<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1997
REGISTRATION NO. 333-37835
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
XPLOR ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1311 76-0543361
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION)
STEVEN W. NANCE
PRESIDENT AND CHIEF EXECUTIVE
10200 GROGANS MILL ROAD OFFICER
SUITE 500 XPLOR ENERGY, INC.
THE WOODLANDS, TEXAS 77380 10200 GROGANS MILL ROAD, SUITE 500
(281) 364-3700 THE WOODLANDS, TEXAS 77380
(ADDRESS, INCLUDING ZIP CODE, AND (281) 364-3700
TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE,
INCLUDING AREA CODE, OF REGISTRANT'S AND TELEPHONE NUMBER, INCLUDING
PRINCIPAL EXECUTIVE OFFICES) AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
J. DAVID KIRKLAND, JR. T. MARK KELLY
BAKER & BOTTS, L.L.P. VINSON & ELKINS L.L.P.
3000 ONE SHELL PLAZA 2300 FIRST CITY TOWER
910 LOUISIANA 1001 FANNIN
HOUSTON, TEXAS 77002-4995 HOUSTON, TEXAS 77002
(713) 229-1101 (713) 758-4592
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED (1) PER SHARE (1) PRICE(2)(3) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share........ -- -- $74,175,000 $22,345(4)
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</TABLE>
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(1) In accordance with Rule 457(o) under the Securities Act, the number of
shares being registered and the proposed maximum offering price per share
are not included in this table.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(4) A filing fee of $17,425 has previously been paid, calculated on the former
registration fee rate of 1/33 of 1% of a proposed maximum aggregate
offering price of $57,500,000. The Registrant is registering an additional
$16,675,000 aggregate offering price of securities, and an additional fee
of $4,920 is being paid herewith, calculated on the new registration fee
rate of .000295 of the incremental increase in the proposed maximum
aggregate offering price.
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION
DATED DECEMBER 3, 1997
4,300,000 Shares
[LOGO OF XPLOR ENERGY APPEARS HERE]
Common Stock
(Par value $.001 per share)
The shares of common stock, par value $.001 per share (the "Common Stock"),
offered hereby (the "Offering") are being issued and sold by XPLOR Energy,
Inc., a Delaware corporation (the "Company"). The Company and the Selling
Stockholder identified herein have agreed to sell up to a total of 645,000
shares of Common Stock solely to cover over-allotments, if any.
Prior to the Offering, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for information relating to the
factors considered in determining the initial public offering price of the
Common Stock.
The Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "XPLR."
Shares of Common Stock are being reserved for sale to the Company's employees
and certain other persons at the initial public offering price. See
"Underwriting." Such employees are expected to purchase in the aggregate not
more than five percent of the Common Stock offered in the Offering.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -----------------------------------------------
Total(3) $ $ $
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</TABLE>
(1)The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting."
(2)Before deducting expenses of the Offering payable by the Company estimated
at $1,300,000.
(3)The Company and the Selling Stockholder have granted to the Underwriters a
30-day option to purchase up to an additional 645,000 shares of Common Stock,
on the same terms set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and the proceeds to the Selling Stockholder will
be $ , $ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock offered by this Prospectus are being offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by Vinson
& Elkins L.L.P., counsel for the Underwriters. It is expected that delivery of
the shares of Common Stock will be made against payment therefor on or about
, 1998 at the offices of J.P. Morgan Securities Inc., 60 Wall Street, New
York, New York.
J.P. MORGAN & CO.
PRUDENTIAL SECURITIES INCORPORATED
RAYMOND JAMES & ASSOCIATES, INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
, 1998
<PAGE>
[MAP OF TEXAS AND LOUISIANA AND ADJACENT GULF OF MEXICO; 3-DIMENSIONAL SEISMIC
DATA; 3-DIMENSIONAL XPLOR ENERGY LOGO]
2
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
No person has been authorized to give any information or make any
representations not contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company, the Selling Stockholder or any Underwriter. This Prospectus
does not constitute an offer to sell, or a solicitation of an offer to buy, the
Common Stock in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation.
No action has been or will be taken in any jurisdiction by the Company, the
Selling Stockholder or any Underwriter that would permit a public offering of
the Common Stock or possession or distribution of this Prospectus in any
jurisdiction where action for that purpose is required, other than in the
United States. Persons into whose possession this Prospectus comes are required
by the Company, the Selling Stockholder and the Underwriters to inform
themselves about and to observe any restrictions as to the offering of the
Common Stock and the distribution of this Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
<S> <C> <C> <C>
Prospectus Summary.................. 4 Business.............................................................. 37
Risk Factors........................ 11 Management............................................................ 54
Use of Proceeds..................... 18 Certain Transactions.................................................. 61
Dividend Policy..................... 18 Principal and Selling Stockholders.................................... 66
Dilution............................ 19 Shares Eligible for Future Sale....................................... 67
Capitalization...................... 20 Description of Capital Stock.......................................... 68
The Combination Transaction......... 21 Underwriting.......................................................... 71
Unaudited Pro Forma Consolidated Legal Matters......................................................... 73
Financial Information.............. 22 Experts............................................................... 73
Selected Historical Financial Data.. 26 Additional Information................................................ 73
Management's Discussion and Analysis Glossary of Certain Industry Terms.................................... 74
of Financial Condition and Results Index to Consolidated Financial Statements............................ F-1
of Operations...................... 27 Letter of Petroleum Engineers......................................... A-1
</TABLE>
UNTIL FEBRUARY , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
Prior to the Offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent public
accountants and with quarterly reports containing unaudited consolidated
financial statements for each of the first three quarters of each fiscal year.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus (i) gives effect to the
combination (the "Combination Transaction") in September 1997 of Araxas Energy
Corporation ("Araxas"), South Coast Exploration Company ("South Coast"), SOCO
Exploration, L.P. ("SOCO") and Interactive Exploration Solutions, Inc. ("INEXS"
and, together with South Coast and SOCO, the "South Coast Companies"), (ii)
assumes that the Underwriters' over-allotment option will not be exercised and
(iii) has been adjusted to reflect the 23.2-for-one split of the Common Stock
effected in November 1997. Unless otherwise indicated by the context,
references herein to the "Company" or "XPLOR" are to XPLOR Energy, Inc., a
Delaware corporation, and its corporate and partnership subsidiaries and
predecessors, and information with respect to the reserves and operating
history of the Company includes the combined reserves and operating history of
Araxas and the South Coast Companies. Certain terms used herein relating to the
oil and gas industry are defined in the Glossary of Certain Industry Terms
included elsewhere in this Prospectus.
THE COMPANY
XPLOR is an independent energy company engaged in the exploration for and
development of oil and gas reserves, primarily in the Louisiana and Texas Gulf
Coast region. The Company focuses on growth through drilling, combining
sophisticated technologies such as 3-D seismic data and interactive computer
analytical techniques with an experienced technical staff and management. XPLOR
applies a disciplined exploration methodology consisting of traditional
subsurface geology followed by acquisition and analysis of specifically
targeted 3-D seismic data, integrated with sound engineering and economic
principles. This methodology is designed to use 3-D seismic data cost-
effectively to confirm rather than to generate prospects.
XPLOR was formed through the strategic combination of Araxas and the South
Coast Companies in the Combination Transaction. Management believes that the
Combination Transaction will enhance the Company's ability to increase its
reserves, production and cash flow per share by combining the complementary
strengths of Araxas's operating expertise, the South Coast Companies'
geophysical expertise and the two companies' portfolios of exploration
prospects concentrated in the Gulf Coast region.
Between December 31, 1994 and September 30, 1997, the Company increased its net
proved reserves from approximately 8 Bcfe to approximately 58 Bcfe. Average net
production increased from 260 Mcfe per day for the year ended December 31, 1994
to approximately 9,700 Mcfe per day for the nine months ended September 30,
1997.
Drilling new wells and interpreting 3-D seismic and other data over existing
fields have together generated approximately 60% of the increase in the
Company's estimated proved reserves from December 31, 1994 to September 30,
1997. The Company drilled 48 gross wells during that time, consisting of 29
exploratory wells, of which 15 were commercially productive, and 19 development
wells, of which 17 were commercially productive. The Company also has added
reserves through acquisitions, which accounted for the balance of the reserve
increase from December 31, 1994 to September 30, 1997. During this period, the
Company completed major acquisitions of substantial working interests in the
Adams-Baggett field in Crockett County, Texas and the Main Pass 35 field in the
shallow state waters of Louisiana. The Company's reserve growth has been
achieved at an average finding cost of $0.73 per Mcfe and an average
acquisition cost of $0.70 per Mcfe. Although the Company expects that its
future reserve and production growth will result primarily from its drilling
program, the Company will consider acquisitions with significant growth
potential.
