicable provisions of the
Securities Act and the Exchange Act and the rules and regulations thereunder.
Section 5.8 Tax Matters.
(a) LSEPO has filed (i) within the time and in the manner prescribed by law,
all required income Tax Returns, Texas franchise Tax Returns and other Tax
Returns calculated on or with reference to income, profits, earnings or gross
receipts and all other Tax Returns required to be filed that would report a
material amount of Tax, (ii) paid all Taxes that are shown on such Tax Returns
as due and payable within the time and in the manner prescribed by law except
for those being contested in good faith and for which adequate reserves have
been established, and (iii) paid all Taxes otherwise required to be paid.
(b) As of the date hereof, there are no claims, assessments, audits or
administrative or court proceedings pending against LSEPO for any alleged
deficiency in Tax, and LSEPO has not executed any outstanding waivers or
comparable consents regarding the application of the statute of limitations
with respect to any Taxes or Tax Returns.
(c) LSEPO has established adequate accruals for Taxes and for any liability
for deferred Taxes in the LSEPO Financial Statements in accordance with GAAP.
(d) Each of LSEPO, EEX and ENSERCH agrees to treat the Merger as a fully
tax-free reorganization under Section 368(a)(1)(A) of the Code.
Section 5.9 Employee Matters; ERISA.
(a) Benefit Plans.
(i) Section 5.9(a) of the LSEPO Disclosure Schedule contains a true and
complete list, as of the date hereof, of:
(A) each "employee benefit plan" within the meaning of Section 3(3)
of ERISA that has been adopted, approved or implemented by ENSERCH in
which LSEPO participates;
(B) each plan, program, policy, or arrangement not listed in (A)
above that provides for bonuses, profit-sharing, incentive
compensation, deferred compensation, equity-based compensation
(including stock options, restricted stock, stock appreciation rights,
performance units, and dividend equivalents), holiday pay, vacation
pay, severance pay, sick pay, disability benefits, dependent care
benefits, flexible benefits (including any cafeteria plan governed by
Section 125 of the Code), paid or unpaid leave (including sick leave,
parental leave, military leave, and bereavement leave), tuition
assistance, relocation or any similar type of benefits, that has been
adopted, approved, or implemented by LSEPO (including any such plan,
program, policy, or arrangement that has been terminated before the
date hereof, if LSEPO could have statutory or contractual liability
with respect to the arrangement on or after the date hereof); and
(C) each employment contract, severance contract, parachute
agreement, or other personal service contract or arrangement with or
covering a current or former officer or director of LSEPO; and any
other employment contracts, severance contracts, parachute agreements,
or personal service contracts or arrangements covering current or
former employees or independent contractors with respect to which
(individually or in the aggregate) LSEPO is reasonably likely to have
liability on or after the date hereof that could give rise to an LSEPO
Material Adverse Effect.
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(ii) For purposes of this Agreement, "LSEPO Benefit Plan" shall mean each
benefit plan, program, policy, contract and arrangement described in
subsections (i)(A), (B) and (C) above (whether or not terminated). LSEPO
has not adopted any "employee benefit plan" within the meaning of Section
3(3) of ERISA, or any similar plan, program, policy or program for
employees, directors or others who have provided services to or for the
benefit of LSEPO, which is not listed in Section 5.9(a) of the LSEPO
Disclosure Schedule.
(iii) With respect to each LSEPO Benefit Plan, Section 5.9(a) of the
LSEPO Disclosure Schedule fully and accurately identifies the source or
sources of benefit payments under the plan (including, where applicable,
the identity of any trust (whether or not a grantor trust), insurance
contract, custodial account, agency agreement, or other arrangement that
holds the assets of, or serves as a funding vehicle or source of benefits
for, such LSEPO Benefit Plan).
(b) Contributions. Except with respect to those exceptions in existence as
of the date hereof and set forth in Section 5.9(b) of the LSEPO Disclosure
Schedule, all material contributions and other material payments required to
have been made by LSEPO pursuant to any LSEPO Benefit Plan have been timely
made or the amount of such payment or contribution obligation has been
reflected in the LSEPO Financial Statements.
(c) Qualification; Compliance. Except as set forth in Section 5.9(c) of the
LSEPO Disclosure Schedule:
(i) Each LSEPO Benefit Plan that is intended to be "qualified" within the
meaning of Code Section 401(a) currently meets all material requirements
under the Code and has received a favorable determination letter from the
IRS to such effect, or application for such a determination has been made
prior to the expiration of the applicable remedial amendment period.
(ii) LSEPO is in compliance with, and each LSEPO Benefit Plan is and has
been operated in compliance with, all applicable laws, rules and
regulations governing such plan, including, without limitation, ERISA and
the Code, except for violations that would not be reasonably likely to have
an LSEPO Material Adverse Effect.
(iii) To the knowledge of LSEPO, no individual or entity has engaged in
any transaction with respect to any LSEPO Benefit Plan as a result of which
any such plan, LSEPO could reasonably expect to be subject to liability
pursuant to ERISA Section 409 or Section 502, or subject to an excise tax
pursuant to Code Section 4975, which would in either case be reasonably
likely to have an LSEPO Material Adverse Effect.
(iv) To the knowledge of LSEPO and ENSERCH,
(A) no LSEPO Benefit Plan is subject to any ongoing audit,
investigation, or other administrative proceeding of the IRS, the
Department of Labor, or any other federal, state, or local government
entity, and
(B) no LSEPO Benefit Plan is the subject of any pending application
for administrative relief under any voluntary compliance program of any
governmental entity (including, without limitation, the IRS's Voluntary
Compliance Resolution Program or Walk-In Closing Agreement Program, or
the Department of Labor's Delinquent Filer Voluntary Compliance
Program.
(d) Liabilities. Except as set forth in Section 5.9(d) of the LSEPO
Disclosure Schedule, with respect to the LSEPO Benefit Plans, individually and
in the aggregate, no termination or partial termination of any LSEPO Benefit
Plan or other event has occurred, and, to the knowledge of LSEPO, there exists
no condition or set of circumstances, that could subject LSEPO to any
liability arising under the Code, ERISA, or any other applicable law
(including, without limitation, any liability to or under any such plan or to
the PBGC, or under any indemnity agreement to which LSEPO is a party, which
liability would be reasonably likely to have an LSEPO Material Adverse Effect
(excluding liability for benefit claims and funding obligations payable in the
ordinary course and liability for PBGC insurance premiums payable in the
ordinary course).
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(e) Welfare Plans. Except as set forth in Section 5.9(e) of the LSEPO
Disclosure Schedule, no LSEPO Benefit Plan that is a "welfare plan" (within
the meaning of ERISA Section 3(1) provides benefits for any retired or former
employees (other than as required pursuant to ERISA Section 601).
(f) Documents Made Available. LSEPO has made available to EEX a true and
correct copy of each collective bargaining agreement to which LSEPO is a party
or under which LSEPO has obligations; and, with respect to each LSEPO Benefit
Plan, LSEPO has made available to EEX a true and correct copy of each of the
following, as applicable:
(i) the current plan document (including all amendments adopted since the
most recent restatement) and its most recently prepared summary plan
description and all summaries of material modifications prepared since the
most recent summary plan description,
(ii) annual reports or Code Section 6039D information returns (IRS Form
5500 Series), including financial statements for the last three years,
(iii) each related trust agreement, insurance contract, service provider
contract or investment management agreement (including all amendments to
each such document),
(iv) the most recent IRS determination letter with respect to the
qualified status under Code Section 401(a) of such plan, and
(v) actuarial reports or valuations for the last three years.
(g) Payments Resulting From Merger. Other than as set forth in Section
5.9(g) of the LSEPO Disclosure Schedule, the consummation or announcement of
any transaction contemplated by this Agreement will not (either alone or upon
the occurrence of any additional or further acts or events) result in any
(i) payment (whether of severance pay or otherwise) becoming due from
LSEPO or EEX to any current or former officer or director thereof or to the
trustee under any "rabbi trust" or other funding arrangement,
(ii) benefit under any LSEPO Benefit Plan being established or becoming
accelerated, vested or payable, except for a payment or benefit that would
have been payable under the same terms and conditions without regard to the
transactions contemplated by this Agreement, or
(iii) payment (whether of severance pay or otherwise) becoming due from
EEX or LSEPO to any current or former employee of LSEPO.
(h) Funded Status of Plans. Except as set forth in Section 5.9(h) of the
LSEPO Disclosure Schedule, (i) each LSEPO Benefit Plan has assets that, as of
the date hereof, have a fair market value equal to or exceeding the present
value of the accrued benefit obligations thereunder on a termination basis, as
of the date hereof, based on the actuarial methods, tables and assumptions
theretofore utilized by such plan's actuary in preparing such plan's most
recently prepared actuarial valuation report, except to the extent that
applicable law would require the use of different actuarial assumptions if
such plan was to be terminated as of the date hereof, and (ii) no LSEPO
Benefit Plan has incurred any "accumulated funding deficiency" (within the
meaning of ERISA Section 302).
(i) Multiemployer Plans.
(i) Except as set forth in Section 5.9(i) of the LSEPO Disclosure
Schedule, no LSEPO Benefit Plan is or was a "multiemployer plan" (within
the meaning of ERISA Section 4001(a)(3) or Code Section 414(f)), or a
"multiple employer welfare arrangement" (within the meaning of ERISA
Section 3(40)); and LSEPO has not been obligated to contribute to, or
otherwise has or has had any liability with respect to, any multiemployer
plan, multiple employer plan, or multiple employer welfare arrangement.
(ii) With respect to any LSEPO Benefit Plan that is listed in Section
5.9(i) of the LSEPO Disclosure Schedule as a multiemployer plan, LSEPO has
not made or incurred a "complete withdrawal" or a "partial withdrawal," as
such terms are defined in ERISA Sections 4203 and 4205, therefrom at any
time during
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the six calendar year period immediately preceding the date of this
Agreement and the transactions contemplated by the Agreement will not, in
and of themselves, give rise to such a "complete withdrawal" or "partial
withdrawal."
(j) Modification or Termination of Plans. Except as set forth in Section
5.9(j) of the LSEPO Disclosure Schedule;
(i) LSEPO is not subject to any legal, contractual, equitable or other
obligation to establish as of any date any employee benefit plan of any
nature, including (without limitation) any pension, profit sharing,
welfare, post-retirement welfare, stock option, stock or cash award, non-
qualified deferred compensation or executive compensation plan, policy or
practice; and
(ii) LSEPO (with the consent of ENSERCH) has the right to, in any manner,
and without the consent of any employee, beneficiary or dependent,
employees' organization or other person, terminate, modify or amend any
LSEPO Benefit Plan (or its participation in any such LSEPO Benefit Plan) at
any time sponsored or maintained by ENSERCH and contributed to by LSEPO,
effective as of any date before, on or after the Effective Time except to
the extent that any retroactive amendment would be prohibited by ERISA
Section 204(g) or would adversely affect a vested accrued benefit or a
previously granted award under any such Plan not subject to ERISA Section
204(g).
(k) Reportable Events; Claims. Except as set forth in Section 5.9(k) of the
LSEPO Disclosure Schedule:
(i) no event constituting a "reportable event" (within the meaning of
ERISA Section 4043(c)), for which the 30-day notice requirement or penalty
has not been waived by the PBGC, has occurred with respect to any LSEPO
Benefit Plan, and
(ii) no liability, claim, action or litigation has been made, commenced
or, to the knowledge of LSEPO, threatened, by or against LSEPO with respect
to any LSEPO Benefit Plan (other than for benefits or PBGC premiums payable
in the ordinary course)
that would reasonably likely have an LSEPO Material Adverse Effect.
(l) Labor Agreements. Except as set forth in Section 5.9(l) of the LSEPO
Disclosure Schedule:
(i) LSEPO is not a party to any collective bargaining agreement or other
current labor agreement with any labor union or organization, and there is
no current union representation question involving employees of LSEPO, nor
does LSEPO know of any activity or proceeding of any labor organization (or
representative thereof) or employee group (or representative thereof) to
organize any such employees;
(ii) there is no unfair labor practice charge or grievance arising out of
a collective bargaining agreement or other grievance procedure against
LSEPO pending, or to the knowledge of LSEPO, threatened, that has, or would
be reasonably likely to have, an LSEPO Material Adverse Effect;
(iii) there is no complaint, lawsuit or proceeding in any forum by or on
behalf of any present or former employee, any applicant for employment or
classes of the foregoing alleging breach of any express or implied contract
of employment, any law or regulation governing employment or the
termination thereof or other discriminatory, wrongful or tortious conduct
in connection with the employment relationship against LSEPO pending, or to
the knowledge of LSEPO, threatened, that has, or would be reasonably likely
to have, an LSEPO Material Adverse Effect;
(iv) there is no strike, dispute, slowdown, work stoppage or lockout
pending, or to the knowledge of LSEPO, threatened, against or involving
LSEPO that has, or would be reasonably likely to have, an LSEPO Material
Adverse Effect;
(v) LSEPO is in compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment, wages, hours
of work and occupational safety and health, except for non-compliance that
does not have, and would not be reasonably likely to have, an LSEPO
Material Adverse Effect; and
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(vi) there is no proceeding, claim, suit, action or governmental
investigation pending or, to the knowledge of LSEPO or ENSERCH, threatened,
in respect to which any current or former director, officer, employee or
agent of LSEPO is or may be entitled to claim indemnification from LSEPO
pursuant to its articles of incorporation or by-laws, as provided in the
indemnification agreements listed on Section 5.9(l) of the LSEPO Disclosure
Schedule or pursuant to applicable Texas or other law that has, or would be
reasonably likely to have, an LSEPO Material Adverse Effect.
Section 5.10 Environmental Protection.
(a) Compliance.
(i) LSEPO is in compliance with all applicable Environmental Laws, except
where the failure to be so in compliance would not reasonably likely have
an LSEPO Material Adverse Effect.
(ii) Neither LSEPO nor ENSERCH has received any written communication
from any person or Governmental Authority that alleges that LSEPO is not in
compliance with applicable Environmental Laws, except where the failure to
be so in compliance would not reasonably likely have an LSEPO Material
Adverse Effect.
(b) Environmental Permits. LSEPO has obtained or applied for all
environmental, health and safety permits and authorizations (collectively,
"Environmental Permits") necessary for the conduct of its operations, and all
such permits are in good standing or, where applicable, a renewal application
has been timely filed, is pending and agency approval is expected to be
obtained, and LSEPO is in compliance with all terms and conditions of all such
Environmental Permits and is not required to make any expenditure in order to
obtain or renew any Environmental Permits, except where the failure to obtain
or be in compliance with such Environmental Permits and the requirement to
make such expenditures would not reasonably likely have an LSEPO Material
Adverse Effect.
(c) Environmental Claims. There is no Environmental Claim pending, or to the
knowledge of LSEPO or ENSERCH, threatened
(i) against LSEPO,
(ii) against any person or entity whose liability for any Environmental
Claim LSEPO has or may have retained or assumed either contractually or by
operation of law, or
(iii) against any real or personal property or operations that LSEPO
owns, leases or manages, in whole or in part,
that, if adversely determined, would be reasonably likely to have an LSEPO
Material Adverse Effect.
(d) Releases. LSEPO and ENSERCH have no knowledge of any Release of any
Hazardous Material that would be reasonably likely to form the basis of any
Environmental Claim against LSEPO, or against any person or entity whose
liability for any Environmental Claim LSEPO has or may have retained or
assumed either contractually or by operation of law, except for Releases of
Hazardous Materials the liability for which would not reasonably likely have
an LSEPO Material Adverse Effect.
(e) Predecessors. LSEPO and ENSERCH have no knowledge, with respect to any
predecessor of LSEPO, of any Environmental Claims pending or threatened, or of
any Release of Hazardous Materials that would be reasonably likely to form the
basis of any Environmental Claims that would have, or that would reasonably
likely have, an LSEPO Material Adverse Effect.
(f) Disclosure. LSEPO and ENSERCH have disclosed to EEX all material facts
that they reasonably believe form the basis of an LSEPO Material Adverse
Effect arising from the cost of pollution control equipment currently required
or known to be required in the future, current remediation costs or
remediation costs known to be required in the future, or any other
environmental matter affecting LSEPO that would have, or that would reasonably
likely have, an LSEPO Material Adverse Effect.
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Section 5.11 Vote Required. No further vote or consent of any holder of any
class or series of the capital stock of LSEPO, which has not been obtained, is
required to approve this Agreement, the Merger and the other transactions
contemplated hereby.
Section 5.12 Insurance. LSEPO is, and has been continuously since March 31,
1992, insured in such amounts and against such risks and losses as are
customary for companies conducting the businesses conducted by LSEPO during
such time period. Neither ENSERCH nor LSEPO has received any notice of
cancellation or termination with respect to any material insurance policy
insuring LSEPO. All material policies applicable to LSEPO are valid and
enforceable policies and will continue to cover New EEX after the Merger.
Section 5.13 O&M Agreements. Except as set forth in Section 5.13 of the
LSEPO Disclosure Schedule, (a) each of the O&M Agreements is in full force and
effect and is valid and enforceable against each of the parties thereto in
accordance with it terms, (b) LSEPO is, and at all times since the earlier of
the time it became assignee thereof or commenced performance thereunder been,
in full compliance with all applicable terms and requirements of each of the
O&M Agreements, (c) each other person that has or had any obligation or
liability under any of the O&M Agreements is, and at all times has been, in
full compliance with all applicable terms and requirements of each of the O&M
Agreements under which it is or was obligated or liable, (d) no event has
occurred or circumstance exists that (with or without notice or lapse of time)
may contravene, conflict with, or result in a violation or breach of, or give
LSEPO or any other person the right to declare a default or exercise any
remedy under, or to cancel, terminate or modify, any of the O&M Agreements,
(e) LSEPO has not given to or received from any other person any notice or
other communication (whether written or oral) regarding any actual, alleged,
possible or potential violation or breach or, or default under, any of the O&M
Agreements, and (f) there are no renegotiations of, attempts to renegotiate,
or outstanding rights to renegotiate any material amounts paid or payable to
LSEPO under any of the O&M Agreements.
ARTICLE VI
Representations and Warranties of EEX
EEX represents and warrants to LSEPO as follows:
Section 6.1 Organization and Qualification. EEX is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Texas, and each of EEX's Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdictions of
incorporation. Each of EEX and its Subsidiaries has requisite corporate power
and authority, and is duly authorized by all necessary regulatory approvals
and orders, to own, lease and operate its assets and properties and to carry
on its business as it is now being conducted, and is duly qualified and in
good standing to do business in each jurisdiction in which the nature of its
business or the ownership or leasing of its assets and properties makes such
qualification necessary, other than such failures which, when taken together
with all other such failures, will not have an EEX Material Adverse Effect.
Section 6.2 Subsidiaries.
All of the issued and outstanding shares of capital stock of each Subsidiary
of EEX are validly issued, fully paid, nonassessable and free of preemptive
rights and are owned directly or indirectly by EEX free and clear of any
liens, claims, encumbrances, security interests, equities, charges and options
of any nature whatsoever, and there are no outstanding subscriptions, options,
calls, contracts, voting trusts, proxies or other commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement, obligating any such Subsidiary to issue, deliver or sell, or cause
to be issued, delivered or sold, additional shares of its capital stock or
obligating it to grant, extend or enter into any such agreement commitment.
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Section 6.3 Capitalization.
(a) As of the date hereof, the authorized capital stock of EEX consists of
200,000,000 shares of EEX Common Stock and 2,000,000 shares of preferred
stock, of no par value.
(b) As of the close of business on September 1, 1996, there were issued and
outstanding (i) 125,935,641 shares of EEX Common Stock and (ii) no shares of
preferred stock of EEX.
(c) All of the issued and outstanding shares of the capital stock of EEX are
validly issued, fully paid and nonassessable and none of such stock was issued
in violation of preemptive rights.
(d) Except as set forth in Section 6.3 of the EEX Disclosure Schedule, there
are no outstanding subscriptions, options, calls, contracts, voting trusts,
proxies or other understandings, restrictions, arrangements, rights or
warrants, including any right of conversion or exchange under any outstanding
security, instrument or other agreement, obligating EEX to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of the
capital stock of EEX or obligating EEX to grant, extend or enter into any such
agreement or commitment.
Section 6.4 Authority; Non-Contravention; Statutory Approvals.
(a) Authority.
(i) EEX has all requisite power and authority to enter into this
Agreement and, subject to the EEX Shareholders' Approval and the EEX
Required Statutory Approvals, to consummate the transactions contemplated
hereby.
(ii) The execution and delivery of this Agreement and the consummation by
EEX of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of EEX.
(iii) This Agreement has been duly and validly executed and delivered by
EEX and, assuming the due authorization, execution and delivery hereof by
ENSERCH and LSEPO, constitutes the valid and binding obligation of EEX,
enforceable against EEX in accordance with its terms, except as would be
limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance or other similar laws affecting the enforcement of creditors'
rights generally and except that the availability of equitable remedies,
including specific performance, may be subject to the discretion of any
court before which any proceeding therefor may be brought.
(b) Non-Contravention. Except as set forth in Section 6.4(b) of the EEX
Disclosure Schedule, the execution and delivery of this Agreement by EEX do
not, and the consummation of the transactions contemplated hereby will not,
result in any Violation by EEX or any of its Subsidiaries or, to the knowledge
of EEX, any of its Joint Ventures, under any provisions of
(i) the articles of incorporation, bylaws or similar governing documents
of EEX or any of its Subsidiaries or Joint Ventures,
(ii) subject to obtaining the EEX Required Statutory Approvals, any
statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any Governmental Authority
applicable to EEX or any of its Subsidiaries or Joint Ventures or any of
their respective properties or assets, or
(iii) subject to obtaining the third-party consents or other approvals
set forth in Section 6.4(b) of the EEX Disclosure Schedule (the "EEX
Required Consents"), any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which EEX or any of its
Subsidiaries or Joint Ventures is now a party or by which it or any of its
properties or assets may be bound or affected,
excluding from the foregoing clauses (ii) and (iii) such Violations as would
not, in the aggregate, reasonably likely have an EEX Material Adverse Effect.
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(c) Statutory Approvals. Except as set forth in Section 6.4(c) of the EEX
Disclosure Schedule, no declaration, filing or registration with, or notice to
or authorization, consent or approval of any Governmental Authority is
necessary for the execution and delivery of this Agreement by EEX or the
consummation by EEX of the transactions contemplated hereby, the failure to
obtain, make or give which would reasonably likely have an EEX Material
Adverse Effect (the "EEX Required Statutory Approvals"), it being understood
that references in this Agreement to "obtaining" such EEX Required Statutory
Approvals shall mean making such declarations, filings or registrations;
giving such notice; obtaining such consents or approvals; and having such
waiting periods expire as are necessary to avoid a violation of law.
Section 6.5 Reports and Financial Statements.
(a) Since January 1, 1995, the filings required to be made by EEX and its
Subsidiaries under the Securities Act and the Exchange Act have been filed,
respectively, as required by each such law or regulation, including all forms,
statements, reports, agreements and all documents, exhibits, amendments and
supplements appertaining thereto, and EEX and its Subsidiaries have complied
in all material respects with all applicable requirements of the appropriate
act and the rules and regulations thereunder.
(b) EEX has made available to LSEPO a true and complete copy of each report,
schedule, registration statement and definitive proxy statement filed by EEX
with the SEC since January 1, 1995 (such documents as filed, and any and all
amendments thereto, the "EEX SEC Reports").
(c) The EEX SEC Reports, including without limitation any financial
statements or schedules included therein, and all forms, reports or other
documents filed by EEX with the SEC after the date hereof, did not and will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The audited consolidated financial statements and unaudited interim
financial statements of EEX included in the EEX SEC Reports have been
prepared, and the audited consolidated financial statements and unaudited
interim financial statements of EEX as included in all forms, reports or other
documents filed with the SEC after the date hereof will be prepared in
accordance with GAAP applied on a consistent basis (except as may be indicated
therein or in the notes thereto and except with respect to unaudited
statements as permitted by Form 10-Q) and fairly present in all material
respects the financial position of EEX as of the respective dates thereof or
the results of operations and cash flows for the respective periods then
ended, as the case may be, subject, in the case of the unaudited interim
financial statements, to normal, recurring audit adjustments.
(e) True, accurate and complete copies of the Articles of Incorporation and
Bylaws of EEX, as in effect on the date hereof, have been delivered to LSEPO.
Section 6.6 Absence of Certain Changes or Events; Absence of Undisclosed
Liabilities.
(a) Except as set forth in the EEX SEC Reports or Section 6.6 of the EEX
Disclosure Schedule, from December 31, 1995 through the date hereof EEX and
each of its Subsidiaries has conducted its business only in the ordinary
course of business consistent with past practice and there has not been, and
no fact or condition exists, that would reasonably likely have, an EEX
Material Adverse Effect.
(b) Neither EEX nor any of its Subsidiaries has any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of a nature
required by GAAP to be reflected in a consolidated corporate balance sheet,
except liabilities, obligations or contingencies that are accrued or reserved
against in the consolidated financial statements of EEX or reflected in the
notes thereto for the year ended December 31, 1995, or that were incurred
after December 31, 1995 in the ordinary course of business and would not
reasonably likely have an EEX Material Adverse Effect.
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Section 6.7 Registration Statement and Proxy Statement.
(a) None of the information supplied or to be supplied by or on behalf of
EEX for inclusion or incorporation by reference in
(i) the Registration Statement will, at the time the Registration
Statement becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading, and
(ii) the Proxy Statement will, at the date mailed to the shareholders of
EEX and, as the same may be amended or supplemented, at the time of the
meeting of such shareholders to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any
material fact with respect to EEX or its Subsidiaries necessary in order to
make the statements therein with respect to EEX or its Subsidiaries, in
light of the circumstances under which they are made, not misleading.
(b) Each of the Registration Statement and the Proxy Statement, as of such
respective dates, will comply as to form in all material respects with the
applicable provisions of the Securities Act and the Exchange Act and the rules
and regulations thereunder.
Section 6.8 Tax Matters.
(a) EEX has filed (i) within the time and in the manner prescribed by law,
all required income Tax Returns, Texas franchise Tax Returns and other Tax
Returns calculated on or with reference to income, profits, earnings or gross
receipts and all other Tax Returns required to be filed that would report a
material amount of Tax, (ii) paid all Taxes that are shown on such Tax Returns
as due and payable within the time and in the manner prescribed by law except
for those being contested in good faith and for which adequate reserves have
been established, and (iii) paid all Taxes otherwise required to be paid.
(b) As of the date hereof, there are no claims, assessments, audits or
administrative or court proceedings pending against EEX for any alleged
deficiency in Tax, and EEX has not executed any outstanding waivers or
comparable consents regarding the application of the statute of limitations
with respect to any Taxes or Tax Returns.
(c) EEX has established adequate accruals for Taxes and for any liability
for deferred Taxes in the EEX Financial Statements in accordance with GAAP.
Section 6.9 Employee Matters; ERISA.
(a) Benefit Plans.
(i) Section 6.9(a) of the EEX Disclosure Schedule contains a true and
complete list, as of the date hereof, of:
(A) each "employee benefit plan" within the meaning of Section 3(3)
of ERISA that has been adopted, approved or implemented by ENSERCH in
which EEX participates;
(B) each plan, program, policy, or arrangement not listed in (A)
above that provides for bonuses, profit-sharing, incentive
compensation, deferred compensation, equity-based compensation
(including stock options, restricted stock, stock appreciation rights,
performance units, and dividend equivalents), holiday pay, vacation
pay, severance pay, sick pay, disability benefits, dependent care
benefits, flexible benefits (including any cafeteria plan governed by
Section 125 of the Code), paid or unpaid leave (including sick leave,
parental leave, military leave, and bereavement leave), tuition
assistance, relocation or any similar type of benefits, that has been
adopted, approved, or implemented by EEX (including any such plan,
program, policy, or arrangement that has been terminated before the
date hereof, if EEX could have statutory or contractual liability with
respect to the arrangement on or after the date hereof); and
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(C) each employment contract, severance contract, parachute
agreement, or other personal service contract or arrangement with or
covering a current or former officer or director of EEX; and any other
employment contracts, severance contracts, parachute agreements, or
personal service contracts or arrangements covering current or former
employees or independent contractors with respect to which
(individually or in the aggregate) EEX is reasonably likely to have
liability on or after the date hereof that could give rise to an EEX
Material Adverse Effect.
(ii) For purposes of this Agreement, "EEX Benefit Plan" shall mean each
benefit plan, program, policy, contract and arrangement described in
subsections (i)(A), (B) and (C) above (whether or not terminated). EEX has
not adopted any "employee benefit plan" within the meaning of Section 3(3)
of ERISA, or any similar plan, program, policy or program for employees,
directors or others who have provided services to or for the benefit of
EEX, which is not listed in Section 5.9(a) of the EEX Disclosure Schedule.
(iii) With respect to each EEX Benefit Plan, Section 6.9(a) of the EEX
Disclosure Schedule fully and accurately identifies the source or sources
of benefit payments under the plan (including, where applicable, the
identity of any trust (whether or not a grantor trust), insurance contract,
custodial account, agency agreement, or other arrangement that holds the
assets of, or serves as a funding vehicle or source of benefits for, such
EEX Benefit Plan).
(b) Contributions. Except with respect to those exceptions in existence as
of the date hereof and set forth in Section 6.9(b) of the EEX Disclosure
Schedule, all material contributions and other material payments required to
have been made by EEX pursuant to any EEX Benefit Plan have been timely made
or the amount of such payment or contribution obligation has been reflected in
the EEX Financial Statements.
(c) Qualification; Compliance. Except as set forth in Section 6.9(c) of the
EEX Disclosure Schedule:
(i) Each EEX Benefit Plan that is intended to be "qualified" within the
meaning of Code Section 401(a) currently meets all material requirements
under the Code and has received a favorable determination letter from the
IRS to such effect, or application for such a determination has been made
prior to the expiration of the applicable remedial amendment period.
(ii) EEX is in compliance with, and each EEX Benefit Plan is and has been
operated in compliance with, all applicable laws, rules and regulations
governing such plan, including, without limitation, ERISA and the Code,
except for violations that would not be reasonably likely to have an EEX
Material Adverse Effect.
(iii) To the knowledge of EEX, no individual or entity has engaged in any
transaction with respect to any EEX Benefit Plan as a result of which any
such plan, EEX could reasonably expect to be subject to liability pursuant
to ERISA Section 409 or Section 502, or subject to an excise tax pursuant
to Code Section 4975, which would in either case be reasonably likely to
have an EEX Material Adverse Effect.
(iv) To the knowledge of EEX and ENSERCH,
(A) no EEX Benefit Plan is subject to any ongoing audit,
investigation, or other administrative proceeding of the IRS, the
Department of Labor, or any other federal, state, or local government
entity, and
(B) no EEX Benefit Plan is the subject of any pending application for
administrative relief under any voluntary compliance program of any
governmental entity (including, without limitation, the IRS's Voluntary
Compliance Resolution Program or Walk-In Closing Agreement Program, or
the Department of Labor's Delinquent Filer Voluntary Compliance
Program.
(d) Liabilities. Except as set forth in Section 6.9(d) of the EEX Disclosure
Schedule, with respect to the EEX Benefit Plans, individually and in the
aggregate, no termination or partial termination of any EEX Benefit Plan or
other event has occurred, and, to the knowledge of EEX, there exists no
condition or set of circumstances, that could subject EEX to any liability
arising under the Code, ERISA, or any other applicable law (including,
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without limitation, any liability to or under any such plan or to the PBGC, or
under any indemnity agreement to which EEX is a party, which liability would
be reasonably likely to have an EEX Material Adverse Effect (excluding
liability for benefit claims and funding obligations payable in the ordinary
course and liability for PBGC insurance premiums payable in the ordinary
course).
(e) Welfare Plans. Except as set forth in Section 6.9(e) of the EEX
Disclosure Schedule, no EEX Benefit Plan that is a "welfare plan" (within the
meaning of ERISA Section 3(1) provides benefits for any retired or former
employees (other than as required pursuant to ERISA Section 601).
(f) Documents Made Available. EEX has made available to LSEPO a true and
correct copy of each collective bargaining agreement to which EEX is a party
or under which EEX has obligations; and, with respect to each EEX Benefit
Plan, EEX has made available to LSEPO a true and correct copy of each of the
following, as applicable:
(i) the current plan document (including all amendments adopted since the
most recent restatement) and its most recently prepared summary plan
description and all summaries of material modifications prepared since the
most recent summary plan description,
(ii) annual reports or Code Section 6039D information returns (IRS Form
5500 Series), including financial statements for the last three years,
(iii) each related trust agreement, insurance contract, service provider
contract or investment management agreement (including all amendments to
each such document),
(iv) the most recent IRS determination letter with respect to the
qualified status under Code Section 401(a) of such plan, and
(v) actuarial reports or valuations for the last three years.
(g) Payments Resulting From Merger. Other than as set forth in Section
6.9(g) of the EEX Disclosure Schedule, the consummation or announcement of any
transaction contemplated by this agreement will not (either alone or upon the
occurrence of any additional or further acts or events) result in any
(i) payment (whether of severance pay or otherwise) becoming due from EEX
or LSEPO to any current or former officer or director thereof or to the
trustee under any "rabbi trust" or other funding arrangement,
(ii) benefit under any EEX Benefit Plan being established or becoming
accelerated, vested or payable, except for a payment or benefit that would
have been payable under the same terms and conditions without regard to the
transactions contemplated by this Agreement, or
(iii) payment (whether of severance pay or otherwise) becoming due from
EEX or LSEPO to any current or former employee of EEX.
(h) Funded Status of Plans. Except as set forth in Section 6.9(h) of the EEX
Disclosure Schedule, (i) each EEX Benefit Plan has assets that, as of the date
hereof, have a fair market value equal to or exceeding the present value of
the accrued benefit obligations thereunder on a termination basis, as of the
date hereof, based on the actuarial methods, tables and assumptions
theretofore utilized by such plan's actuary in preparing such plan's most
recently prepared actuarial valuation report, except to the extent that
applicable law would require the use of different actuarial assumptions if
such plan was to be terminated as of the date hereof, and (ii) no EEX Benefit
Plan has incurred any "accumulated funding deficiency" (within the meaning of
ERISA Section 302).
(i) Multiemployer Plans.
(i) Except as set forth in Section 6.9(i) of the EEX Disclosure Schedule,
no EEX Benefit Plan is or was a "multiemployer plan" (within the meaning of
ERISA Section 4001(a)(3) or Code Section 414(f)), or a "multiple employer
welfare arrangement" (within the meaning of ERISA Section 3(40)); and EEX
has not been obligated to contribute to, or otherwise has or has had any
liability with respect to, any multiemployer plan, multiple employer plan,
or multiple employer welfare arrangement.
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(ii) With respect to any EEX Benefit Plan that is listed in Section
6.9(i) of the EEX Disclosure Schedule as a multiemployer plan, EEX has not
made or incurred a "complete withdrawal" or a "partial withdrawal," as such
terms are defined in ERISA Sections 4203 and 4205, therefrom at any time
during the six calendar year period immediately preceding the date of this
Agreement and the transactions contemplated by the Agreement will not, in
and of themselves, give rise to such a "complete withdrawal" or "partial
withdrawal."
(j) Modification or Termination of Plans. Except as set forth in Section
6.9(j) of the EEX Disclosure Schedule;
(i) EEX is not subject to any legal, contractual, equitable or other
obligation to establish as of any date any employee benefit plan of any
nature, including (without limitation) any pension, profit sharing,
welfare, post-retirement welfare, stock option, stock or cash award, non-
qualified deferred compensation or executive compensation plan, policy or
practice; and
(ii) EEX (with the consent of ENSERCH) has the right to, in any manner,
and without the consent of any employee, beneficiary or dependent,
employees' organization or other person, terminate, modify or amend any EEX
Benefit Plan (or its participation in any such EEX Benefit Plan ) at any
time sponsored or maintained by ENSERCH and contributed to by EEX,
effective as of any date before, on or after the Effective Time except to
the extent that any retroactive amendment would be prohibited by ERISA
Section 204(g) or would adversely affect a vested accrued benefit or a
previously granted award under any such Plan not subject to ERISA Section
204(g).
(k) Reportable Events; Claims. Except as set forth in Section 6.9(k) of the
EEX Disclosure Schedule:
(i) no event constituting a "reportable event" (within the meaning of
ERISA Section 4043(c)), for which the 30-day notice requirement or penalty
has not been waived by the PBGC, has occurred with respect to any EEX
Benefit Plan, and
(ii) no liability, claim, action or litigation has been made, commenced
or, to the knowledge of EEX, threatened, by or against with respect to any
EEX Benefit Plan (other than for benefits or PBGC premiums payable in the
ordinary course)
that would reasonably likely have an EEX Material Adverse Effect.
(l) Labor Agreements. Except as set forth in Section 6.9(l) of the EEX
Disclosure Schedule:
(i) EEX is not a party to any collective bargaining agreement or other
current labor agreement with any labor union or organization, and there is
no current union representation question involving employees of EEX, nor
does EEX know of any activity or proceeding of any labor organization (or
representative thereof) or employee group (or representative thereof) to
organize any such employees;
(ii) there is no unfair labor practice charge or grievance arising out of
a collective bargaining agreement or other grievance procedure against EEX
pending, or to the knowledge of EEX, threatened, that has, or would be
reasonably likely to have, an EEX Material Adverse Effect;
(iii) there is no complaint, lawsuit or proceeding in any forum by or on
behalf of any present or former employee, any applicant for employment or
classes of the foregoing alleging breach of any express or implied contract
of employment, any law or regulation governing employment or the
termination thereof or other discriminatory, wrongful or tortious conduct
in connection with the employment relationship against EEX pending, or to
the knowledge of EEX, threatened, that has, or would be reasonably likely
to have, an EEX Material Adverse Effect;
(iv) there is no strike, dispute, slowdown, work stoppage or lockout
pending, or to the knowledge of EEX, threatened, against or involving EEX
that has, or would be reasonably likely to have, an EEX Material Adverse
Effect;
(v) EEX is in compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment, wages, hours
of work and occupational safety and health, except for
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non-compliance that does not have, and would not be reasonably likely to
have, an EEX Material Adverse Effect; and
(vi) there is no proceeding, claim, suit, action or governmental
investigation pending or, to the knowledge of EEX or ENSERCH, threatened,
in respect to which any current or former director, officer, employee or
agent of EEX is or may be entitled to claim indemnification from EEX
pursuant to its articles of incorporation or by-laws, as provided in the
indemnification agreements listed on Section 6.9(l) of the EEX Disclosure
Schedule or pursuant to applicable Texas or other law that has, or would be
reasonably likely to have, an EEX Material Adverse Effect.
Section 6.10 Environmental Matters. Except as disclosed in the EEX SEC
Reports and except as would not, individually or in the aggregate, be
reasonably expected to result in an EEX Material Adverse Effect, (i) EEX and
its Subsidiaries are in compliance with all applicable Environmental Laws and
the terms and conditions of all applicable Environmental Permits, (ii) there
are no Environmental Claims against the Company or any of its Subsidiaries,
and (iii) no Hazardous Materials have been released, discharged or disposed of
on any of the properties owned or occupied by EEX or its Subsidiaries in any
manner or quantity which requires investigation, assessment, monitoring,
remediation or cleanup under currently applicable Environmental Laws.
Section 6.11 Vote Required. The approval of the Merger by the holders of at
least two-thirds of the outstanding shares of EEX Common Stock (the "EEX
Shareholders' Approval") is the only vote of the holders of any class or
series of the capital stock of EEX required to approve this Agreement, the
Merger and the other transactions contemplated hereby.
Section 6.12 Insurance. EEX is, and has been continuously since January 1,
1995, insured in such amounts and against such risks and losses as are
customary for companies conducting the businesses conducted by EEX during such
time period. EEX has not received any notice of cancellation or termination
with respect to any material insurance policy insuring EEX.
ARTICLE VII
Conduct of Business Pending the Merger
Section 7.1 Ordinary Course of Business. ENSERCH shall cause LSEPO to, and
EEX shall, and shall cause its Subsidiaries to, conduct their respective
businesses in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted and use all commercially reasonable efforts to
preserve their respective business organizations and goodwill, preserve the
goodwill and relationships with customers, suppliers, distributors and others
having business dealings with them and, subject to prudent management of
workforce needs and ongoing programs currently in force, keep available the
services of their present officers and employees.
ARTICLE VIII
Additional Agreements
Section 8.1 Access to Information.
(a) Upon reasonable notice, each of LSEPO and EEX shall, and EEX shall cause
its Subsidiaries to, afford to the officers, directors, employees,
accountants, counsel, investment bankers, financial advisors, consultants and
other representatives of the other (collectively, "Representatives")
reasonable access, during normal business hours throughout the period prior to
the Effective Time, to all of its properties, books, contracts, commitments
and records (including, but not limited to, Tax Returns) and, during such
period, each shall, and EEX shall cause its Subsidiaries to, furnish promptly
to the other:
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(i) a copy of each report, schedule and other document filed by it or any
of its Subsidiaries with the SEC and any other document pertaining to the
transactions contemplated hereby filed with any Governmental Authority that
is not filed as an exhibit to an SEC filing or described in an SEC filing,
and
(ii) all information concerning itself, its Subsidiaries, directors,
officers and shareholders and such matters as may be reasonably requested
by the other party in connection with any filings, applications or
approvals required or contemplated by this Agreement.
Section 8.2 Proxy Statement and Registration Statement.
(a) Preparation and Filing.
(i) As promptly as reasonably practicable after the date hereof, the
parties shall prepare and file with the SEC the Registration Statement and
the Proxy Statement (together the "Proxy/Registration Statement").
(ii) The parties shall take such actions as may be reasonably required to
cause the Registration Statement to be declared effective under the
Securities Act as promptly as practicable after such filing.
(iii) The parties shall also take such action as may be reasonably
required to cause the shares of New EEX Common Stock issuable in connection
with the Merger to be registered or to obtain an exemption from
registration under applicable state "blue sky" or securities laws; provided
that neither LSEPO nor EEX shall be required to register or qualify as a
foreign corporation or to take any other action that would subject it to
general service of process in any jurisdiction in which it will not,
following the Merger, be so subject.
(iv) Each of the parties shall furnish all information concerning itself
that is required or customary for inclusion in the Proxy/Registration
Statement.
(v) No representation, covenant or agreement contained in this Agreement
is made by any party hereto with respect to information supplied by any
other party hereto for inclusion in the Proxy/Registration Statement.
(vi) The Proxy/Registration Statement shall comply as to form in all
material respects with the Securities Act, the Exchange Act and the rules
and regulations thereunder.
(vii) The parties shall take such action as may be reasonably required to
cause the shares of New EEX Common Stock issuable in the Merger to be
approved for listing on the NYSE.
(b) Fairness Opinion. It shall be a condition to the mailing of the Proxy
Statement to the shareholders of EEX and to the obligation of LSEPO to request
effectiveness of the Registration Statement that EEX shall have received an
opinion from DLJ, dated the date of the Proxy Statement, to the effect that,
as of the date thereof, the EEX Ratio and the LSEPO Ratio taken together are
fair from a financial point of view to the holders of EEX Common Stock (other
than ENSERCH, as to which no opinion has been requested and none is
expressed).
Section 8.3 Shareholder Approval.
(a) Approval of EEX Shareholders. EEX shall, as promptly as reasonably
practicable after the date hereof
(i) take all steps reasonably necessary to duly call, give notice of,
convene and hold a special meeting of its shareholders (the "EEX Special
Meeting") for the purpose of securing the EEX Shareholders' Approval,
(ii) distribute to its shareholders the Proxy/Registration Statement in
accordance with applicable federal and state law and its Articles of
Incorporation and Bylaws,
(iii) recommend to its shareholders the approval of the Merger, this
Agreement and the transactions contemplated hereby, and
(iv) cooperate and consult with EEX with respect to each of the foregoing
matters; provided that nothing contained in this Section 8.3(a) shall
require the Board of Directors of EEX to take any action or
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refrain from taking any action that such Board determines in good faith
with written advice of counsel could reasonably be expected to result in a
breach of its fiduciary duties under applicable law.
(b) Fairness Opinions Not Withdrawn. It shall be a condition to the
obligation of EEX to hold the EEX Special Meeting that the opinion of DLJ
referred to in Section 8.2(b) shall not have been withdrawn.
Section 8.4 Directors' and Officers' Indemnification.
(a) Indemnification. To the fullest extent not prohibited by law, LSEPO
agrees that for a period of six (6) years after the Effective Time, all rights
to indemnification existing as of the Effective Time in favor of the current
and former directors, officers and employees of EEX and its Subsidiaries (at
the Effective Time) (each an "EEX Indemnitee") as provided for in their
respective Articles of Incorporation or Bylaws shall continue in full force
and effect. After the Effective Time, LSEPO will consent to the establishment
by EEX and its Subsidiaries of such additional indemnification arrangements in
favor of EEX's and its Subsidiaries' directors and officers as may be
necessary so that they will have the benefit of the maximum indemnification
arrangements available to the directors and officers of LSEPO for all events
or actions occurring subsequent to the Effective Time.
(b) Insurance. For a period of six (6) years after the Effective Time, LSEPO
shall cause to be maintained in effect the policies of directors' and
officers' liability insurance maintained by EEX and its Subsidiaries (at the
Effective Time) provided that LSEPO may substitute therefor policies of at
least the same coverage containing terms that are no less advantageous with
respect to matters occurring prior to the Effective Time to the extent such
liability insurance can be maintained annually at a cost to LSEPO not greater
than 200 percent of the current aggregate annual premiums for the policies
currently maintained by EEX and its Subsidiaries for its directors' and
officers' liability insurance; provided, further, that if such insurance
cannot be so maintained or obtained at such cost, LSEPO shall maintain or
obtain as much of such insurance for EEX and its Subsidiaries as can be so
maintained or obtained at a cost equal to 200 percent of the current annual
premium for directors' and officers' liability insurance.
(c) Successors. In the event that LSEPO, EEX or any of its Subsidiaries or
any of their respective successors or assigns:
(i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger, or
(ii) transfers all or substantially all of its properties and assets to
any person, then and in each such case, proper provision shall be made so
that such successors and assigns shall assume the obligations set forth in
this Section 8.4.