4
<PAGE>
The Company has acquired over 700 square miles of 3-D seismic data and has
leased or optioned acreage in 17 project areas. As of September 30, 1997, XPLOR
had an inventory of 98 exploration and development prospects within these
project areas scheduled to be drilled over the next two years. Prior to the
Offering, capital constraints limited the Company's ability to drill its
prospect inventory. At the closing of this Offering, however, the Company
expects to have $20.0 million available for borrowing under its revolving
credit facility, in addition to its cash flow from operations and the unused
net proceeds from the Offering, available for its drilling program. XPLOR has
budgeted total capital expenditures of approximately $44 million for the period
from October 1, 1997 through the end of 1998, which includes funds for drilling
approximately 80% of its currently identified exploration and development
prospects. The Company believes that its current prospect inventory includes
both moderate potential, lower risk prospects and higher potential, higher risk
prospects that, if successful, may result in significant increases in proved
reserves.
STRENGTHS
XPLOR believes it has the following strengths that are integral to its overall
growth strategy:
Experienced Technical Team
The Company has assembled a technical team that has extensive experience in
applying sophisticated exploration techniques and that it believes has the
capacity to adapt to rapidly changing technological demands. The Company
employs 11 geoscientists, consisting of four geologists and seven
geophysicists, all of whom have 15 to 25 years of experience in exploring for
oil and gas. The Company also has an experienced group of engineers who
participate in the evaluation of the Company's potential projects and manage
the Company's drilling and production operations.
Advanced Technology
The Company's experienced technical team applies advanced technology in oil and
gas exploration and has access to the latest enhancements in such technology.
The Company provides its technical team with a sophisticated in-house computer-
based work environment, which enables the team to evaluate and integrate data
efficiently. XPLOR has 10 networked workstations running the latest 3-D design,
modeling, interpretation, mapping, processing and visualization software
applications.
INEXS, the Company's geophysical consulting subsidiary, is an integral part of
the Company's technology base and gives the Company access to the latest
advances in geoscientific technologies. INEXS has specialized in 3-D seismic
interpretation and project management services since 1990 and has interpreted
over 180 3-D seismic surveys for over 133 companies, including major
integrated, foreign national and independent oil and gas companies. As a result
of this high level of activity, INEXS has formed working relationships with a
number of technology providers. Consequently, INEXS has participated in the
design and testing of new applications, providing the Company with access to
emerging technologies prior to their availability for general use.
Existing Prospect Inventory and Proved Reserves
As of September 30, 1997, XPLOR had an inventory of 98 exploration and
development prospects scheduled to be drilled within the next two years. The
Company has leased or optioned acreage for all 98 prospects. Of these
prospects, 70 are exploratory and 28 are development. The Company also has
identified additional exploratory prospects in various stages of evaluation,
planning and implementation. The Company had total proved reserves of
approximately 58 Bcfe at September 30, 1997, of which approximately 29 Bcfe
were proved developed. For the nine months ended September 30, 1997, net
production averaged approximately 9,700 Mcfe per day.
Experienced Management
XPLOR's executive management has experience in both traditional exploratory and
operational areas and in the application of the latest technological advances.
The Company's executive management has an average of over 20
5
<PAGE>
years of industry experience in engineering, geology, geophysics and finance,
primarily with major integrated and large independent oil and gas companies.
The Company has established both short-term and long-term incentive plans for
management designed to align compensation with the interests of stockholders.
BUSINESS STRATEGY
XPLOR intends to increase its oil and gas reserves, production and cash flow
per share by emphasizing the following:
Growth Through Exploration and Development
The Company believes that its future growth in reserves, production and cash
flow per share will result principally from a combination of exploratory and
development drilling on the Company's inventory of prospects. The Company
follows a disciplined methodology for the evaluation of its prospects,
consisting of four phases: (i) identification of prospects in prolific trends
with a high density of potential reservoirs and traps; (ii) data acquisition
and quality control; (iii) data integration and interdisciplinary review; and
(iv) final decision-making based upon a thorough analysis of economic and
technical information.
Prospect Generation
XPLOR seeks to generate internally the majority of the prospects in which it
participates. This focus on internal prospect generation enables the Company to
control the entire process, from idea formulation to management of prospective
risk and drilling decisions. The Company focuses on defining prospects that
have multiple objectives based on subsurface geology before acquiring 3-D
seismic data. The Company's inventory of prospects has also enabled the Company
to trade for additional desirable prospects held by other oil and gas
companies. In addition, third-party evaluations performed by INEXS provide the
Company with opportunities to participate in exploratory prospects with
industry partners.
Balanced Drilling Program
The Company engages in an active drilling program and attempts to maintain a
balanced portfolio of exploratory and development prospects. The Company's
exploratory prospect portfolio consists of both moderate potential, lower risk
prospects and higher potential, higher risk prospects that, if successful, may
result in significant increases in proved reserves. The Company considers
balancing the relationship between risk and reward in its exploration program
an important component of its business strategy.
Geographic Focus
XPLOR's operating activities are focused onshore and in state waters along the
Gulf Coast, primarily in Louisiana and Texas, where the Company has substantial
technical experience and expertise. Given the region's prolific production
history, the existing infrastructure, existing technical database and the
opportunities that have been created by advances in seismic and drilling
technology, the Company believes that the Gulf Coast represents one of the most
attractive exploration regions in North America. From January 1, 1994 to
September 30, 1997, the Company drilled 42 wells along the Gulf Coast and
acquired a database of geological and engineering data and approximately 400
square miles of 3-D seismic data in the region.
6
<PAGE>
THE COMBINATION TRANSACTION
All of the operations of the Company were previously conducted through Araxas
and the South Coast Companies, the interests of which were acquired, directly
or indirectly, by the Company in the Combination Transaction. An aggregate of
4,709,413 shares of Common Stock and $3.0 million aggregate principal amount of
the Company's notes (the "Combination Notes") were issued in exchange for such
acquired interests. As a result of the Combination Transaction, Araxas and the
South Coast Companies became wholly owned subsidiaries of XPLOR. See "The
Combination Transaction."
THE OFFERING
COMMON STOCK OFFERED BY THE
COMPANY(1)........................ 4,300,000 shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERING(1)(2).................... 9,009,413 shares
USE OF PROCEEDS.................... The Company intends to use approximately
$45.2 million of the net proceeds to repay
outstanding indebtedness of the Company.
The remainder of the net proceeds, along
with borrowings under the Company's
revolving credit facility, will be used
for general corporate purposes, including
funding the Company's exploration and
development activities. See "Use of
Proceeds."
DIVIDEND POLICY.................... The Company does not intend to declare or
pay dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
LISTING............................ The Common Stock has been approved for
quotation on the Nasdaq National Market.
PROPOSED NASDAQ NATIONAL MARKET
SYMBOL............................ XPLR
- --------
(1) Assumes the Underwriters' over-allotment option for up to 545,000 shares of
Common Stock granted by the Company and up to 100,000 shares of Common Stock
granted by the Selling Stockholder is not exercised. See "Underwriting."
(2) Excludes an aggregate of 548,984 shares of Common Stock reserved for
issuance upon exercise of outstanding stock options granted under the Company's
Long-Term Incentive Plan (the "Incentive Plan") and the Company's Nonemployee
Director Stock Option Plan (the "Director Plan") and 730,991 shares of Common
Stock reserved for issuance upon exercise of other outstanding stock options
and warrants. See "Capitalization," "Management--Incentive Plan" and "Shares
Eligible for Future Sale."
RISK FACTORS
Prospective purchasers should carefully consider all of the information
contained in this Prospectus before making an investment in shares of Common
Stock. In particular, prospective purchasers should consider the factors set
forth herein under "Risk Factors," including (i) the Company's dependence on
exploratory drilling activities,(ii) the volatility of oil and gas prices,
(iii) the risks of the Company's hedging activities, (iv) reserve replacement
risk, (v) the uncertainty of reserve information and future net revenue
estimates, (vi) possible shortages of rigs, equipment, supplies and personnel,
(vii) operating risks of oil and gas operations, (viii) the Company's current
concentration of producing properties, (ix) the Company's dependence upon key
personnel, (x) the Company's ability to manage its growth and achieve its
business strategy, (xi) the Company's limited combined operating history, (xii)
the Company's reliance on technological development, (xiii) the Company's
significant capital requirements, (xiv) control of the Company by certain
stockholders, (xv) governmental regulation and environmental matters, (xvi)
competition in all areas of the Company's operations, (xvii) the number of
shares of Common Stock eligible for future sale, (xviii) the Company's
intention not to pay dividends, (xix) the Company's recent losses, (xx) certain
antitakeover provisions affecting the Company, (xxi) no prior public market for
the Common Stock and (xxii) substantial dilution to purchasers of Common Stock
in the Offering.