(d) The provisions of this Section 8.4 are intended to be for the benefit
of, and shall be enforceable by, each EEX Indemnitee, his or her heirs and his
or her Representatives.
Section 8.5 Public Announcements. LSEPO and EEX shall cooperate with each
other in the development and distribution of all news releases and other
public information disclosures with respect to this Agreement or any of the
transactions contemplated hereby and shall not issue any public announcement
or statement prior to consultation with the other party; provided that each
party recognizes the other party's obligations imposed by law or any
applicable national securities exchange, and will endeavor to accommodate such
obligations.
Section 8.6 Rule 145 Affiliates. EEX shall identify in a letter to LSEPO all
persons who are, at the Closing Date, "affiliates" of EEX as such term is used
in Rule 145 under the Securities Act. EEX shall use its reasonable efforts to
cause its affiliates to deliver to LSEPO on or prior to the Closing Date a
written agreement to the effect that:
(i) any future disposition by such person of any New EEX Common Stock
such person receives as the result of the Merger will be accomplished in
accordance with Rule 145(d) under the Securities Act; and
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(ii) such person agrees that appropriate legends shall be placed upon the
certificates evidencing ownership of New EEX Common Stock that such person
receives as a result of the Merger.
Section 8.7 Stock Option and Bonus Plans.
(a) New EEX shall take such action as may be necessary so that after the
Effective Time, outstanding options under the Stock Plan to purchase shares of
EEX Common Stock shall be exercisable to purchase a number of shares of New
EEX Common Stock as may be determined by applying the EEX Ratio; and
(b) New EEX shall
(i) reserve for issuance under the Stock Plan or otherwise provide a
sufficient number of shares of New EEX Common Stock for delivery upon
exercise of options under the Stock Plan that are outstanding at the
Effective Time, and
(ii) as soon as practicable after the Effective Time, file one or more
registration statements under the Securities Act with respect to the shares
of New EEX Common Stock issuable upon the exercise of currently outstanding
options under the Stock Plan to the extent such filing is required under
applicable law and use its best efforts to maintain the effectiveness of
such registration statement(s) (and the current status of the prospectuses
contained therein or related thereto) so long as such options remain
outstanding.
Section 8.8 No Solicitations.
(a) Neither LSEPO nor EEX shall permit any of its Representatives to, and
shall use its best efforts to cause such persons not to, directly or
indirectly, initiate, solicit or encourage, or take any action to facilitate
the making of any offer or proposal that constitutes or is reasonably likely
to lead to any Takeover Proposal, or, in the event of any unsolicited Takeover
Proposal, engage in negotiations or provide any confidential information or
data to any person relating to any Takeover Proposal.
(b) Notwithstanding anything in this Section 8.8 to the contrary, LSEPO or
EEX may, to the extent that the Board of Directors of such party determines in
good faith with the written advice of outside counsel that a failure to do so
could reasonably be expected to result in a breach of its fiduciary duties
under applicable law, participate in discussions or negotiations with, furnish
information to, and afford access to the properties, books and records of such
party and its Subsidiaries to any person in connection with a possible
Takeover Proposal with respect to such party by such person.
Section 8.9 Other Agreements.
(a) Distribution Agreement. Prior to the Effective Time, each of ENSERCH,
EEX, LSEPO and Holding Company shall enter into the Distribution Agreement.
(b) Tax Allocation Agreement. After the Effective Time, ENSERCH, New EEX and
TUC shall enter into the Tax Allocation Agreement substantially in the form
attached hereto as Annex A-3.
(c) Tax Assurance Agreement. After the Effective Time, ENSERCH and New EEX
shall enter into the Tax Assurance Agreement substantially in the form
attached hereto as Annex A-4.
Section 8.10 Covenant to Satisfy Conditions.
(a) Each of LSEPO, EEX and ENSERCH shall take all reasonable actions
necessary to comply promptly with all legal requirements that may be imposed
on it with respect to this Agreement.
(b) Subject to the terms and conditions hereof, and taking into account the
circumstances and giving due weight to the materiality of the matter involved
or the action required, LSEPO, EEX and ENSERCH shall each use all reasonable
efforts to take or cause to be taken all actions, and to do or cause to be
done all things,
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necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Merger and the other transactions
contemplated hereby.
Section 8.11 Indemnification.
(a) FROM AND AFTER THE EFFECTIVE TIME, ENSERCH AGREES TO INDEMNIFY, DEFEND
AND HOLD NEW EEX AND ITS DIRECTORS, OFFICERS, AGENTS, ATTORNEYS AND AFFILIATES
HARMLESS FROM AND AGAINST ALL LOSSES, CLAIMS, OBLIGATIONS, DEMANDS,
ASSESSMENTS, PENALTIES, LIABILITIES, COSTS, DAMAGES, ATTORNEYS' FEES AND
EXPENSES (COLLECTIVELY, "DAMAGES"), ASSERTED AGAINST OR INCURRED BY SUCH
INDEMNITEES (INCLUDING CLAIMS BASED ON THE NEGLIGENCE OF ANY INDEMNITEE) BY
REASON OF OR RESULTING FROM:
(i) A BREACH OR NONPERFORMANCE OF ANY REPRESENTATION, WARRANTY OR
COVENANT OF LSEPO OR ENSERCH CONTAINED HEREIN, IN ANY ANNEX, EXHIBIT,
SCHEDULE, CERTIFICATE OR FINANCIAL STATEMENT DELIVERED HEREUNDER, OR IN ANY
AGREEMENT EXECUTED IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY,
WHETHER TO BE PERFORMED BEFORE OR AFTER THE EFFECTIVE TIME;
(ii) THE ASSETS OWNED BY LSEPO AT OR PRIOR TO THE EFFECTIVE TIME;
(iii) ANY REGULATORY OR COMPLIANCE VIOLATION THAT ARISES OUT OF EVENTS,
ACTIONS OR OMISSIONS TO ACT OF LSEPO OCCURRING PRIOR TO THE EFFECTIVE TIME;
(iv) ANY UNTRUE STATEMENT OR ALLEGED UNTRUE STATEMENT OF ANY MATERIAL
FACT CONTAINED IN THE PROXY/REGISTRATION STATEMENT, OR ANY OMISSION OR
ALLEGED OMISSION TO STATE THEREIN A MATERIAL FACT REQUIRED TO BE STATED
THEREIN OR NECESSARY TO MAKE THE STATEMENTS THEREIN, IN LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING; BUT ONLY IN EACH
CASE TO THE EXTENT BASED UPON INFORMATION WITH RESPECT TO ENSERCH OR LSEPO
FURNISHED IN WRITING BY OR ON BEHALF OF ENSERCH OR LSEPO EXPRESSLY FOR USE
IN THE PROXY/REGISTRATION STATEMENT; AND
(v) ANY ENVIRONMENTAL CLAIM WITH RESPECT TO ANY FACILITY, SITE, LOCATION
OR BUSINESS (WHETHER PAST OR PRESENT AND WHETHER ACTIVE OR INACTIVE) OWNED,
OPERATED OR LEASED BY LSEPO OR ENSERCH PRIOR TO THE EFFECTIVE TIME.
(b) (i) Any party seeking any indemnification provided for under this
Agreement (the "Indemnified Party") in respect of, arising out of or involving
a claim made by any person against the Indemnified Party (a "Third Party
Claim") shall notify in writing (and to the extent received, deliver copies of
all related notices and documents (including court papers) to the party from
whom indemnification is sought (the "Indemnifying Party") of the Third Party
Claim within fifteen Business Days after receipt by such Indemnified Party of
written notice of the Third Party Claim; provided, however, that failure to
give such notification shall not affect the indemnification provided hereunder
except to the extent the Indemnifying Party shall have been actually
prejudiced as a result of such failure (except that the Indemnifying Party
shall not be liable for any expenses incurred during the period in which the
Indemnified Party failed to give such notice if such Indemnified Party failed
to give such notice within the allotted fifteen Business Days). Thereafter,
the Indemnified Party shall deliver to the Indemnifying Party, within five
Business Days' time after the Indemnified Party's receipt thereof, copies of
all other notices and documents (including court papers) received by the
Indemnified Party relating to the Third Party Claim.
(ii) If a Third Party Claim is made against an Indemnified Party, the
Indemnifying Party shall be entitled to participate in the defense thereof
and, if it so chooses (except as provided in Section 8.11(b)(iii)), to
assume the defense thereof with experienced counsel selected by the
Indemnifying Party and reasonably satisfactory to the Indemnified Party.
Should the Indemnifying Party so elect to assume the defense of a Third
Party Claim, the Indemnifying Party shall not be liable to the Indemnified
Party for any legal expenses (except as provided below and in Section
8.11(b)(iii)) subsequently incurred by the Indemnified Party in connection
with the defense thereof. Notwithstanding the Indemnifying Party's election
to assume the defense of such Third Party Claim, the Indemnified Party
shall have the right to employ separate counsel and to participate in the
defense of such action at its own expense; provided, however, that the
Indemnifying Party shall bear the reasonable fees, costs, and expenses of
such separate counsel if (x) the use of counsel chosen by the Indemnifying
Party to represent the Indemnified Party would present such counsel with a
conflict of interest that would preclude such counsel from representing the
Indemnified Party pursuant to
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legal canons of ethics or other applicable law; (y) the Indemnifying Party
shall not have employed counsel reasonably to the Indemnified Party to
represent it within 30 days after notice to the Indemnifying Party of the
institution of such Third Party Claim; or (z) the Indemnifying Party shall
authorize the Indemnified Party to employ separate counsel at the
Indemnifying Party's expense. If the Indemnifying Party chooses to defend
or prosecute a Third Party Claim, each party hereto shall cooperate in the
defense or prosecution thereof. Such cooperation shall include the
retention and (upon the Indemnifying Party's request) the provision to the
Indemnifying Party of records and information which are reasonably relevant
to such Third Party Claim, and making employees available (subject to
reimbursement by the Indemnifying Party of actual expenses incurred
therewith) on a mutually convenient basis to provide additional information
and explanation of any material provided hereunder. If the Indemnifying
Party chooses to defend or prosecute any Third Party Claim, the Indemnified
Party shall agree to any settlement, compromise or discharge of such Third
Party Claim which the Indemnifying Party may recommend and which by its
terms obligates the Indemnifying Party to pay the full amount of the
liability in connection with such Third Party Claim and releases the
Indemnified Party completely in connection with such Third Party Claim.
Whether or not the Indemnifying Party shall have assumed the defense of a
Third Party Claim, so long as the Indemnifying Party acknowledges in
writing its obligation to indemnify the Indemnified Party with respect to
the applicable claims, the Indemnified Party shall not admit any liability
with respect to, or settle, compromise or discharge such Third Party Claim
without the Indemnifying Party's prior written consent, which consent may
not be withheld unless, in the Indemnifying Party's good-faith judgment,
such settlement, compromise or discharge is unreasonable in light of such
Third Party Claim against, and defenses available to, the Indemnified
Party.
(iii) Notwithstanding anything set forth in Section 8.11(b)(ii) to the
contrary, in the event an Indemnified Party reasonably believes and so
notifies the Indemnifying Party in writing that the applicable claim, even
if fully indemnified for, is reasonably likely to have a material adverse
effect on the Indemnified Party's business, financial condition or results
of operations, then the Indemnifying Party shall not have the right to
assume the defense of such claim but shall have the right to employ
separate counsel and to participate in the defense of such action at its
own expense. In such an event, the Indemnified Party and its counsel shall
consult, whenever reasonably practicable, with the Indemnifying Party and
its counsel with respect to the status of the claim and any related
litigation.
Section 8.12 Expenses. The reasonable expenses incurred by the parties in
connection with the Merger and the Distribution shall be paid by ENSERCH.
Section 8.13 Capital Contribution. Immediately prior to the Effective Time,
ENSERCH shall make a capital contribution to LSEPO, or LSEPO shall make a
distribution to ENSERCH, of the amount, if any, needed to cause LSEPO's
working capital to be $3,500,000.
ARTICLE IX
Conditions
Section 9.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction on or prior to the Closing Date of the following conditions,
except, to the extent permitted by applicable law, that such conditions may be
waived in writing pursuant to Section 10.4;
(a) Shareholder Approval. The EEX Shareholders' Approval shall have been
obtained.
(b) No Injunction. No temporary restraining order or preliminary or
permanent injunction or other order by any federal or state court preventing
consummation of the Merger shall have been issued and continue in effect, and
the Merger and the other transactions contemplated hereby shall not have been
prohibited under any applicable federal or state law or regulation.
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(c) Registration Statement. The Registration Statement shall have become
effective in accordance with the provisions of the Securities Act, and no stop
order suspending such effectiveness shall have been issued and remain in
effect.
(d) Listing of Shares. The shares of New EEX Common Stock issuable in the
Merger pursuant to Article III shall have been approved for listing on the
NYSE upon official notice of issuance.
(e) Statutory Approvals. The LSEPO Required Statutory Approvals and the EEX
Required Statutory Approvals shall have been obtained at or prior to the
Effective Time.
(f) Consummation of the EC/TUC Merger. All conditions to the EC/TUC Merger,
other than the Merger and the Distribution, shall have been satisfied.
(g) Tax Ruling. The Internal Revenue Service shall have issued and not
revoked a ruling (the "Ruling") reasonably satisfactory to LSEPO, EEX and
ENSERCH to the effect that the Distribution will result in no taxable gain to
LSEPO, EEX and ENSERCH or its shareholders. Reasonable satisfaction shall
include the right to receive a reasonably satisfactory opinion of counsel on
the transaction upon which the Ruling is contingent.
(h) LSE and Holdings. Lone Star Energy Company and Enserch Exploration
Holdings, Inc., each of which is a Texas corporation and a wholly owned
subsidiary of ENSERCH, shall have been liquidated or merged into ENSERCH.
Section 9.2 Conditions to Obligation of EEX to Effect the Merger. The
obligation of EEX to effect the Merger shall be further subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
except as may be waived by EEX in writing pursuant to Section 10.4;
(a) Performance of Obligations of LSEPO and ENSERCH. LSEPO and ENSERCH shall
have performed in all material respects its agreements and covenants contained
in or contemplated by this Agreement required to be performed by it at or
prior to the Effective Time.
(b) Representations and Warranties. The representations and warranties of
LSEPO and ENSERCH set forth in this Agreement shall be true and correct in all
material respects as of the date hereof and as of the Closing Date as if made
on and as of the Closing Date, except as otherwise contemplated by this
Agreement.
(c) LSEPO Material Adverse Effect. No LSEPO Material Adverse Effect shall
have occurred and there shall exist no fact or circumstance that would have,
or would be reasonably likely to have, an LSEPO Material Adverse Effect.
(d) Tax Opinion. EEX shall have received an opinion of counsel, in form and
substance satisfactory to EEX, dated the Closing Date, which opinion may be
based on appropriate assumptions and representations of LSEPO and EEX, in form
and substance reasonably satisfactory to such counsel, to the effect that the
Merger will be a tax-free reorganization under Code Section 368(a)(1)(A) and
that EEX and the shareholders of EEX whose shares of EEX Common Stock are
converted into New EEX Common Stock in the Merger will recognize no gain or
loss for federal income tax purposes as a result of the consummation of the
Merger.
Section 9.3 Conditions to Obligation of LSEPO to Effect the Merger. The
obligation of LSEPO to effect the Merger shall be further subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
except as may be waived by LSEPO in writing pursuant to Section 10.4:
(a) Performance of Obligations of EEX. EEX shall have performed in all
material respects its agreements and covenants contained in or contemplated by
this Agreement required to be performed by it at or prior to the Effective
Time.
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(b) Representations and Warranties. The representations and warranties of
EEX set forth in this Agreement shall be true and correct in all material
respects as of the date hereof and as of the Closing Date as if made on and as
of the Closing Date, except as otherwise contemplated by this Agreement.
(c) EEX Material Adverse Effect. No EEX Material Adverse Effect shall have
occurred and there shall exist no fact or circumstance that would have, or
would be reasonably likely to have, an EEX Material Adverse Effect.
(d) EEX Required Consents. The EEX Required Consents shall have been
obtained except those that in the aggregate would not result in and would not
reasonably be likely to result in an EEX Material Adverse Effect.
ARTICLE X
Termination, Amendment and Waiver
Section 10.1 Termination. This Agreement may be terminated and the Merger
abandoned at any time prior to the Closing Date, whether before or after
approval by the shareholders of the respective parties hereto contemplated by
this Agreement:
(a) by mutual written consent of the Boards of Directors of LSEPO and EEX;
(b) by either of LSEPO and EEX if the EC/TUC Plan of Merger is terminated;
(c) by LSEPO or EEX, by written notice to the other party if the EEX
Shareholders' Approval shall not have been obtained at a duly held EEX Special
Meeting, including any adjournments thereof;
(d) by LSEPO or EEX, if any state or federal law, order, rule or regulation
is adopted or issued, that has the effect, as supported by the written opinion
of outside counsel for such party, of prohibiting the Merger, or by LSEPO or
EEX, if any court of competent jurisdiction in the United States or any State
shall have issued an order, judgment or decree permanently restraining,
enjoining or otherwise prohibiting the Merger, and such order, judgment or
decree shall have become final and nonappealable;
(e) by EEX, upon two days' prior notice to LSEPO, if, as a result of a
tender offer or any written offer or proposal with respect to a merger, sale
of a material portion of its assets or other business combination, the Board
of Directors of EEX determines in good faith that the fiduciary obligations of
such directors under applicable law require that such tender offer or other
written offer or proposal be accepted;
(f) by EEX, by written notice to LSEPO, if there shall have been any
material breach of any representation or warranty, or any material breach of
any covenant or agreement, of LSEPO or ENSERCH hereunder, and such breach
shall not have been remedied within twenty (20) days after receipt by LSEPO or
ENSERCH of notice in writing from EEX, specifying the nature of such breach
and requesting that it be remedied,
(g) by LSEPO, by written notice to EEX, if
(i) there shall have been any material breach of any representation or
warranty, or any material breach of any covenant or agreement, of EEX
hereunder, and such breach shall not have been remedied within twenty (20)
days after receipt by EEX of notice in writing from LSEPO, specifying the
nature of such breach and requesting that it be remedied, or
(ii) the Board of Directors of EEX shall withdraw or modify in any manner
materially adverse to LSEPO its approval or recommendation of this
Agreement or the Merger or resolve to take such action.
Section 10.2 Effect of Termination. In the event of termination of this
Agreement by either LSEPO or EEX pursuant to Section 10.1, there shall be no
liability hereunder on the part of either LSEPO, EEX or ENSERCH or their
respective directors or officers, except that
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(i) Section 8.4(d) and 8.5 shall survive and
(ii) no such termination shall relieve any party from liability by reason
of any willful breach of any agreement, representation, warranty or
covenant contained in this Agreement.
Section 10.3 Amendment.
(a) This Agreement may be amended by the parties hereto pursuant to action
of their respective Boards of Directors, at any time before or after approval
hereof by the shareholders of EEX and prior to the Effective Time, but after
such approval, no such amendment shall
(i) alter or change the amount or kind of shares to be received or
exchanged for or on conversion of any class or series of capital stock of
either corporation as provided under Article III, or
(ii) alter or change any of the terms and conditions of this Agreement if
any of the alterations or changes, alone or in the aggregate, would
materially and adversely affect the rights of holders of EEX Common Stock.
(b) This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
Section 10.4 Waiver. At any time prior to the Effective Time, the parties
hereto may (i) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed by a duly authorized officer of such party.
ARTICLE XI
General Provisions
Section 11.1 Survival; Remedies Not Affected by Knowledge. Each of the
representations, warranties, covenants and agreements in this Agreement shall
survive the Merger in accordance with its terms. The right to indemnification,
payment of Damages or other remedy based on such representations, warranties,
covenants and agreements shall not be affected by any investigation conducted
with respect to, or any knowledge acquired (or capable of being acquired) at
any time, whether before or after the execution and delivery of this Agreement
or the Effective Time, with respect to the accuracy or inaccuracy, of or
compliance with, any of such representations, warranties, covenants or
agreements. The waiver of any condition based on the accuracy of any
representation or warranty, or on the performance of or compliance with any
covenant or agreement, will not affect the right to indemnification, payment
of Damages or other remedy based on such representations, warranties,
covenants and agreements.
Section 11.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given (a) if delivered personally, or (b) if
sent by overnight courier service (receipt confirmed in writing), or (c) if
delivered by facsimile transmission (with receipt confirmed), or (d) five (5)
days after being mailed by registered or certified mail (return receipt
requested) to the parties, in each case to the following addresses (or at such
other address for a party as shall be specified by like notice):
(i)if to EEX:
Enserch Exploration, Inc.
Energy Square II
4849 Greenville Avenue
Dallas, TX 75206
Attention: Michael G. Fortado, Esq.
Senior Vice President, General Counsel and Secretary
Fax: (214) 670-2097
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(ii)if to ENSERCH:
ENSERCH Corporation
300 South St. Paul
Dallas, Texas 75201-5598
Attention: William T. Satterwhite, Esq.
Senior Vice President and General Counsel
Fax: (214) 573-3430
(iii)if to LSEPO:
Lone Star Energy Plant Operations, Inc.
1817 Wood Street
Dallas, Texas 75201-5598
Attention: Peggy J. Banczak
Vice President, General Counsel and Assistant Secretary
Fax: (214) 987-6664
Section 11.3 Miscellaneous.
(a) This Agreement, including the documents and instruments referred to
herein, (i) constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof, (ii) shall not be
assigned by operation of law or otherwise, and (iii) shall be governed by and
construed in accordance with the laws of the State of Texas applicable to
contracts executed in and to be fully performed in such State, without giving
effect to its conflicts of laws statutes, rules or principles.
(b) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect. The parties hereto
shall negotiate in good faith to replace any provision of this Agreement so
held invalid or unenforceable with a valid provision that is as similar as
possible in substance to the invalid or unenforceable provision.
Section 11.4 Interpretation. When reference is made in this Agreement to
Articles, Sections or Annexes, such reference shall be to an Article, Section
or Annex of this Agreement, as the case may be, unless otherwise indicated.
The table of contents and headings contained in this Agreement are for
reference purposes and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes", or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." Whenever "or" is used in this Agreement it
shall be construed in the nonexclusive sense.
Section 11.5 Counterparts; Effect. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
Section 11.6 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and, except for rights of
(i) EEX Indemnitees and their heirs and Representatives as set forth in
Section 8.4 and (ii) Indemnified Parties and their heirs and Representatives
as set forth in Section 8.11, nothing in this Agreement, express or implied,
is intended to confer upon any person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
Section 11.7 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties hereto shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.
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Section 11.8 Further Assurances. Each party hereto shall execute such
further documents and instruments and take such further actions as may
reasonably be requested by any other party hereto in order to consummate the
Merger in accordance with the terms hereof.
In Witness Whereof, LSEPO, EEX and Enserch have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
Lone Star Energy Plant Operations,
Inc.
/s/ A. E. Gallatin
By: _________________________________
Name: A. E. Gallatin
Title: Vice President and
Treasurer
Enserch Exploration, Inc.
/s/ J. W. Pinkerton
By: _________________________________
Name: J. W. Pinkerton
Title: Vice President and
Controller
Enserch Corporation
/s/ M. E. Rescoe
By: _________________________________
Name: M. E. Rescoe
Title: Senior Vice President
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ANNEX A-1
AGREEMENT AND PLAN OF DISTRIBUTION
AGREEMENT AND PLAN OF DISTRIBUTION, dated as of , 1996 ("Agreement"),
among ENSERCH Corporation, a Texas corporation ("ENSERCH"), Enserch
Exploration, Inc., a Texas corporation and an approximately 83% owned
subsidiary of ENSERCH ("EEX"), Lone Star Energy Plant Operations, Inc., a
Texas corporation and an indirect wholly owned subsidiary of ENSERCH
("LSEPO"), and TUC Holding Company, a Texas corporation 50% of whose
outstanding capital stock is owned by Texas Utilities Company, a Texas
corporation ("TUC") and 50% of whose outstanding capital stock is owned by
ENSERCH ("Holding Company").
RECITALS
WHEREAS, ENSERCH, TUC, Holding Company and TXA, Inc., a wholly owned
subsidiary of TUC, have entered into an Amended and Restated Agreement and
Plan of Merger, dated as of April 13, 1996 (the "Merger Agreement"), providing
for the merger of a wholly owned subsidiary of Holding Company with and into
TUC and the merger of a separate wholly owned subsidiary of Holding Company
with and into ENSERCH (together, the "Mergers");
WHEREAS, it is a condition to the Mergers that EEX will merge with and into
LSEPO in a reorganization described in Section 368(a) of the Internal Revenue
Code in which LSEPO is to be the surviving corporation and is to change its
name to Enserch Exploration, Inc. ("New EEX") (the "Preliminary Merger");
WHEREAS, as a further condition to the Mergers, immediately prior to the
Effective Time (as defined in Section 2.2 of the Merger Agreement) of the
Mergers, subject to the satisfaction or waiver of the conditions set forth in
Article VI of this Agreement, the Board of Directors of ENSERCH expects to
make a distribution (the "Distribution") in accordance with Article 2.38 of
the Texas Business Corporation Act (the "TBCA") to the holders of Common Stock
of ENSERCH, par value $4.45 per share (the "ENSERCH Common Stock"), on a pro
rata basis, of all of the outstanding shares of Common Stock, par value $.01
per share, of New EEX (the "New EEX Common Stock") then owned by ENSERCH.
WHEREAS, the purpose of the Distribution is to make possible the Mergers by
divesting ENSERCH of all of its shares of New EEX Common Stock; and
WHEREAS, this Agreement sets forth or provides for certain agreements among
ENSERCH, Holding Company, EEX and LSEPO in consideration of the separation of
the ownership of New EEX.
NOW, THEREFORE, in consideration of the premises, and of the respective
representations, warranties, covenants and agreements set forth herein the
parties hereto hereby agree as follows:
ARTICLE I
Definitions
Section 1.1 Definitions.
(a) Terms Defined by Reference to Merger Agreement. The following terms are
defined in the Merger Agreement and are used herein with the same meaning:
Environmental Claims
Exchange Act
Governmental Authority
Material Contract
Securities Act
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(b) As used in this Agreement, the following terms shall have the following
meanings:
"Affiliate" means any Person that, directly or indirectly, controls, or is
controlled by or under common control with, another Person. For the purposes
of this definition, "control" (including the terms "controlled by" or "under
common control with"), as used with respect to any Person, means the power to
direct or cause the direction of the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities or
by contract or otherwise. Without limiting the generality of the foregoing, a
Subsidiary of a Person is an Affiliate of that Person.
"Damages" shall have the meaning set forth in Section 7.1(a).
"Distribution Effective Time" shall have the meaning set forth in Section
2.5.
"Documents" shall have the meaning set forth in Section 7.1(a).
"EEX Companies" means EEX and its Subsidiaries.
"ENSERCH Companies" shall mean ENSERCH and its Subsidiaries (other than EEX
Companies and LSEPO).
"Holding Company Parties" means Holding Company and ENSERCH together.
"Indemnified Party" shall have the meaning set forth in Section 7.3(a).
"Indemnifying Party" shall have the meaning set forth in Section 7.3(a).
"Insurance Program" shall have the meaning set forth in Section 2.3(e)(i).
"Merger Parties" means EEX Companies and LSEPO.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, limited liability
company, corporation, company, institution, entity, party, or Governmental
Authority.
"Proxy/Registration Statement" shall have the meaning set forth in Section
6.4.
"Record Date" shall have the meaning set forth in Section 2.4 hereof.
"SEC" means Securities and Exchange Commission.
"Subsidiary" of a Person means a Person of which more than fifty percent of
the outstanding equity interests with ordinary voting power are owned,
directly or through one or more intermediaries, by the first Person.
"Tax Allocation Agreement" shall have the meaning set forth in Section 3.1.
"Tax Assurance Agreement" shall have the meaning set forth in Section 3.1.
"Third Party Claim" shall have the meaning set forth in Section 7.3(a).
"Transfer Agent" shall mean Harris Trust Company of New York, transfer agent
for ENSERCH Common Stock, which has been appointed by ENSERCH to distribute
the New EEX Common Stock in the Distribution.
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ARTICLE II
Mechanics of Distribution
Section 2.1 Terms of Preliminary Merger.
The Preliminary Merger will be effected pursuant to the terms of an
agreement and plan of merger to be entered into among EEX and LSEPO in
accordance with the terms hereof and the TBCA.
Section 2.2 Allocation of Assets and Liabilities.
When the Preliminary Merger takes effect under the TBCA, all of the assets
and liabilities of the Merger Parties shall be allocated to and vested in New
EEX as the surviving corporation of the Preliminary Merger.
Section 2.3 Transition Matters.
It is the intention of the parties to separate the operations of the ENSERCH
Companies and the Merger Parties as of the Distribution Effective Time. To
this end, the ENSERCH Companies and the Merger Parties will take all
commercially reasonable steps to effectuate such separation, including the
termination of all contractual obligations, services, guarantees and other
financial accommodations between the parties in accordance with the terms
thereof unless the continuation of such arrangements are approved by Holding
Company. Until such separation is effectuated, the parties agree as follows:
(a) Contracts
Contracts in existence between any of the Merger Parties and any of the
ENSERCH Companies at the Distribution Effective Time will continue in
accordance with their terms, subject to amendment or termination to the extent
provided therein or as otherwise may occur in accordance with their terms.
(b) Services
Services to the Merger Parties as have historically been provided by the
ENSERCH Companies to the Merger Parties shall be subject to continuation,
revision or termination in the discretion of each of the applicable ENSERCH
Companies and Merger Parties.
(c) Guaranties
Surety and performance bonds and other guaranties executed by any of the
ENSERCH Companies on behalf of any of the Merger Parties shall continue in
effect to the extent the terms thereof are applicable and enforceable and may
otherwise be amended, modified or terminated in the discretion of each of the
ENSERCH Companies and the Merger Parties.
(d) Employee Benefit Plans
Employee benefit plans sponsored by any of the ENSERCH Companies shall be
amended, to the extent necessary, to provide for the transfer of plan assets
and liabilities with respect to transferred participants from such plans to
similar plans to be adopted by the Merger Parties. Nothing in this Agreement
shall be construed to affect the right of the Merger Parties to modify, amend
or terminate any employee benefit plan adopted by the Merger Parties.
(e) Insurance Claims
(i) Insurance. ENSERCH has maintained an insurance program which includes
coverage for EEX and LSEPO, their respective Subsidiaries and predecessor
companies and their respective officers, directors, employees and agents
("Insurance Program"). At the Distribution Effective Time, ENSERCH shall
assign to New EEX all rights to payments for claims covered by the
Insurance Program insofar as such payments relate to periods prior to the
Distribution Effective Time. Without the prior written consent of New EEX,
both prior to and after the Distribution Effective Time, ENSERCH will take
no action that could adversely
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affect the coverage provided by the Insurance Program nor will ENSERCH fail
to act with knowledge that such failure could adversely affect the coverage
provided by the Insurance Program. New EEX shall be responsible for
acquiring such insurance coverage as it deems necessary for periods after
the Distribution Effective Time. ENSERCH shall cooperate with EEX in an
orderly transfer of responsibility for acquiring such insurance.
(ii) Claims. New EEX shall be solely responsible for administering claims
arising under the Insurance Program. If a claim is reasonably anticipated
to involve liability in an amount greater than $250,000 or if such claim is
litigated, New EEX shall notify ENSERCH in writing of such claim or
litigation.
(iii) Additional Premiums. Premiums for portions of the Insurance Program
are adjusted after the termination of the policy period. If an adjustment
is required, New EEX will promptly reimburse ENSERCH for any additional
premiums which result from EEX, LSEPO and their Subsidiaries and
predecessor companies being covered under the Insurance Program and ENSERCH
shall promptly pay New EEX any return premium which results from EEX, LSEPO
and their Subsidiaries and predecessor companies being covered under the
Insurance Program.
Section 2.4 Mechanics of Distribution.
The Distribution shall be effected by the distribution to holders of record
of ENSERCH Common Stock, as of the close of the stock transfer books on the
record date designated by or pursuant to the authorization of the Board of
Directors of ENSERCH (the "Record Date"), of certificates representing the
number of shares of New EEX Common Stock owned by ENSERCH at the Distribution
Effective Time divided by the number of shares of ENSERCH Common Stock
outstanding at the Record Date. No certificate or scrip representing
fractional shares of New EEX Common Stock shall be issued as part of
Distribution and in lieu of receiving fractional shares, each holder of
ENSERCH Common Stock who would otherwise be entitled to receive a fractional
share of New EEX Common Stock pursuant to the Distribution will receive cash
for such fractional share. ENSERCH shall instruct the Transfer Agent to
determine the number of whole shares and fractional shares of New EEX Common
Stock allocable to each holder of record of ENSERCH Common Stock on the Record
Date, to aggregate all such fractional shares into whole shares and to sell
the whole shares obtained thereby in the open market at then prevailing prices
on behalf of holders who otherwise would be entitled to receive fractional
share interests and to distribute to each such holder such holder's ratable
share of the total proceeds of such sale, after making appropriate deductions
of the amount required for Federal tax withholding purposes and after
deducting any applicable transfer taxes. ENSERCH shall bear the costs of
commissions incurred in connection with such sales.
Section 2.5 Timing of Distribution.
Prior to the Distribution Effective Time, subject to the satisfaction or
waiver of the conditions set forth in Article VI, the Board of Directors of
ENSERCH shall formally declare the Distribution and pay it by delivery of
certificates for New EEX Common Stock to the Transfer Agent for delivery to
the holders entitled thereto. The Distribution shall be deemed to be effective
upon notification by ENSERCH to the Transfer Agent that the Distribution has
been declared and that the Transfer Agent is authorized to proceed with the
distribution of New EEX Common Stock, which notification ENSERCH agrees to
deliver promptly following such declarations (the "Distribution Effective
Time").
ARTICLE III
Tax Agreements
Section 3.1 Tax Matters.
Prior to the Distribution Effective Time, the parties hereto shall execute
and deliver (1) an Agreement relating to past and future tax sharing and
certain issues associated therewith substantially in the form attached to the
Merger Agreement as Exhibit B (the "Tax Allocation Agreement") and (ii) an
Agreement containing covenants intended to protect the tax-free status of the
Distribution substantially in the form attached to the Merger Agreement as
Exhibit C (the "Tax Assurance Agreement").
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ARTICLE IV
Representations and Warranties
Section 4.1 Representations and Warranties of ENSERCH.
ENSERCH represents and warrants to the Merger Parties as follows:
(a) Organization
ENSERCH is a corporation duly organized, validly existing and in good
standing under the laws of the State of Texas and has all requisite corporate
power and authority to own and operate its properties and to carry on its
business as now being conducted.
(b) Authority
ENSERCH has all requisite power and authority to execute this Agreement and
to consummate the transactions contemplated hereby. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary action on the part of ENSERCH. This
Agreement has been duly executed and delivered by ENSERCH and constitutes a
legal, valid and binding obligation of ENSERCH enforceable against it in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance or other similar laws
affecting the enforcement of creditors' rights generally, and except that the
availability of equitable remedies, including specific performance, may be
subject to the discretion of any court before which any proceedings may be
brought.
(c) No Conflict
The execution, delivery and performance by ENSERCH of this Agreement will
not contravene, violate, result in a breach of or constitute a default under
(i) any provision of applicable law or of the articles of incorporation or by-
laws of ENSERCH, (ii) any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to ENSERCH or any of its properties or assets,
or (iii) any Material Contract to which ENSERCH is a party or by which ENSERCH
or any of its properties is bound.
(d) Approvals
No consent, approval order, authorization of, or registration, declaration
or filing with, any Governmental Authority is required in connection with the
making or performance by ENSERCH of this Agreement, subject to compliance with
applicable securities laws.
Section 4.2 Representations and Warranties of LSEPO.
LSEPO represents and warrants to ENSERCH and Holding Company as follows:
(a) Organization
LSEPO is a corporation duly organized, validly existing and in good standing
under the laws of the State of Texas and has all requisite corporate power and
authority to own and operate its properties and to carry on its business as
now being conducted.
(b) Authority
LSEPO has all requisite power and authority to execute this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary action on the part of LSEPO. This
Agreement has been duly executed and delivered by LSEPO and constitutes a
legal, valid and binding obligation of LSEPO enforceable against it in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance or other similar laws
affecting the enforcement of creditors'
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rights generally, and except that the availability of equitable remedies,
including specific performance, may be subject to the discretion of any court
before which any proceedings may be brought.
(c) No Conflict
The execution, delivery and performance by LSEPO of this Agreement will not
contravene, violate, result in a breach of or constitute a default under (i)
any provision of applicable law or of the articles of incorporation or by-laws
of LSEPO or (ii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to LSEPO or any of its properties or assets, or (iii)
any Material Contract to which LSEPO is a party or by which LSEPO or any of
its properties is bound.
(d) Approvals
No consent, approval order, authorization of, or registration, declaration
or filing with, any Governmental Authority is required in connection with the
making or performance by LSEPO of this Agreement, subject to compliance with
applicable securities laws.
Section 4.3 Representations and Warranties of EEX.
EEX represents and warrants to ENSERCH and Holding Company as follows:
(a) Organization
EEX is a corporation duly organized, validly existing and in good standing
under the laws of the State of Texas and has all requisite corporate power and
authority to own and operate its properties and to carry on its business as
now being conducted.
(b) Authority
EEX has all requisite power and authority to execute this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary action on the part of EEX, subject
to shareholder approval. This Agreement has been duly executed and delivered
by EEX and constitutes a legal, valid and binding obligation of EEX
enforceable against it in accordance with its terms, except as may be limited
by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally,
and except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceedings may be brought.
(c) No Conflict
The execution, delivery and performance by EEX of this Agreement will not
contravene, violate, result in a breach of or constitute a default under (i)
any provision of applicable law or of the articles of incorporation or by-laws
of EEX or (ii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to EEX or any of its properties or assets, or (iii) any
Material Contract to which EEX is a party or by which EEX or any of its
properties is bound.
(d) Approvals
No consent, approval order, authorization of, or registration, declaration
or filing with, any Governmental Authority is required in connection with the
making or performance by EEX of this Agreement.
Section 4.4 Representations and Warranties of Holding Company.
Holding Company represents and warrants to the other parties hereto as
follows:
(a) Organization
Holding Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Texas and has all requisite
corporate power and authority to perform this Agreement.
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(b) Authority
Holding Company has all requisite power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Holding Company. This Agreement has been duly
executed and delivered by Holding Company and constitutes a legal, valid and
binding obligation of Holding Company enforceable against it in accordance
with its terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or other similar laws affecting the
enforcement of creditors' rights generally, and except that the availability
of equitable remedies, including specific performance, may be subject to the
discretion of any court before which any proceedings may be brought.
(c) No Conflict
The execution, delivery and performance by Holding Company of this Agreement
will not contravene, violate, result in a breach of or constitute a default
under (i) any provision of applicable law or of the articles of incorporation
or by-laws of Holding Company, (ii) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Holding Company or any of its
properties or assets, or (iii) any Material Contract to which Holding Company
is a party or by which Holding Company or any of its properties is bound.
(d) Approvals
No consent, approval order, authorization of, or registration, declaration
or filing with, any Governmental Authority is required in connection with the
making or performance by Holding Company of this Agreement, subject to
compliance with applicable securities laws.
ARTICLE V
Certain Covenants and Agreements
Section 5.1 Expenses.
The reasonable expenses incurred by the Merger Parties in connection with
the Preliminary Merger and the Distribution will be paid by ENSERCH.
Section 5.2 Further Actions.
The parties agree that if after the Distribution Effective Time, either
party holds books, records or other assets which by the terms hereof were
intended to be assigned, transferred and delivered to, or retained by, the
other party, such party shall promptly assign, transfer and deliver or cause
to be assigned, transferred and delivered such books, records or other assets
to the other party. Without limitation of the foregoing, ENSERCH shall deliver
to New EEX all books, records and documents in the possession or control of
any ENSERCH Company relating to the business of EEX or LSEPO that New EEX may
reasonably request.
Section 5.3 Use of Name.
The parties hereto agree that each of ENSERCH, New EEX, and each of their
respective Affiliates shall have the right to use the name "Enserch" (however
capitalized) in its corporate name and in its activities without payment of
any royalty or other remuneration to any other party hereto or any Affiliate
of any other party hereto; provided that no party shall grant to any Person
not an Affiliate a license or other right to use, or otherwise allow such
person to use, the name Enserch.
Section 5.4 Certain Covenants.
LSEPO acknowledges that it will be allocated and vested in the properties
and assets of EEX in the Preliminary Merger without any representation or
warranty, in "as is" condition and on a "where is" basis.
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ARTICLE VI
Conditions
The obligations of ENSERCH and New EEX to consummate the Distribution shall
be subject to the fulfillment of each of the following conditions:
Section 6.1 Tax Allocation Agreement and Tax Assurance Agreement.
The Tax Allocation Agreement shall have been executed and delivered by each
of ENSERCH, New EEX and TUC, and the Tax Assurance Agreement shall have been
executed and delivered by each of ENSERCH and New EEX.
Section 6.2 Certain Transactions.
Prior to the Distribution Effective Time, the Preliminary Merger shall have
been consummated.
Section 6.3 Conditions to Mergers Satisfied.
Each condition to the closing of the Mergers set forth in Article IX of the
Merger Agreement, other than those conditions relating to the Distribution or
those conditions that by their nature are designed to be performed on the date
of the closing of the Mergers, shall have been satisfied or waived.
Section 6.4 Registration of New EEX Shares.
Any registration statement and proxy statement (together, a
"Proxy/Registration Statement") filed by EEX and New EEX with the SEC pursuant
to the Securities Act, or the Exchange Act, in connection with the issuance of
New EEX Common Stock in the Distribution shall have become effective under the
Securities Act or Exchange Act, as applicable, and shall not be the subject of
any stop order or proceeding by the SEC seeking a stop order.
Section 6.5 Regulatory Approvals.
No temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal restraint
or prohibition preventing the consummation of the Distribution shall be in
effect (each party agreeing to use all reasonable efforts to have any such
order reversed or injunction lifted).
ARTICLE VII
Indemnification
Section 7.1 General
(a) From and after the Distribution Effective Time, New EEX agrees to
indemnify and hold harmless the Holding Company Parties and their respective
directors, officers, employees, affiliates, agents and assigns, as applicable,
against any and all losses, costs and damages (collectively "Damages"), as
incurred, for or on account of or arising from or in connection with or
otherwise with respect to:
(i) any breach of or any inaccuracy in any representation or warranty of
the EEX Companies contained in this Agreement or the Tax Allocation
Agreement;
(ii) any breach or nonperformance of any covenant of the Merger Parties
or New EEX contained in this Agreement or as specifically provided for in
the Tax Allocation Agreement whether to be performed before or after the
Distribution Effective Time;
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(iii) the assets owned by the EEX Companies or New EEX (including Damages
related thereto arising prior to or after the Distribution Effective Time),
and activities conducted by the EEX Companies or New EEX, at or prior to
the Distribution Effective Time except as specifically provided for in the
Tax Allocation Agreement;
(iv) any regulatory or compliance violation, or other liability, that
arises out of events, actions or omissions to act of any nature by any of
the EEX Companies or New EEX relating to the Preliminary Merger, this
Agreement or the Tax Allocation Agreement or the transactions provided for
therein or occurring before or after the Distribution Effective Time;
(v) to the extent enforceable, any untrue statement or alleged untrue
statement of any material fact contained in the Proxy/Registration
Statement, or any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; but only in each case to the extent based upon information with
respect to the EEX Companies or New EEX furnished in writing by or on
behalf of the Merger Parties or New EEX, expressly for use in the
Proxy/Registration Statement;
(vi) any Environmental Claim with respect to any facility, site, location
or business (whether past or present and whether active or inactive) owned,
operated or leased by any of the EEX Companies or New EEX before or after
the Distribution Effective Time;
(vii) any outstanding surety or performance bond for the benefit of the
EEX Companies or New EEX that has been guaranteed by ENSERCH to the extent
ENSERCH has not been released therefrom.
It being understood that ENSERCH will remain liable for Damages caused by
actions of LSEPO prior to the Distribution Effective Time with regard to
the matters covered by clauses (i), (iii), (iv), (v) and (vi) above and
shall retain all right and title to any claim of LSEPO relating to the
matters covered by such clauses arising out of an action occurring prior to
the Distribution Effective Time and that the indemnities for Damages with
respect to New EEX contained herein do not apply to Damages with respect to
LSEPO occurring prior to the Distribution Effective Time.
(b) ENSERCH agrees to indemnify and hold harmless the Merger Parties and New
EEX and their respective directors, officers, employees, affiliates, agents
and assigns, as applicable, against any and all Losses, as incurred, for or on
account of or arising from or in connection with or otherwise with respect to:
(i) any breach of or inaccuracy in any representation or warranty of
ENSERCH or Holding Company contained in any of this Agreement or the Tax
Allocation Agreement;
(ii) any breach or nonperformance of any covenant of (A) Holding Company
contained in this Agreement or as specifically provided for in the Tax
Allocation Agreement whether to be performed before or after the
Distribution Effective Time or (B) ENSERCH or any of its post Distribution
Subsidiaries contained in this Agreement or as specifically provided for in
the Tax Allocation Agreement to be performed after the Distribution
Effective Time;
(iii) except for Losses as to which any of the Holding Company Parties
are entitled to indemnification pursuant to the terms of Section 7.1(a)
hereof, any liability arising from the assets of ENSERCH subsequent to the
Mergers; and
(iv) to the extent enforceable, any untrue statement or alleged untrue
statement of any material fact contained in the Proxy/Registration
Statement, or any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; but only in each case to the extent based upon information with
respect to the Holding Company Parties furnished in writing by or on behalf
of Holding Company or any of the ENSERCH Companies, expressly for use in
the Proxy/Registration Statement;
provided, that (i) New EEX shall not be obligated to indemnify any Holding
Company Party or other Person hereunder with respect to any such matter to the
extent that the Damages were caused by any action by any
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ENSERCH Company, other than Damages resulting from ENSERCH's ownership of the
common stock of EEX or any result or effect thereof; and (ii) ENSERCH shall
not be obligated to indemnify the Merger Parties or New EEX or any other
Person hereunder with respect to any such matter to the extent that the
Damages were caused by any action by the EEX Companies or New EEX.