7
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary unaudited pro forma consolidated
financial information of the Company for the year ended December 31, 1996 and
the nine months ended September 30, 1997 as if the Combination Transaction, the
Company's August 1996 acquisition of Main Pass 35 and the Company's April 1997
disposition of Gulfland Industries, Inc., a contract operator of offshore
platforms ("Gulfland Industries"), had occurred on January 1, 1996. The
following financial information is qualified by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Unaudited Pro Forma Consolidated Financial
Information of the Company and related notes thereto, and the financial
statements of XPLOR, the South Coast Companies and Main Pass 35 and the related
notes thereto included elsewhere in this Prospectus, and are based on
assumptions and include adjustments as explained in the notes to Unaudited Pro
Forma Consolidated Financial Information. The Unaudited Pro Forma Consolidated
Financial Information does not purport to be indicative of the Company's
results of operations had such transactions occurred as of such date or to
project the Company's future financial condition or results of operations.
<TABLE>
<S> <C> <C>
----------------------
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
Dollars in thousands, except per share data ------------ -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues
Oil and gas revenues.................................. $ 9,778 $ 7,100
Consulting revenues................................... 1,395 1,282
--------- ---------
Total revenues...................................... 11,173 8,382
--------- ---------
Costs and expenses
Lease operating expenses.............................. 3,874 1,756
Production taxes and gathering fees................... 988 536
Consulting and workstation fees....................... 607 381
Depreciation, depletion and amortization.............. 2,960 2,690
General and administrative............................ 2,590 3,317
Stock-based compensation.............................. -- 1,324
--------- ---------
Total costs and expenses............................ 11,019 10,004
--------- ---------
Income (loss) from operations....................... 154 (1,622)
Other (income) expenses
Interest expense...................................... 3,408 3,064
Interest income....................................... (259) (87)
Other expenses........................................ 652 334
--------- ---------
Loss before income tax benefit and extraordinary
item............................................... (3,647) (4,933)
Income tax benefit.................................... 480 244
--------- ---------
Loss before extraordinary item...................... $ (3,167) $ (4,689)
========= =========
Loss per common share before extraordinary item..... $ (0.48) $ (0.97)
Weighted average shares outstanding................. 4,696,249 4,825,608
GAS EQUIVALENT PRODUCTION (MMCFE)....................... 3,239 2,649
OIL AND GAS OPERATING DATA (PER MCFE)
Oil and gas revenues.................................. $ 3.02 $ 2.68
Operating expenses and production taxes............... 1.50 0.87
Depletion............................................. 0.79 0.87
General and administrative expenses................... 0.80 1.25
Operating income (loss)............................... 0.05 (0.61)
</TABLE>
8
<PAGE>
SUMMARY CONSOLIDATED BALANCE SHEET INFORMATION
The following table sets forth summary consolidated balance sheet information
for the Company as of September 30, 1997 on an historical basis and as adjusted
to give effect to the Offering. The following financial information is
qualified by, and should be read in conjunction with, "Capitalization," "Use of
Proceeds" and the financial statements of XPLOR and the notes thereto included
elsewhere in this Prospectus.
-------------------
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
Dollars in thousands --------- -----------
<S> <C> <C>
BALANCE SHEET DATA
Working capital (deficit)................................ $ (39,078) $
Net property and equipment............................... 41,434 41,434
Total assets............................................. 54,496
Long-term debt, net of current maturities................ 1,557
Total stockholders' equity............................... 8,354
</TABLE>
SUMMARY COMBINED OPERATING DATA
The following table sets forth certain historical combined operating data for
the years ended December 31, 1994, 1995 and 1996 and for the nine months ended
September 30, 1996 and 1997. Such data represent combined operating data for
Araxas and the South Coast Companies for such periods, but do not include data
for Main Pass 35 prior to its acquisition by Araxas in August 1996.
<TABLE>
<S> <C> <C> <C> <C> <C>
------------------------------------
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
1994 1995 1996(1) 1996(1) 1997(1)
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES
Oil and condensate (MBbls)........... 4 55 177 104 232
Gas (MMcf)........................... 74 486 1,304 1,008 1,258
Gas equivalent (MMcfe)............... 96 814 2,368 1,630 2,649
AVERAGE SALES PRICES PER UNIT
Oil and condensate (per Bbl)......... $14.63 $16.36 $20.80 $20.19 $16.77
Gas (per Mcf)........................ 1.83 1.53 2.33 2.36 2.39
NUMBER OF WELLS DRILLED
Gross................................ 6 16 23 13 9(2)
Net.................................. 0.9 3.1 3.0 1.5 1.3(2)
</TABLE>
- --------
(1)Average sales prices reflect hedging arrangements required by the Company's
former debt agreement. During September 1997, the Company closed all its
existing hedging arrangements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Hedging" and "Business--
Marketing." If such hedging arrangements had not been in place, for the year
ended December 31, 1996 and the nine months ended September 30, 1996 and 1997,
the average sales prices for oil and condensate per Bbl would have been $22.91,
$20.66 and $19.80, respectively, and the average sales prices for gas per Mcf
would have been $2.50, $2.44 and $2.59, respectively.
(2) During this period, capital constraints limited the Company's drilling.
9
<PAGE>
SUMMARY RESERVE DATA
The following table sets forth summary data with respect to the Company's
estimated net proved oil and gas reserves and the estimated future net pretax
cash flows attributable thereto as of December 31, 1996, on a combined basis
giving effect to the Combination Transaction, and as of September 30, 1997. See
"The Combination Transaction." All information in this Prospectus relating to
estimated net proved oil and gas reserves as of December 31, 1996 and September
30, 1997 and the estimated future net revenues attributable thereto is based
upon the reserve reports (the "Netherland Sewell Reports") prepared by
Netherland, Sewell & Associates, Inc. ("Netherland Sewell") for XPLOR. A
summary of the Netherland Sewell Report with respect to reserves as of
September 30, 1997 is included as Appendix A to this Prospectus. All
calculations of estimated net proved reserves have been made in accordance with
applicable requirements of the Securities and Exchange Commission (the
"Commission") and, except as otherwise indicated, give no effect to federal or
state income taxes otherwise attributable to estimated future net revenues from
the sale of oil and gas. There are numerous uncertainties inherent in
estimating quantities of proved reserves and in projecting future rates of
production and timing of development expenditures, including many factors
beyond the control of the Company. See "Risk Factors--Uncertainty of Reserve
Information and Future Net Revenue Estimates" and "Business--Oil and Gas
Reserves."
-----------------------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996(1) 1997(2)(3)
Dollars in thousands ------------ -------------
<S> <C> <C>
NET PROVED RESERVES
Oil (MBbls)........................................ 3,983 3,570
Gas (MMcf)......................................... 38,518 36,571
Total (MMcfe).................................... 62,413 57,991
NET PROVED DEVELOPED RESERVES
Oil (MBbls)........................................ 2,650 2,373
Gas (MMcf)......................................... 12,526 14,979
Total (MMcfe).................................... 28,424 29,215
Estimated future net revenues before income
taxes............................................... $172,038 $100,068
Present value of estimated future net revenues
before income taxes(4).............................. $ 96,947 $ 56,668
</TABLE>
- --------
(1) The prices used as of December 31, 1996 averaged $24.23 per Bbl of oil and
$3.97 per Mcf of gas and do not give effect to hedging arrangements required by
the Company's former debt agreement. During September 1997, the Company closed
all of its outstanding hedging arrangements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Hedging" and
"Business--Marketing." Giving effect to such hedging arrangements, the prices
used as of December 31, 1996 would have been $18.10 per Bbl of oil and $3.49
per Mcf of gas, and estimated future net revenues before income taxes and
present value of estimated future net revenues before income taxes as of such
date would have been $158,732,000 and $86,534,000, respectively.
(2) The prices used as of September 30, 1997 averaged $19.93 per Bbl of oil and
$2.60 per Mcf of gas.
(3) The declines in proved reserves from December 31, 1996 to September 30,
1997 reflect production during the period and the exclusion of certain reserves
that were no longer economic at September 30, 1997 prices. During this period,
the Company's capital constraints limited additions to proved reserves.
(4) The present value of estimated future net revenues attributable to the
Company's reserves was prepared using constant prices as of the calculation
date (see Note 1), discounted at 10% per annum on a pretax basis.
10
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements. These statements
include, among others, statements regarding oil and gas reserves, future
drilling and operations, future production of oil and gas, future net cash
flows and future capital expenditures. Actual results could differ materially
from those projected in the forward-looking statements as a result of various
factors, including, without limitation, those set forth below and elsewhere in
this Prospectus. Prospective investors should carefully consider the following
factors, in addition to other information contained in this Prospectus, in
connection with an investment in the shares of Common Stock offered hereby.