Section 7.2 Termination of Indemnification.
The obligations to indemnify and hold harmless any party (i) pursuant to
Sections 7.1(a)(i) and (b)(i) shall terminate on the second anniversary of the
date hereof, (ii) pursuant to Section 7.1(a)(v) and (b)(iv) shall terminate on
the first anniversary of the date hereof and (iii) pursuant to the other
clauses of Section 7.1(a), and (b) shall not terminate; provided, however,
that such obligations to indemnify and hold harmless shall not terminate with
respect to any item as to which the person to be indemnified shall have,
before the expiration of the applicable period, previously made a claim by
delivery of a notice (pursuant to Section 7.3 hereof in the case of Third
Party Claims) specifically identifying such claim to the party providing the
indemnification.
Section 7.3 Procedure.
(a) Any party seeking any indemnification provided for under this Agreement
(the "Indemnified Party") in respect of, arising out of or involving a claim
made by any person against the Indemnified Party (a "Third Party Claim"),
shall notify in writing (and to the extent received, deliver copies of all
related notices and documents (including court papers) to the party from whom
indemnification is sought (the "Indemnifying Party") of the Third Party Claim
within fifteen business days after receipt by such Indemnified Party of
written notice of the Third Party Claim; provided, however, that failure to
give such notification shall not affect the indemnification provided hereunder
except to the extent the Indemnifying Party shall have been actually
prejudiced as a result of such failure (except that the Indemnifying Party
shall not be liable for any expenses incurred during the period in which the
Indemnified Party failed to give such notice if such Indemnified Party failed
to give such notice within the allotted fifteen business days). Thereafter,
the Indemnified Party shall deliver to the Indemnifying Party, within five
business days' time after the Indemnified Party's receipt thereof, copies of
all other notices and documents (including court papers) received by the
Indemnified Party relating to the Third Party Claim.
(b) If a Third Party Claim is made against an Indemnified Party, the
Indemnifying Party shall be entitled to participate in the defense thereof
and, if it so chooses (except as provided in Section 7.3(c)), to assume the
defense thereof with experienced counsel selected by the Indemnifying Party
and reasonably satisfactory to the Indemnified Party. Should the Indemnifying
Party so elect to assume the defense of a Third Party Claim, the Indemnifying
Party shall not be liable to the Indemnified Party for any legal expenses
(except as provided below and in Section 7.3(c)) subsequently incurred by the
Indemnified Party in connection with the defense thereof. Notwithstanding the
Indemnifying Party's election to assume the defense of such Third Party Claim,
the Indemnified Party shall have the right to employ separate counsel and to
participate in the defense of such action at its own expense; provided,
however, that the Indemnifying Party shall bear the reasonable fees, costs,
and expenses of such separate counsel if (i) the use of counsel chosen by the
Indemnifying Party to represent the Indemnified Party would present such
counsel with a conflict of interest that would preclude such counsel from
representing the Indemnified Party pursuant to legal canons of ethics or other
applicable law; (ii) the Indemnifying Party shall not have employed counsel
reasonably satisfactory to the Indemnified Party to represent it within 30
days after notice to the Indemnifying Party of the institution of such Third
Party Claim or (iii) the Indemnifying Party shall authorize the Indemnified
Party to employ separate counsel at the Indemnifying Party's expense. If the
Indemnifying Party chooses to defend or prosecute a Third Party Claim, each
party hereto shall cooperate in the defense or prosecution thereof. Such
cooperation shall include the retention and (upon the Indemnifying Party's
request) the provision to the Indemnifying Party of records and information
which are reasonably relevant to such Third Party Claim, and making employees
available (subject to reimbursement by the Indemnifying Party of actual
expenses incurred therewith) on a mutually convenient basis to provide
additional information and explanation of any material provided hereunder. If
the Indemnifying Party chooses to defend or prosecute any Third Party Claim,
the Indemnified Party shall agree to any settlement, compromise or discharge
of such Third Party Claim which the Indemnifying Party may recommend and which
by its terms
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obligates the Indemnifying Party to pay the full amount of the liability in
connection with such Third Party Claim and releases the Indemnified Party
completely in connection with such Third Party Claim. Whether or not the
Indemnifying Party shall have assumed the defense of a Third Party Claim, so
long as the Indemnifying Party acknowledges in writing its obligation to
indemnify the Indemnified Party with respect to the applicable claims, the
Indemnified Party shall not admit any liability with respect to, or settle,
compromise or discharge, such Third Party Claim without the Indemnifying
Party's prior written consent, which consent may not be withheld unless, in
the Indemnifying Party's good-faith judgment, such settlement, compromises or
discharge is unreasonable in light of such Third Party Claim against, and
defenses available to, the Indemnified Party.
(c) Notwithstanding anything set forth in Section 7.3 to the contrary, in
the event an Indemnified Party reasonably believes and so notifies the
Indemnifying Party in writing that the applicable claim, even if fully
indemnified for, is reasonably likely to have a material adverse effect on the
Indemnified Party's business, financial condition or results of operations,
then the Indemnifying Party shall not have the right to assume the defense of
such claim but shall have the right to employ separate counsel and to
participate in the defense of such action at its own expense. In such an
event, the Indemnified Party and its counsel shall consult, whenever
reasonably practicable, with the Indemnifying Party and its counsel with
respect to the status of the claim and any related litigation.
ARTICLE VIII
Nonsolicitation; Proprietary Information
Section 8.1 Nonsolicitation.
(a) From and after the Distribution Effective Time, except as required by
law, neither New EEX nor any of its Subsidiaries nor any of their respective
representatives shall, at any time, make use of, divulge or otherwise
disclose, directly or indirectly, any trade secret, confidential information
or other proprietary data (including any customer list employee data, record
or financial information constituting a trade secret) concerning the ENSERCH
Companies including without limitation, the business or policies of ENSERCH or
any of its post Distribution Effective Time Subsidiaries, other than
information that is an asset of New EEX.
(b) Notwithstanding any other provision of this Agreement, it is understood
and agreed that the remedy of indemnity payments pursuant to Article VI and
other remedies at law would be inadequate in the case of any breach of the
covenants contained in Section 8.1(a) and that each of Holding Company and
ENSERCH shall be entitled to equitable relief, including the remedy of
specific performance, with respect to any breach or attempted breach of such
covenants.
ARTICLE IX
Termination, Amendment and Waiver
Section 9.1 Termination.
Notwithstanding anything to the contrary in this Agreement, this Agreement
may be terminated and the transactions contemplated hereby abandoned at any
time prior to the Distribution Effective Time by ENSERCH in the event the
Merger Agreement is terminated by any party thereto in accordance with the
terms thereof.
Section 9.2 Amendment and Waivers.
This Agreement may not be amended except by an instrument in writing signed
on behalf of each of the parties hereto. By an instrument in writing, the
parties hereto may waive compliance by any other party with any term or
provision of this Agreement that such other party was or is obligated to
comply with or perform.
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ARTICLE X
General Provisions
Section 10.1 Counterparts.
For the convenience of the parties hereto, this Agreement may be executed in
separate counterparts, each such counterpart being deemed to be an original
instrument, and which counterparts shall together constitute the same
Agreement.
Section 10.2 Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Texas, without reference to its conflicts of law
principles.
Section 10.3 Notices.
Any notice, request, instruction or other document to be given hereunder by
any party to any other party shall be in writing and shall be deemed to have
been duly given (i) on the first business day occurring on or after the date
of transmission if transmitted by facsimile, (ii) on the first business day
occurring on or after the date of delivery if delivered personally or (iii) on
the first business day following the date of dispatch if dispatched by Federal
Express or other next-day courier service. All notices hereunder shall be
given as set forth below, or pursuant to such other instructions as may be
designated in writing by the party to receive such notice:
If to any of the
ENSERCH Companies:
c/o ENSERCH Corporation
300 South St. Paul
Dallas, Texas 75201-5598
Attention: William T. Satterwhite, Esq.
Senior Vice-President & General Counsel
Fax: (214) 573-3430
If to any of the Merger Parties:
c/o Enserch Exploration, Inc.
6688 N. Central Expressway, Suite 1000
Dallas, Texas 75206-3922
Attention: Michael G. Fortado, Esq.
Vice President and General Counsel
Fax: (214) 890-4709
with a copy to:
Jackson & Walker, L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Attention: Byron F. Egan, Esq.
Fax: (214) 953-5822
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If to Holding Company:
c/o Texas Utilities Company
Energy Plaza
1601 Bryan Street
Dallas, Texas 75201
Attention: H. Jarrell Gibbs
Fax: (214) 812-1313
with a copy to:
Worsham, Forsythe & Wooldridge, L.L.P.
Energy Plaza
1601 Bryan St., 30th Floor
Dallas, Texas 75201
Attention: Robert A. Wooldridge, Esq.
Fax: (214) 880-0011
and
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, N.Y. 10019
Attention: Douglas W. Hawes, Esq.
Fax: (212) 424-8500
Section 10.4 Captions.
All article, section and paragraph captions herein are for convenience of
reference only, do not constitute part of this Agreement and shall not be
deemed to limit or otherwise affect any of the provisions hereof.
Section 10.5 Assignment.
Except as expressly provided herein, nothing contained in this Agreement is
intended to confer on any person or entity other than the parties hereto and
their respective successors and permitted assigns any benefit, rights or
remedies under or by reason of this Agreement, except that the provisions of
Article VIII hereof shall inure to the benefit of the persons referred to
therein.
Section 10.6 Survival of Representations.
The representations and warranties contained in this Agreement shall survive
the Distribution Effective Time.
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In Witness Whereof, this Distribution Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto as of the date
first written above.
ENSERCH Corporation
By: _________________________________
Name:
Title:
ENSERCH Exploration, Inc.
By: _________________________________
Name:
Title:
Lone Star Energy Plant Operations,
Inc.
By: _________________________________
Name:
Title:
TUC Holding Company
By: _________________________________
Name:
Title:
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ANNEX A-2
ENSERCH EXPLORATION, INC.
REVISED AND AMENDED 1996 STOCK INCENTIVE PLAN
ARTICLE I.
Purpose
The purpose of the 1996 Revised and Amended Stock Incentive Plan (the
"Plan") is to promote the long-term success of Enserch Exploration, Inc. (the
"Company," which includes its subsidiaries and affiliates) by providing a
means through which the Company can attract and retain key officers,
directors, and employees who can contribute materially to that success. Such
purpose shall be accomplished under the Plan by the (a) grants of stock
Options ("Options") to purchase shares of the Common Stock of the Company
("Shares"), (b) awards of Restricted Stock ("Restricted Stock"), or (c) a
combination of both. The Plan is successor to the 1994 Stock Incentive Plan,
and Options or Restricted Stock granted under that Plan will, to the extent
applicable, be governed by the provisions and terms of this Plan.
ARTICLE II.
Effective Date
The Plan shall become effective on September 10, 1996 (the "Effective
Date"), subject to approval of the Plan by the affirmative vote of the holders
of a majority of the shares outstanding and entitled to vote at the 1997
Annual Meeting of Shareholders of the Company or earlier if such approval is
obtained at a Special Meeting of the Shareholders to be held in connection
with the approval of that certain Agreement and Plan of Merger among the
Company, Lone Star Energy Plant Operations, Inc. and ENSERCH Corporation (the
"Plan of Merger").
ARTICLE III.
Administration
The Compensation Committee (the "Committee") of the Board of Directors of
the Company (the "Board"), shall have the sole responsibility for the
administration of the Plan. The Committee shall establish any Administrative
Guidelines necessary or advisable for the administration of the Plan. The
Committee shall have the authority to amend or rescind the Administrative
Guidelines and shall have full authority with regard to the interpretation of
the Administrative Guidelines or any other matters relating to the Plan. The
Committee shall act by vote or consent of a majority of its members. All acts,
determinations and decisions of the Committee shall be final and conclusive as
to the parties concerned unless otherwise determined by the Board.
ARTICLE IV.
Eligibility
Eligibility for participation in the Plan shall be confined to a limited
number of persons whom the Committee, in its sole discretion, determines to be
key employees of the Company (including officers and directors who are also
employees of the Company) who devote substantially their full time to the
Company and who can make a meaningful contribution to the Company's success
and nonemployee directors of the Company. The Committee shall, from time to
time and in its sole discretion, select from such eligible persons those to
whom Options shall be granted and awards of Restricted Stock shall be made and
shall determine the number of shares to be subject to each Option or award of
Restricted Stock.
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<PAGE>
ARTICLE V.
Reserve of Shares
(a) A total of 4,000,000 Shares is the maximum number of Shares reserved for
the Plan, subject to the adjustments authorized by Subparagraphs (b) and (c)
below. Shares available under the Plan for grants of Options or awards of
Restricted Stock may consist either in whole or in part of authorized but
unissued Shares or Shares held in the treasury of the Company.
(b) The number of Shares held in reserve for the Plan, the number of Shares
subject to Options that may be granted to any individual in any calendar year,
the number of shares of Restricted Stock that may be awarded to an Executive
Officer with respect to all performance periods beginning in any calendar
year, the number of Shares and the Option price for Shares covered by each
outstanding Option, and the number of Shares covered by each outstanding award
of Restricted Stock shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a subdivision or
consolidation of the issued Shares and may, in the absolute discretion of the
Board, be similarly adjusted for any other capital adjustment (including the
reclassification of Shares or recapitalization or reorganization of the
Company), the payment of a stock dividend or the distribution to holders of
the Shares of rights, warrants, assets or evidences of indebtedness.
(c) If an Option as to any Shares expires, terminates, ceases to be
exercisable or is surrendered before being exercised in full, or an award of
Restricted Stock is forfeited (where the forfeiting participant received no
benefits of ownership), the number of Shares that were subject to the Option
but that were not transferred pursuant to the Option or the number of Shares
covered by the forfeited award of Restricted Stock shall, unless the Plan
shall have been terminated, again be available for the granting of Options or
the award of Restricted Stock, subject to the aggregate maximum stated in
Subparagraph (a) above.
ARTICLE VI.
Terms and Conditions of Options
One or more Options may be granted to any person eligible to receive such a
grant under Article IV. The maximum number of Shares subject to Options that
may be granted to any one individual during any calendar year shall not exceed
500,000 shares (subject to adjustment pursuant to Article V hereof). Each
Option granted pursuant to the Plan shall be evidenced by a stock option
agreement (the "Agreement") between the Company and the person to whom the
Option is granted (the "Optionee"), which Agreements need not be identical to
each other but shall comply with and be subject to the following terms and
conditions:
(a) OPTION PRICE: The Option price per Share shall be set at the date of
grant ("Date of Grant") by the Committee but shall in no instance be less than
the Fair Market Value on the date the Option is granted. As used in the Plan
(unless a different method of calculation is required by applicable law),
"Fair Market Value" on any date shall mean (i) the average of the high and low
prices per share of the Shares as reported in the New York Stock Exchange
Composite Transactions Report (or any other consolidated transactions
reporting system which subsequently may replace such Composite Transactions
Report) (the "Consolidated Tape") for the New York Stock Exchange (the "NYSE")
on the date as of which the determination is being made or, if there are no
sales on such date, in accordance with applicable Treasury Service Regulations
relating to the determination of fair market value of stock options or (ii) in
the event that the Shares are not listed for trading on the NYSE, an amount
determined in accordance with standards adopted by the Committee.
(b) DURATION OF OPTIONS: Unless Subparagraph (f) of this Article VI applies,
each Option granted under the Plan shall expire and all rights to purchase
Shares pursuant thereto shall cease on the tenth anniversary of the Date of
Grant of the Option (the "Expiration Date").
(c) VESTING OF OPTIONS: Each Option granted hereunder may be exercised only
to the extent that the Optionee is vested in such Option. An Optionee shall
vest separately in each Option granted hereunder in
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accordance with a schedule determined by the Committee, in its sole
discretion, which will be incorporated into the Agreement. Unless otherwise
determined by the Committee, each Agreement will provide that the Option vests
in accordance with the following schedule:
<TABLE>
<CAPTION>
NUMBER OF YEARS THE OPTIONEE HAS REMAINED IN THE
EMPLOY OR
AS A DIRECTOR OF THE COMPANY FOLLOWING THE GRANT OF EXTENT TO WHICH THE
THE OPTION OPTION IS VESTED
--------------------------------------------------- -------------------
<S> <C>
Less than one......................................... 0%
At least one but less than two........................ 25%
At least two but less than three...................... 50%
At least three but less than four..................... 75%
Four or more.......................................... 100%
</TABLE>
Anything contained in this Subparagraph to the contrary notwithstanding, an
Optionee shall become fully (100%) vested in each of his or her Options upon
the termination of his or her service as a director of the Company for any
reason, or his or her termination of employment with the Company for reasons
of death, Disability or Retirement at or after age 60, upon the sale of a
Subsidiary of the Company to an unaffiliated company such that he or she no
longer remains in the employ of or a director of the Company or if, in the
sole discretion of the Committee, the Committee determines that acceleration
of the Option vesting schedule would be desirable for the Company.
(d) MERGER, CONSOLIDATION, ETC.: In the event that the Company shall,
pursuant to action by its Board, taken after September 10, 1996, propose to
merge into, consolidate with or sell or otherwise transfer all or
substantially all of its assets to another corporation and provision is not
made pursuant to the terms of such transaction for the assumption by the
surviving, resulting or acquiring corporation of outstanding Options, or for
the substitution of new Options with substantially equivalent benefit
therefor, each outstanding Option shall become fully (100%) vested. The
Committee shall advise each Optionee, in writing, of the manner and terms
under which such fully vested Options shall be exercised.
(e) EXERCISE OF OPTIONS:
(i) Unless otherwise prohibited by Subparagraph (f) or the terms of this
Plan, an Optionee may exercise, in whole or in part, the vested portion of
an Option at any time by delivering to the Corporate Secretary of the
Company written notice specifying the number of Shares with respect to
which the Option is being exercised, together with payment in full of the
purchase price of such Shares plus any federal, state or local taxes for
which the Company has a withholding obligation in connection with such
exercise. In addition to payment in cash, payment may be made by the
exchange of Common Stock of the Company previously acquired by the Optionee
and held for such period, if any, as may be determined by the Committee and
having a Fair Market Value on the date of exercise equal to the price for
which the Shares may be purchased pursuant to the Option. The Committee
may, in its sole discretion, authorize such payment, in whole or in part,
in any other form as may be approved by the Board and in a manner
authorized by law.
(ii) An Optionee may elect to satisfy any withholding obligation due on
the exercise of an Option either (a) in cash (the "cash method") or (b) by
the retention by the Company of a number of Shares out of the Shares being
purchased having a Fair Market Value equal to the amount to be withheld
(the "Share retention method"). The Committee shall determine, from time to
time, the amount to be withheld and the time and manner in which an
Optionee may elect to satisfy such withholding obligation. Such amount
shall be not less than the minimum withholding obligation of the Company
and not more than the amount determined by application of the maximum tax
in effect for individuals under applicable federal, state or local tax law.
Under the "Share retention method," the amount to be withheld, subject to
the discretion of the Committee, shall be the amount designated by such
Optionee within such maximum and minimum amounts.
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(f) TERMINATION OF EMPLOYMENT: Unless otherwise determined by the Committee,
the following rules shall apply in the event of an Optionee's termination of
employment with the Company or an Optionee's termination of service as a
director of the Company (a "Termination"):
(i) In the event of a Termination either (1) for cause or (2) voluntarily
on the part of the Optionee, without the written consent of the Company and
for reasons other than death, Disability or Retirement (as such terms are
defined in Subparagraphs (f)(iv) and (v) hereof), his or her Options shall
immediately terminate.
(ii) In the event of a Termination under circumstances other than those
specified in Subparagraph (f)(i) hereof and for reasons other than death,
Disability or Retirement (as defined in Subparagraphs (f)(iv) and (v)
hereof), such Options shall terminate on the earlier of 90 days after the
date of the Termination or the Option's Expiration Date.
(iii) In the event of the death of an Optionee while he or she is
employed by or serving as a director of the Company or during a period when
Subparagraph (f)(ii), (f)(iv) or (f)(v) hereof is applicable, such Options
shall terminate on the earlier of the first anniversary following the
Optionee's death or the Option's Expiration Date.
(iv) In the event of a Termination occurring on account of Disability, as
defined in Section 22(e)(3) of the Internal Revenue Code, such Options
shall terminate on the earlier of the first anniversary following the
Termination or the Option's Expiration Date.
(v) In the event of a Termination of an Optionee, other than a discharge
for cause, after age 65 or on or after age 60 pursuant to the terms of any
retirement plan maintained by the Company in which the Optionee
participates (either of which terminations shall constitute "Retirement"),
such Options shall terminate on the Option's Expiration Date.
(vi) Anything contained in this Subparagraph (f) to the contrary
notwithstanding, an Option may be exercised following a Termination for
reasons other than death, Disability or Retirement only if and to the
extent that such Option was exercisable immediately prior to such
Termination.
(vii) An Optionee's transfer of employment between the Company and its
subsidiaries or affiliates shall not constitute a Termination. An Optionee
that ceases to be an officer or employee of the Company while remaining an
officer or employee of its subsidiaries or affiliates is deemed not to have
terminated his or her employment with the Company until such time as there
is a termination of employment with its subsidiaries or affiliates; and the
Committee shall determine in each case whether an authorized leave of
absence for military service or otherwise shall constitute a Termination.
(g) NONTRANSFERABILITY: Unless otherwise determined by the Committee,
options shall not be transferable other than by will or the laws of descent
and distribution, and no Option may be exercised by anyone other than the
Optionee except that, should the Optionee die or become incapacitated, the
Option may be exercised by his or her estate, legal representative or
beneficiary subject to all other terms and conditions contained in the Plan.
(h) CHANGE IN CONTROL: Anything contained herein to the contrary
notwithstanding, an Optionee shall become fully (100%) vested in each of his
or her Options upon the occurrence of a change in control, and no Option held
by an Optionee at the time a change in control occurs or at any time
thereafter shall terminate for any reason before the Option's Expiration Date.
For this purpose, "change in control" means one or more of the following
events:
(i) Any person within the meaning of Section 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "1934 Act"), other than the Company
(including its subsidiaries and affiliates), has become the beneficial
owner, within the meaning of Rule 13d-3 under the 1934 Act, of 50% or more
of the combined voting power of the Company's then outstanding Common Stock
or equivalent in voting power of any class or classes of the Company's
outstanding securities ordinarily entitled to vote in elections of
directors ("voting securities"), or
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<PAGE>
(ii) Shares representing 50% or more of the combined voting power of the
Company's voting securities are purchased pursuant to a tender offer or
exchange offer (other than an offer by the Company or its subsidiaries or
affiliates), or
(iii) the Shareholders of the Company have:
(A) approved an agreement to merge or consolidate with or into
another corporation or an agreement to sell or otherwise dispose of all
or substantially all of the Company's assets (including a plan of
liquidation), or
(B) elected two or more persons to serve as directors of the Company
who were not nominated and approved by the Board or a committee of the
Board.
(iv) For the purposes of this paragraph (h), but only with respect to any
options granted or restricted stock awards made after September 1, 1996, no
"change in control" shall be deemed to have occurred as a result of any
action taken on transactions (including any Director or shareholder
approvals thereof) or changes in the ownership of the Common Stock of the
Company arising out of, or in connection with, (1) the merger of the
Company with Lone Star Energy Plant Operations, Inc. ("LSEPO"); and (2) the
spinoff by ENSERCH Corporation to its shareholders of its entire interest
in the Company or any successor to the Company, following such merger with
LSEPO.
ARTICLE VII.
Issuance of Shares: Restrictions
Subject to the conditions and restrictions provided in this Article VII, the
Company shall, as soon as practicable after an Option has been exercised in
whole or in part, deliver to the Optionee a certificate, registered in the
name of such Optionee, for the number of Shares with respect to which the
Option has been exercised less any Shares which are to be retained in
accordance with Article VI(e) to satisfy tax withholding requirements. The
Company may legend any stock certificate issued hereunder to reflect any
restrictions necessary under the terms of any federal or state laws or
regulations.
ARTICLE VIII.
Rights as Shareholder and Employee
No Optionee shall have any rights as a Shareholder of the Company with
respect to any Shares prior to the date of issuance to him or her of the
certificate or certificates for such Shares. Neither the Plan nor any Option
granted or Restricted Stock awarded under the Plan shall confer upon the
Optionee any right to continue in the employment of the Company.
ARTICLE IX.
Substitute Options
Anything contained herein to the contrary not withstanding, Options may, at
the discretion of the Committee, be granted under the Plan in substitution for
Options to purchase Shares of capital stock of another corporation which is
merged into or consolidated with, or all or a substantial portion of the
property or stock of which is acquired by, the Company. The terms, provisions
and benefits to Optionees of such substitute Options may be identical in all
respects to the terms, provisions and benefits to Optionees of the Options of
the other corporation on the date of substitution, except that such substitute
Options shall provide for the purchase of Shares instead of shares of such
other corporation.
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<PAGE>
ARTICLE X.
Restricted Stock
(a) AWARDS TO ELIGIBLE PERSONS: The Committee may make awards of Restricted
Stock to any person meeting the eligibility requirements of Article IV for no
cash consideration, for such minimum consideration as may be required by
applicable law, or for such other consideration as may be specified by the
award (an "Award"). The terms and conditions of Restricted Stock, including
the terms of the release of restrictions which may be performance-based, time-
based, or a combination of both, shall be specified by the Award. The
Committee, in its sole discretion, shall determine what rights, if any, the
person to whom an award of Restricted Stock is made shall have in the
Restricted Stock during the restriction period and the restrictions applicable
to the particular Award, including whether the holder of the Restricted Stock
shall have the right to vote the shares or receive all dividends and other
distributions applicable to the Shares. The Committee shall determine when the
restrictions shall lapse or expire and the conditions, if any, under which the
Restricted Stock will be forfeited or sold back to the Company. Each Award may
have different restrictions and conditions. The Committee, in its discretion,
may prospectively change the restriction period and the restrictions
applicable to any particular Award. Restricted Stock may not be transferred or
sold by the recipient until the restrictions specified in the Award have
expired.
(b) ISSUANCE OF STOCK: Any Restricted Stock awarded hereunder may be
evidenced in such manner as the Committee, in its sole discretion, shall deem
appropriate, including, without limitation, book-entry registration or
issuance of a stock certificate or certificates. In the event any stock
certificate is issued in respect of shares of Restricted Stock awarded
hereunder, such certificate shall bear an appropriate legend with respect to
the restrictions applicable to such Award. The Committee may also require as a
condition to the issuance of any such certificate the delivery of an agreement
in writing between the Company and the recipient in form and substance as
shall be approved by the Committee (a "Restricted Stock Agreement"). The
Company may retain, at its option, the physical custody of the Restricted
Stock during the restriction period or require that the Restricted Stock be
placed in an escrow or trust, along with a stock power endorsed in blank,
until all restrictions are removed or expire.
(c) AWARDS TO EXECUTIVE OFFICERS OF PERFORMANCE-BASED STOCK: The following
provisions shall apply to any performance-based awards of Restricted Stock
made under this Plan to any person who has been designated by the Board of
Directors as an Executive Officer of the Company:
(i) the performance criteria upon which vesting of the Restricted Stock
is contingent shall be such objective performance goals as the Committee
shall establish in writing prior to the expiration of 90 days after the
commencement of the performance period to which the performance goal or
goals relate and while the outcome is substantially uncertain, and shall be
based on total shareholder return, total shareholder return compared to a
group of peer companies specified by the Committee, earnings per share,
operating unit income, or reserve finding effectiveness; and
(ii) the maximum number of Shares that may be awarded to any Executive
Officer with respect to all performance periods beginning in a calendar
year shall not exceed 200,000 Shares (subject to adjustment pursuant to
Article V hereof); provided, however, that the Committee may retain the
discretion to reduce an award during or at the conclusion of the
performance period.
(d) WITHHOLDING: Holders of Restricted Stock may elect to satisfy any
federal, state or local tax withholding obligation which is due in connection
with the removal of restrictions on the Shares either (i) in cash or (ii) by
the retention by the Company of a number of Shares of the Restricted Stock on
which the restrictions are being lifted having a Fair Market Value equal to
the amount to be withheld. The Chairman shall determine, from time to time,
the amount to be withheld and the time and manner in which a holder of
Restricted Stock may elect to satisfy such withholding obligation. Such amount
shall be not less than the minimum withholding obligation of the Company and
not more than the amount determined by application of the maximum in effect
for withdrawals under applicable federal, state or local tax law.
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<PAGE>
(e) MERGER, CONSOLIDATION, ETC.: In the event that the Company shall,
pursuant to action by its Board taken after September 10, 1996, propose to
merge into, consolidate with or sell or otherwise transfer all or
substantially all of its assets to another corporation, the restriction on
transferability of the Restricted Stock shall be lifted and the certificate(s)
for the Restricted Stock shall be delivered as soon as practicable.
(f) CHANGE IN CONTROL: In the event of a Change in Control of the Company as
defined in Article VI(h) hereof, the restriction on transferability of the
Restricted Stock shall be lifted and the certificate(s) for the Restricted
Stock shall be delivered as soon as practicable.
ARTICLE XI.
Term of the Plan
Barring any action of the Board to the contrary, the Plan shall terminate
on, and no Options shall be granted or award of Restricted Stock made, after
the tenth anniversary of the Effective Date. The provisions of the Plan,
however, shall continue thereafter to govern all Options theretofore granted
until the exercise, expiration or cancellations of such Options and to govern
all awards of Restricted Stock until all restrictions have lapsed or such
Shares have been forfeited.
ARTICLE XII.
Amendment and Termination of Plan
The Plan may be amended or terminated at any time by the Board except that
no amendment shall be made after the termination of the Plan pursuant to
Article XI hereof. Subject to the provisions of Article VI hereof, no
termination of or amendment to the Plan shall adversely affect the rights of
an Optionee or other person holding an Option previously granted hereunder or
a holder of a Restricted Stock Award without the consent of such person.
ARTICLE XIII.
Construction
The Plan and Agreements shall be interpreted and administered under the laws
of the State of Texas.
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<PAGE>
ANNEX A-3
TAX ALLOCATION AGREEMENT
TAX ALLOCATION AGREEMENT (the "Agreement") dated as of , 1996, among
ENSERCH Corporation, a Texas corporation ("ENSERCH"), Enserch Exploration,
Inc., a Texas corporation ("New EEX") formerly named Lone Star Energy Plant
Operations, Inc. ("LSEPO"), and Texas Utilities Company, a Texas corporation
("TUC").
WHEREAS, ENSERCH is currently the common parent of an affiliated group of
corporations (the "Old ENSERCH Group") within the meaning of Section 1502 of
the Internal Revenue Code of 1986, as amended (the "Code") filing
consolidated, combined or unitary income tax returns ("Consolidated Returns"),
pursuant to which ENSERCH and one or more other members of the affiliated
Group pay Taxes (as defined herein) on a consolidated basis ("Consolidated
Taxes");
WHEREAS, ENSERCH, TUC, and TUC Holding Company, a Texas corporation owned
fifty percent (50%) by TUC and fifty percent (50%) by ENSERCH ("Holding
Company"), have entered into an amended and restated agreement and plan of
merger dated as of April 13, 1996 (the "EC/TUC Plan of Merger") providing for,
among other things, the merger of a wholly-owned subsidiary of Holding Company
with and into TUC and the merger of a separate wholly-owned subsidiary of
Holding Company with and into ENSERCH (collectively, the "EC/TUC Merger");
WHEREAS, on or about , Enserch Exploration, Inc., a Texas corporation
("EEX") has merged into LSEPO (the "Preliminary Merger"), which merger was
structured to be a tax-free reorganization under Section 368(a) of the Code in
which LSEPO changed its name to Enserch Exploration, Inc.;
WHEREAS, ENSERCH plans to distribute all of its stock of New EEX to its
shareholders (the "Distribution") in a transaction intended to qualify as a
tax-free spin-off under Section 355 of the Code, pursuant to a distribution
agreement among ENSERCH, EEX, LSEPO and Holding Company (the "Distribution
Agreement");
WHEREAS, on the beginning of the first day after the date on which the
Distribution occurs (the "Distribution Date"), New EEX and its subsidiaries
(collectively, the "New EEX Group") will cease to be members of the Old
ENSERCH Group;
WHEREAS, ENSERCH and New EEX desire to allocate the liability for the Taxes
of members of the Old ENSERCH Group for any Tax Period (including short Tax
Periods and any portion of any Tax Period) which period (or portion) ends on
or before the Distribution Date (a "Pre-Distribution Tax Period") among the
members of the Old ENSERCH Group in a manner consistent with the various tax
allocation agreements and practices of the Old ENSERCH Group as in effect on
the Distribution Date, and to provide for certain other Tax-related matters;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows.
ARTICLE I
Certain Definitions
The following terms used herein shall have the meanings set forth below
(such terms used herein shall have the meanings set forth below (such terms to
be equally applicable to the singular and plural forms of the terms defined or
referred to below):
1.1. "Agreement" shall have the meaning set forth in the recitals to this
Agreement.
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1.2. "Code" shall have the meaning set forth in the recitals to this
Agreement.
1.3. "Consolidated Return" shall have the meaning set forth in the recitals
to this Agreement.
1.4. "Consolidated Group" or "consolidated group" means an affiliated group
of corporations filing a consolidated federal income tax return, as defined in
Treasury Regulation Section 1.1502-1(h).
1.5. "Distribution" shall have the meaning set forth in the recitals to this
Agreement.
1.6. "Distribution Agreement" shall have the meaning set forth in the
recitals to this Agreement.
1.7. "Distribution Date" shall have the meaning set forth in the recitals to
this Agreement.
1.8. "Distribution Tax Liabilities" shall have the meaning set forth in
Section 5.3 of this Agreement.
1.9. "EC/TUC Merger" shall have the meaning set forth in the recitals to
this Agreement.
1.10. "EC/TUC Plan of Merger" shall have the meaning set forth in the
recitals to this Agreement.
1.11. "EEX" shall have the meaning set forth in the recitals to this
Agreement.
1.12. "ENSERCH" shall have the meaning set forth in the recitals to this
Agreement.
1.13. "ENSERCH Group" means ENSERCH and any subsidiaries which ENSERCH
continues to own following the Distribution that are eligible to join in a
consolidated tax return with ENSERCH, together with ENSERCH.
1.14. "Holding Company" shall have the meaning set forth in the recitals to
this Agreement.
1.15. "Income Tax Liabilities" means all liabilities for Income Taxes,
including liabilities for Income Taxes assumed by a party pursuant to a
contract.
1.16. "Income Taxes" means any and all Taxes based upon or measured by net
income (including, without limitation, any alternative minimum tax under
Section 55 of the Code) imposed by or payable to the U.S., or any state,
county, local or foreign government or any subdivision or agency thereof, and
such term shall include any interest (whether paid or received), penalties or
additions to tax attributable thereto. For purposes of this Agreement, "Income
Taxes" shall not include Distribution Tax Liabilities.
1.17. "Indemnified Party" means the party that is entitled to
indemnification by another party pursuant to this Agreement.
1.18. "Indemnifying Party" means the party that is required to indemnify
another party pursuant to this Agreement.
1.19. "Independent Accounting Firm" means a "big six" independent accounting
firm, jointly selected by the parties with the concurrence of their respective
counsel; or, if the parties cannot agree on such accounting firm, New EEX and
ENSERCH shall each submit the name of a "big six" independent accounting firm
that does not at the time and has not in the prior two years provided services
to any member of the New EEX Group or the ENSERCH Group, and the "Independent
Accounting Firm" shall mean the firm selected by lot from these two firms.
1.20. "Information Return" means any report, return, declaration or other
information or filing (other than a Tax Return) required to be supplied to any
taxing authority or jurisdiction.
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1.21. "New EEX" shall have the meaning set forth in the recitals to this
Agreement.
1.22. "New EEX Group" shall have the meaning set forth in the recitals to
this Agreement.
1.23. "Old ENSERCH Group" shall have the meaning set forth in the recitals
to this Agreement.
1.24. "Other Taxes" means all Taxes other than Income Taxes.
1.25. "Post-Distribution Tax Period" means any Tax Period ending after the
Distribution Date.
1.26. "Pre-Distribution Tax Period" shall have the meaning set forth in the
recitals to this Agreement.
1.27. "Proceeding" means any audit or other examination, judicial or
administrative proceeding relating to liability for or refunds or adjustments
with respect to Other Taxes or Income Taxes.
1.28. "Property Taxes" shall have the meaning set forth in Section 3.2(a)(i)
of this Agreement.
1.29. "Refund" means any refund of Income Taxes or Other Taxes, including
any reduction in liabilities for such taxes.
1.30. "Tax Assurance Agreement" means that certain Tax Assurance Agreement
between ENSERCH and New EEX dated as of the date of this Agreement.
1.31. "Tax Period" means any twelve month period which constitutes the
taxable year of a party hereto.
1.32. "Tax Return" means any report, return, declaration or other
information or filing required to be supplied to any taxing authority or
jurisdiction with respect to Income Taxes or Other Taxes, including, without
limitation, any documents with respect to or accompanying payments of
estimated Income Taxes or Other Taxes, or with respect to or accompanying
requests for the extension of time in which to file any such report, return,
declaration or other document.
1.33. "Taxes" means any and all taxes, levies or other like assessments,
charges or fees, including, without limitation, any excise, real or personal
property, gains, sales, use, license, real estate or personal property
transfer, net worth, stock transfer, payroll, ad valorem and other
governmental taxes and any withholding obligation imposed by or payable to the
U.S., or any state, county, local or foreign government or subdivision or
agency thereof, and any interest (whether paid or received), penalties or
additions to tax attributable thereto.
1.34. "Taxing Authorities" means any governmental authority which imposes,
or is responsible for the imposition of, a Tax.
1.35. "Transfer" means any transfer of assets by a member of the Old ENSERCH
Group which occurs to effectuate the Distribution or the EC/TUC Merger and
which may give rise to deferred intercompany gain or gain pursuant to Code
section 311(b).
1.36. "Treasury Regulations" mean both the final and temporary Income Tax
regulations promulgated under the Code, as such regulations may be amended
from time to time (including corresponding provisions of succeeding
regulations).
1.37. "TUC" shall have the meaning set forth in the recitals to this
Agreement.
1.38. "TUC Group" means the consolidated group of which TUC or any successor
is the "common parent" within the meaning of Section 1504 of the Code and the
Treasury Regulations promulgated under Section 1502 of the Code and any
subsidiary of a member of such consolidated group.
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<PAGE>
ARTICLE II
Termination of Prior Tax Sharing Agreements
2.1 Termination of Prior Tax Sharing Agreements. This AGREEMENT shall take
effect on the Distribution Date and shall supersede all other agreements,
whether or not written, in respect of any Income Taxes or Other Taxes between
or among any members of the ENSERCH Group, or their respective predecessors or
successors, except to the extent necessary to effectuate sections 4.1, 5.1,
5.2 and 6.1 of this Agreement. All such replaced agreements shall terminate as
of the Distribution Date, and any rights or obligations created thereunder
thereby shall be settled in the normal course.
ARTICLE III
Return Preparation, Filing and Payment of Taxes
3.1 Control of Tax Matters.
(a) Return Preparation and Filing.
(i) Pre-Distribution Tax Period. New EEX hereby irrevocably designates,
and agrees to cause each of its subsidiaries to so designate, ENSERCH as
its agent to take any and all actions, necessary or incidental to the
preparation of Consolidated Returns and the filing of such Consolidated
Returns and claims for Refunds or forms relating to any Pre-Distribution
Tax Period; provided, however, that ENSERCH agrees to consult with New EEX
as to the proper treatment of any item or items includible in such
Consolidated Return that relates to members of the New EEX Group includible
in such Consolidated Return.
(ii) Separate Company Returns. Each company that was a member of the Old
ENSERCH Group shall be responsible for filing all of its Tax Returns for
the Tax Period which includes the Distribution Date, other than any
Consolidated Returns.
3.2 Cooperation and Record Retention.
(a) New EEX agrees to cooperate with ENSERCH, and will cause each of its
subsidiaries to so cooperate, in a timely manner consistent with existing
practice in filing any return consent contemplated by this Agreement. New EEX
also agrees to take, and will cause the appropriate subsidiary to take, such
action or actions as ENSERCH may reasonably request, including but not limited
to the filing of requests for the extension of time within which to file
Consolidated Returns, and to cooperate in connection with any refund claim
with respect to any Pre-Distribution Tax Period. New EEX further agrees to
furnish timely, and to cause each of its subsidiaries to so furnish, ENSERCH
with any and all information reasonably requested by ENSERCH in order to carry
out the provisions of this Agreement. Without limiting the generality of the
foregoing sentence, New EEX specifically agrees to provide to ENSERCH
promptly, but in any event within 10 days of receipt thereof, copies of any
correspondence or notices received from the Internal Revenue Service or any
other Taxing Authority with respect to any Consolidated Return of the Old
ENSERCH Group for a Pre-Distribution Tax Period.
(b) ENSERCH and New EEX shall cooperate fully, as and to the extent
reasonably requested by the other party, in connection with any Proceeding.
Such cooperation shall include the retention and (upon the other party's
request) the provision of records and information which are reasonably
relevant to any such Proceeding, and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder. ENSERCH and New EEX agree (i) to retain all books
and records with respect to Tax matters pertinent to the Old ENSERCH Group and
the New EEX Group relating to any Pre-Distribution Tax Period, and to abide by
all record retention agreements entered into with any Taxing Authority, and
(ii) to give the other party reasonable written notice prior to destroying or
discarding any such books and records and, if the other party so requests,
ENSERCH or New EEX, as the case may be, shall allow the requesting party to
take possession of such books and records. ENSERCH and New EEX further
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acknowledge and agree that any such books and records necessary to establish
the amount of any loss carried forward or other Tax Return items shall be
retained until the expiration of the statute of limitations in respect of the
year in which such loss or other items are utilized.
ARTICLE IV
Refunds and Contests
4.1 Refunds of Income Taxes or Other Taxes. The New EEX Group shall be
entitled to all Refunds attributable to the New EEX Group, and ENSERCH shall
be entitled to all Refunds attributable to the ENSERCH Group or the Old
ENSERCH Group (other than those attributable to the New EEX Group). For this
purpose, Refunds attributable to the New EEX Group shall means Refunds
determined pursuant to the prior tax sharing agreement between ENSERCH and
EEX, which agreement is attached hereto, and Refunds attributable to the Old
ENSERCH Group shall mean Refunds determined pursuant to such tax sharing
agreement (other than those attributable to the New EEX Group). A party
receiving a Refund to which another party is entitled pursuant to this
AGREEMENT shall pay the amount to which such other party is entitled within
ten days after the receipt of the Refund.
4.2 Contests.
(a) Except as provided below, in the event that any deficiencies or Refund
claims arise with respect to an Income Tax Liability with respect to any
Consolidated Return of the Old ENSERCH Group for a Pre-Distribution Tax
Period, ENSERCH shall control, and have the authority to resolve, all
proceedings with respect thereto; provided, however, that ENSERCH shall allow,
to the extent feasible, the participation and consultation of New EEX in
connection with any such deficiencies or Refund claims that relate to New EEX.
In the event that New EEX believes the resolution of any such issue by ENSERCH
to be clearly unfair to New EEX, it may submit the issue to an Independent
Accounting Firm for binding arbitration with respect to such issue and the
amount owed by the respective parties hereunder in respect of the issue. New
EEX's right to indemnity hereunder shall be conditioned on New EEX's
compliance with this Agreement, except that New EEX shall be required to give
notice to TUC upon the receipt of oral or written notice by New EEX from any
governmental authority or agent thereof of an issue that may result in Taxes
for which a claim for indemnity from TUC, ENSERCH or New EEX may be made,
under this Agreement.
(b) New EEX and ENSERCH agree to cooperate in all reasonable respects with
respect to Tax deficiencies or Refund claims described in Section 4.2 of this
Agreement, which cooperation shall include executing and filing such waivers,
consents, forms, court petitions, refund claims, complaints, powers of
attorney and other documents needed from time to time in order to defend,
prosecute or resolve such deficiencies or claims.
ARTICLE V
Indemnification for Taxes
5.1 New EEX Group Income Taxes. The New EEX Group shall pay, and shall
indemnify and hold the TUC Group harmless against, (i) all Income Tax
Liabilities of any member of the New EEX Group for all Tax Periods (including
Tax Periods or portions thereof during which any member of the New EEX Group
was a member of the Old ENSERCH Group but excluding all Income Tax Liabilities
arising from the Distribution as provided for in Section 5.3 hereof) and (ii)
all Income Tax Liabilities incurred pursuant to Treasury Regulation Section
1.1502-6 or any comparable state, local or other provision providing for
several liability as a result of any member of the New EEX Group having been a
member of any consolidated, combined, unitary or other group (other than the
Old ENSERCH Group and the TUC Group). For purposes of clause (i) of this
section 5.1, the Income Tax Liabilities of any member or members of the New
EEX Group for any Pre-Distribution Tax
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Period shall be determined pursuant to the prior tax sharing agreement between
ENSERCH and EEX, which agreement is attached hereto.
5.2 The ENSERCH Group and TUC Group Income Taxes. ENSERCH shall pay, and
shall indemnify and hold the New EEX Group harmless against, (i) all Income
Tax Liabilities of any member of the Old ENSERCH Group or the TUC Group (other
than Income Tax Liabilities of any member of the New EEX Group for any Tax
Period) but excluding all Income Tax Liabilities arising from the Distribution
as provided for in Section 5.3 hereof and (ii) all Income Tax Liabilities
incurred pursuant to Treasury Regulation Section 1.1502-6 or any comparable
state, local or other provision providing for several liability as a result of
any member of the Old ENSERCH Group or the TUC Group (other than any member of
the New EEX Group) having been a member of any other consolidated, combined,
unitary or other group. For purposes of clause (i) of this section 5.2, the
Income Tax Liabilities of any member or members of the Old ENSERCH Group for
any Pre-Distribution Tax Period shall be determined pursuant to the prior tax
sharing agreement between ENSERCH and EEX, which agreement is attached hereto.
5.3 Distribution Tax Liabilities. ENSERCH and the New EEX Group shall pay,
shall indemnify and hold the other harmless from and against, any and all
liability for Taxes that, directly or indirectly, results to any person from
the Distribution (the "Distribution Tax Liabilities") in excess of their
proportionate share. The proportionate share of ENSERCH shall be thirty-six
percent (36%) and the proportionate share of the New EEX Group shall be sixty-
four percent (64%). Notwithstanding the foregoing, the New EEX Group shall
pay, and shall indemnify, defend and hold ENSERCH harmless from and against,
any and all Distribution Tax Liabilities if the Distribution Tax Liabilities
were the result of a breach of the Tax Assurance Agreement by New EEX, and
ENSERCH shall pay, and shall indemnify, defend and hold the New EEX Group
harmless from and against, any and all Distribution Tax Liabilities if the
Distribution Tax Liabilities were the result of any of the following events
occurring after the Distribution, or the result of a breach of any of the
following representations, unless such events or breach have been determined,
pursuant to an IRS ruling or opinion of mutually satisfactory nationally-
recognized counsel, to not adversely affect the Distribution: (i) the failure
of ENSERCH to continue a significant portion of its historic business and to
use a significant portion of its historic assets in a business; (ii) the
liquidation or merger of ENSERCH or TUC with or into the Holding Company, and
Holding Company represents that it has no present plan or intention to merge
ENSERCH or Holding Company, within the two year period following the
Distribution Date, into any entity that is unaffiliated with Holding Company;
(iii) the acquisition by Holding Company or its agents or affiliates of
Holding Company common stock from former holders of ENSERCH common stock,
other than pursuant to TUC's existing, or Holding Company's (as successor),
stock repurchase plan, or any other TUC or Holding Company plan contemplating
regular market purchases, and Holding Company represents that, except to the
extent otherwise provided in this (iii), it has no current plan or intention
to acquire, during the six month period following the Distribution Date,
Holding Company common stock from the former holders of ENSERCH common stock;
or (iv) the approval by Holding Company of the termination, without cause, of
the operation contracts which comprise the business of Lone Star Energy Plant
Operations, Inc. by the partnerships that own the cogeneration plants that are
the subject of such operation contracts for so long as Enserch Development
Corporation is a partner in such partnerships. The determination of whether
the Distribution Tax Liabilities were the result of any of the above-described
breaches shall be definitively determined by a mutually selected Independent
Accounting Firm within sixty (60) days of notification of a claim for
indemnity hereunder. In the event that Distribution Tax Liabilities were the
result of both a breach of the Tax Assurance Agreement by New EEX, and any of
the events or representations described (i), (ii), (iii) and (iv) of this
Section 5.3, then ENSERCH and the New EEX Group shall each pay their
proportionate share, as set forth in this Section 5.3, of the resulting
Distribution Tax Liabilities.
5.4 Other Taxes. (a) Except as otherwise provided in Section 5.3, above,
ENSERCH shall pay, and shall indemnify and hold the New EEX Group harmless
against, all liabilities for all Other Taxes attributable to the income,
property or activities of any member of the Old ENSERCH Group or the TUC Group
(other than, in both cases, a member of the New EEX Group), including all
Other Taxes, if any, arising from the Transfer and the Distribution. Except as
provided in the preceding sentence, the New EEX Group shall pay, and shall
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indemnify and hold the TUC Group harmless against, all liabilities for all
Other Taxes attributable to the income, property or activities of any member
of the New EEX Group.
(b) To the extent that the Indemnifying Party is required to indemnify
another party pursuant to this Article V, the Indemnifying Party shall pay to
the Indemnified Party, no later than 10 days prior to the due date of the
relevant Tax Return or estimated Tax Return or 10 days after the Indemnifying
Party receives the Indemnified Party's calculations, whichever occurs later,
the amount that the Indemnifying Party is required to pay the Indemnified
Party. The Indemnified Party shall submit its calculations of the amount
required to be paid pursuant to this Article V, showing such calculations in
sufficient detail so as to permit the Indemnifying Party to understand the
calculations. If the Indemnifying Party disagrees with such calculations, it
must notify the Indemnified Party of its disagreement in writing within 15
days of receiving such calculations. Any dispute regarding such calculations
shall be resolved in accordance with this Agreement.
ARTICLE VI
General Provisions
6.1. Computations.
(a) General. Other than determinations of whether there are any indemnity
obligations under this Agreement, all computations or recomputations of Income
Tax Liability and all determinations, computations or recomputations of any
amount or any payment (including, but not limited to, computations of the
amount of the Income Tax Liability, the amount or effect of any loss, credit
or deduction, the effect of a Federal statutory Tax rate change for a taxable
year, and the amount of any interest, penalties or additions imposed with
respect to any Income Tax) with respect to any Consolidated Return shall be
prepared by ENSERCH and submitted to New EEX for consultation. Any
disagreement as to such computations after submission to New EEX by ENSERCH
shall be resolved by a nationally recognized accounting firm, with expertise
in Tax, independent of each of the parties hereto. Without limiting the
foregoing, ENSERCH shall calculate the taxable income of the Old ENSERCH Group
in accordance with the existing and historic methodology used by the Old
ENSERCH Group in calculating taxable income of the Old ENSERCH Group and in
accordance with the prior tax sharing agreement between ENSERCH and EEX, a
copy of which is attached hereto.
(b) Excess Foreign Losses. Excess foreign losses in respect of all Pre-
Distribution Tax Periods shall be determined in accordance with Treasury
Regulation section 1.1502-9.
(c) State Taxes. If there is a proposed refund or proposed deficiency in
connection with any State Tax relating to a Pre-Distribution Period, the
affected entity of the Old ENSERCH Group shall be primarily responsible for
the control and resolution of any such matter. If the matter relates to a
Refund, the affected entity shall be entitled to such Refund and if the matter
relates to a deficiency, the affected entity shall be liable for such
deficiency. The affected entity shall inform and keep ENSERCH and New EEX
advised of the progress and disposition of any such matter.
6.2. Offsets.
No payment shall be required to be made by either party to the other
pursuant to this Agreement to the extent that there is an amount then due and
payable under this Agreement to the party that is to make such payment.
6.3. Assignment.
Neither this Agreement nor any of the rights, interest or obligations under
this Agreement shall be assigned, in whole or in part, by operation of law or
otherwise by any of the parties without the prior written consent of
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the other parties. Subject to the preceding sentence, this Agreement shall be
binding upon, inure to the benefit of, and be enforceable by, the parties
hereto and their respective successors and assigns.
6.4. Survival.
The provisions of this AGREEMENT shall survive the effective date of the
Merger and remain in full force until all periods of limitations, including
any extensions or waiver periods, for all Tax Periods of ENSERCH and New EEX
prior to or including the effective date of the Merger have expired.
6.5. Notices.
Any notices, payments or other communications required by this Agreement
shall be made as provided in the notice section of the Merger Agreement;
however, copies of such notices, payments or other communications shall, for
both New EEX and ENSERCH, be sent to the attention of the director of taxes.
6.6. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Texas.
6.7. Entire Agreement.
This Agreement (a) constitutes the entire agreement and supersedes all prior
agreement and understandings, both written and oral, among the parties with
respect to the subject matter of this Agreement and (b) is not intended to
confer upon any person other than the parties hereto any rights or remedies.
The parties agree that to the extent the provisions of any other agreements
executed in connection with the Distribution or the Merger are inconsistent
with the provisions hereof, the provisions of this Agreement shall prevail.
6.8. Severability.
If any provision of this Agreement or the application of any such provision
to any person circumstances shall be held invalid, illegal or unenforceable in
any respect by a court of competent jurisdiction, such invalidity, illegality
or unenforceability shall not affect any other provision hereof.
6.9. Headings.
The headings of the sections of this Agreement are inserted for convenience
only and shall not constitute a part thereof or affect in any way the meaning
or interpretation of this Agreement.
6.10 Counterparts.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
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In Witness Whereof, the parties hereto have duly executed this Agreement as
of the date first above written.
Enserch Corporation
By: _________________________________
Name:
Title:
Enserch Exploration, Inc.
By: _________________________________
Name:
Title:
Texas Utilities Company
By: _________________________________
Name:
Title:
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TAX SHARING AGREEMENT
THIS AGREEMENT, effective as of January 1, 1995, is between ENSERCH
Corporation, a Texas corporation ("ENSERCH"), and Enserch Exploration, Inc.
(the "Company").
INTRODUCTION
A. ENSERCH is the common parent of an affiliated group of corporations
within the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and the Company is a member of said affiliated group.
B. ENSERCH and the Company deem it appropriate to define the method by which
the Federal income tax liability of the affiliated group shall be shared
amongst the affiliated group of corporations.
ACCORDINGLY, ENSERCH and the Company hereto agree as follows:
1. Definitions
The following terms as used in this Agreement shall have the meanings set
forth below:
(a) "Consolidated Return" shall mean a consolidated Federal income tax
return filed pursuant to Section 1501 of the Code.
(b) "Consolidated Tax Liability" shall mean the consolidated Federal
income tax liability of the ENSERCH Group for any taxable year for which
the ENSERCH Group files a Consolidated Return.
(c) "ENSERCH Group" shall mean the affiliated group of corporations
within the meaning of Section 1504(a) of the Code of which ENSERCH is a
common parent.
(d) "Gain Group" shall mean a Member Group whose income exceeds
deductions, computed as if it had filed a separate (or subgroup
Consolidated Return) Federal income tax return for the applicable taxable
year.
(e) "Loss Group" shall mean a Member Group whose deductions exceed
income, computed as if it had filed a separate (or subgroup Consolidated
Return) Federal income tax return for the applicable taxable year.
(f) "Member" shall mean each includible corporation as defined in Section
1504(b) of the Code.
(g) "Member Group" shall mean a group comprised of one or more Members of
the ENSERCH Group. Generally, a Member shall not be part of more than one
Member Group. However, the part of ENSERCH attributable to Lone Star Gas
Company, a division of ENSERCH, and the part of ENSERCH attributable to
Lone Star Pipeline Company, a division of ENSERCH, shall be included in the
utility Member Group; the part of ENSERCH, attributable to Enserch
Processing Company, a division of ENSERCH, shall be included in the
processing Member Group; the part of ENSERCH, attributable to Consolidated
Enserch Exploration Company, a division of ENSERCH, shall be included in
the exploration Member Group; and the remaining part of ENSERCH shall
comprise the corporate Member Group. A listing of the Member Groups is
attached as Exhibit A.
(h) "Separate Return Tax Claim" shall mean the Federal income tax claim
(before Tax Credits) attributable to the activities of a Loss Group,
computed as if it had filed a separate (or subgroup Consolidated Return)
Federal income tax return for the applicable taxable year and its losses
were deductible in that year.
(i) "Separate Return Tax Liability" shall mean the Federal income tax
liability (before Tax Credits) attributable to the activities of a Gain
Group, computed as if it had filed a separate (or subgroup Consolidated
Return) Federal income tax return for the applicable taxable year.
(j) "Tax Credits" shall mean those nonrefundable credits including, but
not limited to, those discussed in IRC Sections 29, 38, 41 and 53.
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(k) "Net Minimum Tax" shall mean the tax imposed by Section 55 of the
Code.
(l) "AMT Basis" shall mean adjustment and preferences of each Member
Group under Section 56 and Section 57 of the Code.
2. Tax Allocations
(a) At ENSERCH's direction, each Member Group shall either pay to or receive
from ENSERCH its Separate Return Tax Liability or reimbursable Separate Return
Tax Claim and Tax Credits. ENSERCH shall pay to and receive from the Internal
Revenue Service (IRS) the Federal income tax liabilities and refunds of the
ENSERCH Group.
(b) Each Gain Group shall pay its Separate Return Tax Liability.
(c-1) In the event ENSERCH Group has a Consolidated net income each Loss
Group shall receive its Separate Return Tax Claim no later than 90 days after
filing of ENSERCH Consolidated Return.
(c-2) In the event ENSERCH Group has a consolidated net operating loss, each
Loss Group shall be reimbursed a portion of its Separate Return Tax Claim. The
reimbursement shall be determined by multiplying the Gain Groups' Separate
Return Tax Liabilities by a fraction, the numerator being the Loss Group's
Separate Return Tax Claim and the denominator being the sum of the Loss
Groups' Separate Return Tax Claims. If the consolidated net operating loss can
be carried to prior years, in whole or part, the IRS refund shall be shared
amongst those Loss Groups to which the net operating loss is attributable
using the formula outlined in this paragraph.
(c-3) If a consolidated net operating loss is carried over and reduces
Consolidated Tax Liability, the reduction of Consolidated Tax Liability shall
be shared amongst those Loss Groups to which the net operating loss is
attributable using the formula outlined in paragraph (c-2) for the year in
which loss is generated.
(d) A Loss Group shall not be reimbursed for its allocable share of a
consolidated net operating loss until such loss is used to reduce Consolidated
Tax Liability or obtain an IRS refund.
(e-1) A Member Group shall be reimbursed for its Tax Credits, but only after
each Loss Group has received its Separate Return Tax Claim and the Tax Credits
are used to reduce Consolidated Tax Liability. In the event ENSERCH Group
carries over Tax Credits, each Member Group shall be reimbursed only for that
portion of such credits used. The reimbursement shall be determined by
multiplying the reduction of Consolidated Tax Liability by a fraction, the
numerator being the Member Group's Tax Credits and the denominator being the
sum of all Member Groups' Tax Credits.
(e-2) If Tax Credits are carried over and reduce Consolidated Tax Liability,
the reduction of Consolidated Tax Liability shall be shared amongst those
Member Groups to which the Tax Credits are attributable using the formula
outlined in paragraph (e-1) for the year in which the credits are generated.
(f) In the event ENSERCH Group has Net Minimum Tax liability, each Member
Group shall be allocated its share of such liability. The allocation shall be
determined by multiplying the Net Minimum Tax by a fraction, the numerator
being the Member Group's AMT Basis and the denominator being all Member
Groups' AMT Basis. If a Gain Group's AMT Basis does not exceed 75% of its
Federal taxable income, then its AMT Basis shall be considered to be zero.
3. Miscellaneous Provisions
(a) This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein. No alteration, amendment
or modification of any of the terms of this Agreement shall be valid unless
made by an instrument signed in writing by an authorized officer of each party
hereto.
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(b) This Agreement has been made in and shall be construed and enforced in
accordance with the laws of the State of Texas.
(c) This Agreement shall be binding upon and inure to the benefit of each
party hereto and its respective successors and assigns.
(d) The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not constitute a part hereof.
(e) The Tax Allocations shall reflect amended consolidated Federal income
tax return items, Internal Revenue Service adjustments agreed to by ENSERCH
and any other adjustments as finally determined by proper governmental
authorities.
In Witness Whereof, the parties hereto have caused this Agreement to be duly
executed and their respective corporate seals to be affixed hereto.
Enserch Corporation
Attest:
/s/ R. L. Jay By /s/ Keith Mond
- --------------------------------------- -----------------------------------
Asst. Corporate Secretary Title: Vice President and
Corporate Tax Counsel
Enserch Exploration, Inc.
Attest:
/s/ F. W. Fraley III By /s/ J. W. Pinkerton
- --------------------------------------- -----------------------------------
Corporate Secretary Title: Vice President and
Controller
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EXHIBIT A
ATTACHMENT TO TAX SHARING AGREEMENT
Member Groups include the following (inclusive of their respective
subsidiaries where applicable):
ENSERCH (Corporate, Tower, House)
ENS Insurance Company
Enserch Exploration, Inc. (EEX Group)
Lone Star Gas Company (Utility Group)
Lone Star Energy Co.
Enserch Development Corp.
Enserch Processing Company (Processing Group)
Consolidated Enserch Exploration Company (Exploration Group)
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ANNEX A-4
TAX ASSURANCE AGREEMENT
THIS TAX ASSURANCE AGREEMENT (this "Agreement"), dated as of , 1996,
is by and between ENSERCH CORPORATION, a Texas corporation ("ENSERCH"), and
ENSERCH EXPLORATION, INC., a Texas corporation that was formerly named Lone
Star Energy Plant Operations, Inc. ("New EEX").
RECITALS
1. New EEX is a corporation more than 80 percent of the common stock, par
value $.01 per share ("New EEX Common Stock"), of which is owned by ENSERCH.
2. Due to ENSERCH's compelling business considerations, ENSERCH's Board of
Directors has determined that it is in the best interests of ENSERCH and its
shareholders to effect the distribution to the shareholders of ENSERCH of all
of the New EEX Common Stock owned by ENSERCH (the "Distribution").
3. New EEX's Board of Directors has determined that the Distribution is in
the best interests of New EEX and its shareholders.
4. It is fundamental to achieving the business benefits to both ENSERCH and
New EEX that the Distribution qualify as a tax-free spin-off under Section 355
and other applicable sections of the Code.
5. In furtherance of the Distribution, ENSERCH and New EEX have entered into
this Agreement, which contains certain restrictions on the activities of New
EEX after the Distribution designed to preserve the tax-free status of the
Distribution.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, ENSERCH and New EEX, both intending to be legally bound, hereby
agree as follows:
ARTICLE 1
Section 1.1 Certain Definitions. Capitalized terms used but not defined in
this Agreement shall have the meanings specified in the Request for Ruling
filed with the Internal Revenue Service ("IRS") on June 12, 1996, by and on
behalf of ENSERCH, New EEX and Texas Utilities Company relating to the
taxability of the Distribution. In addition, the following terms shall have
the meaning specified below:
"Distribution Time" shall mean the time at which the Distribution becomes
effective upon notification by ENSERCH to the transfer agent for the New EEX
Common Stock that the Distribution has been declared and that the transfer
agent is authorized to proceed with the distribution of New EEX Common Stock.
"Permitted Option" shall mean an option granted under a Stock Incentive Plan
to purchase New EEX Common Stock that (i) has an exercise price equal to or
greater than the market price of New EEX Common Stock on the date of grant and
(ii) is not exercisable before the termination of the Restricted Stock Period.
"Restricted Asset Period" shall mean the period beginning at the
Distribution Time and ending on the second anniversary of the Distribution
Time.
"Restricted Stock Period" shall mean the period beginning at the
Distribution Time and ending on the six month anniversary of the Distribution
Time.
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"Rights" means rights issued to holders of New EEX Common Stock entitling
the holder, among other things, (i) upon the occurrence of certain events to
purchase from New EEX shares of preferred stock of New EEX and (ii) upon the
occurrence of certain further events, to receive New EEX Common Stock (or, in
certain circumstances, other consideration) having a purchase price equal to
two times the exercise price of the Rights, and "Rights Plan" means any plan
or agreement pursuant to which Rights are issued.
"Stock Incentive Plan" shall mean the Enserch Exploration, Inc. Revised and
Amended 1996 Stock Incentive Plan or any similar plan approved by the Board of
Directors of New EEX.
"Subsidiary" of any person means any corporation not less than 80% of whose
voting stock and total number of shares of all other classes of stock is
owned, directly or indirectly, by the person.
ARTICLE 2
Business Covenants of New EEX
Section 2.1 Continuity of Business Enterprise. Except as otherwise provided
in Section 2.2 below, New EEX covenants and agrees with ENSERCH that during
the Restricted Asset Period it will continue to own at least fifty percent
(50%) of the fair market value of its properties, determined both with
reference to New EEX only and with reference to New EEX and its subsidiaries
on a consolidated basis, at the time of the Distribution.
Section 2.2 Exceptions. Notwithstanding any other provisions of this
Agreement, in determining whether New EEX continues to own at least fifty
percent (50%) of the fair market value of New EEX's properties for purposes of
Section 2.1 above, the following transactions shall be disregarded:
(a) production and sale of oil and gas in the ordinary course of
business;
(b) acquisitions and dispositions in the ordinary course of business;
(c) exchanges which are fully tax-free to New EEX pursuant to Section
1031 of the Code of active business properties for other active business
properties of like kind;
(d) transfers of business properties to joint ventures, partnerships, tax
partnerships or other joint arrangements, whether or not elections under
Section 761 of the Code are then in effect, so long as New EEX has
significant active participation in the activities of the ventures and, in
the case of a limited partnership, is the managing general partner;
(e) transfers to one or more Subsidiaries under Section 351 of the Code;
provided that not more than forty percent (40%) of New EEX's properties are
so transferred;
(f) dispositions of business properties if within six (6) months after
the dispositions the proceeds from such dispositions are utilized, or
commitments are made, for the acquisition of other business properties of
similar value that further the same active business operations of New EEX;
(g) New EEX financing of acquisitions or operations through
hypothecations, mortgages or grants of security interests in or other liens
on assets, creation of production payments, transfers associated with
leasing arrangements, and other financing arrangements; and
(h) unilateral termination of agreements by third parties;
Section 2.3 LSEPO Business. During the Restricted Asset Period, New EEX will
take no action voluntarily to cease to continue directly to own and operate
the business that LSEPO operated immediately before the Preliminary Merger.
The exceptions provided in Section 2.2 (other than 2.2(h)) shall not apply to
the LSEPO Business.
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<PAGE>
ARTICLE 3.
Stock (Equity) Covenants of New EEX
Section 3.1 Continuity of Interest. Except as otherwise provided in Section
3.4 below, New EEX covenants and agrees with ENSERCH that during the
Restricted Stock Period New EEX will not, directly or indirectly, undertake,
authorize, approve, facilitate or consummate any transaction involving:
(a) the repurchase of New EEX Common Stock;
(b) the issuance of shares of New EEX Common Stock (whether pursuant to
the exercise of options or the grant of stock under a Stock Incentive Plan
or otherwise; provided that the lapse of forfeiture restrictions on stock
previously issued pursuant to a Stock Incentive Plan shall not be deemed an
issuance of stock); or
(c) the acquisition by any person of outstanding New EEX Common Stock
(whether by (1) redeeming Rights, (2) finding a tender offer to be a
"permitted offer" under any such Rights Plan or otherwise causing any such
plan to be inapplicable or neutralized with respect to any proposed
acquisition, or (3) approving any proposed acquisition transaction for the
purpose of any applicable statute or regulation or any "fair price" or
other provision of New EEX's articles of incorporation or bylaws, or
otherwise);
unless in each case, in the aggregate or cumulatively, the shares of New EEX
Common Stock repurchased, issued or acquired does not exceed 3.0 percent of
the number of shares of New EEX Common Stock outstanding immediately prior to
the Distribution. Except as otherwise provided in Section 3.4 below, New EEX
covenants and agrees with ENSERCH that during the Restricted Stock Period New
EEX will not, directly or indirectly, issue any options, rights, warrants or
securities exercisable or convertible into any New EEX Common Stock.
Section 3.2 Other New EEX Stock. New EEX covenants and agrees with ENSERCH
that, during the Restricted Stock Period, New EEX will not issue any class or
series of capital stock other than New EEX Common Stock ("Other New EEX
Stock") or issue any options, rights, warrants or securities exercisable or
convertible into any Other New EEX Stock; provided that the foregoing shall
not apply to, or restrict the issuance of, Rights or Other New EEX Stock which
may be issued or delivered pursuant to Rights.
Section 3.3 Liquidation. New EEX covenants and agrees with ENSERCH that,
during the Restricted Stock Period, New EEX will not, directly or indirectly,
undertake, authorize, approve, facilitate or consummate any transaction
regarding the dissolution or liquidation of New EEX or any announcement of any
intent regarding the foregoing.
Section 3.4 Exceptions. Notwithstanding the restrictions contained in
Section 3.1 above or any other provision of this Agreement, such restrictions
shall not apply with respect to the following:
(a) the granting of Permitted Options under a Stock Incentive Plan;
(b) issuance of other options, warrants or similar instruments to
purchase capital stock of New EEX at a price that exceeds the market price
of New EEX Common Stock at the time issuance is authorized, provided that
such options, warrants or similar instruments may not be exercised during
the Restricted Stock Period;
(c) any split-up of the New EEX Common Stock or any share dividend paid
in New EEX Common Stock;
(d) the issuance of Rights or stock pursuant to a Rights Plan; and
(e) issuance by New EEX of debt convertible into New EEX Common Stock,
which debt (i) carries a market rate of interest; (ii) has a conversion
price that exceeds by not less than 5% the market price of New EEX Common
Stock immediately prior to the pricing of the debt offering; and (iii) may
not be converted into New EEX Common Stock during the Restricted Stock
Period.
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<PAGE>
ARTICLE 4.
Waiver of Restrictions
Section 4.1 Ruling or Opinion. Notwithstanding the foregoing, the
restrictions upon New EEX contained in Article 2 and Article 3 shall not apply
if (a) New EEX or ENSERCH is a party to a ruling from the National Office of
the IRS, based on a ruling request satisfactory to New EEX and ENSERCH, that
the transaction that otherwise would be restricted under this Agreement will
not cause the Distribution to be taxable; or (b) New EEX or ENSERCH secures an
opinion of counsel satisfactory to New EEX and ENSERCH in form and substance
satisfactory to New EEX and ENSERCH to the effect that the proposed
transaction that otherwise would be restricted under this Agreement will not
cause the Distribution to be taxable.
ARTICLE 5.
Representations
Section 5.1 No Plan or Intention. New EEX represents and warrants that as of
the date hereof, it has no plan or intention of engaging in any transaction
that would violate either Article 2 or Article 3 of this Agreement.
ARTICLE 6.
Miscellaneous
Section 6.1 Survival. The representations, warranties, covenants and
agreements contained herein shall survive the Distribution. No investigation
or other examination by ENSERCH or representatives of ENSERCH shall affect the
term of survival of the representations, warranties, covenants and agreements
set forth in this Agreement.
Section 6.2 Notices. Any notice, demand, claim or other communication under
this Agreement shall be in writing and shall be deemed to have been given:
(a) upon the delivery or mailing thereof, as the case may be, if
delivered personally or sent by registered or certified mail, return
receipt requested, postage prepaid;
(b) on the date on which delivery thereof is guaranteed by the carrier if
delivered by a national courier guaranteeing delivery within a fixed number
of days after sending;
(c) five days after the mailing thereof if mailed postage prepaid by any
other method; or
(d) on the date on which facsimile transmission thereof is confirmed "OK"
by the receiving machine if transmitted by facsimile machine and confirmed
by delivery by one of the prior methods;
but, in each case, only if addressed to the parties in the following manner at
the following addresses or facsimile numbers ("FAX") (or at such other address
or other number as a party may specify by written notice to the other):
ENSERCH:ENSERCH Corporation
300 S. St. Paul Street
Dallas, TX 75201-5598
Attention: William T. Satterwhite, Esq.
Senior Vice President and General Counsel
Fax: (214) 573-3430
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<PAGE>
New EEX: Enserch Exploration, Inc.
6688 N. Central Expressway, Suite 1000
Dallas, TX 75206-3922
Attention: Michael G. Fortado, Esq.
Vice President and General Counsel
Telephone: (214) 670-2649
Facsimile: (214) 890-4709
Section 6.3 Assignment. Neither ENSERCH nor New EEX shall assign this
Agreement or any rights, interests or obligations hereunder, or delegate
performance of any of its obligations hereunder.
Section 6.4 Entire Agreement. This Agreement embodies the entire agreement
and understanding of the parties in respect of the subject matter contained in
this document; provided that this provision shall not abrogate any other
written agreement between the parties executed simultaneously with this
Agreement. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
Section 6.5 Waiver, Amendment, etc. This Agreement may not be amended or
supplemented, and no waivers of or consents to departures from the provisions
hereof shall be effective, unless set forth in a writing signed by, and
delivered to, each party. No failure or delay of any party in exercising any
power or right under this Agreement will operate as a waiver thereof, nor will
any single or partial exercise of any right or power, or any abandonment or
discontinuance of steps to enforce such right or power, preclude any other or
further exercise thereof or the exercise of any other right or power.
Section 6.6 Binding Agreement; No Third Party Beneficiaries. This Agreement
shall be binding upon and inure only to the benefit of the parties hereto and
their respective successors and permitted assigns. This Agreement is not
intended to benefit any Person other than the parties hereto and such
successors and permitted assigns, and no such Person shall be a third party
beneficiary hereof.
Section 6.7 Remedies. Each party to this Agreement acknowledges and agrees
that the sole and exclusive remedy for a breach of this Agreement or a loss
occasioned by a breach of this Agreement, is an action for specific
performance by the non-breaching party or loss party against the breaching
party. Any damages or increased tax liability as a result of a breach of this
Agreement shall be determined under the Tax Allocation Agreement between the
parties to this Agreement, dated , 1996.
Section 6.8 Governing Law; Dispute Resolution.
THIS AGREEMENT HAS BEEN EXECUTED, DELIVERED AND ACCEPTED AT, AND SHALL BE
DEEMED TO HAVE BEEN MADE IN TEXAS AND SHALL BE INTERPRETED, AND THE RIGHTS,
OBLIGATIONS AND LIABILITIES OF THE PARTIES HERETO DETERMINED, IN ACCORDANCE
WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS) OF THE
STATE OF TEXAS. EACH PARTY HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED WITHIN DALLAS COUNTY, THE STATE OF TEXAS, CONSENTS THAT
ALL SERVICE OF PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL DIRECTED TO
THE PARTY AT THE ADDRESS STATED IN SECTION 6.2, AND AGREES THAT JURISDICTION
AND VENUE FOR ANY ACTION BROUGHT TO ENFORCE THE PROVISIONS HEREOF SHALL BE
EXCLUSIVELY IN DALLAS COUNTY, TEXAS. TO THE EXTENT PERMITTED BY LAW, EACH
PARTY HERETO WAIVES ANY OBJECTION THAT SUCH PARTY MAY HAVE BASED ON LACK OF
JURISDICTION OR IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY
PROCEEDING INSTITUTED HEREUNDER AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT.
Section 6.9 Severability. The invalidity or unenforceability of any
provision hereof in any jurisdiction will not affect the validity or
enforceability of the remainder hereof in that jurisdiction or the validity or
A-4-5
<PAGE>
enforceability of this Agreement, including that provision, in any other
jurisdiction. To the extent permitted by applicable law, each party waives any
provision of applicable law that renders any provision hereof prohibited or
unenforceable in any respect. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, in order to achieve the intent of the parties to the extent
possible.
Section 6.10 Further Assurances; Cooperation. Each party shall from time to
time, at the request of the other party, take such actions as the other party
may reasonably request in order to effectuate the purpose and intent of this
Agreement. Without limiting the generality of the foregoing, the parties shall
cooperate with each other and take such actions as either party may reasonably
request to obtain any IRS ruling or opinion of counsel contemplated by this
Agreement. In addition, each party shall keep, maintain and preserve books,
records and documentation necessary in or applicable to the determination of
liabilities pursuant to this Agreement and the establishment of the
Distribution as a tax-free distribution until the expiration of all applicable
statutes of limitation. Finally, the parties to this Agreement expressly agree
for all purposes to treat the Distribution as a tax-free distribution and (i)
to not knowingly act (or to not knowingly refrain from acting), except where
required by law to do so, in a manner inconsistent with such treatment of the
Distribution or the intent to qualify it as a tax-free distribution and (ii)
to take any and all such actions reasonably available to such party to support
and defend such treatment and qualification of the Distribution.
Section 6.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
Section 6.12 Good Faith Obligation. Any right to be exercised under this
Agreement must be exercised in good faith and any obligation imposed under
this Agreement must be discharged in good faith.
In Witness Whereof, ENSERCH and New EEX have caused their respective duly
authorized officers to execute this Agreement as of the day and year first
above written.
Enserch Corporation
By: _________________________________
Name:
Title:
Enserch Exploration, Inc.
By: _________________________________
Name:
Title:
A-4-6
<PAGE>
ANNEX B
[LETTERHEAD OF DONALDSON, LUFKIN & JENRETTE]
September 10, 1996
Board of Directors
Enserch Exploration, Inc.
1500 Two Energy Square
4849 Greenville Avenue
Dallas, Texas 75206
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the shareholders of Enserch Exploration, Inc. (the "Company"), other
than ENSERCH Corporation ("ENSERCH") (such shareholders, the "Public
Shareholders"), of the EEX Ratio and LSEPO Ratio, as hereinafter defined,
pursuant to the terms of the Agreement and Plan of Merger dated as of
September 10, 1996 (the "Agreement"), among Lone Star Energy Plant Operations,
Inc. ("LSEPO"), the Company and ENSERCH, pursuant to which the Company will be
merged (the "Merger") with and into LSEPO. In the Merger, LSEPO will be the
surviving corporation and will change its name to Enserch Exploration, Inc.
("New EEX").
Pursuant to the Agreement, each share of common stock, par value $1.00 per
share, of the Company ("Company Common Stock") will be converted, subject to
certain exceptions, into the right to receive one share (the "EEX Ratio") of
common stock, $0.01 par value per share, of New EEX ("New EEX Common Stock"),
and the existing shares of LSEPO Common Stock ("LSEPO Common Stock") will be
converted into the right to receive the number of shares of New EEX Common
Stock (the "LSEPO Ratio") equal to the quotient obtained by dividing $7.0
million by the average of the closing sales prices of Company Common Stock on
each of the 15 consecutive trading days preceding the fifth trading day prior
to the consummation of the Merger.
In arriving at our opinion, we have reviewed the draft dated September 10,
1996, of the Agreement and the exhibits thereto and financial and other
information that was publicly available or furnished to us by the Company and
LSEPO, including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
respective managements were certain financial projections of the Company for
the period beginning January 1, 1996, and ending December 31, 1996, prepared
by management of the Company. Also included in the discussions with the
respective managements were their respective views as to the assumptions
underlying certain financial projections with respect to LSEPO for the period
beginning June 30, 1996, and ending December 31, 2007. We have also reviewed
the operating and management agreements between LSEPO and the respective
owners of the three cogeneration plants to which LSEPO provides its operating
services. In addition, we have compared certain financial and securities data
of the Company with various other companies whose securities are traded in
public markets, reviewed the historical stock prices and trading volumes of
the common stock of the Company, and conducted such other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company and LSEPO or
their representatives, or that was otherwise reviewed by us. With respect to
the financial projections supplied to us by the Company, we have assumed that
they have been reasonably prepared on the basis reflecting the best currently
available estimates and judgments of the management of the Company as to the
future operating and financial performance of the Company. With respect to the
assumptions underlying the financial projections relating to LSEPO, we have
assumed that such assumptions, which have been reviewed with the managements
of the Company and LSEPO, reflect the best currently available estimates and
judgments of the respective managements of the companies as to the future
operating and financial performance of LSEPO.
<PAGE>
We have not assumed any responsibility for making an independent evaluation of
the Company's or LSEPO's assets or liabilities or for making any independent
verification of any of the information reviewed by us. We have relied as to
certain legal matters on advice of counsel to the Company. In addition, we
have assumed that the Merger qualifies as a tax-free reorganization under the
Internal Revenue Code.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
price at which New EEX Common Stock will actually trade at any time. Our
opinion does not constitute a recommendation to any shareholder as to how such
shareholder should vote on the proposed transaction. Our opinion does not
address the underlying business decision to engage in the Merger, nor does it
address any potential combination of ENSERCH and TUC Holding Company or any
potential spin-off of the Company from ENSERCH. In addition, our opinion does
not address the fairness of the EEX Ratio or the LSEPO Ratio to ENSERCH or any
other person or persons, other than the Public Shareholders.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the EEX Ratio and the LSEPO Ratio taken together are fair
to the Public Shareholders from a financial point of view.
Very truly yours,
Donaldson, Lufkin & Jenrette
Securities Corporation
By: /s/ Michael V. Johnson
-----------------------------------
Michael V. Johnson
Managing Director
<PAGE>
ANNEX C
RESTATED ARTICLES OF INCORPORATION
OF
LONE STAR ENERGY PLANT OPERATIONS, INC.
SECTION ONE
Lone Star Energy Plant Operations, Inc. (the "Company"), pursuant to the
provisions of Article 4.07 of the Texas Business Corporation Act, as amended
(the "TBCA"), hereby adopts Restated Articles of Incorporation that accurately
copy the Articles of Incorporation and all amendments thereto that are in
effect immediately prior hereto (collectively, the "Old Articles") and as
further amended by such Restated Articles of Incorporation as hereinafter set
forth and which contain no other change in any provision thereof.
SECTION TWO
The Restated Articles of Incorporation restate and integrate and further
amend the Old Articles by substituting for the provisions of the Old Articles
in their entirety the provisions of the Restated Articles of Incorporation set
forth in Section Five of these Restated Articles of Incorporation. The further
amendments effected by the Restated Articles of Incorporation affect the Old
Articles as follows: (i) amend Article One (name), Article Three (purpose),
Article Four (authorized shares), Article Five (preemptive rights), Article
Seven (power to amend Bylaws), Article Eight (voting rights), Article Nine
(registered office and agent), Article Ten (directors), and Article Eleven
(limitation of director liability); (ii) delete all of Article Six
(commencement of business); (iii) add Articles Eight (meetings of
shareholders), Nine (business combinations) and Ten (amendments); and (iv)
renumber the Articles.
Further, the capital stock of the Company is hereby reclassified and
converted as follows: the outstanding ten (10) shares of the Company's Common
Stock, par value $100 per share, are hereby reclassified and converted into
ten (10) shares of the Company's Common Stock, par value $.01 per share. The
reclassification and conversion decreases the stated capital represented by
the outstanding Common Stock from $1,000 to $.10.
SECTION THREE
Each amendment made by the Restated Articles of Incorporation has been
effected in conformity with the provisions of the TBCA, and such Restated
Articles of Incorporation and each amendment made by the Restated Articles of
Incorporation were duly adopted by the holder of all of outstanding capital
stock of the Company by a written consent dated September 10, 1996.
SECTION FOUR
The number of shares outstanding was 100 and the number of shares entitled
to vote on the Restated Articles of Incorporation as so amended was 100, the
holder of which has signed a written consent to the adoption of such Restated
Articles of Incorporation as so amended pursuant to Article 9.10 of the TBCA.
SECTION FIVE
The Old Articles are hereby superseded by the following Restated Articles of
Incorporation, which accurately copy the entire text thereof as amended as
above set forth:
C-1
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
LONE STAR ENERGY PLANT OPERATIONS, INC.
ARTICLE ONE
The name of the corporation (the "Company") is Lone Star Energy Plant
Operations, Inc.
ARTICLE TWO
The period of its duration is perpetual.
ARTICLE THREE
The purposes for which the Company is organized are:
(1) To engage in all phases of the gas and oil business and related
activities, including without limitation engaging in exploration, drilling,
development, and production of gas and oil properties;
(2) To store, transport, buy and sell, gas, oil, salt, brine and other
mineral solutions and liquefied minerals;
(3) To explore for, produce, purchase and sell, store, process and
manufacture, transport and distribute gas, oil and all other minerals;
(4) To manufacture, produce, purchase or otherwise acquire, sell or
dispose of, distribute, mortgage, pledge, lease, repair, install, operate,
deal in and with, whether as principal or agent, products, goods,
appliances, wares, merchandise, fixtures, plants, structures, machinery,
and materials of every kind and description, to lend money for the carrying
out of such purposes, and to take and hold real and personal property for
the payment of such funds so loaned;
(5) To engage in the business of operation and maintenance of
cogeneration and other power production projects; and
(6) To transact any or all lawful business for which corporations may be
incorporated under the Texas Business Corporation Act, as amended and in
effect from time to time (the "TBCA").
ARTICLE FOUR
(A) Authorized Capital Stock. The aggregate number of shares of all classes
of stock the Company shall have authority to issue is 410,000,000 consisting
of and divided into:
(i) one class of 400,000,000 shares of Common Stock, par value $0.01 per
share (the "Common Stock"); and
(ii) one class of 10,000,000 shares of Preferred Stock, no par value (the
"Preferred Stock"), which may be divided into and issued in one or more
series, as hereinafter provided.
(B) Series. The Preferred Stock may be divided into and issued in, at any
time and from time to time, one or more series as the Board of Directors shall
determine pursuant to the authority hereby vested in it. The Board of
Directors shall have the authority to establish series of unissued shares of
Preferred Stock, at any time and from time to time, by fixing and determining
the designations, preferences, limitations and relative rights of
C-2
<PAGE>
the shares of the series, subject to and within the limitations of the TBCA
and the Articles of Incorporation, including without limitation the following:
(a) the number of shares constituting the series and the distinctive
designation of that series;
(b) the dividend rate on shares of the series, the dividend payment
dates, whether dividends shall be cumulative (and, if so, from which date
or dates), non-cumulative, or partially cumulative, and the relative rights
of priority, if any, of payment of dividends on the shares of the series;
(c) the amount payable to the holders of shares of the series upon any
voluntary or involuntary liquidation of the Company;
(d) the preference in the assets of the Company over any other class,
classes or series of shares upon the voluntary or involuntary liquidation
of the Company;
(e) whether the shares of the series are redeemable at the option of the
Company, the shareholder or another person or upon occurrence of a
designated event and, if so, the price payable upon redemption of shares of
the series and the terms and conditions on which such shares are
redeemable;
(f) the provisions of the sinking fund, if any, for the redemption or
purchase of shares of the series;
(g) the voting rights, if any, of the shares of the series;
(h) the terms and conditions, if any, on which such shares may be
converted, at the option of the Company, the shareholder or another person
or upon occurrence of a designated event, into shares of any other class or
series;
(i) the terms and conditions, if any, on which such shares may be
exchanged, at the option of the Company, the shareholder or another person
or upon occurrence of a designated event, for shares, obligations,
indebtedness, evidences of ownership, rights to purchase securities or
other securities of the Company or one or more other domestic or foreign
corporations or other entities or for other property or for any combination
of the foregoing; and
(j) any other special rights and qualifications, limitations or
restrictions permitted by the TBCA to be granted to or imposed on the
series.
Any of the designations, preferences, limitations and relative rights of the
shares of any series so established may be made dependent upon facts
ascertainable outside the Articles of Incorporation, which facts may include
future acts of the Company, provided that the manner in which such facts shall
operate upon the designations, preferences, limitations and relative rights of
the shares of any series shall be set forth in the resolution or resolutions
establishing the series.
All shares within the same series of Preferred Stock shall be identical
except as to the date of issue and the dates from which dividends on shares of
the series issued on different dates will cumulate, if cumulative. The Board
of Directors shall have the authority to increase or decrease the number of
shares within each series of Preferred Stock; provided, that the Board of
Directors may not decrease the number of shares within a series to less than
the number of shares within such series that are then outstanding.
(C) Preemptive Rights. No shareholder of the Company shall by reason of the
shareholder's holding shares of any class or series have any preemptive or
preferential right to purchase or subscribe to any shares of any class or
series of the Company, now or hereafter to be authorized, or any notes,
debentures, bonds or other securities convertible into or carrying options or
warrants to purchase shares of any class or series, now or hereafter to be
authorized, whether or not the issuance of any such shares, or such notes,
debentures, bonds or other securities, would adversely affect the dividend or
voting rights of such shareholders, other than such rights, if any, as the
Board of Directors in its discretion may fix; and the Board of Directors may
issue shares of any class or series of the Company, or any notes, debentures,
bonds or other securities convertible into or carrying options or warrants to
purchase shares of any class or series, without offering any such shares of
any class or series, either in whole or in part, to the existing shareholders
of any class or series.
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<PAGE>
(D) Subordination of Common Stock. The Common Stock shall be subject and
subordinate to the rights, privileges and preferences of any series of
Preferred Stock to the extent set forth in the resolution or resolutions of
the Board of Directors establishing the series.
(E) Other Provisions Applicable to Capital Stock.
(a) Each outstanding share of Common Stock shall be entitled to one vote
on each matter submitted to a vote at a meeting of shareholders, except as
otherwise provided by the TBCA or as set forth in the resolution or
resolutions of the Board of Directors establishing any series of Preferred
Stock.
(b) At each election for directors of the Company ("Directors"), every
shareholder entitled to vote at such election shall have the right to vote
the number of shares owned by such shareholder for as many persons as there
are Directors to be elected and for whose election such shareholder has a
right to vote; provided that cumulative voting in the election for
Directors is prohibited.
(c) In the event of any dissolution, liquidation or winding up of the
Company, but subject to the rights of the holders of any series of
Preferred Stock, holders of Common Stock shall be entitled to receive pro
rata all of the remaining assets of the Company available for distribution
to its shareholders.
(d) Subject to the rights of the holders of Preferred Stock as set forth
in the resolution or resolutions of the Board of Directors establishing any
series of Preferred Stock, dividends may be paid upon Common Stock to the
exclusion of Preferred Stock out of any assets of the Company available
therefor.
ARTICLE FIVE
The street address of the Company's registered office is 6688 North Central
Expressway, Suite 1000, Dallas, Texas 75206, and the name of its registered
agent at that address is Michael G. Fortado.
ARTICLE SIX
(A) Number. The number of Directors constituting the Board of Directors of
the Company shall be fixed from time to time by the Board of Directors by the
affirmative vote of not less than a majority of the Continuing Directors (as
defined in Article Ten) but shall not be less than three (3), subject to such
rights to elect additional Directors under such specified circumstances as may
be granted to holders of Preferred Stock.
(B) Required Vote to Elect Directors. With respect to the election of
Directors, the act of the shareholders electing the Directors shall be a vote
of the holders of a majority of the outstanding shares entitled to vote in the
election of Directors.
(C) Term. Directors shall hold office until their respective successors
shall have been elected and qualified.
(D) Removal. Directors may be removed from office, with or without cause,
only by the affirmative vote of the holders of not less than a majority of the
outstanding shares entitled to vote in the election of Directors, if notice of
the intention to act upon such matter shall have been given in the notice
calling for the meeting.
(E) Vacancies; Increase in Number of Directors. Subject to such rights to
elect Directors under specified circumstances as may be granted to holders of
Preferred Stock, newly created directorships resulting from any increase in
the number of Directors and any vacancies on the Board of Directors resulting
from death, resignation, disqualification, removal or other reason shall be
filled solely by the affirmative vote of a majority of the Continuing
Directors, even though less than a quorum of the Board of Directors. No
decrease in the number of Directors constituting the Board of Directors shall
shorten the term of any incumbent Director.
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<PAGE>
(F) Current Directors. The number of Directors constituting the Board of
Directors is five, subject to being increased or decreased as set forth above.