DEPENDENCE ON EXPLORATORY DRILLING ACTIVITIES
The success of the Company will be materially dependent upon the success of its
exploratory drilling program, which will be funded in part with the proceeds
from the Offering. Exploratory drilling involves numerous risks, including the
risk that no commercially productive oil or gas reservoirs will be encountered.
The cost of drilling, completing and operating wells is often uncertain, and
drilling operations may be curtailed, delayed or canceled as a result of a
variety of factors, including unexpected drilling conditions, pressure or
irregularities in formations, equipment failures or accidents, adverse weather
conditions, compliance with governmental requirements and shortages or delays
in the availability of drilling rigs and the delivery of equipment. The use of
3-D seismic data and other advanced technologies does not enable the
interpreter to determine whether hydrocarbons are in fact present in subsurface
structures that may be identified. In addition, the use of 3-D seismic data and
other advanced technologies requires greater pre-drilling expenditures than
traditional drilling strategies, and the Company could incur losses as a result
of such expenditures. Moreover, the Company may identify prospects through a
number of methods that do not include interpretation of 3-D seismic data or the
use of other advanced technologies. The Company's future drilling activities
may not be successful, and if unsuccessful, such failure will have a material
adverse effect on the Company's results of operations and financial condition.
There can be no assurance that the Company's overall drilling success rate or
its drilling success rate for activity within a particular project area will
not decline. The Company may choose not to acquire option and lease rights
prior to acquiring seismic data and may identify a prospect or drilling
location before seeking option or lease rights in the prospect or location.
Although the Company has identified or budgeted for numerous drilling
prospects, there can be no assurance that such prospects will ever be drilled
(or drilled within the scheduled time frame) or that oil or gas will be
produced from any such prospects or any other prospects. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
VOLATILITY OF OIL AND GAS PRICES
The Company's revenues, future rate of growth, results of operations, financial
condition and ability to borrow funds or obtain additional capital, as well as
the carrying value of its properties, are substantially dependent upon
prevailing prices of oil and gas. Historically, the markets for oil and gas
have been volatile, and such markets are likely to continue to be volatile in
the future. Prices for oil and gas are subject to wide fluctuations in response
to relatively minor changes in the supply of and demand for oil and gas, market
uncertainty and a variety of additional factors beyond the control of the
Company. These factors include the level of consumer product demand, weather
conditions, domestic and foreign governmental regulations, the price and
availability of alternative fuels, political conditions in the Middle East, the
foreign supply of oil and gas, the price of foreign imports and overall
economic conditions. It is impossible to predict future oil and gas price
movements with certainty. Declines in oil and gas prices may materially
adversely affect the Company's financial condition, liquidity, ability to
finance planned capital expenditures and results of operations. Lower oil and
gas prices also may reduce the amount of oil and gas that the Company can
produce economically. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Marketing."
The Company periodically reviews the carrying value of its oil and gas
properties under the full cost accounting rules of the Commission. Under these
rules, capitalized costs of proved oil and gas properties may not exceed the
present value of estimated future net revenues from proved reserves, discounted
at 10%. Application of this "ceiling" test generally requires pricing future
revenue at the unescalated prices in effect as of the end of each
11
<PAGE>
fiscal quarter and requires a write-down for accounting purposes if the ceiling
is exceeded, even if prices were depressed for only a short period of time. The
Company may be required to write down the carrying value of its oil and gas
properties when oil and gas prices are depressed or unusually volatile, which
would result in a charge to earnings but would not affect cash flow from
operating activities. Once incurred, a write-down of oil and gas properties is
not reversible at a later date.
RISKS OF HEDGING ACTIVITIES
The Company's former debt agreement with Stratum Group Energy Partners, L.P.
(collectively with its affiliates, "Stratum") required the Company to put into
place significant long-term commodity price arrangements in an effort to reduce
the effects of short-term fluctuations in the price of oil and gas. Such
arrangements were required at the closing of such financing and at the times of
additional drawdowns thereunder. During the year ended December 31, 1996, the
Company received a fixed price and paid the New York Mercantile Exchange
("NYMEX") price with respect to 575 MMBtus of gas and 60 MBbls of oil under
commodity price arrangements, realizing losses of $598,000. During the first
nine months of 1997, the Company received a fixed price and paid the NYMEX
price with respect to 589 MMBtus of gas and 257 MBbls of oil under commodity
price arrangements, realizing losses of $906,000. The Company did not engage in
hedging prior to 1996. The Company repaid and terminated its former debt
agreement in September 1997, and the Company's current credit facility with
Credit Lyonnais, New York Branch ("Credit Lyonnais") does not require the
Company to maintain hedges. During September 1997, the Company closed all its
outstanding hedging arrangements, at a cost to the Company of $2.8 million. The
Company has recorded this cost as a deferred charge, which is required to be
amortized through 2001 (the life of the commodity price arrangements that gave
rise to the loss) as part of the hedged oil and gas revenues. During September
1997, the Company recorded $46,000 of the amortization as a reduction of oil
and gas revenues. The total amortization for 1998 is expected to be $0.8
million. The Company currently does not intend to hedge more than one-third of
its production, but may reevaluate its hedging policy from time to time. The
Company may also close out any portion of hedges that may exist from time to
time as determined to be appropriate by management. Any future hedging
arrangements would apply to only a portion of the Company's production and
would provide only partial price protection against declines in oil and gas
prices. Such hedging may expose the Company to risk of financial loss in
certain circumstances, including instances where production is less than
expected, where the Company's customers fail to purchase contracted quantities
of oil or gas or where a sudden, unexpected event materially affects oil or gas
prices. In addition, such hedging would limit the benefit to the Company of
increases in the price of oil and gas. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Hedging" and
"Business--Marketing."
RESERVE REPLACEMENT RISK
In general, the volume of production from oil and gas properties declines as
reserves are depleted, with the rate of decline depending on reservoir
characteristics. Except to the extent the Company conducts successful
exploration and development activities or acquires properties containing proved
reserves, or both, the proved reserves of the Company will decline as reserves
are produced. The Company's future oil and gas production is, therefore, highly
dependent upon its level of success in finding or acquiring additional
reserves. The business of exploring for, developing or acquiring reserves is
capital intensive. During 1997, the Company's capital constraints have limited
its ability to add to proved reserves. To the extent cash flow from operations
is reduced and external sources of capital become limited or unavailable, the
Company's ability to make the necessary capital investment to maintain or
expand its asset base of oil and gas reserves would be impaired. In addition,
there can be no assurance that the Company's future exploration, development
and acquisition activities will result in additional proved reserves or that
the Company will be able to drill productive wells at acceptable costs.
Furthermore, if prevailing prices for oil and gas increase significantly, the
Company's finding and development costs could also increase. Of the Company's
98 identified drilling prospects as of September 30, 1997, approximately 80%
(representing approximately 55% of the Company's estimated capital drilling
expenditures for such projects) were operated by parties other than the
Company. As nonoperator, the Company has less control over the timing of
drilling and other operations on such prospects than if it were the operator of
such properties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
12
<PAGE>
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES
There are numerous uncertainties inherent in estimating oil and gas reserves
and their values, including many factors beyond the control of the producer.
The reserve data set forth in this Prospectus represent estimates only.
Reservoir engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner.
Estimates of economically recoverable oil and gas reserves and of future net
cash flows necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future oil and gas prices,
future operating costs, severance and excise taxes, development costs and
workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery, and estimates of
the future net cash flows expected therefrom prepared by different engineers or
by the same engineers but at different times may vary substantially and such
reserve estimates may be subject to downward or upward adjustment based upon
such factors. Actual production, revenues and expenditures with respect to the
Company's reserves will likely vary from estimates, and such variances may be
material. In addition, the 10% discount factor, which is required by the
Commission to be used in calculating discounted future net cash flows for
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with
the Company or the oil and gas industry in general. See "Business--Oil and Gas
Reserves."
SHORTAGES OF RIGS, EQUIPMENT, SUPPLIES AND PERSONNEL
There is a general shortage of drilling rigs, equipment and supplies, which the
Company believes may intensify. The costs and delivery times of rigs, equipment
and supplies are substantially greater than in prior periods and are currently
escalating. Shortages of drilling rigs, equipment or supplies could delay and
adversely affect the Company's exploration and development operations, which
could have a material adverse effect on its financial condition and results of
operations.