The names and addresses of the persons who are to serve as Directors and their
classification are:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
D.W. Biegler................................... 300 South St. Paul Street,
Dallas, TX 75201
G.R. Bryan..................................... 300 South St. Paul Street,
Dallas, TX 75201
D.R. Long...................................... 300 South St. Paul Street,
Dallas, TX 75201
W.T. Satterwhite............................... 300 South St. Paul Street,
Dallas, TX 75201
M.E. Rescoe.................................... 300 South St. Paul Street,
Dallas, TX 75201
</TABLE>
ARTICLE SEVEN
To the fullest extent permitted by law, a Director shall not be liable to
the Company or its shareholders for monetary damages for any act or omission
in his capacity as a Director. Any repeal or modification of this Article
shall be prospective only and shall not adversely affect any limitation of the
personal liability of a Director existing at the time of the repeal or
modification. The provisions of this Article shall not be deemed to limit or
preclude indemnification of a Director by the Company for any liability of a
Director that has not been eliminated by the provisions of this Article.
ARTICLE EIGHT
(A) Power to Alter, Amend or Repeal Bylaws. The power to alter, amend,
suspend or repeal the Bylaws or to adopt new Bylaws shall be vested in, and
shall require the affirmative vote of not less a majority of the Continuing
Directors (as defined in Article Ten); provided that any Bylaw or amendment
thereto as adopted by the Board of Directors may be altered, amended,
suspended or repealed by the affirmative vote of the holders of not less than
66 2/3% of the outstanding Voting Stock (as defined in Article Ten) or a new
Bylaw in lieu thereof may be adopted by vote of such shareholders. No Bylaw
that has been altered, amended or adopted by such a vote of the shareholders
may be altered, amended or repealed by vote of the Directors until two years
shall have expired since such action by such vote of shareholders.
(B) Bylaw Stock Ownership Restrictions. The Board of Directors shall have
the power and authority, from time to time, to adopt, alter or amend the
Bylaws to add or amend such provisions as in their judgment may be necessary
or appropriate to ensure that the Company and its shareholders satisfy the
citizenship or other requirements imposed by any federal or state law relating
to the ownership, possession or leasing of gas, oil or other minerals, land,
vessels or any other property, licenses or rights of any nature whatsoever in
which the Company or any of its subsidiaries may have or hereafter have, or
seek to have, any right or interest. Without limiting such general powers, the
Board of Directors shall have the power and authority, from time to time, to
adopt, alter or amend the Bylaws to add or amend provisions that for such
purpose impose restrictions on the transfer or registration of transfer of the
shares of the Company, including without limitation restrictions that:
(1) obligate the holders of the restricted shares to offer to the Company
or to any other holders of shares of the Company or to any other person or
to any combination of the foregoing, a prior opportunity, to be exercised
within a reasonable time, to acquire the restricted shares;
(2) provide that the Company or the holders of any class of shares of the
Company must consent to any proposed transfer of the restricted shares or
approve the proposed transferee of the restricted shares before the
transfer may be effected;
(3) prohibit the transfer of the restricted shares to designated persons
or classes of persons; or
(4) maintain any tax or other status or advantage to the Company.
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ARTICLE NINE
(A) No Shareholder Written Consent Action. Any action required or permitted
to be taken by the shareholders of the Company must be effected at a duly
called annual or special meeting of such holders and may not be effected by
any consent in writing by such holders.
(B) Special Meetings of Shareholders. Subject to such rights to call special
meetings of shareholders under specified circumstances as may be granted to
holders of Preferred Stock, special meetings of shareholders may be called
only by the Chairman of the Board or the President of the Company, at the
request in writing or by vote of not less than a majority of the Continuing
Directors (as defined in Article Ten) or at the request of the holders of not
less than 50% of the outstanding shares entitled to vote at the meeting, and
not by any other persons. Any request for a special meeting made by the Board
of Directors shall state the purpose or purposes of the proposed meeting, and
business transacted at the meeting shall be confined to the objects stated in
the notice of the meeting.
ARTICLE TEN
In addition to any other vote of shareholders required by the TBCA, the
Articles of Incorporation or otherwise, the affirmative vote of the holders of
not less than 80% of the outstanding shares of "Voting Stock" (as hereinafter
defined) of the Company, including the affirmative vote of the holders of not
less than 50% of the outstanding shares of Voting Stock not "Beneficially
Owned"(as hereinafter defined), directly or indirectly, by any "Related
Person" (as hereinafter defined), shall be required for the approval or
authorization of any "Business Combination" (as hereinafter defined) in which
any Related Person has an interest (except proportionately as a shareholder of
the Company); provided, that the 50% voting requirement referred to above
shall not be applicable if the Business Combination is approved by the
affirmative vote of the holders of not less than 90% of the outstanding shares
of Voting Stock; provided further that the 80% requirement referred to above
shall not be applicable if:
(1) The Board of Directors by a vote of not less than a majority of the
"Continuing Directors" (as hereinafter defined) then holding office (a)
expressly approved in advance the acquisition of outstanding shares of
Voting Stock that resulted in the Related Person becoming a Related Person
or (b) approved the Business Combination prior to the Related Person
involved in the Business Combination having become a Related Person;
(2) The Business Combination is solely between the Company and another
corporation, 100% of the Voting Stock of which is owned, directly or
indirectly, by the Company; or
(3) All of the following conditions have been met: (a) the Business
Combination is a merger or consolidation, the consummation of which is
proposed to take place within one (1) year after the date of the
transaction that resulted in the Related Person becoming a Related Person
and the cash or fair market value of the property, securities or other
consideration to be received per share by holders of Common Stock in the
Business Combination is not less than the highest per share price (with
appropriate adjustments for recapitalizations and for stock splits, reverse
stock splits and share dividends, and including any brokerage commissions,
transfer taxes and soliciting dealer fees) paid by the Related Person in
acquiring any of its holdings of Common Stock; (b) the consideration to be
received by such holders is either cash or, if the Related Person shall
have acquired the majority of its holdings of Common Stock with a form of
consideration other than cash, the same form of consideration with which
the Related Person acquired such majority; (c) after such Related Person
has become a Related Person and prior to consummation of such Business
Combination: (i) except as approved by a majority of the "Continuing
Directors" (as hereinafter defined), there shall have been no failure to
declare and pay at the regular date therefor any full quarterly dividends
(whether or not cumulative) on any outstanding shares of Preferred Stock,
(ii) there shall have been no reduction in the annual rate of dividends
paid per share on the Company's Common Stock (adjusted as appropriate for
recapitalizations and for stock splits, reverse stock splits and share
dividends) except as
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approved by a majority of the Continuing Directors, (iii) such Related
Person shall not have become the Beneficial Owner of any additional shares
of Voting Stock of the Company except as part of the transaction that
resulted in such Related Person becoming a Related Person, and (iv) such
Related Person shall not have received the benefit, directly or indirectly
(except proportionately as a shareholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits or
other tax advantages provided by the Company, whether in anticipation of or
in connection with such Business Combination or otherwise; and (d) a proxy
statement, that complies with the requirements of the "Exchange Act" (as
hereinafter defined) and the rules and regulations thereunder (or any
subsequent provisions replacing the Exchange Act, rules or regulations),
shall be mailed to all shareholders of record not less than forty (40) days
prior to the consummation of the Business Combination for the purpose of
soliciting shareholder approval of the Business Combination and shall
contain at the front thereof, in a prominent place, any recommendations as
to the advisability (or inadvisability) of the Business Combination that
the Continuing Directors, or any of them, may choose to state and, if
deemed advisable by a majority of the Continuing Directors, an opinion of a
reputable investment banking firm as to the fairness (or unfairness) of the
terms of such Business Combination from the point of view of the remaining
shareholders of the Company (such investment banking firm to be selected by
a majority of the Continuing Directors and to be paid a reasonable fee for
its services by the Company upon receipt of such opinion).
For the purposes of this Article:
"Affiliate," when used to indicate a relationship to a specified person,
shall mean a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, the specified person.
"Associate," when used to indicate a relationship with a specified person,
shall mean (a) any corporation, partnership or other organization of which the
specified person is an officer or partner or is, directly or indirectly, the
Beneficial Owner of five percent or more of any class of equity securities,
(b) any trust or other estate in which the specified person has a substantial
beneficial interest or as to which the specified person serves as trustee or
in a similar fiduciary capacity, (c) any relative or spouse of the specified
person, or any relative of that spouse, who has the same home as the specified
person or who is a director or officer of the Company or any of its parents or
Subsidiaries, and (d) any person who is a director or officer of the specified
person or any of its parents or subsidiaries (other than the Company or any
Subsidiary of the Company).
"Beneficial Owner" and "Beneficially Own," when used with reference to any
Voting Stock, shall mean
(a) that the person or any of its Affiliates or Associates beneficially
owns, directly or indirectly, within the meaning of Rule 13d-3 under the
Exchange Act as in effect on September 10, 1996;
(b) that the person or any of its Affiliates or Associates has (i) the right
to acquire (whether that right is exercisable immediately or only after the
passage of time and whether that right is contingent or absolute) pursuant to
any agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (ii) the right
to vote pursuant to any agreement, arrangement or understanding (but neither
that person nor any such Affiliate or Associate shall be deemed to be the
Beneficial Owner of any shares of Voting Stock solely by reason of a revocable
proxy granted with respect to shares for a particular meeting of shareholders
pursuant to a public solicitation of proxies for that meeting, if neither that
person nor any such Affiliate or Associate is otherwise deemed the Beneficial
Owner of those shares); or
(c) that are beneficially owned, directly or indirectly, within the meaning
of Rule 13d-3 under the Exchange Act as in effect on September 10, 1996 by any
other person with which the person or any of its Affiliates or Associates has
any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting (other than solely by reasons of a revocable proxy given in
response to public proxy or consent solicitation made pursuant to the
applicable rules under the Exchange Act) or disposing of any shares of Voting
Stock;
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provided, however, that in the case of any employee stock ownership or similar
plan of the Company or of any Subsidiary in which the beneficiaries thereof
possess the right to vote any shares of Voting Stock held by that plan, no
such plan and no trustee with respect thereto (or any Affiliate of that
trustee), solely by reason of that capacity as trustee, shall be deemed for
the purposes hereof to Beneficially Own any shares of Voting Stock held under
any such plan.
"Business Combination" shall mean (a) any merger, consolidation or share
exchange involving the Company or a Subsidiary, (b) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of all or any "Substantial
Part" (as hereinafter defined) of the assets either of the Company (including
without limitation any voting securities of a Subsidiary) or of a Subsidiary,
(c) any sale, lease, exchange, transfer or other disposition of assets having
a fair market value of $5,000,000 or more to the Company or a Subsidiary, (d)
the issuance or transfer by the Company or a Subsidiary (other than by way of
a pro rata distribution to all shareholders) of any securities of the Company
or a Subsidiary, (e) any reclassification of securities (including any reverse
stock split) or recapitalization by the Company, the effect of which would be
to increase the voting power (whether or not currently exercisable) of a
Related Person, (f) any plan or proposal for the liquidation or dissolution of
the Company, (g) any series or combination of transactions having, directly or
indirectly, the same effect as any of the foregoing, and (h) any agreement,
contract or other arrangement providing, directly or indirectly, for any of
the foregoing.
"Continuing Director" shall mean any member of the Board of Directors who is
not an Affiliate or Associate of a Related Person and who was a member of the
Board of Directors immediately prior to the time that the Related Person
became a Related Person, and any successor to a Continuing Director who is not
an Affiliate or Associate of the Related Person and is recommended to succeed
a Continuing Director by a majority of Continuing Directors then serving as
members of the Board of Directors. Provisions hereof requiring approval by
Continuing Directors shall not be deemed satisfied unless there is at least
one Continuing Director.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"other consideration to be received," for purposes of subparagraph (3) of
this Article, shall include without limitation Common Stock retained by the
Company's existing public shareholders in the event of a Business Combination
in which the Company is the surviving corporation.
"person" shall mean any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, limited liability
company, corporation, company, institution, entity, party or governmental
authority.
"Related Person" shall mean and include any person or "group" of persons (as
such term is used in Regulation 13D-G under the Exchange Act), and each
Affiliate and Associate of any such person, that individually or collectively
is the Beneficial Owner in the aggregate of not less than 10% of the
outstanding Voting Stock, other than the Company or any employee benefit
plan(s) sponsored by the Company.
"Subsidiary" shall mean, with respect to any person, a person in which the
person directly or indirectly owns at least a majority of the outstanding
voting securities or other equity interests having the power, under ordinary
circumstances, to elect a majority of the directors, or otherwise to direct
the management and policies, of such person, and any person that is affiliated
with such person.
"Substantial Part" shall mean more than 5% of the book value of the total
assets of the person in question as of the end of the most recently completed
fiscal year or, in the case of Voting Stock of a Subsidiary, 10% or more of
the outstanding shares of such Subsidiary's Voting Stock.
"Voting Stock" shall mean all outstanding shares of capital stock of the
Company or other person entitled to vote generally in the election of
Directors, considered for the purposes of this Article as a single class. If
the Company has Voting Stock entitled to more or less than one vote for any
such share, each reference in this
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Article to a proportion or percentage of shares of Voting Stock shall be
calculated by reference to the portion or percentage of votes entitled to be
cast by the holders of such shares.
For the purpose of this Article, a majority of the Continuing Directors
shall have the power to determine, on the basis of information known to them,
of: (a) the number of shares of Voting Stock of which any person is the
Beneficial Owner, (b) whether a person is a Related Person, (c) whether a
person is an Affiliate or Associate of another person, (d) whether a person
has an agreement, arrangement or understanding with another as to the matters
referred to in the definition of Beneficial Owner herein, (e) whether the
assets subject to any Business Combination constitute a Substantial Part, (f)
whether any Business Combination is one in which a Related Person has an
interest (except proportionately as a shareholder of the Company), (g) the
fair market value of property other than cash or stock, (h) the highest per
share price in accordance with this Article, (i) whether the applicable
conditions set forth in this Article have been met with respect to any
Business Combination, and (j) such other matters with respect to which a
determination is required under this Article.
A majority of the Continuing Directors then in office shall have the right
to demand that any person who those Directors reasonably believe is a Related
Person (or holds of record shares of Voting Stock Beneficially Owned by any
Related Person) supply the Company with complete information about (a) the
record owner(s) of all shares Beneficially Owned by the persons who those
Directors reasonably believe is a Related Person, (b) the number of, and class
or series of, shares Beneficially Owned by any such person who those Directors
reasonably believe is a Related Person and held of record by each such record
owner and the number(s) of the stock certificates(s) evidencing such shares
and (c) any other factual matter relating to the applicability or effect of
this Article as may reasonably be requested of such person, and that person
shall furnish that information within ten days after receipt of the demand.
ARTICLE ELEVEN
The provisions set forth in Articles Six, Eight and Nine hereof may not be
amended, altered, changed, repealed or rescinded in any respect unless such
action is approved by the affirmative vote of the holders of not less than 75%
of all shares of "Voting Stock" (as defined in Article Ten), considered for
purposes of this Article as one class; the amendment, alteration, change,
repeal or recision of this Article and Article Ten hereof shall require both
such 75% vote and the affirmative vote of the holders of not less than 50% of
such Voting Stock, excluding the vote of any shares owned by a "Related
Person" (as defined in Article Ten), if any (such 50% voting requirement shall
not be applicable if such amendment, alteration, change, repeal or recision is
approved by the affirmative vote of the holders of not less than 90% of such
Voting Stock). The voting requirement contained in this Article and in
Articles Six, Eight, Nine and Ten hereof shall be in addition to voting
requirements imposed by law, other provisions of these Articles of
Incorporation or any designation of preferences in favor of certain classes or
series of classes of shares of capital stock of the Company.
EXECUTED as of the 10th day of September, 1996.
Lone Star Energy Plant Operations,
Inc.
/s/ J. W. Pinkerton
By: _________________________________
Vice President
Its: ________________________________
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STATEMENT OF RESOLUTION
ESTABLISHING AND DESIGNATING A SERIES OF SHARES
OF
LONE STAR ENERGY PLANT OPERATIONS, INC.
$200 SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, NO PAR VALUE PER SHARE
Pursuant to the provisions of Article 2.13 of the Texas Business Corporation
Act, and pursuant to Article Four of its Articles of Incorporation, the
undersigned, Lone Star Energy Plant Operations, Inc. (the "Company"), hereby
submits the following statement for the purposes of establishing and
designating a series of shares and fixing and determining the relative rights
and preferences thereof:
I. The name of the Company is Lone Star Energy Plant Operations, Inc.
II. The following resolution establishing and designating a series of shares
and fixing and determining the relative rights and preferences thereof was
duly adopted by the Board of Directors of the Company effective September 10,
1996:
RESOLVED, that pursuant to the authority conferred upon the Board of
Directors of this Company by the provisions of the Restated Articles of
Incorporation of this Company, the Board of Directors hereby creates a new
series of Preferred Stock of the Company which shall consist of 1,000,000
shares of no par value, which shall be designated and known as $200 Series A
Junior Participating Preferred Stock, and that in addition to the preferences,
rights, voting powers and the restrictions or qualifications of all shares of
Preferred Stock regardless of series, described and expressed in the Restated
Articles of Incorporation of the Company, the Board of Directors hereby
declares that the shares of the $200 Series A Junior Participating Preferred
Stock shall have the terms, conditions, rights and preferences, as follows:
1. Designation. The shares of such series shall be designated "$200 Series A
Junior Participating Preferred Stock" (herein called "Series A Preferred
Stock").
2. Number. The number of shares of Series A Preferred Stock shall be
1,000,000, which number may be increased or decreased by resolution adopted by
the Board of Directors; provided, however, that no decrease shall reduce the
number of authorized shares of Series A Preferred Stock to less than the
number of shares then issued and outstanding plus the number of shares
issuable upon the exercise of outstanding rights, options or warrants or upon
conversion of outstanding securities issued by the Company.
3. Dividends. Subject to the rights of the holders of any shares of any
other series of Preferred Stock (or any similar stock) of the Company with
respect to dividends, but in preference to the holders of shares of the Common
Stock, par value $0.01 per share (the "Common Stock"), of the Company or of
any other class or series of stock of the Company ranking junior to the Series
A Preferred Stock, the holders of shares of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, dividends for each Quarterly Dividend
Period (as hereinafter defined) equal (rounded to the nearest cent) to the
greater of (a) $20 or (b) subject to the provision for adjustment hereinafter
set forth, 200 times the aggregate per share amount of all cash dividends, and
200 times the aggregate per share amount (payable in cash, based upon the fair
market value at the time the non-cash dividend or other distribution is
declared as determined in good faith by the Board of Directors) of all non-
cash dividends or other distributions other than a dividend payable in shares
of Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared (but not withdrawn) on the Common
Stock during the immediately preceding Quarterly Dividend Period, or, with
respect to the first Quarterly Dividend Period, since the first issuance of
any share or fraction of a share of Series A Preferred Stock. In the event the
Company shall at any time after September 10, 1996 (the "Rights Declaration
Date") (i) declare any dividend on Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case the amount to which holders
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of shares of Series A Preferred Stock were entitled immediately prior to such
event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
As used herein "Quarterly Dividend Period" shall mean a period of three
months which shall commence on February 1, May 1, August 1 and November 1 in
each year (or in the case of original issuance, from the date of original
issuance) and shall end on and include the day next preceding the first date
of the next Quarterly Dividend Period. The first day of each such Quarterly
Dividend Period shall be the dividend payment date for the regular quarterly
dividend payable for the preceding Quarterly Dividend Period, except that the
first dividend on shares of Series A Preferred Stock shall be payable on the
quarterly payment date next succeeding the expiration of 30 days after the
date of initial issue of any shares of the Series A Preferred Stock.
Dividends on the Series A Preferred Stock, if any, shall be cumulative so
that no dividend (other than a dividend payable in Common Stock) or other
distribution shall be paid or declared or made on, and no amounts shall be
applied to the purchase or redemption of, the Common Stock or any other class
of stock ranking junior to the Series A Preferred Stock as to dividends or
assets unless (i) full cumulative dividends for all past Quarterly Dividend
Periods have been paid or declared and set apart for payment, and full
cumulative dividends for the then current Quarterly Dividend Period shall have
been or simultaneously therewith shall be paid and declared on outstanding
Series A Preferred Stock, and (ii) after giving effect to such payment of
dividend, other distribution, purchase or redemption, the aggregate capital of
the Company applicable to all capital stock outstanding ranking junior to the
Series A Preferred Stock as the dividends or assets plus the consolidated
surplus of the Company and its subsidiaries shall exceed the aggregate amount
payable on involuntary dissolution, liquidation or winding up of the Company
on all shares of the Series A Preferred Stock and all stock ranking prior to
on a parity with the Series A Preferred Stock as the dividends or assets to be
outstanding after the payment of such dividend, other distribution, purchase
or redemption. Determinations made with respect to the declaration and payment
of dividends and other distributions shall be made in accordance with the
provisions of the Texas Business Corporation Act, as amended and in effect at
the time (the "TBCA").
4. Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of the Series A
Preferred Stock shall, subject to the prior and superior rights of the holders
of any shares of any other series of Preferred Stock (or any similar stock) of
the Company, be entitled to receive the greater of (a) $200 per share, or (b)
an amount per share, subject to the provision for adjustment hereinafter set
forth, equal to 200 times the aggregate amount to be distributed per share to
holders of Common Stock, plus in either instance accrued dividends to the date
of distribution, whether or not earned or declared. In the event the Company
shall at any time after the Rights Declaration Date (i) declare any dividend
on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders
of shares of Series A Preferred Stock were entitled immediately prior to such
event pursuant to clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
No distribution shall be made to the holders of shares of Common Stock or
any other stock ranking junior to the Series A Preferred Stock upon
liquidation, distribution or winding up, unless, prior thereto, the holders of
shares of Series A Preferred Stock shall have received the amounts set forth
above. If the assets available for distribution to holders of shares of Series
A Preferred Stock shall not be sufficient to pay in full the amounts so
determined to be payable on all shares of the Series A Preferred Stock in the
event of such voluntary or involuntary dissolution, liquidation or winding up,
as the case may be, then the assets available for payment shall be distributed
ratably among the holders of the Series A Preferred Stock of all series in
accordance with the amounts so determined to be payable on the shares of each
series in the event of voluntary or involuntary dissolution, liquidation or
winding up, as the case may be, in proportion to the full preferential amounts
to which they are respectively entitled. After payment to the holders of the
Series A Preferred Stock of the full preferential
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amounts hereinbefore provided for, the holders of Series A Preferred Stock
will have no other rights or claims to any of the remaining assets of the
Company either upon distribution of such assets or upon dissolution,
liquidation or winding up. The sale of all or substantially all of the
property of the Company to, or the merger or consolidation of the Company into
or with, any other corporation, or the purchase or redemption by the Company
of any shares of its Preferred Stock, or its Series A Preferred Stock or its
Common Stock or any other class of its stock shall not be deemed to be a
distribution of assets or a dissolution, liquidation or winding up for the
purposes of this paragraph.
5. Optional Redemption. So long as full cumulative dividends on all
outstanding shares of Series A Preferred Stock for all dividend periods ending
on or prior to the date fixed for redemption shall have been paid or declared
and set apart for payment and subject to any applicable requirements of Texas
law and the rights of the holders of any shares of any other series of
Preferred Stock (or any similar stock) of the Company, the Company shall have
the option to redeem the whole or any part of the Series A Preferred Stock at
any time on at least 30 days notice in accordance with the provisions of the
procedures for redemptions set forth in the TBCA at a redemption price equal
to the greater of (a) $200 and (b), subject to the provision for adjustment
hereinafter set forth, 200 times the "current per share market price" of the
Common Stock on the date of mailing of the notice of redemption, together with
unpaid accumulated dividends to the date of such redemption. In the event the
Company shall at any time after the Rights Declaration Date (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders
of shares of Series A Preferred Stock were otherwise entitled immediately
prior to such event under the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. The "current per share market
price" on any date shall be deemed to be the average of the closing price per
share of such Common Stock for the 10 consecutive "trading days" (as such term
is hereinafter defined) immediately prior to such date. The closing price for
each day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Common Stock is not listed
or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the principal national securities exchange on
which the Common Stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") or such other system then in use or, if on any such date the Common
Stock is not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market
in the Common Stock selected by the Board of Directors of the Company. If on
such date no such market maker is making a market in the Common Stock, the
fair value of the Common Stock on such date as determined in good faith by the
Board of Directors of the Company shall be used. The term "trading day" shall
mean a day on which the principal national securities exchange on which the
Common Stock is listed or admitted to trading is open for the transaction of
business or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday
on which banking institutions in the State of New York are not authorized or
obligated by law or executive order to close.
6. Treasury Shares. So long as any shares of the Series A Preferred Stock
are outstanding, shares of the Series A Preferred Stock which are purchased,
redeemed or otherwise acquired by the Company shall not be reissued, or
otherwise disposed of, as shares of Series A Preferred Stock.
7. Conversion. Other than as set forth above, the Series A Preferred Stock
shall not have any conversion or exchange rights.
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8. Voting Rights.
(A) Each share of Series A Preferred Stock shall entitle the holder
thereof to 200 votes on all matters submitted to a vote of the shareholders
of the Company. In the event the Company shall at any time after the Rights
Declaration Date, (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) The Series A Preferred Stock shall have no voting rights other than
the voting rights set forth herein, in the Restated Articles of
Incorporation of the Company or as otherwise provided by Texas law.
9. Consolidation, Merger, etc. In case the Company shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or converted or changed into other stock or
securities, cash and/or other property, then in any such case proper provision
shall be made so that each share of Series A Preferred Stock shall at the same
time be similarly exchanged for or converted or changed into an amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
200 times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, for which or into which each
share of Common Stock is exchanged for or converted or changed. In the event
the Company shall at any time after the Rights Declaration Date (i) declare
any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding Common Stock, or (iii) combine the outstanding Common Stock
into a smaller number of shares, then in each such case the amount set forth
in the preceding sentence with respect to the exchange or conversion or change
of shares of Series A Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior
to such event.
10. Amendment. No change shall be made in any of the rights or preferences
of the Series A Preferred Stock at the time outstanding without the
affirmative vote of at least two-thirds the votes entitled to be cast with
respect to the shares of the Series A Preferred Stock outstanding on the
record date for such meeting in addition to any other vote, if any, as may be
required for such change under the applicable provisions of the Restated
Articles of Incorporation and the laws of the State of Texas at the time
applicable thereto.
IN WITNESS WHEREOF, this Statement of Resolution is executed on behalf of
the Company by its President this 10th day of September, 1996.
Lone Star Energy Plant Operations,
Inc.
By: J.W. Pinkerton
-------------------------------------
Vice President
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ANNEX XII
BYLAWS OF LONE STAR ENERGY PLANT OPERATIONS, INC.,
A CORPORATION INCORPORATED UNDER
THE LAWS OF THE STATE OF TEXAS
PURPOSE AND SCOPE OF BYLAWS
These Bylaws shall constitute the private laws of LONE STAR ENERGY PLANT
OPERATIONS, INC., a corporation duly incorporated under the laws of the State
of Texas (herein called the "Company"), for the administration and regulation
of the affairs of the Company.
In the event any provision of these Bylaws is or may be in conflict with any
applicable law of the United States or the State of Texas, or of any order,
rule, regulation, decree or judgment of any governmental body or power or
court having jurisdiction over the Company, or over the subject matter to
which such provision of these Bylaws applies or may apply, such provision of
these Bylaws shall be inoperative to the extent only that the operation
thereof unavoidably conflicts with such law or order, rule, regulation, decree
or judgment, and shall in all other respects be in full force and effect.
ARTICLE I
Offices
Section 1. The registered office of the Company shall be at 6688 North
Central Expressway, in the City of Dallas, County of Dallas, State of Texas,
and the registered agent of the Company at such address shall be Michael G.
Fortado or such other person as the Board of Directors may from time to time
designate.
Section 2. The Company may also have offices at such other places both
within and without the State of Texas as the Board of Directors may from time
to time determine or the business of the Company may require.
ARTICLE II
Meetings of Shareholders
Section 1. All meetings of the shareholders shall be held at the registered
office of the Company or at such other place either within or without the
State of Texas as shall be designated from time to time by the Board of
Directors.
Section 2. The annual meeting of shareholders shall be held on the second
Tuesday of May in each year, at 2:00 P.M., for the election of a Board of
Directors and the transaction of such other business as may properly be
brought before the meeting.
Section 3. Special meetings of the shareholders may only be called by the
Chairman of the Board or the President, at the request in writing or by vote
of not less than a majority of the Continuing Directors (as defined in Article
Ten of the Restated Articles of Incorporation of the Company) of the Board of
Directors, or the holders of not less than 50% of all the outstanding shares
entitled to vote at the meetings, and not by any other persons. Business
transacted at all special meetings shall be confined to the objects stated in
the notice of meeting.
Section 4. Written or printed notice stating the place, day and hour of the
meeting, and, in case of a special meeting, the purpose or purposes for which
the meeting is called, shall be delivered not less than ten (10) nor more than
sixty (60) days before the date of the meeting, either personally or by mail,
by or at the direction of the Chairman, the Corporate Secretary, or the
officer or person calling the meeting, to each shareholder of record entitled
to vote at such meeting. If mailed, such notice shall be deemed to be
delivered when deposited in
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the United States mail addressed to the shareholder at his address as it
appears on the stock transfer books of the Company, with postage thereon
prepaid.
Section 5. The officer or agent having charge of the stock transfer books
for shares of the Company shall make, at least ten (10) days before each
meeting of shareholders, a complete list of the shareholders entitled to vote
at such meeting or any adjournment thereof, arranged in alphabetical order,
with the address of and the number of shares held by each, which list, for a
period of ten (10) days prior to such meeting, shall be kept on file at the
registered office of the Company and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any shareholder during the whole time of the
meeting. The original stock transfer books shall be prima-facie evidence as to
who are the shareholders entitled to examine such list or transfer books or to
vote at any meeting of shareholders.
Section 6. The holders of a majority of the shares issued and outstanding
and entitled to vote thereat, present in person or represented by written
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present or represented. At such
adjourned meeting at which a quorum shall be present or represented any
business may be transacted which might have been transacted at the meeting as
originally notified.
Section 7. Each outstanding share, of any class, shall be entitled to as
many votes per share as the Articles of Incorporation shall provide, on each
matter submitted to a vote at a meeting of shareholders, except to the extent
that the voting rights of the shares of any class or classes are limited or
denied by the Articles of Incorporation or these Bylaws. The vote for the
election of Directors and, upon demand by any shareholder, the vote upon any
question before the meeting shall be by ballot. Cumulative voting is expressly
prohibited.
Section 8. At any meeting of the holders, every shareholder having the right
to vote shall be entitled to vote in person or by proxy executed in writing by
such shareholder or by his duly authorized attorney-in-fact. No proxy shall be
valid after eleven (11) months from the date of its execution unless otherwise
provided in the proxy. All proxies shall be revocable unless expressly
provided therein to be irrevocable and are coupled with an interest and shall
be filed with the Corporate Secretary of the Company prior to or at the time
of the meeting at which they are to be voted.
Section 9. When a quorum is present at any meeting, matters brought before
the meeting shall be determined by the shareholders in the following manner:
(a) with respect to any matter, other than the election of Directors or a
matter for which the affirmative vote of a specified portion of the shares
entitled to vote is required by the statutes or the Articles of Incorporation,
the act of the shareholders shall be the affirmative vote of the holders of a
majority of the shares entitled to vote on, and voted for or against, that
matter at a meeting of shareholders at which a quorum is present and (b) with
respect to the election of Directors, the act of the shareholders electing the
Directors shall be a majority of all outstanding shares entitled to vote in
the election of Directors, unless in each case the question is one upon which,
by express provision of the statutes or of the Articles of Incorporation or of
these Bylaws, a different vote is required, in which case such express
provision shall govern and control the decision of such question. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
Section 10. The Chairman shall preside at all meetings of the shareholders.
In his absence, the President or an officer of the Company designated by the
Board of Directors shall preside and perform the duties of the Chairman at
such meeting. He shall appoint two inspectors of voting to serve at each such
meeting. Before acting at any meeting, the inspectors shall be sworn
faithfully to execute their duties with strict impartiality and according to
the best of their ability. The inspectors shall determine the number of shares
outstanding, the voting
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power of each, the shares represented at the meeting, the existence of a
quorum, the qualification of the voters, the authenticity, validity and effect
of proxies, receive votes and ballots, hear and determine all challenges and
questions in any way arising in connection with the vote, count and tabulate
all votes and determine and announce the result of the voting.
Section 11. At an annual meeting of the shareholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board, otherwise properly brought before the meeting by or at the
direction of the Board, or otherwise properly brought before the meeting by a
shareholder. In addition to any other applicable requirements, for business to
be properly brought before an annual meeting by a shareholder, the shareholder
must have given timely notice thereof in writing to the Corporate Secretary.
To be timely, a shareholder's notice must be delivered to or mailed and
received at the principal executive offices of the Company, not less than
fifty (50) days nor more than seventy-five (75) days prior to the meeting;
provided, however, that in the event that less than sixty-five (65) days'
notice or prior public disclosure of the date of the meeting is given or made
to shareholders, notice by the shareholder to be timely must be so received
not later than the close of business on the 15th day following the day on
which such notice of the date of the annual meeting was mailed or such public
disclosure was made. A shareholder's notice to the Corporate Secretary shall
set forth as to each matter the shareholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of the shareholder proposing
such business, (iii) the class and number of shares of the Company which are
beneficially owned by the shareholder, and (iv) any material interest of the
shareholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures
set forth in this Section 11; provided, however, that nothing in this Section
11 shall be deemed to preclude discussion by any shareholder of any business
properly brought before the annual meeting in accordance with said procedure.
The chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 11, and if he should
so determine, he shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
Section 12. Only persons who are nominated in accordance with the following
procedures shall be eligible for election as Directors. Nominations of persons
for election to the Board of Directors of the Company may be made at a meeting
of shareholders by or at the direction of the Board of Directors by any
nominating committee or person appointed by the Board or by any shareholder of
the Company entitled to vote for the election of Directors at the meeting who
complies with the notice procedures set forth in this Section 12. Such
nominations, other than those made by or at the direction of the Board, shall
be made pursuant to timely notice in writing to the Corporate Secretary. To be
timely, a shareholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Company not less than fifty (50) days
nor more than seventy-five (75) days prior to the meeting; provided, however,
that in the event that less than sixty-five (65) days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be so received not later than the close
of business on the 15th day following the date on which such notice of the
date of the meeting was mailed or such public disclosure was made. Such
shareholder's notice to the Corporate Secretary shall set forth (a) as to each
person whom the shareholder proposes to nominate for election or re-election
as a Director, (i) the name, age, business address and residence address of
the person, (ii) the principal occupation or employment of the person, (iii)
the class and number of shares of capital stock of the Company which are
beneficially owned by the person, and (iv) any other information relating to
the person that is required to be disclosed in solicitations for proxies for
election of Directors pursuant to Regulation 14A under the Securities Exchange
Act of 1934 as amended; and (b) as to the shareholder giving the notice (i)
the name and record address of shareholder and (ii) the class and number of
shares of capital stock of the Company which are beneficially owned by the
shareholder. The Company may require any proposed nominee to furnish such
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other information as may reasonably be required by the Company to determine
the eligibility of such proposed nominee to serve as Director of the Company.
No person shall be eligible for election as a Director of the Company unless
nominated in accordance with the procedures set forth herein.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
ARTICLE III
Directors
Section 1. The powers of the Company shall be exercised under the authority
of, and the business and affairs of the Company shall be managed under the
direction of, its Board of Directors who may do all such lawful acts and
things as are not by statute or by the Articles of Incorporation or by these
Bylaws directed or required to be exercised or done by the shareholders.
Section 2. The number of Directors constituting the Board of Directors of
the Company shall be fixed from time to time by the Board of Directors by the
affirmative vote of not less than a majority of the Continuing Directors (as
defined in Article Ten of the Restated Articles of Incorporation of the
Company), but shall not be less than three (3), subject to such rights to
elect additional Directors under such specified circumstances as may be
granted to holders of Preferred Stock. Directors need not be shareholders or
residents of the State of Texas. A person shall be ineligible to be a Director
of the Company after the date of the annual meeting of shareholders of the
Company in the year in which such person's seventieth birthday occurs. Unless
he shall resign or become ineligible, each Director shall hold office until
his successor shall be elected and shall qualify.
Section 3. Any Director may resign at any time either by oral tender of
resignation at any meeting of the Board of Directors or by giving written
notice thereof to the Corporate Secretary. Resignations shall take effect when
tendered or at the time specified in the tender and, unless otherwise
specified, the acceptance of a resignation shall not be necessary to make it
effective.
Section 4. Any Director may be removed either for or without cause, at any
special meeting of shareholders by the affirmative vote of the holders of
record of not less than a majority of the shares entitled to vote for such
removal, if notice of the intention to act upon such matter shall have been
given in the notice calling for such meeting. Any vacancy occurring in the
Board of Directors may be filled by the affirmative vote of a majority of the
remaining Directors even though such remaining Directors shall be less than a
quorum of the Board of Directors. A Director elected to fill a vacancy shall
be elected for the unexpired term of his predecessor in office. Any
directorship to be filled by reason of an increase in the number of directors
as provided in Section 1 hereof shall be filled solely by the affirmative vote
of not less than a majority of the Continuing Directors for a term of office
continuing until the next annual meeting of shareholders; provided that the
Board of Directors may not fill more than two such directorships between any
two successive annual meetings of shareholders.
Section 5. The Board of Directors, by resolution adopted by a majority of
the full Board of Directors, may designate from among its members one or more
committees, each of which shall be comprised of one or more of its members,
and may designate one or more of its members as alternate members of any
committee, who may, subject to any limitations imposed by the Board of
Directors, replace absent or disqualified members at any meeting of that
committee. Any such committee, to the extent provided in such resolutions or
in the Articles of Incorporation or the Bylaws, shall have and may exercise
all of the authority of the Board of Directors, provided that no committee of
the Board of Directors shall have the authority of the Board of Directors in
reference to: (1) amending the Articles of Incorporation, except that a
committee may, to the extent provided in the resolution designating that
committee or in the Articles of Incorporation or the Bylaws, exercise the
authority of the Board of Directors vested in it in accordance with Article
2.13 of the Texas Business Corporation Act ("Act"); (2) proposing a reduction
of the stated capital of the Company in the manner permitted by Article 4.12
of the Act; (3) approving a plan of merger or share exchange of the Company;
(4) recommending to the shareholders the sale, lease, or exchange of all or
substantially all of the property and assets of the Company
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otherwise than in the usual and regular course of its business; (5)
recommending to the shareholders a voluntary dissolution of the Company or a
revocation thereof, (6) amending, altering, or repealing the Bylaws of the
Company or adopting new Bylaws of the Company; (7) filling vacancies in the
Board of Directors; (8) filling vacancies in or designating alternate members
of any such committee; (9) filling any directorship to be filled by reason of
an increase in the number of Directors; (10) electing or removing officers of
the Company or members or alternate members of any such committee; (11) fixing
the compensation of any member or alternate members of such committee; or (12)
altering or repealing any resolution of the Board of Directors that by its
terms provides that it shall not be so amendable or repealable; and, unless
such resolution designating a particular committee, the Articles of
Incorporation, or the Bylaws expressly so provide, no committee of the Board
of Directors shall have the authority to authorize a distribution or to
authorize the issuance of shares of the Company.
Meetings of the Board of Directors
Section 6. The Directors of the Company may hold their meetings, both
regular and special, either within or without the State of Texas.
Section 7. The first meeting of each newly elected Board of Directors shall
be held without further notice immediately following the annual meeting of
shareholders, and at the same place, unless by unanimous consent of the
Directors then elected and serving such time or place shall be changed.
Section 8. Regular meetings of the Board of Directors may be held with or
without notice at such time and place as shall from time to time be determined
by the Board of Directors.
Section 9. Special meetings of the Board of Directors may be called on
twenty-four (24) hours' notice to each Director, or such shorter period of
time as the person calling the meeting deems appropriate in the circumstances,
either personally, or by mail, or by telegram; special meetings shall be
called by the Chairman or, in the event of the inability of the Chairman to
act, the President or the Corporate Secretary in like manner and on like
notice on the written request of two Directors. Neither the business to be
transacted at, nor the purpose of, any special meeting need be specified in a
notice or waiver of notice.
Section 10. At all meetings of the Board of Directors the presence of a
majority of the Directors shall constitute a quorum for the transaction of
business and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors. Any action
required or permitted to be taken at a meeting of the Board of Directors may
be without a meeting if a consent in writing, setting forth the action so
taken, is signed by all members of the Board of Directors. If a quorum shall
not be present at any meeting of Directors, the Directors present thereat may
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present.
Section 11. The Board of Directors shall have authority to establish, from
time to time, the amount of compensation which shall be paid to its members
for their services as Directors.
ARTICLE IV
Notices
Section 1. Whenever under the provisions of the statutes or of the Articles
of Incorporation or of these Bylaws, notice is required to be given to any
Director or shareholder, and no provision is made as to how such notice shall
be given, it shall not be construed to mean notice, but any such notice may be
given in writing, by mail, postage prepaid, addressed to such Director or
shareholder at such address as appears on the books of the Company. Any notice
required or permitted to be given by mail shall be deemed to be given at the
time when the same shall be thus deposited in the United States mails as
aforesaid.
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Section 2. Whenever any notice is required to be given to any shareholder or
Director of the Company under the provisions of the statutes or of the
Articles of Incorporation, or of these Bylaws, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or
after the time stated in such notice, shall be equivalent to the giving of
such notice. Attendance of a Director at a meeting shall constitute a waiver
of notice of such meeting, except when a Director attends a meeting for the
express purpose, in writing filed at the meeting, of objecting to the
transaction of any business on the grounds that the meeting is not lawfully
called or held.
ARTICLE V
Officers
Section 1. The officers of the Company shall be a Chairman, a President, one
or more Executive Vice Presidents, Senior Vice Presidents or Vice Presidents,
a General Counsel, a Controller, a Corporate Secretary and a Treasurer, all of
whom shall be elected by the Board of Directors. Any two or more offices may
be held by the same person. Each such officer shall have such authority and
perform such duties in the management of the Company as may be determined by
resolution of the Board of Directors.
Section 2. The Board of Directors may elect or appoint such other officers
and agents as it shall deem necessary, who shall hold their offices for such
term and who shall have such authority and perform such duties as may be
prescribed by the Board of Directors or the Chairman. The power to appoint
such other officers and agents may be delegated by the Board of Directors to
the Chairman to the extent the Board may delineate by resolution.
Section 3. Each officer of the Company shall hold office until his successor
is chosen and qualified in his stead or until his death or until his
resignation, retirement or removal from office. Any officer or agent elected
or appointed by the Board of Directors may be removed by the Board of
Directors whenever in its judgment the best interests of the Company will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an
officer or agent shall not of itself create contract rights.
Section 4. The Chairman shall be the chief executive officer of the Company.
He shall, subject to the direction and control of the Board of Directors, be
their representative and medium of communication. He shall see that all
orders, resolutions and policies adopted by the Board of Directors are carried
into effect. He shall preside at all meetings of shareholders and at all
meetings of the Board of Directors. He shall be in complete charge with
attendant responsibility and accountability of the entire Company and its
affairs.
Section 5. The President shall be the chief operating officer of the
Company. He shall, subject to the direction of the Chairman, have
responsibility for such operations and functions assigned to him; and in the
absence of the Chairman, shall preside at all meetings of the shareholders and
at all meetings of the Board of Directors.
Section 6. Each Executive Vice President shall have such powers and
responsibilities, and shall perform such duties, as delineated by the Board or
by the Chairman. They shall be directly responsible to such officer as the
Chairman may from time to time prescribe.
Section 7. The Senior Vice President, Chief Financial Officer, shall have
such powers and responsibilities and shall perform such duties, as delineated
by the Board of Directors or by the Chairman. He shall be responsible to the
Chairman in said performance.
Section 8. Other Senior Vice Presidents shall have such powers and
responsibilities, and shall perform such duties, as delineated by the Board or
by the Chairman. They shall be directly responsible to such officer as the
Chairman may from time to time prescribe.
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Section 9. The General Counsel shall have general control over all matters
of a legal nature concerning the Company and shall perform such duties as
delineated by the Board or by the Chairman. He shall be directly responsible
to the Chairman in said performance.
Section 10. Each Vice President shall have such powers and responsibilities,
and shall perform such duties, as may be delineated by the Board or the
Chairman. They shall be directly responsible to such officer as the Chairman
may from time to time prescribe.
Section 11. The Controller shall be in general control of the accounts of
the Company, shall be responsible for the making of adequate audits, shall
prepare and interpret required accounting, financial and statistical
statements, and shall be directly responsible to such officer and perform such
other duties as the Board or Chairman may from time to time prescribe.
Section 12. The Corporate Secretary shall attend all meetings of the Board
of Directors and shareholders and act as secretary thereof and shall record
all votes and the minutes of all proceedings of the Board of Directors and
shareholders in a book for that purpose maintained and kept in his custody. He
shall keep in his custody the seal of the Company and shall in general perform
all the duties incident to the office of Secretary of a Company. He shall act
as Transfer Agent of the Company and/or Registrar of its capital stock and
other securities; provided that the Board of Directors may by resolution
appoint one or more other persons or corporations as Transfer Agents and/or
Registrars or as Co-Transfer Agents and/or Co-Registrars. He shall be directly
responsible to such officer and shall perform such other duties as the Board
or Chairman may from time to time prescribe.
Section 13. The Treasurer shall have custody of all the funds and securities
of the Company and shall keep full and accurate accounts of receipts and
disbursements. He may endorse checks, notes and other obligations on behalf of
the Company for collection and shall deposit the same, together with all
monies and other valuable effects, to the credit of the Company in banks or
depositories as the Board of Directors may designate by resolution or as may
be established in accordance with Article VIII of these Bylaws. He shall be
directly responsible to such officer as the Chairman may from time to time
designate and shall perform all duties incident to the office of Treasurer of
a Company or as the Board or Chairman shall designate.
Section 14. The Board of Directors may appoint one or more Assistant
Corporate Secretaries, Assistant Treasurers and Assistant Controllers and such
other appointive officers as may be appropriate and required. They shall be
directly responsible to such officer and shall perform such duties as the
Board or Chairman may from time to time designate.
ARTICLE VI
Certificates Representing Shares
Section 1. The shares of stock of the Company shall be deemed personal
estate, and shall be transferable only on the books of the Company in such
manner as these Bylaws prescribe.
Section 2. Every shareholder in the Company shall be entitled to have a
certificate or certificates representing the number of shares owned by him.
The certificates of shares of stock of the Company shall be numbered and shall
be entered in the books of the Company as they are issued. They shall exhibit
the holder's name and number of shares, and shall be signed by the Chairman,
the President or a Vice President, and the Treasurer or an Assistant Treasurer
and bear the corporate seal; but the signatures of such officers and the seal
of the Company upon such certificates may be facsimiles, engraved or printed
where such certificate is signed by a duly authorized Transfer Agent or Co-
Transfer Agent and a Registrar or Co-Registrar.
Section 3. The Board of Directors may make such rules and regulations as it
may deem expedient concerning the issue, transfer, conversion, and
registration of certificates for shares of the capital stock of the Company.
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Section 4. The Board of Directors may direct a new certificate representing
shares to be issued in place of any certificate theretofore issued by the
Company alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate to be lost or
destroyed. When authorizing such issue of a new certificate, the Board of
Directors, in its discretion and as a condition precedent to the issuance
thereof, may require the owner of such lost or destroyed certificate, or his
legal representative, to advertise the same in such manner as it shall require
and/or give the Company a bond in such form, in such sum, and with such surety
or sureties as it may direct as indemnity against any claim that may be made
against the Company and its Transfer Agents and Registrars and its Co-Transfer
Agents and Co-Registrars with respect to the certificate alleged to have been
lost or destroyed.
Section 5. Transfers of shares of stock shall be made on the books of the
Company only by the person named in the certificate or by attorney, lawfully
constituted in writing, and upon surrender of the certificate therefor.
Section 6. The Board of Directors may close the stock transfer books of the
Company for a period not to exceed sixty (60) days for the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
distribution and share dividend, or in order to make a determination of
shareholders for any purpose, provided that if such books shall be closed for
the purpose of determining shareholders entitled to notice of or to vote at a
shareholders' meeting, such books shall be closed for at least ten (10) days
immediately preceding such meeting. In lieu of so closing the stock transfer
books, the Board of Directors may fix a date in advance, not exceeding sixty
(60) days preceding the date of any meeting of shareholders, or the date for
the payment of any distribution and share dividend or the date for the
allotment of rights, or the date when any change or conversion or exchange of
capital stock shall go into effect, as a record date for the respective
determination of the shareholders entitled to notice of, and to vote at, any
such meeting, or entitled to receive payment of any such distribution and
share dividend, or to any such allotment of rights, or to exercise rights in
respect of any such change, conversion or exchange of capital stock and in
such case such shareholders and only such shareholders as shall be
shareholders of record on the date so fixed shall be entitled to such notice
of, and to vote at, such meeting, or to receive payment of such distribution
and share dividend, or to receive such allotment of rights, or to exercise
such rights, as the case may be, notwithstanding any transfer of any shares of
stock on the books of the Company after any such record date fixed as
aforesaid. In the absence of any designation with respect thereto by the Board
of Directors, the date upon which the notice of a meeting is mailed or
resolutions declaring a distribution and share dividend are adopted shall be
the record date for such determination in regard to meetings of shareholders
or declarations of distributions and share dividends.
Section 7. The Company shall be entitled to treat the holder of record of
any share or of stock as the holder in fact thereof and, accordingly, shall
not be bound to recognize any equitable or other claim to or interest in such
share on the part of any other person, whether or not it shall have express or
other notice thereof, save as expressly provided by the laws of Texas.
Section 8. Bonds, debentures and other evidence of indebtedness of the
Company shall be signed by the Chairman, the President or any Vice President
and the Treasurer or an Assistant Treasurer and shall bear the corporate seal
and when so executed shall be binding upon the Company, but not otherwise. The
seal of the Company thereon may be facsimile, engraved or printed, and where
any such bond, debenture or other evidence of indebtedness is authenticated
with the manual signature of an authorized officer of the Company or trustee
appointed or named by an indenture of trust or other agreement under which
such security is issued, the signature of any of the Company's officers
authorized to execute such security may be facsimile.
Section 9. In case any officer who signed, or whose facsimile signature has
been placed on any certificate representing shares of stock, bond, debenture
or evidence of indebtedness of this Company shall cease to be an officer of
the Company for any reason before the same has been issued or delivered by the
Company, such certificate, bond, debenture or evidence of indebtedness may
nevertheless be issued and delivered as though the person who signed it or
whose facsimile signature had been placed thereon had not ceased to be such
officer.
D-8
<PAGE>
ARTICLE VII
Deeds and Other Instruments of Conveyance
Section 1. Deeds and other instruments of the Company conveying land or any
interest in land shall be signed by the Chairman, the President or a Vice
President or attorney-in-fact of the Company when authorized by appropriate
resolution of the Board of Directors or shareholders, and when required by
law, shall be attested by the Corporate Secretary or an Assistant Corporate
Secretary and shall bear the corporate seal, and when so executed shall be
binding upon the Company, but not otherwise.
ARTICLE VIII
Checks, Drafts and Bills of Exchange
Section 1. The Chairman or the President of the Company may from time to
time establish General Bank Accounts, Depository Bank Accounts, and such
Special Bank Accounts as in the judgment of either of them may be needed in
carrying on and dispatching the business of the Company. All checks, drafts
and bills of exchange issued in the name of the Company and calling for the
payment of money out of said General Accounts, Depository Accounts, or Special
Accounts of the Company shall be signed by the Controller or Assistant
Controller, or such agents and employees as the Chairman or the President may
from time to time designate and authorize to sign for the Controller, and
countersigned by the Treasurer or any Assistant Treasurer, or such agents and
employees as the Chairman or the President may from time to time designate and
authorize to sign for the Treasurer; and when so designated by the Chairman or
the President, the signature of the Treasurer or an Assistant Treasurer may be
affixed by the use of a check-signing machine; provided that for the purpose
of transferring funds from any bank or depository at which the Company has
funds on deposit to any other bank or depository of the Company for credit to
the Company's account, a form of check having plainly printed upon its face
"DEPOSITORY TRANSFER CHECK," and being by its wording payable to a bank or
depository for credit to the account of the Company, is hereby authorized, and
such checks shall require no signature other than the name of the Company
printed at the lower right corner; and further provided that checks, drafts
and bills of exchange issued in the name of the Company in the amount of
$25,000.00 or less need bear only one signature and that being the signature
of the Treasurer or an Assistant Treasurer, affixed either manually or by the
use of a check-signing machine, or the manual signature of such agents and
employees as the Chairman or the President may from time to time designate and
authorize to sign for the Treasurer; and provided further that checks and
drafts issued in the name of the Company and calling for the payment of
production revenue or royalties need bear only one signature and that being
the signature of the Treasurer or an Assistant Treasurer, affixed either
manually or by the use of a check-signing machine, or the manual signature of
such agents and employees as the Chairman or the President may from time to
time designate and authorize to sign for the Treasurer; and provided further
that checks and drafts issued in the name of the Company and calling for
payment of money out of Special Bank Accounts established for the payment of
dividends need bear only one signature and that being the signature of the
Treasurer or an Assistant Treasurer, affixed either manually or by the use of
a check-signing machine, or the manual signature of such agents and employees
as the Chairman or the President may from time to time designate and authorize
to sign for the Treasurer; and further provided that no person authorized to
sign checks or drafts may sign a check or draft payable to himself. When in
such applicable manner, but not otherwise, every check, draft or bill of
exchange issued in the name of the Company and calling for the payment of
money out of the General Bank Accounts, Depository Bank Accounts, and Special
Bank Accounts of the Company shall be valid and enforceable according to its
wording, tenor and effect, but not otherwise. Provided, however, that for the
purpose of transferring funds between accounts of the Company, from accounts
of the Company to accounts of subsidiaries and affiliates, from accounts of
the Company for the purpose of investment of corporate funds, and from
accounts of the Company for the payment of dividends, the Treasurer or an
Assistant Treasurer, or such agents and employees as the Chairman or the
President may from time to time designate and authorize, may make such
transfer of funds by bank wire transfers through oral or written instructions;
and for the purpose of transferring funds from accounts of the Company to
accounts of other third
D-9
<PAGE>
parties, such funds may be transferred by bank wire transfers but only upon
written instructions from the Treasurer or an Assistant Treasurer, or such
agents and employees as the Chairman or the President may from time to time
designate and authorize to sign for the Treasurer, and countersigned by the
Controller or Assistant Controller, or such agents and employees as the
Chairman or the President may from time to time designate and authorize to
sign for the Controller.
Section 2. The Treasurer of the Company may establish special bank accounts
designated as Agent's Account in such bank or banks as in his judgment may be
needed in carrying on and dispatching the business of the Company, provided
that the Treasurer in establishing and maintaining such accounts shall keep
only such funds therein and in such amount as may be required for the local
needs of such accounts and provided that checks or drafts issued against or
drawn on such accounts shall be valid and binding on the Company according to
their wording, tenor and effect when signed by either the Treasurer of the
Company or by such agent or employee of the Company as may be designated by
the Treasurer in writing to such bank or when signed in such manner and by
such agent or employee of the Company as may be designated by the Chairman or
the President of the Company; and further provided that checks and drafts
issued in the name of the Company against funds in such Agent's Account in the
amount of $1,000.00 or more must be countersigned by two persons authorized to
sign such checks or drafts.
ARTICLE IX
Fiscal Year
Section 1. The fiscal year shall begin on the first day of January in each
year.
ARTICLE X
Distributions and Share Dividends
Section 1. Distributions and share dividends upon the outstanding shares of
the Company, subject to the provisions of the Articles of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting. Distributions may be paid in cash or property, and share dividends
may be paid in shares of the authorized but unissued shares or in treasury
shares, of the Company subject to the provisions of the Articles of
Incorporation.
ARTICLE XI
Reserves
Section 1. There may be created by resolution of the Board of Directors out
of the earned surplus of the Company such reserve or reserves as the Directors
from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends, or to repair or maintain any property
of the Company, or for such other purpose as the Directors shall think
beneficial to the Company, and the Directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE XII
Seal
Section 1. The Company's seal shall have inscribed thereon the name of the
Company, the year of the organization and the words "Corporate Seal, Texas."
Said seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
D-10
<PAGE>
ARTICLE XIII
Indemnification
Section 1. The Company shall indemnify, and advance or reimburse reasonable
expenses incurred by, any person who (1) is or was a director, officer,
employee or agent of the corporation, or (2) while a director, officer,
employee or agent of the Company, its divisions or subsidiaries, is or was
serving at the request of the Company, pursuant to a resolution adopted by the
Board of Directors, as a director, officer, partner, venturer, proprietor,
trustee, employee, agent or similar functionary of another foreign or domestic
Company, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise, to the fullest extent that a Company may or
is required to grant indemnification to a director under the Act. The Company,
pursuant to a resolution adopted by the Board of Directors, may indemnify any
such persons to such further extent as permitted by law. Action by the Board
of Directors to amend, modify or terminate this ARTICLE XIII, Section 1, shall
be prospective from the effective date of such action and any rights or
obligations resulting from an event or events occurring prior thereto shall be
governed by the provisions of this ARTICLE XIII, Section 1, as of the date of
such event or events.
ARTICLE XIV
Amendments
Section 1. The power to alter, amend, suspend or repeal the Bylaws or to
adopt new Bylaws shall be vested in, and shall require the approval of, the
majority of Continuing Directors then in office; provided, however, that any
Bylaw or Amendment thereto as adopted by the Board of Directors may be
altered, amended, suspended or repealed by the vote of the holders of 66 2/3%
of the shares entitled to vote for the election of Directors or a new Bylaw in
lieu thereof may be adopted by vote of such shareholders. No Bylaw which has
been altered, amended or adopted by such a vote of the shareholders may be
altered, amended, suspended or repealed by vote of the Directors until two
years after such action by vote of the shareholders.
ARTICLE XV
Restrictions on Foreign Ownership
Section 1. The purpose of this Article XV is to limit ownership and control
of shares of any class of capital stock of the Company by persons who are not
Eligible Citizens in order to permit the Company or any of its Subsidiaries to
conduct its business as a U.S. Mineral Lessee. The Board of Directors is
hereby authorized to adopt such resolutions, and to effect any and all other
measures reasonably necessary or desirable (consistent with applicable law and
the provisions of the Articles of Incorporation) to fulfill the purpose and
implement the restrictions of this Article XV, including without limitation,
requiring, as a condition precedent to the transfer of shares on the records
of the Company, representations and other proof as to the identity of existing
or prospective shareholders and persons on whose behalf of shares of any class
of capital stock of the Company or any interest therein or right thereof are
or are to be held and as to whether or not such persons are Eligible Citizens.
Section 2. Any transfer, or attempted or purported transfer, of any shares
of any class of capital stock issued by the Company or any interest therein or
right thereof, which would result in the ownership or control by one or more
non-Eligible Citizens of the shares of any class of capital stock of the
Company or of any interest or right therein will, until such condition no
longer exists, be void and will be ineffective as against the Company and the
Company will not recognize the purported transferee as a shareholder of the
Company for any purpose other than the transfer of such shares to a person who
is an Eligible Citizen provided, however, that such shares may nevertheless be
deemed to be shares held or owned by non-Eligible Citizens for the purposes of
this Article XV.
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<PAGE>
Section 3. No shares of the outstanding capital stock of the Company or any
class thereof transferred to, or acquired or held by, a non-Eligible Citizen
shall be entitled to receive or accrue any rights with respect to any
dividends or other distributions of assets declared payable or paid to the
holders of such capital stock during such period. Furthermore, no shares held
by or for the benefit of any non-Eligible Citizen will be entitled to vote
with respect to any matter submitted to stockholders of the Company so long as
such condition exists.
Section 4. If at any time (i) the Company is named, or is threatened to be
named, as a party in a judicial or administrative proceeding that seeks the
cancellation or forfeiture of any property, lease, right or license in which
the Company has an interest or (ii) if, in the opinion of the Board of
Directors, the Company's ability to hold any property, lease, right or license
would be prohibited or restricted because of the nationality, citizenship,
residence, or other status, of any shareholder of the Company (or, in the case
of a shareholder which is a Company, partnership or association, of any
shareholder, owner, partner or member of such shareholder), the Company may
redeem the shares held by such shareholder at the then Current Market Price
and upon such terms as shall be determined by the Board of Directors, in their
sole discretion.
Section 5. "Current Market Price" per share of capital stock of the Company
on any date is the average of the Quoted Prices of such class of capital stock
during the four trading weeks before the date in question. In the absence of
one or more such quotations, the Board of Directors shall determine the
current market price on the basis of such quotations as it considers
appropriate.
"Eligible Citizen" means any person (including a Company, partnership or
other entity) whose ownership, holding or control of shares in the Company
would not, by reason of such person's citizenship or the citizenship of its
members or owners or otherwise, (1) disqualify the Company or any of its
Subsidiaries from owning, acquiring, holding, possessing, or leasing oil, gas
or other minerals, mineral deposits, land, vessels or any other property,
licenses, or rights of any nature whatsoever in federal lands or leases under
federal laws and regulations in effect from time to time, or (2) violate any
other qualifications as the Board of Directors deems in its reasonable
discretion are necessary or appropriate to permit the Company and its
Subsidiaries to engage in any other business activities for which there may be
qualifications or restrictions on shareholders of the Company or any of its
Subsidiaries applicable under federal or state law. A person is an Eligible
Citizen if the applicable following requirement is met: (1) for an individual,
that he is native-born, naturalized or a derivative Citizen of the United
States or otherwise qualifies as a United States citizen; (2) for a Company,
that is organized or existing under the laws of the United States, a state,
the District of Columbia or United States territory or possession, that at
least 75% of the ownership interest in, and the voting power over, the Company
is held by Eligible Citizens, that the Company's president or other chief
executive officer and the chairman of its board of directors are United States
citizens and that no more than a minority of the number of directors required
to constitute a quorum are non-United States citizens; (3) for a partnership,
that all of the interests in the partnership, are owned by Eligible Citizens;
(4) for a trust, that each of its trustees and each of its beneficiaries is an
Eligible Citizen; and (5) for an association, joint venture, or other entity,
that all members, venturers or other equity participants are Eligible Citizens
and that such association, joint venture or other entity is capable of holding
leases or other interest in federal minerals or lands under the laws of the
United States.
"Quoted Price" means, with respect to any class of capital stock of the
Company, the last reported sales price regular way or, in case no such
reported sale takes place on such day, the average of the closing bid and
asked prices regular way for such day, in each case on the principal national
securities exchange on which the shares of such class of capital stock are
listed or admitted to trading or, if not listed or admitted to trading, the
last sale price regular way for such shares as published by NASDAQ, or if such
last price is not so published by NASDAQ or if no such sale takes place on
such day, the mean between the closing bid and asked prices for such shares as
published by NASDAQ or in the absence of any of the foregoing, the fair market
value as determined by the Board of Directors.
"Subsidiary" means any Company more than 50% of the outstanding capital
stock of which is owned by the Company or any Subsidiary of the Company.
D-12
<PAGE>
"U.S. Mineral Lessee" means any Company or other entity directly or
indirectly owning, acquiring, holding, possessing, or leasing oil, gas or
other minerals, mineral deposits, lands, vessels or any other property,
licenses, or rights of any nature whatsoever in federal lands or leases under
federal laws and regulations in effect from time to time, including, without
limitation, the Mineral Leasing Act of 1920, as amended, 30 U.S.C.A. (S)181 et
seq.
D-13
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Restated Articles of Incorporation provide that, to the
fullest extent permitted by Texas law, directors of the Registrant will not be
liable to the Registrant or its shareholders for monetary damages for any act
or omission occurring in their capacity as a director. Texas law does not
currently authorize the elimination or limitation of the liability of a
director to the extent the director is found liable for (i) any breach of the
director's duty of loyalty to the Registrant or its shareholders, (ii) acts or
omissions not in good faith that constitute a breach of duty of the director
of the Registrant or which involve intentional misconduct or a knowing
violation of law, (iii) transactions from which the director received an
improper benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office or (iv) acts or omissions for which
the liability of a director is expressly provided by an applicable statute.
The Registrant's Restated Articles of Incorporation and its Bylaws grant
mandatory indemnification to directors and officers of the Registrant to the
fullest extent authorized under the Texas Business Corporation Act (the
"TBCA"). In general, a Texas corporation may indemnify a director or officer
who was, is or is threatened to be made a named defendant or respondent in a
proceeding by virtue of his position in the corporation if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, in the case of criminal proceedings,
had no reasonable cause to believe his conduct was unlawful. A Texas
corporation may indemnify a director or officer in an action brought by or in
the right of the corporation only if such director or officer was not found
liable to the corporation, unless or only to the extent that a court finds him
to be fairly and reasonably entitled to indemnity for such expenses as the
court deems proper, within statutory limits.
The above discussion of LSEPO's Restated Articles of Incorporation and
Bylaws and of the TBCA is not intended to be exhaustive and is qualified in
its entirety by the Restated Articles of Incorporation and Bylaws and the
TBCA.
LSEPO maintains director and officer liability insurance providing insurance
protection for specified liabilities under specified terms.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all exhibits filed as a part of this Registration
Statement on Form S-4, including those incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2 Agreement and Plan of Merger dated as of September 10, 1996 between
the Registrant and Enserch Exploration, Inc. (included as Annex A
to the Joint Proxy Statement/Prospectus that forms a part of this
Registration Statement)
3.1 Restated Articles of Incorporation of the Registrant (included as
Annex C to the Joint Proxy Statement/Prospectus that forms a part
of this Registration Statement)
3.2 Bylaws of the Registrant (included as Annex D to the Joint Proxy
Statement/Prospectus that forms a part of this Registration
Statement)
4.1 Form of Common Stock Certificate included as an Exhibit to EEX's
Registration Statement on Form S-4 (No. 33-56792)(2)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
5 Opinion of Jackson & Walker, L.L.P.(1)
8.1 Opinion of King & Spalding regarding tax matters(1)
10.1 Lease Agreement for Garden Banks 388-1 between EEX and Enserch
Exploration Holdings, Inc. (formerly Enserch Exploration, Inc.),
filed as Exhibit 10.3 to EEX's Registration Statement on Form S-4
(No. 33-56792)(2)
10.2 Lease Agreement for Garden Banks 388-2 between EEX and Enserch
Exploration Holdings, Inc. (formerly Enserch Exploration, Inc.),
filed as Exhibit 10.4 to EEX's Registration Statement on Form S-4
(No. 33-56792)(2)
10.3 Lease Agreement for Mississippi Canyon 441 between EEX and Enserch
Exploration Holdings, Inc. (formerly Enserch Exploration, Inc.),
filed as Exhibit 10.5 to EEX's Registration Statement on Form S-4
(No. 33-56792)(2)
10.4 Participation Agreement between EP Operating Limited Partnership
and Mobil Producing Texas and New Mexico Inc., filed as Exhibit
10.6 to EEX's Registration Statement on Form S-4 (No. 33-
56792)(2)
10.5 Stock Purchase Agreement dated as of April 12, 1995, By and
Between PG&E Enterprises, as Seller, and EEX, as Buyer, filed as
Exhibit 10.7 to EEX's Registration Statement on Form S-2 (No. 33-
60461)(2)
10.6 Gas Purchase Contract between EP Operating Company and Lone Star
Gas Company, a division of ENSERCH Corporation, dated January 1,
1988, Amendatory Agreement dated June 1, 1990, Amendatory
Agreement dated July 1, 1992 and Letter Amendment dated August
30, 1993, filed as Exhibit 10.5 to EEX's Form 10-K for the year
ended December 31, 1994(2)
10.7 Natural Gas Sales and Purchase Contract between EP Operating
Limited Partnership and Enserch Gas Company, each effective March
1, 1993, filed as Exhibit 10.9 to EEX's Registration Statement on
Form S-2 (No. 33-60461)(2)
10.8 Natural Gas Sales and Purchase Contract between EP Operating
Limited Partnership and Enserch Gas Company, effective March 1,
1993, and amendment effective November 1, 1994, filed as Exhibit
10.10 to EEX's Registration Statement on Form S-2
(No. 33-60461)(2)
10.9 Agency Agreement between EP Operating Limited Partnership and
Enserch Gas Company effective March 1, 1993, filed as Exhibit
10.11 to EEX's Registration Statement on Form S-2 (No. 33-
60641)(2)
10.10 Credit Agreement among Enserch Exploration, Inc. as Borrower,
Texas Commerce Bank National Association, as Administrative
Agent, The Chase Manhattan Bank, N.A., as Syndication Agent,
Chemical Bank, as Auction Agent and The Lenders now or hereafter
Parties thereto dated as of May 1, 1995, filed as Exhibit 10.19
to EEX's Registration Statement on Form S-2 (No. 33-60641)(2)
10.11 Tax Sharing Agreement between ENSERCH Corporation and Enserch
Exploration, Inc., filed as Exhibit 10.21 to EEX's Registration
Statement on Form S-2 (No. 33-60461)(2)
10.12 Amended and Restated Limited Liability Company Agreement of MIStS
Issuer L.L.C. dated August 4, 1995, filed as Exhibit 10.22 to
EEX's Registration Statement on Form S-2 (No. 33-60461)(2)
10.13 Performance Incentive Plan--Calendar Year 1996, filed as Exhibit
10.15 to EEX's Annual Report on Form 10-K for the year ended
December 31, 1995(2)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.14 ENSERCH Corporation Retirement Income Restoration Plan and
Amendment No. 1 thereto dated September 30, 1994, filed as
Exhibit 10.10 to EEX's Form 10-K for the year ended December 31,
1994(2)
10.15 ENSERCH Corporation Retirement Income Restoration Trust, filed as
Exhibit 10.11 to EEX's Annual Report on Form 10-K for the year
ended December 31, 1994(2)
10.16 Form of Change of Control Agreement executed by certain executive
officers of the Company, filed as Exhibit 10.20 to EEX's Annual
Report on Form 10-K for the year ended December 31, 1995(2)
10.17 Form of Distribution Agreement among ENSERCH, EEX, LSEPO and
Holding Company (included as Annex A-1 to the Agreement and Plan
of Merger)
10.18 Revised and Amended 1996 Stock Incentive Plan of EEX (included as
Annex A-2 to the Agreement and Plan of Merger)
10.19 Form of Tax Allocation Agreement among ENSERCH, New EEX and TUC
and attached Tax Sharing Agreement dated as of January 1, 1995
between ENSERCH and EEX (included as Annex A-3 to the Agreement
and Plan of Merger)
10.20 Form of Tax Assurance Agreement between ENSERCH and New EEX
(included as Annex A-4 to the Agreement and Plan of Merger)
10.21 Rights Agreement dated as of September 10, 1996 between LSEPO and
Harris Trust Company of New York as Rights Agent(1)
10.22 Form of Employment Bonus Agreement executed by certain executive
officers(1)
15 Letter of Deloitte & Touche re unaudited interim financial
information
23.1 Consent of Jackson & Walker, L.L.P. (included in the Exhibit 5
opinion filed herewith)
23.2 Consent of Deloitte & Touche LLP(1)
23.3 Consent of Donaldson, Lufkin & Jenrette Securities Corporation(1)
23.4 Consent of DeGolyer and MacNaughton(1)
23.5 Consents of future directors(1)
23.6 Consent of Arthur Andersen LLP(1)
99 Form of Proxy Card(1)
</TABLE>
--------
(1) Filed herewith.
(2) Incorporated by reference.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
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<PAGE>
Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that
are incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c)(1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED IN THE CITY OF DALLAS, STATE OF TEXAS ON THE 1ST DAY OF
OCTOBER, 1996.
Lone Star Energy Plant Operations,
Inc.
By: /s/ G. R. Bryan
----------------------------------
Name: G. R. Bryan
Title: Chairman
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints each of D.
W. Biegler, W. T. Satterwhite and M. E. Rescoe as his true and lawful attorney-
in-fact and agent, each acting alone, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ G. R. Bryan Chairman and Director October 1, 1996
- ------------------------------------ (Principal Executive
G. R. BRYAN Officer)
/s/ D. W. Biegler Director October 1, 1996
- ------------------------------------
D. W. BIEGLER
/s/ W. T. Satterwhite Director October 1, 1996
- ------------------------------------
W. T. SATTERWHITE
Director October 1, 1996
- ------------------------------------
D. R. LONG
/s/ M. E. Rescoe Director October 1, 1996
- ------------------------------------
M. E. RESCOE
/s/ J. W. Pinkerton Vice President and October 1, 1996
- ------------------------------------ Controller (Principal
J. W. PINKERTON Accounting Officer)
/s/ A. E. Gallatin Vice President and October 1, 1996
- ------------------------------------ Treasurer
A. E. GALLATIN (Principal Financial
Officer)
II-5
<PAGE>
Exhibit 5
October 1, 1996
Lone Star Energy Plant Operations, Inc.
1817 Wood Street
Dallas, Texas 75201
Ladies and Gentlemen:
We have acted as counsel for Lone Star Energy Plant Operations, Inc., a
Texas corporation (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended (the "Act"), by the Company of the
offering of shares of Common Stock, par value $.01 per share (the "Shares"),
of the Company to be issued pursuant to the terms of that certain Agreement
and Plan of Merger dated as of September 10, 1996 (the "Plan of Merger"),
among the Company, ENSERCH Corporation, a Texas corporation, and Enserch
Exploration, Inc., a Texas corporation. A registration statement on Form S-4
(the "Registration Statement") is being filed with the Securities and Exchange
Commission (the "Commission") concurrently with the delivery of this opinion.
In connection with the rendering of this opinion, we have examined and
relied upon the originals or copies, certified to our satisfaction, of such
documents, certificates and instruments as we have deemed necessary for the
expression of the opinions expressed herein, including the Restated Articles
of Incorporation and the Bylaws of the Company, the Plan of Merger, copies of
resolutions of the Board of Directors of the Company authorizing the offering
and the issuance of the Shares and the Registration Statement, as amended, and
all exhibits thereto. In making the foregoing examinations, we have assumed
the genuineness of all signatures on original documents, the authenticity of
all documents submitted to us as originals and the conformity to original
documents of all copies submitted to us.
Based upon the foregoing examination, subject to the comments and exceptions
herein stated, and limited in all respects to the laws of the State of Texas
and the laws of the United States of America, and subject to confirmation that
the Commission has declared the Registration Statement effective, it is our
opinion that the Shares have been duly and validly authorized by the Company,
and when issued in accordance with the terms of the Plan of Merger after
Articles of Merger have been duly filed with the Secretary of State of the
State of Texas in accordance with the Texas Business Corporation Act as
contemplated by the Plan of Merger and a Certificate of Merger shall have been
issued by such official, the Shares will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to our Firm in the Registration
Statement. In giving this consent we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ Jackson P. Walker, L.L.P.
<PAGE>
Exhibit 8.1
KING & SPALDING
1730 Pennsylvania Avenue, N.W.
Washington, D.C. 20006-4706
Telephone: 202/737-0500
Facsimile: 202/626-3737
September 27, 1996
Lone Star Energy Plant Operations, Inc.
1817 Wood Street
Dallas, TX 75201-5598
Enserch Exploration, Inc.
Energy Square II
4849 Greenville Avenue, Suite 1500
Dallas, Texas 75206
Re: Registration Statement on Form S-4 of
Lone Star Energy Plant Operations, Inc.
---------------------------------------
Ladies and Gentlemen:
This opinion is delivered to you in connection with the Registration
Statement on Form S-4 (the "Registration Statement") to be filed with the
Securities and Exchange Commission (the "SEC") by Lone Star Energy Plant
Operations, Inc. ("LSEPO") in connection with the merger of Enserch
Exploration, Inc. ("EEX") with and into LSEPO in which LSEPO's name will be
changed to Enserch Exploration, Inc. ("New EEX") (the "Transaction").
INFORMATION RELIED UPON
-----------------------
In rendering the opinion expressed herein, we have examined such documents
as we have deemed appropriate. Specifically, we have examined, among other
documents, the originals or drafts, as may be applicable, of (i) the
Registration Statement, including the Proxy Statement/Prospectus for EEX and
New EEX (the "Proxy Statement") (ii) the Agreement and Plan of Merger, dated
September 10, 1996, among LSEPO, EEX, and ENSERCH Corporation ("ENSERCH");
(iii) the Agreement and Plan of Distribution among ENSERCH,
<PAGE>
Lone Star Energy Plant Operations, Inc.
Enserch Exploration, Inc.
September 27, 1996
Page 2
EEX, LSEPO, and TUC Holding Company ("Holding Company"); (iv) the Tax
Allocation Agreement among ENSERCH, New EEX, and Texas Utilities Company
("TUC"); (v) the Tax Assurance Agreement between ENSERCH and New EEX; (vi) the
Registration Statement on Form S-4 filed with the SEC on September 20, 1996 by
Holding Company; (vii) the Amended and Restated Agreement and Plan of Merger,
dated April 13, 1996, among ENSERCH, TUC, and Holding Company; (viii) the
Trust Agreement for ENS Holdings Trust, dated December 31, 1994, between
ENSERCH and ENS Holdings Limited Partnership; (ix) the Amendment and
Termination of Trust Agreement for ENS Holdings Trust between ENSERCH and ENS
Holdings Limited Partnership; and (x) the Rights Agreement, dated September
10, 1996, between LSEPO and Harris Trust Company of New York (the Rights
Agent).
In our examination of the documents and in our reliance upon them in
issuing this opinion, we have assumed, with your consent, that all documents
submitted to us as photocopies or by telecopy faithfully reproduce the
originals thereof, that the originals are authentic, that all such documents
submitted to us have been or will be duly executed and validly signed (or
filed, where applicable) to the extent required in substantially the same form
as they have been provided to us, that each executed document will constitute
the legal, valid, binding and enforceable agreement of the signatory parties,
that all representations and statements set forth in the documents are and
will remain true, correct, and complete in all material respects, and that all
obligations imposed on the parties by any of the documents have been or will
be performed or satisfied in accordance with their terms in all material
respects. We have further assumed that, for our examination in connection with
this opinion, you have disclosed to us all of the documents, arrangements or
understandings that are material to the Transaction.
We also have obtained such additional information and representations, upon
which we have relied in rendering this opinion, as we have deemed relevant and
necessary, through consultations with various representatives of ENSERCH and
through written certificates from LSEPO and EEX verifying certain relevant
facts that have been represented to us or that we have been authorized to
assume and upon which we have relied in rendering this opinion.
<PAGE>
Lone Star Energy Plant Operations, Inc.
Enserch Exploration, Inc.
September 27, 1996
Page 3
OPINION
-------
Based on the foregoing, it is our opinion that the statements contained in
the Proxy Statement in the section captioned "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" fairly present in all material respects the information set
forth therein and fairly summarize the matters referred to therein.
This opinion is based on current authorities and upon facts and assumptions
as of this date. It is subject to change in the event of a change in the
applicable law or a change in the interpretation of such law by the courts or
by the Internal Revenue Service. There can be no assurance that legislative
or administrative changes or court decisions will not be forthcoming that
would significantly modify this opinion or cause its withdrawal. We are under
no obligation to inform you of any such changes or decisions. In addition,
our opinion is based solely on the documents that we have examined, the
additional information that we have obtained, and the representations referred
to herein that we have assumed with your consent to be true on the date
hereof. Our opinion cannot be relied upon if any of the material facts
contained in such documents or any such additional information is, or later
becomes, materially inaccurate or if any of the representations referred to
herein are, or later become, materially inaccurate or if the written
certificates required to be delivered prior to the closing of the Mergers are
not delivered. Our opinion represents our legal judgment and has no official
status of any kind. Finally, our opinion is limited to the tax matters
specifically covered thereby.
This letter is furnished by us as counsel for ENSERCH and is solely for the
benefit of ENSERCH, EEX, and LSEPO. We consent to the filing of this opinion
as an exhibit to the Registration Statement in connection with the Transaction
and to the use of our name in the Proxy Statement.
Very truly yours,
KING & SPALDING
<PAGE>
EXHIBIT 10.21
LONE STAR ENERGY PLANT OPERATIONS, INC.
AND
HARRIS TRUST COMPANY OF NEW YORK,
RIGHTS AGENT
-------------------------------
RIGHTS AGREEMENT
DATED AS OF SEPTEMBER 10, 1996
<PAGE>
TABLE OF CONTENTS
Section 1. Certain Definitions 1
Section 2. Appointment of Rights Agent 6
Section 3. Issuance of Rights Certificates 7
Section 4. Form of Rights Certificates 8
Section 5. Countersignature and Registration 9
Section 6. Transfer, Split Up, Combination and
Exchange of Rights Certificates; Mutilated,
Destroyed, Lost or Stolen Rights Certificates 10
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights 11
Section 8. Cancellation and Destruction of Rights Certificates 12
Section 9. Reservation and Availability of Capital Stock 13
Section 10. Preferred Stock Record Date 14
Section 11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights 15
Section 12. Certification of Adjusted Purchase Price or Number of Shares 23
Section 13. Consolidation. Merger or Sale or Transfer of Assets
or Earning Power 23
Section 14. Fractional Rights and Fractional Shares 25
Section 15. Rights of Action 26
Section 16. Agreement of Rights Holders 27
Section 17. Rights Certificate Holder Not Deemed a Shareholder 27
Section 18. Concerning the Rights Agent 28
Section 19. Merger or Consolidation or Change of Name of Rights Agent 28
i
<PAGE>
Section 20. Duties of Rights Agent 29
Section 21. Change of Rights Agent 31
Section 22. Issuance of New Rights Certificates 31
Section 23. Redemption and Termination 32
Section 24. Notice of Certain Events 33
Section 25. Notices 34
Section 26. Supplements and Amendments 34
Section 27. Successors 35
Section 28. Determinations and Actions by the Board of Directors, etc 35
Section 29. Benefits of this Agreement 35
Section 30. Severability 35
Section 31. Governing Law 36
Section 32. Counterparts 36
Section 33. Descriptive Headings 36
Exhibit A -- Statement of Resolution Establishing and
Designating a Series of Shares of Lone
Star Energy Plant Operations, Inc.
Exhibit B -- Form of Rights Certificate
Exhibit C -- Summary of Rights to Purchase Voting
Preferred Stock
ii
<PAGE>
RIGHTS AGREEMENT
----------------
RIGHTS AGREEMENT, dated as of September 10, 1996 (the "Agreement"), between
---------
Lone Star Energy Plant Operations, Inc., a Texas corporation (the "Company"),
-------
and Harris Trust Company of New York, a New York trust company (the "Rights
------
Agent").
- -----
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, effective September 10, 1996 (the "Rights Declaration Date"), the
-----------------------
Board of Directors of the Company (the "Board") authorized the issuance and
distribution of one Right for each share of Common Stock outstanding upon the
close of business on September 30, 1996 (the "Record Date"), and has authorized
-----------
the issuance of one Right (as such number may hereinafter be adjusted pursuant
to the provisions of Section 11(p) hereof) for each share of Common Stock issued
between the Record Date (whether originally issued or delivered from the
Company's treasury) and the Distribution Date (as hereinafter defined), each
Right initially representing the right to purchase one two-hundredths of a share
of $200 Series A Junior Participating Preferred Stock of the Company having the
rights, powers and preferences set forth in the Statement of Resolution of the
Company, attached hereto as Exhibit A upon the terms and subject to the
conditions hereinafter set forth (the "Rights").
------
WHEREAS, the Board has also approved an Agreement and Plan of Merger (the
"EEX Plan of Merger") which provides that (i) ENSERCH Exploration, Inc., a Texas
- -------------------
corporation ("EEX") whose common stock is 83% owned by ENSERCH Corporation
---
("ENSERCH"), shall merge (the "EEX Merger") with and into the Company, (ii) the
- --------- ---------
Company shall be the surviving corporation of the EEX Merger in which the name
of the Company shall be changed to ENSERCH Exploration, Inc. ("New EEX"), and
-------
(iii) this Agreement shall survive the effectiveness the EEX Merger and Rights
shall be issued in respect of all shares of Common Stock issued in the EEX
Merger upon conversion of common stock of EEX or the Company. The EEX Merger
will become effective upon the issuance of a certificate of merger therefor by
the Secretary of State of the State of Texas (the "EEX Merger Effective Time")
-------------------------
and, from and after the EEX Merger Effective Time, all references herein to
"Company" shall become references to New EEX as the surviving corporation of the
- --------
EEX Merger. After the EEX Merger ENSERCH plans to distribute all of the shares
of Common Stock then owned by ENSERCH, expressly including all of the shares
issued to ENSERCH upon the conversion of common stock of EEX into Common Stock
in the EEX Merger, to the holders of the common stock of ENSERCH on a pro rata
basis (the "ENSERCH Distribution").
--------------------
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
-------------------
following terms have the meanings indicated:
1
<PAGE>
(a) "Acquiring Person" shall mean any Person who or which, together with
----------------
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
eighteen percent (18%) or more of the shares of Common Stock then outstanding,
but shall not include (i) the Company, (ii) any Subsidiary of the Company, (iii)
any employee benefit plan of the Company or of any Subsidiary of the Company,
(iv) any Person or entity organized, appointed or established by the Company for
or pursuant to the terms of any such plan, (v) any such Person who has reported
or is required to report such ownership (but less than 20%) on Schedule 13G
under the Exchange Act (or any comparable or successor report) or on Schedule
13D under the Exchange Act (or any comparable or successor report) which
Schedule 13D does not state any intention to or reserve the right to control or
influence the management or policies of the Company or engage in any of the
actions specified in Item 4 of such Schedule (other than the disposition of the
Common Stock) and, within 10 Business Days of being requested by the Company to
advise it regarding the same, certifies to the Company that such Person acquired
shares of Common Stock in excess of 17.9% inadvertently or without knowledge of
the terms of the Rights and who, together with all Affiliates and Associates,
thereafter does not acquire additional shares of Common Stock while the
Beneficial Owner of eighteen percent (18%) or more of the shares of Common Stock
then outstanding; provided, however, that if the Person requested to so certify
-------- -------
fails to do so within 10 Business Days, then such Person shall become an
Acquiring Person immediately after such 10 Business Day Period, (vi) any such
Person who became such a Person solely as a result of having received shares of
Common Stock in the ENSERCH Distribution and who, together with all Affiliates
and Associates, thereafter does not acquire any additional shares of Common
Stock while the Beneficial Owner of eighteen percent (18%) or more of the Common
Stock then outstanding, or (vii) prior to the effective time of the ENSERCH
Distribution, ENSERCH and any of its Subsidiaries and other Affiliates and
Associates.
(b) "Act" shall mean the Securities Act of 1933.
---
(c) "Adjustment Shares" shall have the meaning set forth in Section
-----------------
11(a)(ii) hereof.
(d) "Affiliate" and "Associate" shall have the respective meanings ascribed
--------- ---------
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended and in effect on the date of this
Agreement (the "Exchange Act").
------------
(e) A Person shall be deemed the "Beneficial Owner" of, and shall be deemed
----------------
to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such
right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding (whether or not in
writing) or upon the exercise of conversion rights, exchange rights,
rights, warrants or options, or otherwise; provided, however, that a Person
-------- -------
shall not be deemed the "Beneficial Owner" of, or to "beneficially own,"
(A) securities tendered pursuant to a tender or exchange
2
<PAGE>
offer made by such Person or any of such Person's Affiliates or Associates
until such tendered securities are accepted for purchase or exchange, (E)
securities issuable upon exercise of Rights at any time prior to the
occurrence of a Triggering Event or (C) securities issuable upon exercise
of Rights from and after the occurrence of a Triggering Event which Rights
were acquired by such Person or any of such Person's Affiliates or
Associates prior to the Distribution Date or pursuant to Section 3(a) or
Section 22 hereof (the "Original Rights") or pursuant to Section 11(i)
---------------
hereof in connection with an adjustment made with respect to any Original
Rights;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Exchange Act), including pursuant
to any agreement, arrangement or understanding, whether or not in writing;
provided, however, that a Person shall not be deemed the "Beneficial Owner"
-------- -------
of, or to "beneficially own," any security under this subparagraph (ii) as
a result of an agreement, arrangement or understanding to vote such
security if such agreement, arrangement or understanding: (A) arises solely
from a revocable proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
provisions of the General Rules and Regulations under the Exchange Act, and
(B) is not reportable by such Person on Schedule 13D under the Exchange Act
(or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person
(or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing), for the purpose
of acquiring, holding, voting (except pursuant to a revocable proxy as
described in the proviso to subparagraph (ii) of this paragraph (e)) or
disposing of any voting securities of the Company;
provided, however, that nothing in this paragraph (e) shall cause a Person
- -------- -------
engaged in business as an underwriter of securities to be the "Beneficial Owner"
of, or to "beneficially own," any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until the
expiration of forty (40) days after the date of such acquisition.
Notwithstanding anything contained in this Section 1(e) to the contrary,
securities (including any securities issuable upon conversion or exercise of
such securities) issued (or agreed to be issued) by the Company or a Subsidiary
of the Company to any Person or Persons prior to the Stock Acquisition Date
shall not be deemed to be "beneficially owned" by such Person or Persons for
purposes of determining whether any such Person is an Acquiring Person or
whether a Stock Acquisition Date or a Section 11(a)(ii) Event (as hereinafter
defined) has occurred,
3
<PAGE>
provided that (i) such securities were issued (or agreed to be issued) as part
of a business combination (as hereinafter defined) involving such Person or
Persons which is approved by a majority of the Continuing Directors (as
hereinafter defined) at such time as there are Continuing Directors then in
office, and (ii) it is contemplated at the time of issuance (or agreement to
issue) that such securities will be transferred (and in fact are transferred
within one year of issuance) to other Persons. In the event that such
securities are not transferred to other Persons within one year of issuance,
then such Person or Persons shall be deemed to "beneficially own" all such
securities beneficially owned by it or them at the end of such year. For
purposes hereof, the term "business combination" shall mean any merger or
--------------------
consolidation of the Company or any Subsidiary of the Company with any other
Person, any sale or exchange to the Company or any Subsidiary of the Company of
all or any part of the assets of any other Person or any Subsidiary of such
other Person, any share exchange transaction under the Texas Business
Corporation Act or any other transaction pursuant to which all or any part of
the assets and operations of any other Person and its Subsidiaries are combined
with or acquired by the Company or any Subsidiary of the Company.
(f) "Business Day" shall mean any day other than a Saturday, Sunday or a
------------
day on which banking institutions in the States of Texas or New York are
authorized or obligated by law or executive order to close.
(g) "Close of business" on any given date shall mean 5:00 P.M., New York
-----------------
City time (or Dallas time for purposes of Section 23 hereof), on such date;
provided, however, that if such date is not a Business Day it shall mean 5:00
- -------- -------
P.M., New York City time (or Dallas time for purposes of Section 23 hereof), on
the next succeeding Business Day.
(h) "Common Stock" shall mean the common stock, par value $0.01 per share,
------------
of the Company, except that (i) from and after the effective time of the EEX
Merger, "Common Stock" shall mean the common stock, par value $.01 per share, of
New EEX as the surviving corporation of the EEX Merger, and (ii) "Common Stock"
when used with reference to any Person other than the Company or New EEX shall
mean the capital stock of such Person with the greatest voting power, or the
equity securities or other equity interest having power to control or direct the
management, of such Person.
(i) "Common Stock Equivalents" shall have the meaning set forth in Section
------------------------
11(a)(iii) hereof.
(j) "Continuing Director" shall mean (i) any member of the Board of
-------------------
Directors of the Company, while such Person is a member of the Board, who is not
an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a
representative of an Acquiring Person or of any such Affiliate or Associate, and
was a member of the Board prior to the date of this Agreement, or (ii) any
Person who subsequently becomes a member of the Board, while such Person is a
member of the Board, who is not an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, or a representative of an Acquiring Person or
of any such Affiliate or
4
<PAGE>
Associate, if such Person's nomination for election or election to the Board is
recommended or approved by a majority of the Continuing Directors.
(k) "Current Market Price" shall have the meaning set forth in Section
--------------------
11(d) hereof.
(l) "Current Value" shall have the meaning set forth in Section 11(a)(iii)
-------------
hereof.