The demand for, and wage rates of, qualified rig crews have begun to rise in
the drilling industry in response to the increasing number of active rigs in
service. Such shortages have in the past occurred in the industry in times of
increasing demand for drilling services. If the number of active drilling rigs
continues to increase, the oil and gas industry may experience shortages of
qualified personnel to operate drilling rigs, which could delay the Company's
drilling operations and adversely affect the Company's financial condition and
results of operations.
OPERATING RISKS OF OIL AND GAS OPERATIONS
The oil and gas business involves certain operating hazards such as well
blowouts, craterings, explosions, uncontrollable flows of oil, gas or well
fluids, fires, formations with abnormal pressures, pipeline ruptures or spills,
pollution, releases of toxic gas and other environmental hazards and risks, any
of which could result in substantial losses to the Company. In addition, the
Company may be liable for environmental damages caused by previous owners of
property purchased and leased by the Company. As a result, substantial
liabilities to third parties or governmental entities may be incurred, the
payment of which could reduce or eliminate the funds available for exploration,
development or acquisitions or result in the loss of the Company's properties.
In accordance with customary industry practices, the Company maintains
insurance against some, but not all, of such risks and losses. The Company may
elect to self-insure if management believes that the cost of insurance,
although available, is excessive relative to the risks presented. In addition,
pollution and environmental risks generally are not fully insurable, and the
Company carries only limited business interruption insurance. The occurrence of
an event not fully covered by insurance could have a material adverse effect on
the financial condition and results of operations of the Company. See
"Business--Operating Hazards and Insurance."
The availability of a ready market for the Company's oil and gas production
depends on the proximity of reserves to, and the capacity of, oil and gas
gathering systems, pipelines and trucking or terminal facilities. The Company
delivers gas through gas gathering systems and gas pipelines that it does not
own. Federal and state regulation of
13
<PAGE>
gas and oil production and transportation, tax and energy policies, changes in
supply and demand and general economic conditions all could adversely affect
the Company's ability to produce and market its oil and gas.
CURRENT CONCENTRATION OF PRODUCING PROPERTIES
Approximately 33% of the Company's average daily net production for the nine
months ended September 30, 1997 was attributable to Main Pass 35. As of
September 30, 1997, approximately 30% of the Company's proved reserves were
associated with this field. Consequently, the Company's future results of
operations are significantly dependent upon the future performance of Main Pass
35. In the third quarter of 1997, the field was shut in for a period of three
days due to a hurricane, and otherwise experienced curtailments of production
due to temporary capacity constraints of its water injection system. As a
result, average net production attributable to the field decreased from 580 BOE
per day in the second quarter of 1997 to 420 BOE per day in the third quarter
of 1997. Since acquiring the field in August 1996, the Company has expended
approximately $1.0 million to upgrade the operating equipment. If the Company's
operations in Main Pass 35 are adversely affected by future events that
increase costs, reduce availability of equipment or supplies, restrict drilling
activity or limit production, the Company could experience a material adverse
impact on its financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of certain key management
personnel, the loss of any of which could have a material adverse effect on the
Company's operations. Prior to the Offering, the Company entered into
employment agreements with each of Mr. Steven W. Nance (the Company's President
and Chief Executive Officer), Mr. Ron A. Krenzke (the Company's Executive Vice
President and Chief Operating Officer) and Mr. Stephen M. Clark (the Company's
Vice President, Chief Financial Officer, Secretary and Treasurer) described
herein under "Management--Employment Agreements." The Company does not maintain
key-man life insurance with respect to any of its employees. The Company
believes that its success is also dependent upon its ability to continue to
employ and retain skilled technical personnel. See "Business--Strengths."
ABILITY TO MANAGE GROWTH AND ACHIEVE BUSINESS STRATEGY
The Company has experienced significant growth in the recent past, which has
placed, and is expected to continue to place, a significant strain on the
Company's financial, technical, operational and administrative resources. The
Company has relied in the past and expects to continue to rely to a certain
extent on project partners and independent contractors that have provided the
Company with land acquisition, drilling and other services. At September 30,
1997, the Company had 32 full-time employees and seven contract employees. As
the Company increases the number of projects it is evaluating or in which it is
participating, there will be additional demands on the Company's financial,
technical, operational and administrative resources and continued reliance by
the Company on project partners and independent contractors, and these strains
on resources, additional demands and continued reliance may negatively affect
the Company. The Company's ability to continue its growth will depend upon a
number of factors, including its ability to obtain leases or options on
properties for 3-D seismic surveys, its ability to acquire additional 3-D
seismic data, its ability to identify and acquire new exploratory sites, its
ability to develop existing sites, its ability to continue to retain and
attract skilled personnel, its ability to maintain or enter into new
relationships with project partners and independent contractors, the results of
its drilling program, hydrocarbon prices, access to capital and other factors.
There can be no assurance that the Company will be successful in achieving
growth or any other aspect of its business strategy.
LIMITED COMBINED OPERATING HISTORY
The Company was organized in July 1997 to consolidate and continue the
activities previously conducted by Araxas and the South Coast Companies. Prior
to the Combination Transaction, Araxas and the South Coast Companies operated
as separate, independent businesses. The historical financial results of Araxas
and the South Coast Companies cover periods when such companies were not under
common control or management and, therefore, may not be indicative of the
Company's future financial or operating results. Moreover, there can be no
14
<PAGE>
assurance that the consolidation of the management and administrative functions
of Araxas and the South Coast Companies will be successful or that the
Company's management will be able to manage the operations of the combined
entity effectively or profitably.
RELIANCE ON TECHNOLOGICAL DEVELOPMENT AND POSSIBLE TECHNOLOGICAL OBSOLESCENCE
The Company's business is dependent upon utilization of changing technology. As
a result, the Company's ability to adapt to evolving technologies, obtain new
products and maintain technological advantages will be important to its future
success. As new technologies develop, the Company may be placed at a
competitive disadvantage, and competitive pressures may force the Company to
implement such new technologies at substantial cost. There can be no assurance
that the Company will be able to use successfully, or expend the financial
resources necessary to acquire, new technology, that others will not achieve
technological expertise comparable to or exceeding that of the Company or that
others will not implement new technologies before the Company. One or more of
the technologies currently used by the Company or implemented in the future may
become obsolete. In such case, the Company's business, financial condition and
results of operations could be materially adversely affected. If the Company is
unable to use the most advanced commercially available technology, the
Company's business, financial condition and results of operations could be
materially and adversely affected. See "Business--Strengths--Advanced
Technology."
SIGNIFICANT CAPITAL REQUIREMENTS
The Company has experienced and expects to continue to experience substantial
working capital needs, particularly as a result of its active 3-D seismic data
acquisition and drilling program. The Company intends to fund its capital
expenditures through the end of 1998 from the unused net proceeds from the
Offering, borrowings under its revolving credit facility and cash flow from
operations. Upon consummation of the Offering, the Company expects to have
$20.0 million of borrowing capacity under the credit facility available for its
drilling program. The Company expects to fund the balance of such capital
expenditures from cash flow from operations and the unused net proceeds from
the Offering. However, additional financing may be required in the future to
fund the Company's growth. No assurances can be given as to the availability or
terms of any such additional financing that may be required or to the continued
availability of financing under existing credit arrangements. In the event such
capital resources are not available to the Company, its drilling, development
and other activities may be curtailed, and the Company may be unable to drill
some of its currently identified prospects. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
CONTROL BY CERTAIN STOCKHOLDERS
Upon completion of the Offering, the Company's officers, directors and key
employees will beneficially own approximately 33% (31% if the Underwriters'
over-allotment option is exercised in full) of the outstanding shares of Common
Stock, and Equitable Resources, Inc., through its subsidiaries (collectively,
"Equitable"), and New West Resources, Inc. ("New West") will beneficially own
approximately 8% and 10%, respectively (7%, and 8%, respectively, if the
Underwriters' over-allotment option is exercised in full), of the outstanding
shares. As a result, such stockholders will be in a position to influence
significantly or to control the outcome of certain matters requiring a
stockholder vote, including the election of directors, the adoption or
amendment of provisions in the Company's Certificate of Incorporation or Bylaws
and the approval of mergers and other significant corporate transactions. Such
ownership of Common Stock may have the effect of delaying, deferring or
preventing a change in control of the Company and may adversely affect the
voting and other rights of other stockholders. See "Principal Stockholders."
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Oil and gas operations are subject to various federal, state and local
governmental regulations, which may be changed from time to time in response to
economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling bonds, reports concerning
operations, the spacing of wells,
15
<PAGE>
unitization and pooling of properties and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production
by restricting the rate of flow of oil and gas wells below actual production
capacity to conserve supplies of oil and gas. The Company is also subject to
changing and extensive tax laws, the effects of which cannot be predicted.