(m) "Distribution Date" shall have the meaning set forth in Section 3(a)
-----------------
hereof.
(n) "Equivalent Preferred Stock" shall have the meaning set forth in
--------------------------
Section 11(b) hereof.
(o) "Exchange Act" shall have the meaning set forth in Section 1(d) hereof.
------------
(p) "Expiration Date" shall have the meaning set forth in Section 7(a)
---------------
hereof.
(q) "Final Expiration Date" shall mean the close of business on September
---------------------
10, 2006.
(r) "NASDAQ" shall have the meaning set forth in Section 11(d)(i) hereof.
------
(s) "Original Rights" shall have the meaning set forth in Section 1(e)
---------------
hereof.
(t) "Person" shall mean any individual, firm, corporation, partnership,
------
limited liability company, trust or other entity.
(u) "Preferred Stock" shall mean shares of $200 Series A Junior
---------------
Participating Preferred Stock, without par value, of the Company (New EEX after
the EEX Merger Effective Time) and, to the extent that there are not a
sufficient number of shares of $200 Series A Junior Participating Preferred
Stock authorized to permit the full exercise of the then outstanding Rights,
such other series of Preferred Stock, without par value, of the Company
designated by the Board of Directors for such purpose containing terms
substantially similar to the terms of the $200 Series A Junior Participating
Preferred Stock.
(v) "Principal Party" shall have the meaning set forth in Section 13(b)
---------------
hereof.
(w) "Purchase Price" shall have the meaning set forth in Section 4(a)
--------------
hereof.
(x) "Qualified Offer" shall have the meaning set forth in Section 11(a)(ii)
---------------
hereof.
(y) "Record Date" shall have the meaning set forth in the first WHEREAS
-----------
clause at the beginning of this Agreement.
(z) "Redemption Price" shall have the meaning set forth in Section 23(a)
----------------
hereof.
5
<PAGE>
(aa) "Rights" shall have the meaning set forth in the first WHEREAS clause
------
at the beginning of this Agreement.
(bb) "Rights Agent" shall have the meaning set forth in the parties clause
------------
at the beginning of this Agreement.
(cc) "Rights Certificates" shall have the meaning set forth in Section 3(a)
-------------------
hereof.
(dd) "Rights Declaration Date" shall have the meaning set forth in the
-----------------------
third WHEREAS clause at the beginning of this Agreement.
(ee) "Section 11(a)(ii) Event" shall mean any event described in Section
-----------------------
11(a)(ii) hereof.
(ff) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth in
------------------------------
Section 11(a)(iii) hereof.
(gg) "Section 13 Event" shall mean any event described in clauses (x), (y)
----------------
or (z) of Section 13(a) hereof.
(hh) "Spread" shall have the meaning set forth in Section 11(a)(iii)
------
hereof.
(ii) "Stock Acquisition Date" shall mean the first date of public
----------------------
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed or amended pursuant to Section 13(d) under the
Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has
become such.
(jj) "Subsidiary" shall mean, with reference to any Person, any corporation
----------
or other entity of which an amount of securities or other equity interests with
voting power (in the absence of a contingency) sufficient to elect at least a
majority of the directors, managers or the equivalent of such corporation or
other entity is beneficially owned, directly or indirectly, by such Person, or
otherwise controlled by such Person. The foregoing notwithstanding, each
limited partnership of which the Company or any of its other Subsidiaries is a
general partner shall be deemed to be a Subsidiary of the Company.
(kk) "Substitution Period" shall have the meaning set forth in Section
-------------------
11(a)(iii) hereof.
(ll) "Summary of Rights" shall have the meaning set forth in Section 3(b)
-----------------
hereof.
(mm) "Trading Day" shall have the meaning set forth in Section 11(d)(i)
-----------
hereof.
(nn) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
----------------
Section 13 Event.
6
<PAGE>
Section 2. Appointment of Rights Agent. The Company hereby appoints the
---------------------------
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Stock) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such Co-Rights Agents as it may deem necessary or
desirable.
Section 3. Issuance of Rights Certificates.
-------------------------------
(a) Until the earlier of (i) the close of business on the tenth day after
the Stock Acquisition Date (or, if the tenth day after the Stock Acquisition
Date occurs before the Record Date, the close of business on the Record Date),
or (ii) the close of business on the tenth Business Day (or such later date as
the Board shall determine) after the date that a tender or exchange offer by any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company, or any Person
or entity organized, appointed or established by the Company for or pursuant to
the terms of any such plan) is first published or sent or given within the
meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange
Act, if upon consummation thereof, such Person would be the Beneficial Owner of
eighteen percent (18%) or more of the shares of Common Stock then outstanding
(the earlier of (i) and (ii) being herein referred to as the "Distribution
------------
Date"), (x) the Rights will be evidenced (subject to the provisions of paragraph
- ----
(b) of this Section 3) by the certificates for the Common Stock registered in
the names of the holders of the Common Stock (which certificates for Common
Stock shall be deemed also to be certificates for Rights) and not by separate
certificates, and (y) the Rights will be transferable only in connection with
the transfer of the underlying shares of Common Stock (including a transfer to
the Company). As soon as practicable after the Distribution Date, the Rights
Agent will send by first-class, insured, postage prepaid mail, to each record
holder of the Common Stock as of the close of business on the Distribution Date,
at the address of such holder shown on the records of the Company, one or more
right certificates, in substantially the form of Exhibit B hereto (the "Rights
------
Certificates"), evidencing one Right for each share of Common Stock so held,
- ------------
subject to adjustment as provided herein. In the event that an adjustment in
the number of Rights per share of Common Stock has been made pursuant to Section
11(p) hereof, at the time of distribution of the Rights Certificates, the
Company shall make the necessary and appropriate rounding adjustments (in
accordance with Section 14(a) hereof) so that Rights Certificates representing
only whole numbers of Rights are distributed and cash is paid in lieu of any
fractional Rights. As of and after the Distribution Date, the Rights will be
evidenced solely by such Rights Certificates.
(b) The Company will make available a copy of a Summary of Rights, in
substantially the form attached hereto as Exhibit C (the "Summary of Rights"),
-----------------
to any holder of Rights who may so request from time to time. With respect to
certificates for the Common Stock outstanding as of the Record Date, or which
were issued subsequent to the Record Date, unless and until the Distribution
Date shall occur, the Rights will be evidenced by such certificates for the
Common Stock and the registered holders of the Common Stock shall also be the
registered holders of the
7
<PAGE>
associated Rights. Until the earlier of the Distribution Date or the Expiration
Date, the transfer of any certificates representing shares of Common Stock in
respect of which Rights have been issued shall also constitute the transfer of
the Rights associated with such shares of Common Stock.
(c) Rights shall be issued in respect of all shares of Common Stock which
are issued (whether originally issued or from the Company's treasury and
expressly including all of the shares issued upon the conversion of common
stock of EEX into Common Stock in the EEX Merger) after the Record Date but
prior to the earlier of the Distribution Date or the Expiration Date.
Certificates representing such shares of Common Stock shall also be deemed to be
certificates for Rights, and shall bear the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Rights Agreement between the Company and
the Rights Agent thereunder (the "Rights Agreement"), the terms of which
are hereby incorporated herein by reference and a copy of which is on file
at the principal offices of the Rights Agent. Under certain circumstances,
as set forth in the Rights Agreement, such Rights will be evidenced by
separate certificates and will no longer be evidenced by this certificate.
The Rights Agent will mail to the holder of this certificate a copy of the
Rights Agreement, as in effect on the date of mailing, without charge,
promptly after receipt of a written request therefor. Under certain
circumstances set forth in the Rights Agreement, Rights issued to, or held
by, any Person who is, was or becomes an Acquiring Person or any Affiliate
or Associate thereof (as such terms are defined in the Rights Agreement),
whether currently held by or on behalf of such Person or by any subsequent
holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the transfer
of any of such certificates shall also constitute the transfer of the Rights
associated with the Common Stock represented by such certificates.
Section 4. Form of Rights Certificates.
---------------------------
(a) The Rights Certificates (and the forms of election to purchase and of
assignment to be printed on the reverse thereof) shall each be substantially in
the form set forth in Exhibit B hereto and may have such marks of identification
or designation and such legends, summaries or endorsements printed thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any applicable law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Rights may from time to time be listed, or to
conform to usage. Subject
8
<PAGE>
to the provisions of Section 11 and Section 22 hereof, the Rights Certificates,
whenever distributed, shall be dated as of the Record Date and on their face
shall entitle the holders thereof to purchase such number of one two-hundredths
of a share of Preferred Stock as shall be set forth therein at the price set
forth therein (such exercise price per one two-hundredth of a share, the
"Purchase Price"), but the amount and type of securities purchasable upon the
- ---------------
exercise of each Right and the Purchase Price thereof shall be subject to
adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22
hereof that represents Rights beneficially owned by: (i) an Acquiring Person or
any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding (whether or not in writing)
regarding the transferred Rights or (B) a transfer which the Board has
determined is part of a plan, arrangement or understanding (whether or not in
writing) which has as a primary purpose or effect avoidance of Section 7(e)
hereof, and any Rights Certificate issued pursuant to Section 6 or Section 11
hereof upon transfer, exchange, replacement or adjustment of any other Rights
Certificate referred to in this sentence, shall contain (to the extent feasible)
the following legend:
The Rights represented by this Rights Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement). Accordingly, this Rights Certificate and the Rights represented
hereby may become null and void in the circumstances specified in Section
7(e) of the Rights Agreement.
The Company shall notify the Rights Agent, and, if such notification is
given orally, the Company shall confirm same in writing on or prior to the
Business Day next following, at such time as the Company has notice that any
Person constitutes an Acquiring Person or an Affiliate or Associate of an
Acquiring Person, and until such notice is received by the Rights Agent, the
Rights Agent may conclusively presume for all purposes that the foregoing legend
need be imprinted only on Rights Certificates beneficially owned by Persons that
the Company has previously identified to the Rights Agent as constituting an
Acquiring Person or an Affiliate or Associate of an Acquiring Person and
transferees of any such Persons. The Rights Agent, however, will use its best
efforts to assist the Company in its efforts to identify any such persons.
Section 5. Countersignature and Registration.
---------------------------------
(a) The Rights Certificates shall be executed on behalf of the Company by
its Chairman of the Board, its President or any Vice President, either manually
or by facsimile signature, and
9
<PAGE>
shall have affixed thereto the Company's seal or a facsimile thereof which shall
be attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Rights Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
of the Rights Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Rights Certificates had not ceased to be such officer
of the Company; and any Rights Certificates may be signed on behalf of the
Company by any person who, at the actual date of the execution of such Rights
Certificate, shall be a proper officer of the Company to sign such Rights
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office or offices designated as the appropriate place
for surrender of Rights Certificates upon exercise or transfer, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Rights
Certificates, the number of Rights evidenced on its face by each of the Rights
Certificates and the date of each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
------------------------------------------------------
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
- ----------------------------------------------------------------------
(a) Subject to the provisions of Section 4(b), Section 7(e) and Section 14
hereof, at any time after the close of business on the Distribution Date, and at
or prior to the close of business on the Expiration Date, any Rights Certificate
or Certificates may be transferred, split up, combined or exchanged for another
Rights Certificate or Certificates, entitling the registered holder to purchase
a like number of one two-hundredths of a share of Preferred Stock (or, following
a Triggering Event, Common Stock, other securities, cash or other assets, as the
case may be) as the Rights Certificate or Certificates surrendered then entitled
such holder (or former holder in the case of a transfer) to purchase. Any
registered holder desiring to transfer, split up, combine or exchange any Rights
Certificate or Certificates shall make such request in writing delivered to the
Rights Agent, and shall surrender the Rights Certificate or Certificates to be
transferred, split up, combined or exchanged at the principal office or offices
of the Rights Agent designated for such purpose. Neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Rights Certificate until the registered holder
shall have completed and signed the certificate contained in the form of
assignment on the reverse side of such Rights Certificate and shall have
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial owner) or Affiliates or Associates thereof as the Company
shall reasonably request. Thereupon the Rights Agent shall, subject to Section
4(b), Section 7(e) and Section 14 hereof, countersign and deliver to the Person
entitled thereto a Rights Certificate or Rights Certificates, as the case may
be, as so requested.
10
<PAGE>
The Company may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer, split
up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Rights
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to the Company and
the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificate if
mutilated, the Company will execute. and deliver a new Rights Certificate of
like tenor to the Rights Agent for countersignature and delivery to the
registered owner in lieu of the Rights Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
----------------------------------- -------------------------
(a) Subject to Section 7(e) hereof, the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the principal office or offices of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price with respect to
the total number of one two-hundredths of a share (or other securities, cash or
other assets, as the case may be) as to which such surrendered Rights are then
exercisable, at or prior to the earlier of (i) the close of business on
September 10, 2006 (the "Final Expiration Date"), or (ii) the time at which the
---------------------
Rights are redeemed as provided in Section 23 hereof (the earlier of (i) and
(ii) being herein referred to as the "Expiration Date").
---------------
(b) The Purchase Price for each one two-hundredth of a share of Preferred
Stock pursuant to the exercise of a Right shall initially be $45.00, and shall
be subject to adjustment from time to time as provided in Section 11 and Section
13(a) hereof and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable Rights,
with the form of election to purchase and the certificate duly executed,
accompanied by payment, with respect to each Right so exercised, of the Purchase
Price per one two-hundredth of a share of Preferred Stock (or other shares,
securities, cash or other assets, as the case may be) to be purchased as set
forth below and an amount equal to any applicable transfer tax, the Rights Agent
shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition
from any transfer agent of the shares of Preferred Stock (or make available, if
the Rights Agent is the transfer agent for such shares) certificates for the
total number of one two-hundredths of a share of Preferred Stock to be purchased
and the Company hereby irrevocably authorizes its transfer agent to comply with
all such requests, or (B) if the Company shall have elected to deposit the total
number of shares of
11
<PAGE>
Preferred Stock issuable upon exercise of the Rights hereunder with a depositary
agent, requisition from the depositary agent depositary receipts representing
such number of one two-hundredths of a share of Preferred Stock as are to be
purchased (in which case certificates for the shares of Preferred Stock
represented by such receipts shall be deposited by the transfer agent with the
depositary agent) and the Company will direct the depositary agent to comply
with such request, (ii) requisition from the Company the amount of cash, if any,
to be paid in lieu of fractional shares in accordance with Section 14 hereof,
(iii) after receipt of such certificates or depositary receipts, cause the same
to be delivered to or, upon the order of the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such
holder, and (iv) after receipt thereof, deliver such cash, if any, to or upon
the order of the registered holder of such Rights Certificate. The payment of
the Purchase Price (as such amount may be reduced pursuant to Section 11(a)(iii)
hereof) shall be made in cash or by certified bank check or bank draft payable
to the order of the Company. In the event that the Company is obligated to
issue other securities (including Common Stock) of the Company, pay cash and/or
distribute other property pursuant to Section 11(a) hereof, the Company will
make all arrangements necessary so that such other securities, cash and/or other
property are available for distribution by the Rights Agent, if and when
appropriate.
(d) In case the registered holder of any Rights Certificate shall exercise
less than all the Rights evidenced thereby, a new Rights Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent and delivered to, or upon the order of, the registered holder of
such Rights Certificate, registered in such name or names as may be designated
by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially
owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such, or
(iii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding
(whether or not in writing) regarding the transferred Rights or (B) a transfer
which the Board has determined is part of a plan, arrangement or understanding
(whether or not in writing) which has as a primary purpose or effect the
avoidance of this Section 7(e), shall become null and void without any further
action and no holder of such Rights shall have any rights whatsoever with
respect to such Rights, whether under any provision of this Agreement or
otherwise. The Company shall use all reasonable efforts to insure that the
provisions of this Section 7(e) and Section 4(b) hereof are complied with, but
neither the Company nor the Rights Agent shall have any liability to any holder
of Rights Certificates or other Person as a result of the Company's failure to
make any determinations with respect to an Acquiring Person or its Affiliates,
Associates or transferees hereunder.
12
<PAGE>
(f) Notwithstanding anything in this Agreement to the contrary, neither the
Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise, and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All
---------------------------------------------------
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all canceled Rights Certificates to the Company, or shall, at the
written request of the Company, destroy such canceled Rights Certificates, and
in such case shall deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
---------------------------------------------
(a) The Company covenants and agrees that it will cause to be reserved and
kept available out of its authorized and unissued shares of Preferred Stock
(and, following the occurrence of a Triggering Event, out of its authorized and
unissued shares of Common Stock or other securities, or both, or out of its
authorized and issued shares held in its treasury), the number of shares of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock or other securities, or both) that, as provided in this Agreement
including Section 11(a)(iii) hereof, will be sufficient to permit the exercise
in full of all outstanding Rights.
(b) So long as the shares of Preferred Stock (and, following the occurrence
of a Triggering Event, Common Stock or other securities, or both) issuable and
deliverable upon the exercise of the Rights may be listed on any national
securities exchange, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable, all shares reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, a registration statement under the Act, with respect to the securities
purchasable upon exercise of the Rights on an appropriate form, (ii) cause such
registration
13
<PAGE>
statement to become effective as soon as practicable after such filing, and
(iii) cause such registration statement to remain effective (with a prospectus
at all times meeting the requirements of the Act) until the earlier of (A) the
date as of which the Rights are no longer exercisable for such securities, and
(B) the date of the expiration of the Rights. The Company will also take such
action as may be appropriate under, or to ensure compliance with, the securities
or "blue sky" laws of the various states in connection with the exercisability
of the Rights. The Company may temporarily suspend, for a period of time not to
exceed ninety (90) days after the date set forth in clause (i) of the first
sentence of this Section 9(c), the exercisability of the Rights in order to
prepare and file such registration statement and permit it to become effective.
Upon any such suspension, the Company shall issue a public announcement stating
that the exercisability of the Rights has been temporarily suspended, as well as
a public announcement at such time as the suspension is no longer in effect. In
addition, if the Company shall determine that a registration statement is
required following the Distribution Date, the Company may temporarily suspend
the exercisability of the Rights until such time as a registration statement has
been declared effective. Notwithstanding any provision of this Agreement to the
contrary, the Rights shall not be exercisable in any jurisdiction if the
requisite qualification in such jurisdiction has not been obtained, the exercise
thereof is not permitted under applicable law or a registration statement has
not been declared effective.
(d) The Company covenants and agrees that it will take all such action as
may be necessary to ensure that all one two-hundredths of a share of Preferred
Stock (and, following the occurrence of a Triggering Event, Common Stock or
other securities, or both) delivered upon exercise of Rights shall, at the time
of delivery of the certificates for such shares (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Rights Certificates and of
any certificates for a number of one two-hundredths of a share of Preferred
Stock (or Common Stock or other securities, or both, as the case may be) upon
the exercise of Rights. The Company shall not, however, be required to pay any
transfer tax which may be payable in respect of any transfer or delivery of
Rights Certificates to a Person other than, or the issuance or delivery of a
number of one two-hundredths of a share of Preferred Stock (or Common Stock or
other securities, or both, as the case may be) in respect of a name other than
that of, the registered holder of the Rights Certificates evidencing Rights
surrendered for exercise or to issue or deliver any certificates for a number of
one two-hundredths of a share of Preferred Stock (or Common Stock or other
securities, or both, as the case may be) in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have been
paid (any such tax being payable by the holder of such Rights Certificate at the
time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
14
<PAGE>
Section 10. Preferred Stock Record Date. Each person in whose name any
---------------------------
certificate for a number of one two-hundredths of a share of Preferred Stock (or
Common Stock or other securities, or both, as the case may be) is issued upon
the exercise of Rights shall for all purposes be deemed to have become the
holder of record of such fractional shares of Preferred Stock (or Common Stock
or other securities, or both, as the case may be) represented thereby on, and
such certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; provided, however, that if the
-------- -------
date of such surrender and payment is a date upon which the Preferred Stock (or
Common Stock or other securities, or both, as the case may be) transfer books of
the Company are closed, such Person shall be deemed to have become the record
holder of such shares (fractional or otherwise) on, and such certificate shall
be dated, the next succeeding Business Day on which the Preferred Stock (or
Common Stock or other securities, or both, as the case may be) transfer books of
the Company are open. Prior to the exercise of the Rights evidenced thereby,
the holder of a Rights Certificate shall not be entitled to any rights of a
shareholder of the Company with respect to shares for which the Rights shall be
exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
----------------------------------------------------------
Number of Rights. The Purchase Price, the number and kind of shares covered by
- ----------------
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Stock payable in
shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock,
(C) combine the outstanding Preferred Stock into a smaller number of
shares, or (D) issue any shares of its capital stock in a reclassification
of the Preferred Stock (including any such reclassification in connection
with a consolidation or merger in which the Company is the continuing or
surviving corporation), except as otherwise provided in this Section 11(a)
and Section 7(e) hereof, the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares of
Preferred Stock or capital stock, as the case may be, issuable on such
date, shall be proportionately adjusted so that the holder of any Right
exercised after such time shall be entitled to receive, upon payment of the
Purchase Price then in effect, the aggregate number and kind of shares of
Preferred Stock or capital stock, as the case may be, which, if such Right
had been exercised immediately prior to such date and at a time when the
Preferred Stock transfer books of the Company were open, such holder would
have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination or reclassification. If an event
occurs which would require an adjustment under both this Section 11(a)(i)
and Section 11(a)(ii) hereof, the adjustment provided for in this Section
11(a)(i) shall
15
<PAGE>
be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii) hereof.
(ii) In the event any Person, alone or together with its Affiliates
and Associates, shall, at any time after the Rights Declaration Date,
becomes an Acquiring Person, unless the event causing such Person to become
an Acquiring Person is a transaction set forth in Section 13(a) hereof, or
is an acquisition of shares of Common Stock pursuant to a tender offer or
an exchange offer for all outstanding shares of Common Stock at a price and
on terms determined by a least a majority of the members of the Board who
are not officers of the Company and who are not representatives, nominees,
Affiliates or Associates of an Acquiring Person, after receiving advice
from one or more investment banking firms selected by them, to be (a) at a
price that is fair to shareholders (taking into account all factors that
such members of the Board deem relevant including, without limitation,
prices that could reasonably be achieved if the Company or its assets were
sold on an orderly basis designed to realize maximum value) and (b)
otherwise in the best-interests of the Company and its shareholders (a
"Qualified Offer"), then, promptly following the occurrence of such event,
----------------
proper provision shall be made so that each holder of a Right (except as
provided below and in Section 7(e) hereof) shall thereafter have the right
to receive, upon exercise thereof at the then current Purchase Price in
accordance with the terms of this Agreement, in lieu of a number of one
two-hundredths of a share of Preferred Stock, such number of shares of
Common Stock of the Company as shall equal the result obtained by (x)
multiplying the then current Purchase Price by the then number of one two-
hundredths of a share of Preferred Stock for which a Right was exercisable
immediately prior to the first occurrence of a Section 11(a)(ii) Event, and
(y) dividing that product (which, following such first occurrence, shall
thereafter be referred to as the "Purchase Price" for each Right and for
all purposes of this Agreement) by fifty percent (50%) of the Current
Market Price (determined pursuant to Section 11(d) hereof) per share of
Common Stock on the date of such first occurrence (such number of shares,
the "Adjustment Shares").
-----------------
(iii) In the event that the number of shares of Common Stock which
are authorized by the Company's Articles of Incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise
of the Rights are not sufficient to permit the exercise in full of the
Rights in accordance with the fore going subparagraph (ii) of this Section
11(a), the Company shall: (A) determine the value of the Adjustment Shares
issuable upon the exercise of a Right (the "Current Value") and (B) with
-------------
respect to each Right (subject to Section 7(e) hereof), make adequate
provision to substitute for the Adjustment Shares, upon the exercise of a
Right and payment of the applicable Purchase Price, (1) cash, (2) a
reduction in the Purchase Price, (3) Common Stock or other equity
securities of the Company (including, without limitation, shares, or units
of shares, of voting preferred stock,
16
<PAGE>
such as the Preferred Stock, which the Board has deemed to have essentially
the same value or economic rights as shares of Common Stock (such shares of
voting preferred stock being referred to as "Common Stock Equivalents")),
------------------------
(4) debt securities of the Company, (5) other assets or (6) any combination
of the foregoing, having an aggregate value (in the case of clauses (1),
(3), (4), (5) and (6)) equal to the Current Value (less the amount of any
reduction in the Purchase Price), where such aggregate value has been
determined by the Board based upon the advice of a nationally recognized
investment banking firm selected by the Board; provided, however, that if
-------- -------
the Board shall not have made adequate provision to deliver value pursuant
to clause (B) above within thirty (30) days following the later of (x) the
first occurrence of a Section 11(a)(ii) Event and (y) the date on which the
Company's right of redemption pursuant to Section 23(a) expires (the later
and (y) being referred to herein as the "Section 11(a)(ii) Trigger Date"),
------------------------------
then the Company shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the Purchase Price,
shares of Common Stock (to the extent available) and then, if necessary,
cash, which shares and/or cash have an aggregate value equal to the Spread.
For purposes of the preceding sentence, the term "Spread" shall mean the
------
excess of (i) the Current Value over (ii) the Purchase Price. If the Board
determines in good faith that it is likely that sufficient additional
shares of Common Stock could be authorized for issuance upon exercise in
full of the Rights, the thirty (30) day period set forth above may be
extended to the extent necessary, but not more than ninety (90) days after
the Section 11(a)(ii) Trigger Date, in order that the Company may seek
shareholder approval for the authorization of such additional shares (such
thirty (30) day period, as it may be extended, is hereinafter called the
"Substitution Period"). To the extent that some action is to be taken
--------------------
pursuant to the first and/or third sentences of this Section 11(a)(iii) the
Company (1) shall provide, subject to Section 7(e) hereof, that such action
shall apply uniformly to all outstanding Rights, and (2) may suspend the
exercisability of the Rights until the expiration of the Substitution
Period in order to seek such shareholder approval for such any
authorization of additional shares and/or to decide the appropriate form of
distribution to be made pursuant to such first sentence and to determine
the value thereof. In the event of any such suspension, the Company shall
issue a public announcement stating that the exercis ability of the Rights
has been temporarily suspended, as well as a public announcement at such
time as the suspension is no longer in effect. For purposes of this
Section 11(a)(iii), the value of each Adjustment Share shall be the current
market price per share of the Common Stock on the Section 11(a)(ii) Trigger
Date and the value of any "Common Stock Equivalent" shall be deemed to have
the same value as the Common Stock on such date.
(b) In case the Company shall fix a record date for the issuance of rights,
options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within forty-five (45) calendar
days after such record date) Preferred Stock (or shares
17
<PAGE>
having the same rights, privileges and preferences as the shares of Preferred
Stock ("Equivalent Preferred Stock")) or securities convertible into Preferred
--------------------------
Stock or Equivalent Preferred Stock at a price per share of Preferred Stock or
per share of Equivalent Preferred Stock (or having a conversion price per share,
if a security convertible into Preferred Stock or Equivalent Preferred Stock)
less than the Current Market Price (as determined pursuant to Section 11(d)
hereof) per share of Preferred Stock on such record date, the Purchase Price to
be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of shares of Preferred Stock
outstanding on such record date, plus the number of shares of Preferred Stock
which the aggregate offering price of the total number of shares of Preferred
Stock and/or Equivalent Preferred Stock so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such Current Market Price, and the denominator of which shall be the
number of shares of Preferred Stock outstanding on such record date, plus the
number of additional shares of Preferred Stock and/or Equivalent Preferred Stock
to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible). In case such
subscription price may be paid by delivery of consideration part or all of which
may be in a form other than cash, the value of such consideration shall be as
determined in good faith by the Board, whose determination shall be described in
a statement filed with the Rights Agent and shall be binding on the Rights Agent
and the holders of the Rights. Shares of Preferred Stock owned by or held for
the account of the Company shall not be deemed outstanding for the purpose of
any such computation. Such adjustment shall be made successively whenever such
a record date is fixed, and in the event that such rights or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to all
holders of Preferred Stock (including any such distribution made in connection
with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness, cash (other than a regular quarterly
dividend out of the earnings or retained earnings of the Company), assets (other
than a regular quarterly dividend referred to above or a dividend payable in
Preferred Stock, but including any dividend payable in stock other than
Preferred Stock) or subscription rights or warrants (excluding those referred to
in Section 11(b) hereof), the Purchase Price to be in effect after such record
date shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
Current Market Price (as determined pursuant to Section 11(d) hereof) per share
of Preferred Stock on such record date, less the fair market value (as
determined in good faith by the Board, whose determination shall be described in
a statement filed with the Rights Agent) of the portion of the cash, assets or
evidences of indebtedness so to be distributed or of such subscription rights or
warrants applicable to a share of Preferred Stock and the denominator of which
shall be such Current Market Price (as determined pursuant to Section 11(d)
hereof) per share of Preferred Stock. Such adjustments shall be made
successively whenever such a record date is fixed, and in the event that such
distribution is not so made, the Purchase Price shall be adjusted to be the
Purchase Price which would have been in effect if such record date had not been
fixed.
18
<PAGE>
(d)(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the "Current
-------
Market Price" per share of Common Stock on any date shall be deemed to be
------------
the average of the daily closing prices per share of such Common Stock for
the thirty (30) con secutive Trading Days (as hereinafter defined)
immediately prior to such date, and for purposes of computations made
pursuant to Section 11(a)(iii) hereof, the "Current Market Price" per share
--------------------
of Common Stock on any date shall be deemed to be the average of the daily
closing prices per share of such Common Stock for the ten (10) consecutive
Trading Days immediately following such date; provided, however, that in
-------- -------
the event that the Current Market Price per share of the Common Stock is
determined during a period following the announcement by the issuer of such
Common Stock of (A) a dividend or distribution on such Common Stock payable
in shares of such Common Stock or securities convertible into shares of
such Common Stock (other than the Rights), or (B) any subdivision,
combination or reclassification of such Common Stock, and the ex-dividend
date for such divi dend or distribution, or the record date for such
subdivision, combination or reclassification shall not have occurred prior
to the commencement of the requisite thirty (30) Trading Day or ten (10)
Trading Day period, as set forth above, then, and in each such case, the
"Current Market Price" shall be properly adjusted to take into account ex-
---------------------
dividend trading. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the shares of Common Stock are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed
on the principal national securities exchange on which the shares of Common
Stock are listed or admitted to trading or, if the shares of Common Stock
are not listed or admitted to trading on any national securities exchange,
the last quoted price or, if not so quoted, the average of the high bid and
low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") or such other system then in use, or, if on any such date the
------
shares of Common Stock are not quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional market
maker making a market in the Common Stock selected by the Board. If on any
such date no market maker is making a market in the Common Stock, the fair
value of such shares on such date as determined in good faith by the Board
shall be used. The term "Trading Day" shall mean a day on which the
-----------
principal national securities exchange on which the shares of Common Stock
are listed or admitted to trading is open for the transaction of business
or, if the shares of Common Stock are not listed or admitted to trading on
any national securities exchange, a Business Day. If the Common Stock is
not publicly held or not so listed or traded, "Current
-------
19
<PAGE>
Market Price " per share shall mean the fair value per share as determined
------------
in good faith by the Board, whose determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all
purposes.
(ii) For the purpose of any computation hereunder, the "Current Market
--------------
Price" per share of Preferred Stock shall be determined in the same manner
-----
as set forth above for the Common Stock in clause (i) of this Section 11(d)
(other than the last sentence thereof). If the Current Market Price per
share of Preferred Stock cannot be determined in the manner provided above
or if the Preferred Stock is not publicly held or listed or traded in a
manner described in clause (i) of this Section 11(d), the "Current Market
--------------
Price" per share of Preferred Stock shall be conclusively deemed to be an
-----
amount equal to 200 (as such number may be appropriately adjusted for such
events as stock splits, stock dividends and recapitalizations with respect
to the Common Stock occurring after the date of this Agreement) multiplied
by the Current Market Price per share of the Common Stock. If neither the
Common Stock nor the Preferred Stock is publicly held or so listed or
traded, "Current Market Price" per share of the Preferred Stock shall mean
--------------------
the fair value per share as determined in good faith by the Board, whose
determination shall be described in a statement filed with the Rights Agent
and shall be conclusive for all purposes. For all purposes of this
Agreement, the "Current Market Price" of one two-hundredth of a share of
--------------------
Preferred Stock shall be equal to the Current Market Price of one share of
Preferred Stock divided by 200.
(e) Anything herein to the contrary notwithstanding, no adjustment in the
Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the Purchase Price;
provided, however, that any adjustments which by reason of this Section 11(e)
- -------- -------
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 11 shall be made
to the nearest cent or to the nearest ten-thousandth of a share of Common Stock
or other share or one-millionth of a share of Preferred Stock, as the case may
be. Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
(3) years from the date of the transaction which mandates such adjustment, or
(ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock other than Preferred Stock,
thereafter the number of such other shares so receivable upon exercise of any
Right and the Purchase Price thereof shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Stock contained in Sections 11(a), (b),
(c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7, 9,
10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like
terms to any such other shares.
20
<PAGE>
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one two-hundredths of a
share of Preferred Stock purchasable from time to time hereunder upon exercise
of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one two-hundredths of a
share of Preferred Stock (calculated to the nearest one-millionth) obtained by
(i) multiplying (x) the number of one two-hundredths of a share covered by a
Right immediately prior to this adjustment, by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price, and (ii) dividing
the product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in lieu of any adjustment in the
number of one two-hundredths of a share of Preferred Stock purchasable upon the
exercise of a Right. Each of the Rights outstanding after the adjustment in the
number of Rights shall be exercisable for the number of one two-hundredths of a
share of Preferred Stock for which a Right was exercisable immediately prior to
such adjustment. Each Right held of record prior to such adjustment of the
number of Rights shall become that number of Rights (calculated to the nearest
one-ten-thousandth) obtained by dividing the Purchase Price in effect
immediately prior to adjustment of the Purchase Price by the Purchase Price in
effect immediately after adjustment of the Purchase Price. The Company shall
make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the Rights
Certificates have been issued, shall be at least ten (10) days later than the
date of the public announcement. If Rights Certificates have been issued, upon
each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the option of the Company, the adjusted Purchase
Price) and shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one two-hundredths of a share of Preferred Stock issuable upon the
exercise of the Rights, the Rights
21
<PAGE>
Certificates theretofore and thereafter issued may continue to express the
Purchase Price per one two-hundredth of a share and the number of one two-
hundredths of a share which were expressed in the initial Rights Certificates
issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then stated value, if any, of the number of one two-
hundredths of a share of Preferred Stock issuable upon exercise of the Rights,
the Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable such number of one two-hundredths of a share of
Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuance to the holder of any Right exercised after such record date the number
of one two-hundredths of a share of Preferred Stock and other capital stock or
securities of the Company, if any, issuable upon such exercise over and above
the number of one two-hundredths of a share of Preferred Stock and other capital
stock or securities of the Company, if any, issuable upon such exercise on the
basis of the Purchase Price in effect prior to such adjustment; provided,
--------
however, that the Company shall deliver to such holder a due bill or other
- -------
appropriate instrument evidencing such holder's right to receive such additional
shares (fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board shall determine to be
advisable in order that any (i) consolidation or subdivision of the Preferred
Stock, (ii) issuance wholly for cash of any shares of Preferred Stock at less
than the Current Market Price, (iii) issuance wholly for cash of shares of
Preferred Stock or securities which by their terms are convertible into or
exchangeable for shares of Preferred Stock, (iv) stock dividends or (v) issuance
of rights, options or warrants referred to in this Section 11, hereafter made by
the Company to holders of its Preferred Stock shall not be taxable to such
shareholders.
(n) The Company covenants and agrees that it shall not, at any time after
the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Company in a transaction which complies with Section 11(o) hereof), or (iii)
sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise
22
<PAGE>
eliminate the benefits intended to be afforded by the Rights or (y) prior to,
simultaneously with or immediately after such consolidation, merger or sale, the
shareholders of the Person who constitutes, or would constitute, the "Principal
Party" for purposes of Section 13(a) hereof shall have received a distribution
of Rights previously owned by such Person or any of its Affiliates and
Associates.
(o) The Company covenants and agrees that, after the Distribution Date, it
will not, except as permitted by Section 23 or Section 26 hereof, take (or
permit any Subsidiary to take) any action if at the time such action is taken it
is reasonably foreseeable that such action will diminish substantially or
otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company shall at any time after the Rights Declaration Date and
prior to the Distribution Date (i) declare a dividend on the outstanding shares
of Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, the number of Rights associated
with each share of Common Stock then outstanding, or issued or delivered
thereafter but prior to the Distribution Date, shall be proportionately adjusted
so that the number of Rights thereafter associated with each share of Common
Stock following any such event shall equal the result obtained by multiplying
the number of Rights associated with each share of Common Stock immediately
prior to such event by a fraction the numerator of which shall be the total
number of shares of Common Stock outstanding immediately prior to the occurrence
of the event and the denominator of which shall be the total number of shares of
Common Stock outstanding immediately following the occurrence of such event.
Section 12. Certification of Adjusted Purchase Price or Number of Shares.
------------------------------------------------------------
Whenever an adjustment is made as provided in Section 11 and Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Common Stock, a copy of such certificate, and (c) if a
Distribution Date has occurred, mail a brief summary thereof to each holder of a
Rights Certificate in accordance with Section 25 hereof. The Rights Agent shall
be fully protected in relying on any such certificate and on any adjustment
therein contained.
Section 13. Consolidation. Merger or Sale or Transfer of Assets or
-------------------------------------------------------
Earning Power.
- -------------
(a) In the event that, following the Stock Acquisition Date, directly or
indirectly, (w) the Common Stock shall be acquired by any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof) pursuant to a share exchange transaction effected in accordance
with the applicable provisions of the Texas Business Corporation Act, (x) the
Company shall consolidate with, or merge with and into, any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof), and the Company shall not be the continuing or surviving
corporation of such
23
<PAGE>
consolidation or merger, (y) any Person (other than a Subsidiary of the Company
in a transaction which complies with Section 11(o) hereof) shall consolidate
with, or merge with or into, the Company, and the Company shall be the
continuing or surviving corporation of such consolidation or merger and, in
connection with such consolidation or merger, all or part of the outstanding
shares of Common Stock shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property, or (z) except by
way of a pro-rata distribution to all holders of Common Stock, the Company shall
sell or otherwise transfer (or one or more of its Subsidiaries shall sell or
otherwise transfer), in one transaction or a series of related transactions,
assets or earning power aggregating more than fifty percent (50%) of the assets
or earning power of the Company and its Subsidiaries (taken as a whole) to any
Person or Persons (other than the Company or any Subsidiary of the Company in
one or more transactions each of which complies with Section 11(o) hereof),
then, and in each such case (except as may be contemplated by Section 13(d)
hereof), proper provision shall be made so that: (i) each holder of a Right,
except as provided in Section 7(e) hereof, shall thereafter have the right to
receive, upon the exercise thereof at the then current Purchase Price in
accordance with the terms of this Agreement, such number of validly authorized
and issued, fully paid, non-assessable and freely tradeable shares of Common
Stock of the Principal Party (as hereinafter defined), not subject to any liens,
encumbrances, rights of first refusal or other adverse claims, as shall be equal
to the result obtained by (1) multiplying the then current Purchase Price by the
number of one two-hundredths of a share of Preferred Stock for which a Right is
exercisable immediately prior to the first occurrence of a Section 13 Event (or,
if a Section 11(a)(ii) Event has occurred prior to the first occurrence of a
Section 13 Event, multiplying the number of such one two-hundredths of a share
for which a Right was exercisable immediately prior to the first occurrence of a
Section 11(a)(ii) Event by the Purchase Price in effect immediately prior to
such first occurrence), and dividing that product (which, following the first
occurrence of a Section 13 Event, shall be referred to as the "Purchase Price"
for each Right and for all purposes of this Agreement) by (2) fifty percent
(50%) of the Current Market Price (determined pursuant to Section 11(d)(i)
hereof) per share of the Common Stock of such Principal Party on the date of
consummation of such Section 13 Event; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this Agreement; (iii)
the term "Company" shall thereafter be deemed to refer to such Principal Party,
it being specifically intended that the provisions of Section 11 hereof shall
apply only to such Principal Party following the first occurrence of a Section
13 Event; (iv) such Principal Party shall take such steps (including, but not
limited to, the reservation of a sufficient number of shares of its Common
Stock) in connection with the consummation of any such transaction as may be
necessary to assure that the provisions hereof shall thereafter be applicable,
as nearly as reasonably may be, in relation to its shares of Common Stock
thereafter deliverable upon the exercise of the Rights; and (v) the provisions
of Section 11(a)(ii) hereof shall be of no effect following the first occurrence
of any Section 13 Event.
(b) "Principal Party" shall mean:
-----------------
(i) in the case of any transaction described in clause (w), (x) or (y)
of the first sentence of Section 13(a), the Person that is the issuer of
any securities into
24
<PAGE>
which shares of Common Stock of the Company are converted in such merger or
consolidation, or for which such shares are exchanged in such share
exchange, and if no securities are so issued, the Person that is the other
party to such merger, consolidation or share exchange; and
(ii) in the case of any transaction described in clause (z) of the
first sentence of Section 13(a), the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to
such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock of such Person
- -------- -------
is not at such time and has not been continuously over the preceding twelve (12)
month period registered under Section 12 of the Exchange Act, and such Person is
a direct or indirect Subsidiary of another Person the Common Stock of which is
and has been so registered, "Principal Party" shall refer to such other Person;
and (2) in case such Person is a Subsidiary, directly or indirectly, of more
than one Person, the Common Stocks of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such share exchange,
consolidation, merger, sale or transfer unless the Principal Party shall have a
sufficient number of authorized shares of its Common Stock which have not been
issued or reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and further providing that, as soon as practicable after
the date of any share exchange, consolidation, merger or sale of assets
mentioned in paragraph (a) of this Section 13, the Principal Party will:
(i) prepare and file a registration statement under the Act, with
respect to the Rights and the securities purchasable upon exercise of the
Rights on an appropriate form, and will use its best efforts to cause such
registration statement to (A) become effective as soon as practicable after
such filing and (B) remain effective (with a prospectus at all times
meeting the requirements of the Act) until the Expiration Date; and
(ii) will deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which Comply
in all respects with the requirements for registration on Form 10 under the
Exchange Act.
The provisions of this Section 13 shall similarly apply to successive share
exchanges, mergers or consolidations or sales or other transfers. In the event
that a Section 13 Event shall occur at any
25
<PAGE>
time after the occurrence of a Section 11(a)(ii) Event, the Rights which have
not theretofore been exercised shall thereafter become exercisable in the manner
described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary, Section 13
shall not be applicable to a transaction described in subparagraphs (w), (x) and
(y) of Section 13(a) if (i) such transaction is consummated with a Person or
Persons who acquired shares of Common Stock pursuant to a Qualified Offer (or a
wholly owned subsidiary of any such Person or Persons), (ii) the price per share
of Common Stock offered in such transaction is not less than the price per share
of Common Stock paid to all holders of shares of Common Stock whose shares were
purchased pursuant to such tender offer or exchange offer and (iii) the form of
consideration being offered to the remaining holders of shares of Common Stock
pursuant to such transaction is the same as the form of consideration paid
pursuant to such tender offer or exchange offer. Upon consummation of any such
transaction contemplated by this Section 13(d), all Rights hereunder shall
expire.
Section 14. Fractional Rights and Fractional Shares.
---------------------------------------
(a) The Company shall not be required to issue fractions of Rights, except
prior to the Distribution Date as provided in Section 11(p) hereof, or to
distribute Rights Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Rights Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For purposes of this Section 14(a), the current market
value of a whole Right shall be the closing price of the Rights for the Trading
Day immediately prior to the date on which such fractional Rights would have
been otherwise issuable. The closing price of the Rights for any day shall be
the last sale price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New York
Stock Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Rights are listed or admitted to trading, or if the Rights
are not listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board.
If on any such date no such market maker is making a market in the Rights the
fair value of the Rights on such date as determined in good faith by the Board
shall be used.
(b) The Company shall not be required to issue fractions of shares of
Preferred Stock (other than fractions which are integral multiples of one two-
hundredth of a share of Preferred Stock) upon exercise of the Rights or to
distribute certificates which evidence fractional shares of
26
<PAGE>
Preferred Stock (other than fractions which are integral multiples of one two-
hundredth of a share of Preferred Stock). In lieu of fractional shares of
Preferred Stock that are not integral multiples of one two-hundredth of a share
of Preferred Stock, the Company may pay to the registered holders of Rights
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of one two-
hundredth of a share of Preferred Stock. For purposes of this Section 14(b),
the current market value of one two-hun dredth of a share of Preferred Stock
shall be one two-hundredth of the closing price of a share of Preferred Stock
(as determined pursuant to Section 11(d)(ii) hereof) for the Trading Day
immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall not
be required to issue fractions of shares of Common Stock upon exercise of the
Rights or to distribute certificates which evidence fractional shares of Common
Stock. In lieu of fractional shares of Common Stock, the Company may pay to the
registered holders of Rights Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of one (1) share of Common Stock. For purposes of this Section
14(c), the current market value of one share of Common Stock shall be the
closing price of one share of Common Stock (as determined pursuant to Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise.
(d) The holder of a Right by the acceptance of the Rights expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
----------------
Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Stock), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and shall be entitled to specific performance
of the obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by
---------------------------
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
27
<PAGE>
(a) prior to the Distribution Date, the Rights will be transferable only in
connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office or offices of the Rights Agent designated for such purposes, duly
endorsed or accompanied by a proper instrument of transfer and with the
appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name a Rights Certificate
(or, prior to the Distribution Date, the associated Common Stock certificate) is
registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Rights
Certificates or the associated Common Stock certificate made by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and neither
the Company nor the Rights Agent, subject to the last sentence of Section 7(e)
hereof, shall be required to be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither the
Company nor the Rights Agent shall have any liability to any holder of a Right
or other Person as a result of its inability to perform any of its obligations
under this Agreement by reason of any preliminary or permanent injunction or
other order, decree or ruling issued by a court of competent jurisdiction or by
a governmental, regulatory or administrative agency or commission, or any
statute, rule, regulation or executive order promulgated or enacted by any
governmental authority, prohibiting or otherwise restraining performance of such
obligation; provided, however, the Company must use its best efforts to have any
-------- -------
such order, decree or ruling lifted or otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Shareholder. No
--------------------------------------------------
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of one two-
hundredths of a share of Preferred Stock or any other securities of the Company
which may at any time be issuable on the exercise of the Rights represented
thereby, nor shall anything contained herein or in any Rights Certificate be
construed to confer upon the holder of any Rights Certificate, as such, any of
the rights of a shareholder of the Company or any right to vote for the election
of directors or upon any matter submitted to shareholders at any meeting
thereof, or to give or withhold consent to any corporate action, or to receive
notice of meetings or other actions affecting shareholders (except as provided
in Section 24 hereof), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by such Rights Certificate shall
have been exercised in accordance with the provisions hereof.