Legal requirements are frequently changed and subject to interpretation, and
the Company is unable to predict the ultimate cost of compliance with these
requirements or their effect on its operations. No assurance can be given that
existing laws or regulations, as currently interpreted or reinterpreted in the
future, or future laws or regulations will not materially adversely affect the
Company's results of operations and financial condition. The development,
production, handling, storage, transportation and disposal of oil and gas, by-
products thereof and other substances and materials produced or used in
connection with oil and gas operations are subject to federal, state and local
laws and regulations primarily relating to protection of human health and the
environment. The discharge of oil, gas or pollutants into the air, soil or
water may give rise to significant liabilities on the part of the Company to
the government and third parties and may require the Company to incur
substantial costs of remediation. See "Business--Regulation."
COMPETITION
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of exploratory prospects and
proven properties. The Company's competitors include major integrated oil and
gas companies, numerous independent oil and gas companies, individuals and
drilling and income programs. Many of its competitors are large, well-
established companies that have substantially larger operating staffs and
greater capital resources than those of the Company and that, in many
instances, have been engaged in the oil and gas business for a much longer time
than the Company. Such companies may be able to pay more for exploratory
prospects and productive oil and gas properties and may be able to define,
evaluate, bid for and purchase a greater number of properties and prospects
than the Company's financial or human resources permit. In addition, such
companies may be able to expend greater resources on the existing and changing
technologies that the Company believes are and will be increasingly important
to the current and future success of oil and gas companies. The Company's
ability to explore for oil and gas prospects and to acquire additional
properties in the future will be dependent upon its ability to conduct its
operations, to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment. See "Business--
Competition."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
closing of the Offering, or the expectation of such sales or the availability
of shares for sale, could adversely affect the market price of the Common
Stock. Upon the completion of the Offering, the Company will have a total of
9,009,413 shares of Common Stock outstanding. Of these shares, the 4,300,000
shares of Common Stock offered hereby will be freely tradeable without
restrictions or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined under the Securities Act. The remaining
4,709,413 shares of Common Stock outstanding will be restricted securities as
that term is defined by Rule 144 as promulgated under the Securities Act ("Rule
144"). In addition, 548,984 shares of Common Stock are issuable pursuant to
options granted under the Company's Incentive Plan and its Director Plan,
515,991 shares of Common Stock are issuable upon exercise of an option granted
to Stratum and 215,000 shares of Common Stock (242,250 shares if the
Underwriters' over-allotment option is exercised in full) are issuable upon
exercise of a warrant granted to Credit Lyonnais.
Under Rule 144 (and subject to certain volume limitations, manner of sale and
other requirements related to the sale of securities), the 4,709,413 restricted
shares will become eligible for sale in September 1998, or one year following
the consummation of the Combination Transaction. The Company anticipates that
the 548,984 shares of Common Stock issuable upon exercise of outstanding
employee and director options will become available for future sale in the
public market pursuant to subsequently filed registration statements on Form S-
8. See "Management--Executive Compensation." The Company also has entered or
intends to enter into registration rights agreements with stockholders who
beneficially own substantially all of the currently outstanding shares of
Common Stock and with Stratum and Credit Lyonnais, which have options and
warrants to purchase 730,991 shares of Common Stock (758,241 shares if the
Underwriters' over-allotment option
16
<PAGE>
is exercised in full), pursuant to which such persons have received demand and
"piggyback" registration rights that provide for the registration of the resale
of such shares at the Company's expense. See "Certain Transactions--
Registration Rights." The Company, substantially all of its existing
stockholders and certain other persons have agreed, however, to certain
restrictions relating to the sale of their Common Stock for a period of 180
days following the date of this Prospectus. See "Underwriting." Future sales of
substantial amounts of Common Stock in the public market following this
Offering, or the expectation of such sales or the availability of shares for
sale, could adversely affect the market price of the Common Stock. For further
information concerning Common Stock available for resale after this Offering,
see "Shares Eligible for Future Sale."
NO INTENTION TO PAY DIVIDENDS
The Company currently intends to retain any earnings for the future operation
and development of its business and does not currently intend to declare or pay
any dividends on its Common Stock in the foreseeable future. In addition, the
payment of dividends by the Company is restricted by the Company's credit
facility. See "Dividend Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
RECENT LOSSES
On a pro forma basis, the Company incurred net losses for the year ended
December 31, 1996 and the nine months ended September 30, 1997. There can be no
assurance that the Company will be profitable in the future. The Company was
not in compliance with certain restrictive covenants of its former credit
facility with Stratum at December 31, 1996. The Company obtained waivers to
such covenants at December 31, 1996 and through August 31, 1997. See "Unaudited
Pro Forma Consolidated Financial Information" and the related notes thereto,
"Selected Historical Financial Data" and the financial statements of XPLOR and
the related notes thereto included elsewhere in this Prospectus.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware General
Corporation Law contain provisions that may have the effect of delaying,
deferring or preventing a change in control of the Company. These provisions,
among other things, provide for a classified Board of Directors with staggered
terms, restrict the ability of stockholders to take action by written consent,
authorize the Board of Directors to set the terms of preferred stock and
provide for a supermajority vote for business combinations with related
persons. See "Description of Capital Stock."
NO PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiation between the
Company and the Underwriters and may not be indicative of the price at which
the Common Stock will trade following the completion of the Offering. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The completion of the Offering provides no
assurance that an active trading market for the Common Stock will develop or,
if developed, that it will be sustained. The market price of the Common Stock
could also be subject to significant fluctuation and may be influenced by many
factors, including variations in results of operations, variations in oil and
gas prices, investor perceptions of the Company and the oil and gas industry
and general economic and other conditions.
DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of their stock of $ per
share (assuming an initial public offering price of $ per share). See
"Dilution."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,300,000 shares of Common
Stock offered hereby to be sold by the Company are estimated to be
approximately $ million ($ million if the Underwriters' over-allotment
option is exercised in full), based on an assumed initial public offering price
of $ per share and after deducting underwriting discounts and expenses of
the Offering payable by the Company. If the Underwriters exercise the over-
allotment option, the Company will receive no proceeds from the sale of shares
of Common Stock by the Selling Stockholder. The Company intends to use the net
proceeds as follows:
<TABLE>
<S> <C>
-------
<CAPTION>
Dollars in thousands
<S> <C>
Repayment of Bridge Loan(1)............................................ $34,000
Repayment of notes payable(2).......................................... 11,200
General corporate purposes(3)..........................................
-------
$
=======
</TABLE>
- --------
(1) The Company's bridge loan (the "Bridge Loan") with Credit Lyonnais bears
interest at a fluctuating rate (10% per annum at September 30, 1997) based upon
the Credit Lyonnais base rate or LIBOR, and will mature upon closing of the
Offering. At September 30, 1997, $30.8 million was outstanding under the Bridge
Loan, the proceeds of which were used primarily to repay indebtedness of Araxas
and to close hedging arrangements entered into by Araxas. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Financing Transactions."
(2) Notes payable include (i) $3.0 million principal amount of the Combination
Notes, which bear no interest and will mature upon the closing of the Offering;
(ii) $2.2 million of indebtedness incurred in the acquisition by the Company of
Faulkinberry Oil and Gas Company, Inc. ("FO&G"), which indebtedness bears
interest at 5.8% per annum and will mature upon the closing of the Offering
(the "FO&G Note"); (iii) $5.0 million of indebtedness to Equitable incurred in
July 1997 to provide working capital to the Company, which indebtedness bears
interest at 9% per annum and will mature on July 31, 1998 (the "Equitable
Note"); and (iv) a $1.0 million principal amount note issued to Mr. W.E.
Rowsey, III in October 1997, which note bears no interest and will mature upon
the closing of the Offering (the "Rowsey Note"). See "The Combination
Transaction," "Certain Transactions" and "Management."
(3) General corporate purposes are expected to include capital expenditures to
fund the Company's exploration and development activities. Pending such use,
such net proceeds will be invested in short-term, investment grade securities.
DIVIDEND POLICY
The Company does not intend to declare or pay dividends on the Common Stock in
the foreseeable future. The Company currently intends to retain any earnings
for the future operation and development of its business, including
exploration, development and acquisition activities. In addition, the payment
of dividends by the Company is restricted by the terms of the Company's credit
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
18
<PAGE>
DILUTION
As of September 30, 1997, the net tangible book value of the Company was
approximately $2.2 million, or approximately $0.47 per share of Common Stock.
Net tangible book value per share represents the amount of the Company's
tangible book value (total book value of tangible assets less total
liabilities) divided by the total number of shares of Common Stock outstanding.
After giving effect to the receipt of the estimated net proceeds from the
Offering at an assumed initial public offering price of $ per share (after
deducting underwriting discounts and expenses of the Offering payable by the
Company), the adjusted pro forma net tangible book value of the Common Stock
outstanding at September 30, 1997 would have been $ per share, representing
an immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate and substantial dilution of $ per share (the
difference between the assumed initial public offering price and the net
tangible book value per share after the Offering) to new investors purchasing
Common Stock at the assumed initial public offering price. The following table
illustrates such per share dilution:
<TABLE>
<S> <C> <C>
------------
Assumed initial public offering price per share.................... $
Net tangible book value per share before the Offering............ $0.47
Increase attributable to new investors...........................
-----
Pro forma net tangible book value per share after the Offering..... $
------
Dilution in net tangible book value per share to new investors..... $
======
</TABLE>
The following table sets forth as of September 30, 1997 the differences between
the existing stockholders of the Company and the new investors with respect to
the number of shares of Common Stock acquired from the Company or to be
purchased in the Offering, the average price per share and the total
consideration paid or to be paid.
<TABLE>
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------
<CAPTION>
AVERAGE PRICE
PER SHARE TOTAL
SHARES PURCHASED(1) ------------- CONSIDERATION
NUMBER PERCENT AMOUNT PERCENT
------------ ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 4,709,413 52.3% $1.77 $8,353,614(2) %
New investors........... 4,300,000 47.7
------------ ------- ----- ---------- ----
Total................. 9,009,413 100% $ $ 100%
============ ======= ===== ========== ====
</TABLE>
- --------
(1) Assumes that the Underwriters do not exercise their over-allotment option.
(2) Total consideration for the existing stockholders represents the book value
at September 30, 1997 of the allocable portion of the Company's net assets and
liabilities.
19
<PAGE>
CAPITALIZATION
The following table sets forth at September 30, 1997 the historical
capitalization of the Company and the capitalization of the Company as adjusted
to give effect to the issuance and sale by the Company of 4,300,000 shares of
Common Stock in the Offering at an assumed initial offering price of $ per
share and the application of the estimated net proceeds to the Company
therefrom of $ million as set forth in "Use of Proceeds" (including the
repayment of debt incurred after September 30, 1997). This table should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements of XPLOR and
of the South Coast Companies and the notes thereto included elsewhere in this
Prospectus.
----------------
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
AS
HISTORICAL ADJUSTED
------------ ----------
Dollars in thousands
<S> <C> <C> <C>
Long-term debt
Bridge Loan..................................... $30,750 $ --
Credit facility................................. -- --
Notes payable(1)................................ 10,017 987
--------- ---------
Total long-term debt, including current
portion...................................... 40,767 987
Stockholders' equity
Preferred Stock, $.001 par value; 10,000,000
shares authorized; none outstanding............ -- --
Common Stock, $.001 par value; 30,000,000 shares
authorized; 4,709,413 shares issued and
outstanding (historical); 9,009,413 shares
issued and outstanding (as adjusted)(2)........ 5 9
Additional paid-in capital...................... 18,935
Accumulated deficit............................. (10,586) (14,378)
--------- ---------
Total stockholders' equity.................... 8,354
--------- ---------
Total capitalization.......................... $ 49,121 $
========= =========
</TABLE>
- --------
(1) Includes (i) $3.0 million of Combination Notes issued in connection with
the Combination Transaction (recorded at $2.7 million, net of discount), (ii)
the $2.2 million FO&G Note issued in connection with the Company's acquisition
of FO&G (recorded at $1.3 million prior to the Offering) and (iii) the $5.0
million Equitable Note issued to provide working capital to the Company.
(2) Does not include (i) an aggregate of 548,984 shares of Common Stock
reserved for issuance upon exercise of outstanding stock options granted to
employees and nonemployee directors, (ii) 515,991 shares of Common Stock
reserved for issuance upon exercise of an outstanding option granted to
Stratum, which has an exercise price of $2.42 per share and expires on June 30,
1999, and (iii) 215,000 shares of Common Stock (242,250 shares if the
Underwriters' over-allotment option is exercised in full) reserved for issuance
upon exercise of an outstanding warrant granted to Credit Lyonnais, which has
an exercise price of 125% of the initial public offering price per share set
forth on the cover page of this Prospectus and expires two years following the
closing of the Offering. See "Management" and "Certain Transactions."
20
<PAGE>
THE COMBINATION TRANSACTION
XPLOR was formed through the strategic combination in September 1997 of Araxas
and the South Coast Companies in the Combination Transaction, which was
accounted for as a purchase of the South Coast Companies by XPLOR, as successor
to Araxas. Management believes that the Combination Transaction will enhance
the Company's ability to increase its reserves, production and cash flow per
share by combining the complementary strengths of Araxas's operating expertise,
the South Coast Companies' geophysical expertise and the two companies'
portfolios of exploration prospects concentrated in the Gulf Coast region.
The Company was incorporated in Delaware in July 1997 to continue activities
previously conducted by Araxas and to acquire the South Coast Companies. In the
Combination Transaction, the Company (i) acquired all of the outstanding
capital stock of Araxas, South Coast and INEXS, and all of the outstanding
limited partnership interests of SOCO, (ii) exchanged all of the outstanding
stock of Araxas for 2,923,988 shares of Common Stock and (iii) issued to the
owners of the outstanding capital stock and limited partnership interests of
the South Coast Companies 1,785,425 shares of Common Stock and $3.0 million
principal amount of Combination Notes. The Combination Notes mature at the
closing of the Offering and will be repaid with the net proceeds therefrom. To
secure payment of the Combination Notes, the former stockholders of INEXS (all
of whom are officers of the Company) hold a lien on all of the capital stock of
INEXS. Such lien will be released following repayment of the Combination Notes
with a portion of the net proceeds of the Offering.
Prior to the Combination Transaction, the outstanding capital stock of Araxas
was owned in part by Messrs. Rowsey and Nance and by New West, and the
outstanding capital stock and partnership interests of the South Coast Entities
were owned in part by Mr. Krenzke, Mr. Craig S. Davis and Mr. Philip V. Duggan,
and by Equitable. In addition, Stratum held an option to purchase capital stock
of Araxas. As a result of the Combination Transaction, Mr. Rowsey, Mr. Nance
and New West beneficially own 1,877,599; 77,008 and 874,570 shares of Common
Stock, respectively (approximately 40%, 2% and 19%, respectively, of the
Company's currently outstanding Common Stock), Messrs. Krenzke, Davis and
Duggan and Equitable beneficially own 365,539; 359,438; 256,012 and 714,166
shares of Common Stock, respectively (approximately 8%, 8%, 5% and 15%,
respectively, of the Company's currently outstanding Common Stock), and Stratum
has an option to purchase 515,991 shares of Common Stock (approximately 11% of
the Company's currently outstanding Common Stock).
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated financial information of XPLOR, as
successor to Araxas, reflects the Combination Transaction as a purchase of the
South Coast Companies, the August 1996 acquisition of Main Pass 35 and the
April 1997 divestiture of Gulfland Industries. The unaudited pro forma
consolidated statement of operations for the year ended December 31, 1996 and
the nine months ended September 30, 1997 is based on the historical financial
results of XPLOR giving effect to the transactions as though they were
consummated as of January 1, 1996.