28
<PAGE>
Section 18. Concerning the Rights Agent.
---------------------------
(a) The Company agrees to pay to the Rights Agent reasonable compensation
for all services rendered by it hereunder and, from time to time, on demand of
the Rights Agent, its reasonable expenses and counsel fees and disbursements and
other disbursements incurred in the administration and execution of this
Agreement and the acceptance, exercise or performance of its duties hereunder.
The Company also agrees to indemnify the Rights Agent for, and to hold it
harmless against, any loss, liability, or expense, incurred without negligence,
bad faith or willful misconduct on the part of the Rights Agent, for anything
done, suffered or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability in the premises (including reasonable
counsel fees and expenses).
(b) The Rights Agent shall be protected and shall incur no liability for or
in respect of any action taken, suffered or omitted by it in connection with its
administration of this Agreement in reliance upon any Rights Certificate or
certificate for Common Stock or for other securities of the Company, instrument
of assignment or transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement, or other paper or document
believed by it to be genuine and to be signed, executed and, where necessary,
verified or acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
----------------------------------------------------------
(a) Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
corporate trust or stock transfer business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto; provided, however, that such corporation would be
-------- -------
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall
succeed to the agency created by this Agreement, any of the Rights Certificates
shall have been countersigned but not delivered, any such successor Rights Agent
may adopt the countersignature of a predecessor Rights Agent and deliver such
Rights Certificates so counter signed; and in case at that time any of the
Rights Certificates shall not have been countersigned, any successor Rights
Agent may countersign such Rights Certificates either in the name of the
predecessor or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed and
at such time any of the Rights Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Rights Certificates so countersigned; and in case at that time
any of the Rights Certificates shall not have been countersigned, the Rights
Agent may countersign such Rights Certificates either in its prior name
29
<PAGE>
or in its changed name; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
----------------------
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action
taken, suffered or omitted by it in good faith and in reliance upon such
opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "Current Market Price") be proved or established by the Company
prior to taking, suffering or omitting any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a certificate signed by
the Chairman of the Board, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Corporate Secretary or any Assistant Corporate
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full and complete authorization to the Rights Agent for any action
taken, suffered or omitted in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own negligence,
bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement, the Summary of
Rights or in the Rights Certificates or be required to verify the same (except
as to its countersignature on such Rights Certificates), but all such statements
and recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any cove nant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any adjustment required under the provisions of Section 11 or
Section 13 hereof or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Rights Certificates after actual notice of any such adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock or Preferred Stock to
be issued pursuant to this
30
<PAGE>
Agreement or any Rights Certificate or as to whether any shares of Common Stock
or Preferred Stock will, when so issued, be validly authorized and issued, fully
paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President, the Corporate
Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any action taken,
suffered or omitted to be taken by it in good faith in reliance upon
instructions of any such officer.
(h) The Rights Agent and any shareholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct; provided, however, reasonable care was exercised in the
-------- -------
selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 or 2 thereof, or
both, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
----------------------
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice
31
<PAGE>
in writing mailed to the Company, and to each transfer agent of the Common Stock
and Preferred Stock, by registered or certified mail, and to the holders of the
Rights Certificates by first-class mail. The Company may remove the Rights
Agent or any successor Rights Agent upon thirty (30) days, notice in writing,
mailed to the Rights Agent or successor Rights Agent, as the case may be, and to
each transfer agent of the Common Stock and Preferred Stock, by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. If the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Rights Agent.
If the Company shall fail to make such appointment within a period of thirty
(30) days after giving notice of such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Rights Agent or by the holder of a Rights Certificate (who shall, with such
notice, submit his Rights Certificate for inspection by the Company), then any
registered holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court, shall be a (a) legal
business entity organized and doing business under the laws of the United States
or of the States of Texas or New York (or of any other state of the United
States so long as such corporation is authorized to do business in the States of
Texas or New York), in good standing, having a principal office in the. States
of Texas or New York which is authorized under such laws to exercise corporate
trust or stock transfer powers and is subject to supervision or examination by
federal or state authority and which has at the time of its appointment as
Rights Agent a combined capital and surplus of at least $25,000,000 or (b) an
affiliate of a legal business entity described in clause (a) of this sentence.
After appointment, the successor Rights Agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
as Rights Agent without further act or deed; but the predecessor Rights Agent
shall deliver and transfer to the successor Rights Agent any property at the
time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Stock
and the Preferred Stock, and mail a notice thereof in writing to the registered
holders of the Rights Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
-----------------------------------
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by the Board to reflect any adjustment or change in the
Purchase Price and the number or kind or class of shares or other securities or
property purchasable under the Rights Certificates made in accordance with the
provisions of this Agreement. In addition, in connection with the issuance or
sale of shares of Common Stock following the Distribution Date and prior to the
redemption or expiration of the Rights, the Company (a) shall, with respect to
shares of Common Stock so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement, granted or awarded as of the
Distribution Date, or upon the exercise, conversion or exchange of securities
hereinafter
32
<PAGE>
issued by the Company, and (b) may, in any other case, if deemed necessary or
appropriate by the Board, issue Rights Certificates representing the appropriate
number of Rights in connection with such issuance or sale; provided, however,
-------- -------
that (i) no such Rights Certificate shall be issued if, and to the extent that,
the Company shall be advised by counsel that such issuance would create a
significant risk of material adverse tax consequences to the Company or the
Person to whom such Rights Certificate would be issued, and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption and Termination.
--------------------------
(a) The Board may, at its option, at any time prior to the earlier of (i)
the close of business on the fifteenth day following the Stock Acquisition Date
(or, if the Stock Acquisition Date shall have occurred prior to the Record Date,
the close of business on the fifteenth day following the Record Date), as such
date may be extended from time to time (but in no event more than a year from
the Stock Acquisition Date) by the Board while the Rights are redeemable in
accordance with the terms of this Agreement, or (ii) the Final Expiration Date,
redeem all but not less than all the then outstanding Rights at a redemption
price of $.01 per Right, as such amount may be appropriately adjusted to reflect
any stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"); provided, however, if the Board authorizes redemption of the Rights or
-------- -------
the extension of the redemption period in either of the circumstances set forth
in clauses (i) and (ii) below, then there must be Continuing Directors then in
office and such authorization shall require the concurrence of a majority of
such Continuing Directors: (i) such authorization occurs on or after the time a
Person becomes an Acquiring Person, or (ii) such authorization occurs on or
after the date of a change (resulting from a proxy or consent solicitation) in a
majority of the directors in office at the commencement of such solicitation if
any Person who is a participant in such solicitation has stated (or, if upon the
commencement of such solicitation, a majority of the Board has determined in
good faith) that such Person (or any of its Affiliates or Associates) intends to
take, or may consider taking, any action which would result in such Person
becoming an Acquiring Person or which would cause the occurrence of a Triggering
Event unless, concurrent with such solicitation, such Person (or one or more of
its Affiliates or Associates) is making a tender offer which constitutes a
Qualified Offer (as defined in Section 11(a)(ii) hereof). Notwithstanding
anything contained in this Agreement to the contrary, the Rights shall not be
exercisable after the first occurrence of a Section 11(a)(ii) Event until such
time as the Company's right of redemption hereunder has expired.
(b) Immediately upon the action of the Board ordering the redemption of the
Rights, evidence of which shall have been filed with the Rights Agent and
without any further action and without any notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price for each Right so held. Promptly after
the action of the Board ordering the redemption of the Rights, the Company shall
give notice of such redemption to the Rights Agent and the holders of the then
outstanding Rights by mailing such notice to all such holders at each holder's
last address as it appears upon the registry books
33
<PAGE>
of the Rights Agent or, prior to the Distribution Date, on the registry books of
the transfer agent for the Common Stock. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder receives
the notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
Section 24. Notice of Certain Events.
------------------------
(a) In case the Company shall propose, at any time after the Distribution
Date, (i) to pay any dividend payable in stock of any class to the holders of
Preferred Stock or to make any other distribution to the holders of Preferred
Stock (other than a regular quarterly cash dividend out of earnings or retained
earnings of the Company), or (ii) to offer to the holders of Preferred Stock
rights or warrants to subscribe for or to purchase any additional shares of
Preferred Stock or shares of stock of any class or any other securities, rights
or options, or (iii) to effect any reclassification of its Preferred Stock
(other than a reclassification involving only the subdivision of outstanding
shares of Preferred Stock), or (iv) to effect any consolidation or merger into
or with any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o) hereof), or to effect any sale or
other transfer (or to permit one or more of its Subsidiaries to effect any sale
or other transfer), in one transaction or a series of related transactions, of
more than fifty percent (50%) of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to any other Person or Persons (other than
the Company and/or any of its Subsidiaries in one or more transactions each of
which complies with Section 11(o) hereof), or (v) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 25 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of the shares of Preferred
Stock, if any such date is to be fixed, and such notice shall be so given in the
case of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least twenty (20) days prior to the date of the taking of such proposed action
or the date of participation therein by the holders of the shares of Preferred
Stock whichever shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii) hereof shall
occur, then, in any such case, (i) the Company shall as soon as practicable
thereafter give to each holder of a Rights Certificate, to the extent feasible
and in accordance with Section 25 hereof, a notice of the occurrence of such
event, which shall specify the event and the consequences of the event to
holders of Rights under Section 11(a)(ii) hereof, and (ii) all references in the
preceding paragraph to Preferred Stock shall be deemed thereafter to refer to
Common Stock and/or, if appropriate, other securities.
34
<PAGE>
Section 25. Notices. Notices or demands authorized by this Agreement to
-------
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Lone Star Energy Plant Operations, Inc.
Energy Square II
4849 Greenville Avenue
Dallas, Texas 75206
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
Harris Trust Company of New York
77 Water Street
New York, New York 10005
Attention: Corporate Trust
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by first-
class mail, postage prepaid, addressed to such holder at the address of such
holder as shown on the registry books of the Company.
Section 26. Supplements and Amendments. Prior to the Distribution Date,
--------------------------
the Company and the Rights Agent shall, if the Company so directs, supplement or
amend any provision of this Agreement without the approval of any holders of
certificates representing shares of Common Stock. From and after the
Distribution Date, the Company and the Rights Agent shall, if the Company so
directs, supplement or amend this Agreement without the approval of any holders
of Rights Certificates in order (i) to cure any ambiguity, (ii) to correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provisions herein, (iii) to conform, in the opinion of the Board,
to applicable law, or (iv) to change or supplement the provisions hereunder in
any manner which the Company may deem necessary or desirable and which shall not
adversely affect in any material respect the interests of the holders of Rights
Certificates. Upon the delivery of a certificate from an appropriate officer of
the Company which states that the proposed supplement or amendment is in
compliance with the terms of this Section 26, the Rights Agent shall execute
such supplement or amendment. Prior to the Distribution Date, the interests of
the holders of Rights shall be deemed coincident with the interests of the
holders of Common Stock. Notwithstanding anything contained herein to the
contrary, this Agreement may not be amended prior to the Distribution Date and
following the first occurrence of an event
35
<PAGE>
set forth in clauses (i) and (ii) of the proviso to Section 23(a) hereof, unless
there are Continuing Directors and such amendment is approved by a majority of
the Continuing Directors.
Section 27. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 28. Determinations and Actions by the Board of Directors, etc.
---------------------------------------------------------
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations
under the Exchange Act. The Board (with, where specifically provided for
herein, the con currence of the Continuing Directors) shall have the exclusive
power and authority to administer this Agreement and to exercise all rights and
powers specifically granted to the Board (with, where specifically provided for
herein, the concurrence of the Continuing Directors) or to the Company, or as
may be necessary or advisable in the administration of this Agreement,
including, without limitation, the right and power to (i) interpret the
provisions of this Agreement, and (ii) make all determinations deemed necessary
or advisable for the administration of this Agreement (including a determination
to redeem or not redeem the Rights or to amend the Agreement). All such
actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) which
are done or made by the Board (with, where specifically provided for herein the
concurrence of the Continuing Directors) in good faith, shall (x) be final,
conclusive and binding on the Company, the Rights Agent, the holders of the
Rights and all other parties, and (y) not subject the Board or the Continuing
Directors to any liability to the holders of the Rights.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall
--------------------------
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock).
Section 30. Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
- -------- -------
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board determines
in its good faith judgment that severing the invalid lan guage from this
Agreement would adversely affect the purpose or effect of this Agreement, the
36
<PAGE>
right of redemption set forth in Section 23 hereof shall be reinstated and shall
not expire until the close of business on the tenth day following the date of
such determination by the Board. Without limiting the foregoing, if any
provision requiring a majority of the Continuing Directors to act is held by a
court of competent jurisdiction or other authority to be invalid, void or
unenforceable, such determination shall then be made by the Board in accordance
with applicable law and the Company's Articles of Incorporation and By-Laws.
Section 31. Governing Law. This Agreement, each Right and each Rights
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Texas and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State, except that the rights and
obligations of the Rights Agent shall be governed by the laws of the State of
New York.
Section 32. Counterparts. This Agreement may be executed in any number
------------
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
--------------------
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
Attest: LONE STAR ENERGY PLANT
OPERATIONS, INC.
By: /s/ R. L. Jay By:/s/ J. W. Pinkerton
------------------------------- -----------------------------------
Name: R. L. Jay Name: J. W. Pinkerton
Title: Assistant Corporate Title: Vice President
Secretary
37
<PAGE>
Attest: HARRIS TRUST COMPANY
OF NEW YORK
By:/s/ Charles V. Zade By:/s/ Richard C. Carlson
------------------------------- -----------------------------------
Name: Charles V. Zade Name: Richard C. Carlson
Title: Vice President Title: Vice President
38
<PAGE>
Exhibit A
---------
STATEMENT OF RESOLUTION
ESTABLISHING AND DESIGNATING A SERIES OF SHARES
OF
LONE STAR ENERGY PLANT OPERATIONS, INC.
$200 Series A Junior Participating Preferred Stock, no par value per share
Pursuant to the provisions of Article 2.13 of the Texas Business
Corporation Act, and pursuant to Article Four of its Articles of Incorporation,
the undersigned, Lone Star Energy Plant Operations, Inc. (the "Company"), hereby
-------
submits the following statement for the purposes of establishing and designating
a series of shares and fixing and determining the relative rights and
preferences thereof:
I. The name of the Company is Lone Star Energy Plant Operations, Inc.
II. The following resolution establishing and designating a series of
shares and fixing and determining the relative rights and preferences thereof
was duly adopted by the Board of Directors of the Company effective September
10, 1996:
RESOLVED, that pursuant to the authority conferred upon the Board of
Directors of this Company by the provisions of the Restated Articles of
Incorporation of this Company, the Board of Directors hereby creates a new
series of Preferred Stock of the Company which shall consist of 1,000,000 shares
of no par value, which shall be designated and known as $200 Series A Junior
Participating Preferred Stock, and that in addition to the preferences, rights,
voting powers and the restrictions or qualifications of all shares of Preferred
Stock regardless of series, described and expressed in the Restated Articles of
Incorporation of the Company, the Board of Directors hereby declares that the
shares of the $200 Series A Junior Participating Preferred Stock shall have the
terms, conditions, rights and preferences, as follows:
1. Designation. The shares of such series shall be designated "$200
Series A Junior Participating Preferred Stock" (herein called "Series A
Preferred Stock").
2. Number. The number of shares of Series A Preferred Stock shall be
1,000,000, which number may be increased or decreased by resolution adopted by
the Board of Directors; provided, however, that no decrease shall reduce the
number of authorized shares of Series A Preferred Stock to less than the number
of shares then issued and outstanding plus the number of shares issuable upon
the exercise of outstanding rights, options or warrants or upon conversion of
outstanding securities issued by the Company.
39
<PAGE>
3. Dividends. Subject to the rights of the holders of any shares of any
other series of Preferred Stock (or any similar stock) of the Company with
respect to dividends, but in preference to the holders of shares of the Common
Stock, par value $0.01 per share (the "Common Stock"), of the Company or of any
other class or series of stock of the Company ranking junior to the Series A
Preferred Stock, the holders of shares of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, dividends for each Quarterly Dividend
Period (as hereinafter defined) equal (rounded to the nearest cent) to the
greater of (a) $20 or (b) subject to the provision for adjustment hereinafter
set forth, 200 times the aggregate per share amount of all cash dividends, and
200 times the aggregate per share amount (payable in cash, based upon the fair
market value at the time the non-cash dividend or other distribution is declared
as determined in good faith by the Board of Directors) of all non-cash dividends
or other distributions other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared (but not withdrawn) on the Common Stock during the
immediately preceding Quarterly Dividend Period, or, with respect to the first
Quarterly Dividend Period, since the first issuance of any share or fraction of
a share of Series A Preferred Stock. In the event the Company shall at any time
after September 10, 1996 (the "Rights Declaration Date") (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
As used herein "Quarterly Dividend Period" shall mean a period of three
months which shall commence on February 1, May 1, August 1 and November 1 in
each year (or in the case of original issuance, from the date of original
issuance) and shall end on and include the day next preceding the first date of
the next Quarterly Dividend Period. The first day of each such Quarterly
Dividend Period shall be the dividend payment date for the regular quarterly
dividend payable for the preceding Quarterly Dividend Period, except that the
first dividend on shares of Series A Preferred Stock shall be payable on the
quarterly payment date next succeeding the expiration of 30 days after the date
of initial issue of any shares of the Series A Preferred Stock.
Dividends on the Series A Preferred Stock, if any, shall be cumulative so
that no dividend (other than a dividend payable in Common Stock) or other
distribution shall be paid or declared or made on, and no amounts shall be
applied to the purchase or redemption of, the Common Stock or any other class of
stock ranking junior to the Series A Preferred Stock as to dividends or assets
unless (i) full cumulative dividends for all past Quarterly Dividend Periods
have been paid or declared and set apart for payment, and full cumulative
dividends for the then current Quarterly Dividend Period shall have been or
simultaneously therewith shall be paid and declared on
40
<PAGE>
outstanding Series A Preferred Stock, and (ii) after giving effect to such
payment of dividend, other distribution, purchase or redemption, the aggregate
capital of the Company applicable to all capital stock outstanding ranking
junior to the Series A Preferred Stock as the dividends or assets plus the
consolidated surplus of the Company and its subsidiaries shall exceed the
aggregate amount payable on involuntary dissolution, liquidation or winding up
of the Company on all shares of the Series A Preferred Stock and all stock
ranking prior to on a parity with the Series A Preferred Stock as the dividends
or assets to be outstanding after the payment of such dividend, other
distribution, purchase or redemption. Determinations made with respect to the
declaration and payment of dividends and other distributions shall be made in
accordance with the provisions of the Texas Business Corporation Act, as amended
and in effect at the time (the "TBCA").
4. Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of the Series
A Preferred Stock shall, subject to the prior and superior rights of the holders
of any shares of any other series of Preferred Stock (or any similar stock) of
the Company, be entitled to receive the greater of (a) $200 per share, or (b) an
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 200 times the aggregate amount to be distributed per share to holders
of Common Stock, plus in either instance accrued dividends to the date of
distribution, whether or not earned or declared. In the event the Company shall
at any time after the Rights Declaration Date (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event pursuant to clause
(b) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
No distribution shall be made to the holders of shares of Common Stock or
any other stock ranking junior to the Series A Preferred Stock upon liquidation,
distribution or winding up, unless, prior thereto, the holders of shares of
Series A Preferred Stock shall have received the amounts set forth above. If
the assets available for distribution to holders of shares of Series A Preferred
Stock shall not be sufficient to pay in full the amounts so determined to be
payable on all shares of the Series A Preferred Stock in the event of such
voluntary or involuntary dissolution, liquidation or winding up, as the case may
be, then the assets available for payment shall be distributed ratably among the
holders of the Series A Preferred Stock of all series in accordance with the
amounts so determined to be payable on the shares of each series in the event of
voluntary or involuntary dissolution, liquidation or winding up, as the case may
be, in proportion to the full preferential amounts to which they are
respectively entitled. After payment to the holders of the Series A Preferred
Stock of the full preferential amounts hereinbefore provided for, the holders of
Series A Preferred Stock will have no other rights or claims to any of the
remaining assets of the Company either upon distribution of such assets or upon
dissolution, liquidation or winding up. The sale of all or substantially all of
the property of the Company to, or the merger or consolidation of the Company
into or with, any other corporation, or the purchase or redemption by the
Company of any shares of its Preferred Stock, or its Series A Preferred Stock or
its
41
<PAGE>
Common Stock or any other class of its stock shall not be deemed to be a
distribution of assets or a dissolution, liquidation or winding up for the
purposes of this paragraph.
5. Optional Redemption. So long as full cumulative dividends on all
outstanding shares of Series A Preferred Stock for all dividend periods ending
on or prior to the date fixed for redemption shall have been paid or declared
and set apart for payment and subject to any applicable requirements of Texas
law and the rights of the holders of any shares of any other series of Preferred
Stock (or any similar stock) of the Company, the Company shall have the option
to redeem the whole or any part of the Series A Preferred Stock at any time on
at least 30 days notice in accordance with the provisions of the procedures for
redemptions set forth in the TBCA at a redemption price equal to the greater of
(a) $200 and (b), subject to the provision for adjustment hereinafter set forth,
200 times the "current per share market price" of the Common Stock on the date
of mailing of the notice of redemption, together with unpaid accumulated
dividends to the date of such redemption. In the event the Company shall at any
time after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount to which holders of shares of Series A
Preferred Stock were otherwise entitled immediately prior to such event under
the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event. The "current per share market price" on any date shall be deemed to be
the average of the closing price per share of such Common Stock for the 10
consecutive "trading days" (as such term is hereinafter defined) immediately
prior to such date. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the last quoted price or, if not so quoted the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ") or such other system then in use or, if on any such
date the Common Stock is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Common Stock selected by the Board of Directors of the Company.
If on such date no such market maker is making a market in the Common Stock, the
fair value of the Common Stock on such date as determined in good faith by the
Board of Directors of the Company shall be used. The term "trading day" shall
mean a day on which the principal national securities exchange on which the
Common Stock is listed or admitted to trading is open for the transaction of
business or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday
on
42
<PAGE>
which banking institutions in the State of New York are not authorized or
obligated by law or executive order to close.
6. Treasury Shares. So long as any shares of the Series A Preferred
Stock are outstanding, shares of the Series A Preferred Stock which are
purchased, redeemed or otherwise acquired by the Company shall not be reissued,
or otherwise disposed of, as shares of Series A Preferred Stock.
7. Conversion. Other than as set forth above, the Series A Preferred
Stock shall not have any conversion or exchange rights.
8. Voting Rights.
(A) Each share of Series A Preferred Stock shall entitle the holder thereof
to 200 votes on all matters submitted to a vote of the shareholders of the
Company. In the event the Company shall at any time after the Rights
Declaration Date, (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Series A Preferred Stock shall have no voting rights other than the
voting rights set forth herein, in the Restated Articles of Incorporation of the
Company or as otherwise provided by Texas law.
9. Consolidation, Merger, etc. In case the Company shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or converted or changed into other stock or
securities, cash and/or other property, then in any such case proper provision
shall be made so that each share of Series A Preferred Stock shall at the same
time be similarly exchanged for or converted or changed into an amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
200 times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, for which or into which each
share of Common Stock is exchanged for or converted or changed. In the event
the Company shall at any time after the Rights Declaration Date (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or conversion or change of
shares of Series A Preferred Stock shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common Stock
43
<PAGE>
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
10. Amendment. No change shall be made in any of the rights or
preferences of the Series A Preferred Stock at the time outstanding without the
affirmative vote of at least two-thirds the votes entitled to be cast with
respect to the shares of the Series A Preferred Stock outstanding on the record
date for such meeting in addition to any other vote, if any, as may be required
for such change under the applicable provisions of the Restated Articles of
Incorporation and the laws of the State of Texas at the time applicable thereto.
IN WITNESS WHEREOF, this Statement of Resolution is executed on behalf of
the Company by its Vice President this 10th day of September, 1996.
Lone Star Energy Plant Operations, Inc.
By:
--------------------------------------------
Vice President
44
<PAGE>
Exhibit B
---------
(Form of Rights Certificate]
Certificate No. R- _______ Rights
NOT EXERCISABLE AFTER SEPTEMBER 10, 2006 OR EARLIER IF REDEEMED BY THE COMPANY.
THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER
RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS
DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY
BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR
WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7(e) OF SUCH AGREEMENT./*/
/*/ The portion of the legend in brackets shall be inserted only if
applicable and shall replace the preceding sentence.
Rights Certificate
Lone Star Energy Plant Operations, Inc.
This certifies that , or registered
assigns, is the registered owner of the number of Rights set forth above, each
of which entitles the owner thereof, subject to the terms, provisions and
conditions of the Rights Agreement, dated as of September 10, 1996 (the "Rights
Agreement"), between Lone Star Energy Plant Operations, Inc., a Texas
corporation (the "Company"), and Harris Trust Company of New York, a New York
trust company (the "Rights Agent"), to purchase from the Company at any time
prior to 5:00 P.M. (New York City time) on September 10, 2006 at the office or
offices of the Rights Agent designated for such purpose, or its successors as
Rights Agent, one two-hundredth of a fully paid, non-assessable share of $200
Series A Junior Participating Preferred Stock (the "Preferred Stock") of the
Company, at a purchase price of $45 per one two-hundredth of a share (the
"Purchase Price"), upon
45
<PAGE>
presentation and surrender of this Rights Certificate with the Form of Election
to Purchase and related Certificate duly executed. The number of Rights
evidenced by this Rights Certificate (and the number of shares which may be
purchased upon exercise thereof) set forth above, and the Purchase Price per
share set forth above, are the number and Purchase Price as of March 26, 1996,
based on the Preferred Stock as constituted at such date.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, after such transfer, became an
Acquiring Person, or an Affiliate or Associate of an Acquiring Person, such
Rights shall become null and void and no holder hereof shall have any right with
respect to such Rights from and after the occurrence of such Section 11(a)(ii)
Event.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Preferred Stock or other securities, which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office or offices of the Rights Agent designated
for such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of one two-hundredths of a share of Preferred
Stock as the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $.01 per Right at any time prior to the earlier of the close
of business on (i) the fifteenth day following the Stock Acquisition Date (as
such time period may be extended for up to a year pursuant to the Rights
46
<PAGE>
Agreement), and (ii) the Final Expiration Date. Under certain circumstances set
forth in the Rights Agreement, the decision to redeem or extend the period for
redemption shall require the concurrence of a majority of the Continuing
Directors.
No fractional shares of Preferred Stock will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one two-hundredth of a share of Preferred Stock which may,
at the election of the Company, be evidenced by depositary receipts), but in
lieu thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Preferred
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions af fecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of ____________________ ______, 1996
ATTEST: LONE STAR ENERGY PLANT
OPERATIONS, INC.
______________________________ By_____________________________________
Secretary Title:
Countersigned:
HARRIS TRUST COMPANY OF NEW YORK
By_____________________________
Authorized Signature
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<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED
hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint
______________________________ Attorney, to transfer the within Rights
Certificate on the books of the within-named Company, with full power of
substitution.
Dated: ___________________________, 19____
Signature
Signature Guaranteed:
Certificate
-----------
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
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<PAGE>
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] I did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: _______________, 19____
Signature
Signature Guaranteed:
NOTICE
------
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
49
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)
To: LONE STAR ENERGY PLANT OPERATIONS INC:
The undersigned hereby irrevocably elects to exercise
_____________________ Rights represented by this Rights Certificate to purchase
the shares of Preferred Stock issuable upon the exercise of the Rights (or such
other securities of the Company or of any other person which may be issuable
upon the exercise of the Rights) and requests that certificates for such shares
be issued in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
Dated: ______________________, 19___
Signature
Signature Guaranteed:
50
<PAGE>
Certificate
-----------
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or became an Acquiring Person or an Affiliate or Associate of
an Acquiring Person.
Dated: ______________________, 19___
Signature
Signature Guaranteed:
NOTICE
------
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
51
<PAGE>
Exhibit C
---------
SUMMARY OF RIGHTS TO PURCHASE
VOTING PREFERRED STOCK
Effective September 10, 1996, the Board of Directors of Lone Star
Energy Plant Operations, Inc. (the "Company") authorized the issuance and
distribution of one Right for each outstanding share of Lone Star Energy Plant
Operations, Inc. Common Stock to shareholders of record at the close of business
on September 30, 1996 (the "Record Date"). Each Right entitles the registered
holder to purchase from the Company a unit consisting of one two-hundredth of a
share of $200 Series A Junior Participating Preferred Stock, without par value
(the "Preferred Stock"), at a Purchase Price of $45 per one two-hundredth of a
share, subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement (the "Rights Agreement") between the Company and
Harris Trust Company of New York, as Rights Agent.
Initially, the Rights will be attached to all Common Stock
certificates representing shares then outstanding, and no separate Rights
Certificates will be distributed. The Rights generally will be separate from
the Common Stock and a Distribution Date will occur upon the earlier of (i) 10
days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 18% or more of the outstanding shares of
Common Stock (the "Stock Acquisition Date"), or (ii) 10 business days (or such
later date as the Board shall determine) following the commencement of a tender
offer or exchange offer that would result in a person or group beneficially
owning 18% or more of such outstanding shares of Common Stock. Notwithstanding
the foregoing, a person will not be deemed an Acquiring Person if such person
became such a person solely as a result of acquiring shares of Common Stock in a
distribution by ENSERCH Corporation of all of its shares of the Company to its
shareholders if such person, together with all of its affiliates and associates
does not acquire additional shares of Common Stock while such a beneficial
owner. Until the Distribution Date, (i) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with such Common
Stock certificates, (ii) new Common Stock certificates issued after the Record
Date will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on September 10, 2006, unless earlier redeemed
by the Company as described below.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of the Common Stock as of the
close of business on the Distribution Date and,
52
<PAGE>
thereafter, the separate Rights Certificates alone will represent the Rights.
Except as otherwise determined by the Board of Directors and except in certain
circumstances set forth in the Rights Agreement, only shares of Common Stock
issued prior to the Distribution Date will be issued with Rights.
In the event that a Person becomes the beneficial owner of 18% or more
of the then outstanding shares of Common Stock (except pursuant to an offer for
all outstanding shares of Common Stock which the independent directors determine
to be fair to and otherwise in the best interests of the Company and its
shareholders), each holder of a Right will thereafter have the right to receive,
upon exercise, Common Stock (or, in certain circumstances, other consideration
of the Company) having a value equal to two times the exercise price of the
Right. Notwithstanding any of the foregoing, following the occurrence of the
event set forth in this paragraph, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person will be null and void. However, Rights are not exercisable
following the occurrence of the event set forth above until such time as the
Rights are no longer redeemable by the Company as set forth below.
For example, at an exercise price of $45 per Right, each Right not
owned by an Acquiring Person (or by certain related parties) following an event
set forth in the preceding paragraph would entitle its holder to purchase $90
worth of Common Stock (or other consideration, as noted above) for $45.
Assuming that the Common Stock had a per share value of $10 at such time, the
holder of each valid Right would be entitled to purchase 9 shares of Common
Stock for $45.
In the event that, at any time following the Stock Acquisition Date,
(i) the Company is acquired in a merger or other business combination
transaction in which the Company is not the surviving corporation (other than a
merger which follows an offer described in the second preceding paragraph), (ii)
the Company is acquired pursuant to a share exchange transaction under the Texas
Business Corporation Act, or (iii) 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the exercise price of the Right. The events set forth
in this paragraph and in the second preceding paragraph are referred to as the
"Triggering Events."
At any time until fifteen days following the Stock Acquisition Date,
or such later date not to exceed one year from the Stock Acquisition Date which
may be set by the Board while the Rights are still redeemable, the Company may
redeem the Rights in whole, but not in part, at a price of $.01 per Right.
Under certain circumstances set forth in the Rights Agreement, the decision to
redeem or extend the period of redemption shall require the concurrence of a
majority of the Continuing Directors. Immediately upon the action of the Board
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $.01 redemption price.
53
<PAGE>
The term "Continuing Directors" means any member of the Board of
Directors of the Company who was a member of the Board prior to the date of the
Rights Agreement, and any person who is subsequently elected to the Board if
such person is recommended or approved by a majority of the Continuing
Directors, but shall not include an Acquiring Person, or an affiliate or
associate of an Acquiring Person, or any representative of the foregoing
entities.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders or to the Company, shareholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company or for
common stock of the acquiring company as set forth above.
Any of the provisions of the Rights Agreement may be amended by the
Board (in certain circumstances with the concurrence of a majority of the
Continuing Directors) prior to the Distribution Date. After the Distribution
Date, the provisions of the Rights Agreement may be amended by the Board in
order to cure any ambiguity, to correct any inconsistency, to conform to
applicable law or to make changes which do not adversely affect in any material
respect the interests of holders of Rights.
A copy of the Rights Agreement is available free of charge from the
Rights Agent. This summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
which is incorporated herein by reference.
54
<PAGE>
EXHIBIT 10.22
EMPLOYMENT BONUS AGREEMENT
--------------------------
THIS AGREEMENT, dated the ______ day of __________________, 1996 is between
Enserch Exploration, Inc., a Texas corporation ("EEX") and _______________ (the
"Executive").
WHEREAS, ENSERCH Corporation ("ENSERCH") has entered into a merger
agreement with Texas Utilities Company and intends to distribute or spin-off its
ownership interest in EEX or EEX's successor (the "EEX Shares") to the ENSERCH
shareholders;
WHEREAS, it is important to EEX that the Executive provide good faith
assistance and cooperation with EEX in effecting the spin-off; and
WHEREAS, the Executive is a key employee of EEX and it is important to EEX
that the Executive be motivated to remain in the employ of EEX during the term
of this agreement;
NOW THEREFORE, in consideration of the foregoing and of the mutual promises
contained herein and other good and valuable consideration, EEX and the
Executive agree as follows:
1. Bonus Payment
-------------
(a) EEX will pay to the Executive an employment bonus equal to $___________
(the "Retention Bonus Payment") if the Executive continues his employment with
EEX (uninterrupted other than by normal vacation, holidays, weekends, sick leave
or other standard provisions for employee leave) after the date of the
distribution of the EEX Shares (the "Distribution Date") until a date eighteen
months after the Distribution Date (the "Bonus Date").
(b) The Retention Bonus Payment shall not be payable in the event (i) the
Executive voluntarily terminates his employment with EEX prior to the Bonus
Date, or (ii) the Executive's employment is terminated by EEX for Cause.
"Cause" for termination of the employment of the Executive shall mean (1) an act
or acts of dishonesty or material violation of an EEX policy by, or at the
direction of, the Executive; (2) willful failure or refusal of the Executive to
perform services as properly required by EEX; (3) any action or failure to act
on the part of the Executive which is intended to result in injury to the
assets, business or prospects of EEX; or (4) the conviction of the Executive of
a felony (other than in connection with the possession of a firearm). A
termination of employment by the Executive as a result of EEX having made an
adverse change in the Executive's compensation or a material adverse change in
the Executive's work location shall not be deemed a voluntary termination of
employment.
<PAGE>
2
(c) The Retention Bonus Payment shall be payable to the Executive if the
Executive's employment is terminated by EEX for any reason other than for Cause
either before or after the Distribution Date.
(d) The Retention Bonus Payment, if earned in accordance with the terms of
this agreement, shall be paid within ten days following the Bonus Date. The
Executive shall be entitled to payment of such Retention Bonus Payment if the
Executive's employment is terminated for any reason after the Bonus Date and
prior to payment.
(e) The Retention Bonus Payment under this agreement is not includable as
defined compensation for purposes of pension and welfare benefit determinations.
(f) Retention Bonus Payment under this agreement is in addition to any
other compensation, bonus, change of control or other plans or benefits in which
the Executive participates or will participate with EEX.
2. Death or Disability of Executive
--------------------------------
(a) In the event the Executive dies or the Executive's employment with EEX
is terminated as a result of his total disability (which shall mean the
Executive's incapacity to perform all of his normal duties of employment with
EEX on a full-time basis for more than six months due to physical or mental
illness), then the Executive shall be entitled to a pro rata part of the
Retention Bonus Payment proportional to the Executive's service after the
Distribution Date through the date of death or disability to the Bonus Date;
provided, however, the Retention Bonus Payment shall not be prorated in the
event of the Executive's death while the Executive is performing his duties as
an employee of EEX. In making this calculation in the case of the Executive's
disability, the Executive's service shall be deemed to have ceased upon the
first date that the Executive ceased to perform his employment duties by reason
of the disability.
(b) In the event of the Executive's death, any earned but unpaid Retention
Bonus Payment shall be paid to his estate.
3. The Executive's Agreements
--------------------------
(a) The Executive agrees that he will, in such manner as EEX shall
reasonably request, use his best efforts to assist EEX in completing the
distribution.
(b) The Executive understands that throughout his employment with EEX, the
Executive will be bound by all employment rules, policies and procedures
applicable to employees of EEX and is to devote full energies and attention to
duties currently and additionally assigned.
<PAGE>
3
(c) Without the prior written consent of EEX, the Executive agrees that he
will not take any action that would result in the Executive deriving any
personal benefit (whether direct or indirect and whether pecuniary or otherwise)
as a result of the distribution except as set forth in this agreement or related
written agreements between the Executive and EEX other than with respect to
publicly traded shares or options owned or acquired by the Executive.
(d) The Executive agrees that he will not communicate with any third party
or other person or entity with respect to a possible sale or other acquisition
of EEX or any of its divisions or subsidiaries except as specifically directed
by EEX (other than as may be required to appropriately decline such
discussions). The Executive will inform EEX's Board of Directors of the content
of all oral or written communications to or from the Executive and any person or
entity concerning a prospective sale or other acquisition of EEX.
4. No Assignment
-------------
This agreement is personal to the Executive and shall not be assignable by
the Executive without the prior written consent of EEX. This agreement shall
inure to the benefit of and be enforceable by the parties hereto, and their
respective heirs, personal representatives, successors and assigns.
5. Miscellaneous
-------------
(a) This agreement shall be governed by and construed in accordance with
the substantive laws of the State of Texas. The captions of this agreement are
not part of the provisions hereof and shall have no force or effect. This
agreement may not be amended or modified other than by a written agreement
executed by the parties hereto, nor may any provision hereof be waived except by
a writing signed by the party waiving such provision.
(b) All notices and other communications hereunder shall be in writing and
shall be given when hand delivered to the other party or when mailed to the
other party's address by registered or certified mail, return receipt requested,
postage prepaid.
(c) The invalidity or unenforceability of any provision of this agreement
shall not affect the validity or enforceability of any other provision of this
agreement.
(d) EEX may withhold from any amounts payable under this agreement such
federal, state or local taxes as shall be required to be withheld pursuant to
any applicable law or regulation.
<PAGE>
4
(e) This agreement contains the entire understanding of the parties hereto
with respect to the subject matter hereof.
IN WITNESS WHEREOF, EEX and the Executive have hereunder executed this
agreement of the date above first written.
Enserch Exploration, Inc.
By: _________________________________
____________________________________
Executive
<PAGE>
EXHIBIT 15
Lone Star Energy Plant Operations, Inc.:
We have reviewed in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited interim condensed
consolidated financial information of Enserch Exploration, Inc. and subsidiaries
for the periods ended March 31, 1996 and 1995, and June 30, 1996 and 1995, as
indicated in our reports dated May 1, 1996, and July 29, 1996, respectively;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our reports referred to above, which were included in the
Quarterly Reports on Form 10-Q of Enserch Exploration, Inc. for the quarters
ended March 31, 1996 and June 30, 1996, are being incorporated by reference in
this Registration Statement.
We also are aware that the aforementioned reports, pursuant to Rule 436(c) under
the Securities Act of 1933, are not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Dallas, Texas
September 30, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Lone Star Energy Plant
Operations, Inc. on Form S-4 of our report on Enserch Exploration, Inc. and
subsidiaries dated February 9, 1996 and of our report on Lone Star Energy Plant
Operations, Inc. dated June 19, 1996, appearing or incorporated by reference in
the Prospectus, which is part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE, LLP
Dallas, Texas
September 30, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
We hereby consent to (i) the inclusion of our opinion letter, dated
September 10, 1996, to the Board of Directors of Enserch Exploration, Inc. (the
"Company") as Annex B to the Proxy Statement/Prospectus (the "Proxy
Statement/Prospectus") relating to the merger of the Company with and into Lone
Star Energy Plant Operations, Inc. ("LSEPO"), which constitutes a part of the
Registration Statement on Form S-4 of LSEPO, and (ii) all references to
Donaldson, Lufkin & Jenrette Securities Corporation in the sections of the Proxy
Statement/Prospectus captioned "Summary" and "The Merger." In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under, and we do not admit that we are "experts" for
purposes of, the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE>
EXHIBIT 23.4
[LETTERHEAD OF DEGOLYER AND MACNAUGHTON]
September 30, 1996
Lone Star Energy Plant Operations, Inc.
1817 Wood Street
Dallas, TX 75201
Gentlemen:
We hereby consent to (a) the incorporation by reference in the
Registration Statement on Form S-4 of Lone Star Energy Plant Operations, Inc. to
be filed on or about September 30, 1996 ("S-4 Registration Statement") of
information from our reserves reports as of January 1, 1996, appearing in the
Enserch Exploration, Inc. Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 ("Exploration 1995 Form 10-K") and (b) the references to
us in the Exploration 1995 Form 10-K and S-4 Registration Statement.
Very truly yours,
/s/ DeGolyer and MacNaughton
DeGOLYER and MacNAUGHTON
<PAGE>
EXHIBIT 23.5
CONSENT OF FUTURE DIRECTOR
The undersigned hereby consents to the use of his name as a proposed
director of Lone Star Energy Plant Operations, Inc., a Texas corporation (the
"Company"), in the Registration Statement registering the offering of common
stock of the Company to be filed with the Securities and Exchange Commission in
October of 1996.
/s/ B.A. Bridgewater, Jr.
------------------------------------
B.A. Bridgewater, Jr.
<PAGE>
CONSENT OF FUTURE DIRECTOR
The undersigned hereby consents of the use of his name as a proposed
director of Lone Star Energy Plant Operations, Inc., a Texas corporation (the
"Company"), in the Registration Statement registering the offering of common
stock of the Company to be filed with the Securities and Exchange Commission in
October of 1996.
/s/ F.S. Addy
-----------------------------------
F.S. Addy
<PAGE>
CONSENT OF FUTURE DIRECTOR
The undersigned hereby consents to the use of his name as a proposed
director of Lone Star Energy Plant Operations, Inc., a Texas corporation (the
"Company"), in the Registration Statement registering the offering of common
stock of the Company to be filed with the Securities and Exchange Commission in
October of 1996.
/s/ Gary J. Junco
--------------------
Gary J. Junco
<PAGE>
CONSENT OF FUTURE DIRECTOR
The undersigned hereby consents to the use of his name as a proposed
director of Lone Star Energy Plant Operations, Inc., a Texas corporation (the
"Company"), in the Registration Statement registering the offering of common
stock of the Company to be filed with the Securities and Exchange Commission in
October of 1996.
/s/ W. C. McCord
-------------------
W. C. McCord
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement on Form S-4 of Lone Star Energy
Plant Operations of our report on the financial statements of Dalen Corporation
as of December 31, 1994 and 1993, and for the three years in the period ended
December 31, 1994, dated February 24, 1995, included in Enserch Corporation's
Form 8-K dated May 26, 1995, and to all references to our firm included in this
registration statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Dallas, Texas
September 30, 1996
<PAGE>
EXHIBIT 99
PROXY PROXY
[LOGO OF ENSERCH EXPLORATION, INC.]
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
THE CORPORATION FOR SPECIAL MEETING NOVEMBER 15, 1996
The undersigned hereby appoints F. S. Addy and D. W. Biegler, or either of
them, the attorneys and proxies of the undersigned, each with full power of
substitution, to vote on behalf of the undersigned at the Special Meeting of
Shareholders of Enserch Exploration, Inc., to be held at 301 South Harwood
Street, Dallas, Texas, on Friday, November 15, 1996, at 3:00 p.m., and at any
adjournments or postponements thereof, all the shares of Common Stock of the
Corporation in the name of the undersigned or which the undersigned may be
entitled to vote on the proposal to approve the Plan of Merger and the
transactions contemplated therein ("Plan of Merger") and the proposal to
approve the Revised and Amended 1996 Stock Incentive Plan ("Stock Plan
Amendment"), each as described in the accompanying Joint Proxy
Statement/Prospectus and, in their discretion, upon all such other matters as
may properly come before said meeting; hereby revoking any proxy or proxies
heretofore given by the undersigned.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1 AND 2. IT IS REVOCABLE AT ANY TIME BEFORE IT IS
EXERCISED.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
(Continued and to be signed on reverse side.)
<PAGE>
ENSERCH EXPLORATION, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
The Board of Directors recommends a vote FOR the Plan of Merger.
1. Approval of Plan of Merger
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
The Board of Directors recommends a vote FOR the Stock Plan Amendment.
2. Approval of the Stock Plan Amendment
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. In their discretion, upon such other matters as may properly come before the
meeting.
Dated: _______________, 1996
-----------------------------------------
-----------------------------------------
Signature of Shareholder(s)
THIS PROXY MUST BE SIGNED EXACTLY AS NAME
APPEARS HEREON. EXECUTORS,
ADMINISTRATORS, TRUSTEES, ETC., SHOULD
GIVE FULL TITLE AS SUCH. IF THE SIGNER IS
A CORPORATION, PLEASE SIGN FULL CORPORATE
NAME BY DULY AUTHORIZED OFFICER.