The following unaudited pro forma information has been included as required by
the rules of the Commission and is provided for comparison purposes only. The
unaudited pro forma information is based upon the historical consolidated
financial statements of XPLOR and the South Coast Companies and the statements
of revenues and direct operating expenses of Main Pass 35, and should be read
in conjunction with such financial statements and the related notes thereto
included elsewhere herein. The unaudited pro forma information does not include
the impact of the debt refinancing that occurred coincident with the
Combination Transaction. An extraordinary charge of approximately $3.9 million
to reflect these items is included in the unaudited interim financial
statements of the Company for the nine months ended September 30, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The pro forma information is based on assumptions and includes adjustments as
explained in the notes to the unaudited pro forma consolidated financial
statements, and the actual recording of the transactions could differ once fair
value estimates and actual costs are finalized. The unaudited pro forma
information does not purport to be indicative of the Company's financial
condition or results of operations had such transactions occurred as of the
date or prior to the periods presented or to project the Company's future
financial condition or results of operations.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS OF XPLOR
<TABLE>
<S> <C> <C> <C> <C> <C>
------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
SOUTH MAIN
XPLOR COAST PASS 35 ADJUSTMENTS PRO FORMA
--------- ------ ------- ----------- ---------
Dollars in thousands, except
per share data
<S> <C> <C> <C> <C> <C>
Oil and gas revenues........ $ 6,043 $ 686 $3,548 $ (304)(a) $ 9,778
(195)(b)
Offshore services........... 1,745 -- -- (1,745)(c) --
Consulting revenues......... -- 1,395 -- -- 1,395
--------- ------ ------ --------- ---------
Total revenues............ 7,788 2,081 3,548 (2,244) 11,173
--------- ------ ------ --------- ---------
Lease operating expenses.... 1,614 69 2,292 (101)(a) 3,874
Production taxes and
gathering fees............. 555 29 444 (40)(a) 988
Cost of offshore services... 2,194 -- -- (2,194)(c) --
Consulting and workstation
fees....................... -- 607 -- -- 607
Depletion, depreciation and
amortization............... 1,714 256 -- 990 (d)(e) 2,960
General and administrative.. 1,501 1,089 -- -- 2,590
--------- ------ ------ --------- ---------
Total costs and expenses.. 7,578 2,050 2,736 (1,345) 11,019
--------- ------ ------ --------- ---------
Income (loss) from
operations............... 210 31 812 (899) 154
Interest expense............ 2,076 -- -- 1,332 (f) 3,408
Interest income............. (24) (235) -- -- (259)
Other expense (income)...... 658 (6) -- -- 652
--------- ------ ------ --------- ---------
2,710 (241) -- 1,332 3,801
--------- ------ ------ --------- ---------
Income (loss) before
income tax benefit
(expense)................ (2,500) 272 812 (2,231) (3,647)
Income tax benefit
(expense).................. 36 (95) -- 539 (g) 480
--------- ------ ------ --------- ---------
Net income (loss)....... $ (2,464) $ 177 $ 812 $ (1,692) $ (3,167)
========= ====== ====== ========= =========
Net loss per common share... $ (0.55) $ (0.48)
========= =========
Weighted average common
shares and dilutive common
equivalent shares
outstanding................ 2,829,019 1,785,425 (h) 4,696,249
81,805 (h)
</TABLE>
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS OF XPLOR
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
SOUTH
XPLOR COAST ADJUSTMENTS PRO FORMA
--------- ----- ----------- ---------
Dollars in thousands, except per share
data
<S> <C> <C> <C> <C>
Oil and gas revenues................... $ 6,536 $ 564 -- $ 7,100
Offshore services...................... 1,581 -- $(1,581)(c) --
Consulting revenues.................... -- 1,282 -- 1,282
--------- ----- --------- ---------
Total revenues..................... 8,117 1,846 (1,581) 8,382
--------- ----- --------- ---------
Lease operating expenses............... 1,714 42 -- 1,756
Production taxes and gathering fees.... 487 49 -- 536
Cost of offshore services.............. 1,689 -- (1,689)(c) --
Consulting and workstation fees........ -- 381 -- 381
Depletion, depreciation and
amortization.......................... 2,240 262 188 (d) 2,690
General and administrative............. 1,520 1,797 -- 3,317
Stock-based compensation............... 1,324 -- -- 1,324
--------- ----- --------- ---------
Total costs and expenses........... 8,974 2,531 (1,501) 10,004
--------- ----- --------- ---------
Income (loss) from operations........ (857) (685) (80) (1,622)
Interest expense....................... 2,823 -- 241 (f) 3,064
Interest income........................ (44) (43) -- (87)
Other expense (income)................. 362 (28) -- 334
--------- ----- --------- ---------
3,141 (71) 241 3,311
--------- ----- --------- ---------
Income (loss) before income tax
benefit (expense) and extraordinary
item................................ (3,998) (614) (321) (4,933)
Income tax benefit (expense)......... -- 122 122 (g) 244
--------- ----- --------- ---------
Loss before extraordinary item..... $ (3,998) $(492) $ (199) $ (4,689)
========= ===== ========= =========
Loss per common share before
extraordinary item.................... $ (1.32) $ (0.97)
========= =========
Weighted average common shares and
dilutive shares outstanding........... 3,040,183 1,785,425 (h) 4,825,608
</TABLE>
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Pro forma adjustments to record the Combination Transaction, the acquisition of
Main Pass 35 and the disposition of Gulfland Industries are summarized below:
(a) To adjust August 1996 oil and gas revenue and expenses on the Main Pass 35
acquisition for the August 6, 1996 closing date of the acquisition.
(b) To adjust oil and gas revenues for the 5.5% overriding royalty interest
assigned to Stratum in connection with the Main Pass 35 acquisition.
(c) To eliminate the offshore services revenue and expense related to the
divestiture of Gulfland Industries.
(d) To adjust depreciation, depletion and amortization to give effect to the
Combination Transaction and the Main Pass 35 acquisition under the full cost
method of accounting.
(e) To adjust for the amortization of goodwill of $1,375,555 attributable to
the acquisition of INEXS in the Combination Transaction, assuming a 10 year
life.
(f) To adjust interest expense for the $3.0 million in Combination Notes issued
to the South Coast principals at an assumed implicit interest rate of 12% per
annum and the incremental interest expense related to the cash portion of the
Main Pass 35 purchase price of $9,625,000 assuming the acquisition occurred as
of January 1, 1996, at an estimated effective rate of 18% per annum.
(g) To adjust for taxes at an assumed federal and state effective income tax
rate of 38%, including the tax effect on the SOCO partnership.
(h) To record the issuance of shares of XPLOR in the acquisitions of the South
Coast Companies and Main Pass 35.
25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data as of December 31, 1995 and 1996 and for each of
the years ended December 31, 1994, 1995 and 1996 are derived from the audited
consolidated financial statements of XPLOR (as successor to Araxas) included
elsewhere in this Prospectus. The selected financial data presented below as of
December 31, 1992, 1993 and 1994 and for the years ended December 31, 1992 and
1993 are derived from consolidated financial statements of the Company not
included in this Prospectus. The selected financial data as of and for the nine
months ended September 30, 1996 and 1997 are derived from the unaudited
financial statements of XPLOR that in the opinion of management reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial condition and results of operations of the
Company as of such dates and for such periods. The results for the nine month
period ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the entire year. The selected historical financial
data up to September 30, 1997 reflect the results of operations of Araxas as
predecessor to XPLOR and are not combined with the results of operations of the
South Coast Companies. The September 30, 1997 balance sheet reflects the
acquisition of the South Coast Companies, which occurred in September 1997. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and notes thereto included
elsewhere in the Prospectus.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------- ------- -------- --------
Dollars in thousands, except
per share data (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue
Oil and gas revenues...... $ 322 $ 98 $ 190 $ 1,376 $ 6,043 $4,069 $ 6,536
Offshore services......... -- -- -- -- 1,745 636 1,581
------ ------ ------- ------- ------- ------- --------
Total revenues.......... 322 98 190 1,376 7,788 4,705 8,117
------ ------ ------- ------- ------- ------- --------
Costs and expenses
Lease operating expenses.. 17 251 245 296 1,614 781 1,714
Production taxes and
gathering fees........... 23 5 12 99 555 325 487
Offshore services......... -- -- -- -- 2,194 774 1,689
Depreciation, depletion
and amortization......... 17 46 134 741 1,714 1,257 2,240
General and
administrative........... 821 527 920 867 1,501 1,004 1,520
Stock-based compensation.. -- -- -- 1,313 -- -- 1,324
------ ------ ------- ------- ------- ------- --------
Total costs and
expenses............... 878 829 1,311 3,316 7,578 4,141 8,974
------ ------ ------- ------- ------- ------- --------
Income (loss) from
operations............. (556) (731) (1,121) (1,940) 210 564 (857)
Other (income) expenses
Gain on sale of oil and
gas properties........... (676) (1,190) (1,320) -- -- -- --
Interest expense.......... 93 85 117 500 2,076 1,191 2,823
Interest income........... (2) -- (1) (17) (24) (17) (44)
Other expenses (income)... (10) (265) 17 96 658 242 362
------ ------ ------- ------- ------- ------- --------
Income (loss) before
income tax (expense)
benefit and
extraordinary item..... 39 639 66 (2,519) (2,500) (852) (3,998)
Income tax benefit
(expense).................. 27 (219) (26) 949 36 36 --
Extraordinary item--early
extinguishment of debt..... -- -- -- -- -- -- (3,909)
------ ------ ------- ------- ------- ------- --------
Net income (loss)....... $ 66 $ 420 $ 40 $(1,570) $(2,464) $ (816) $ (7,907)
Preferred stock
dividends.............. -- -- -- -- (67) (67) --
Preferred stock
redemption discount.... -- -- -- -- 980 980 --
------ ------ ------- ------- ------- ------- --------
Net income (loss)
applicable to common
shares................. $ 66 $ 420 $ 40 $(1,570) $(1,551) $ 97 $ (7,907)
====== ====== ======= ======= ======= ======= ========
Net income (loss) per
common share before
extraordinary item..... $ .03 $ .21 $ .02 $ (.64) $ (.55) $ .04 $ (1.31)
====== ====== ======= ======= ======= ======= ========
Net income (loss) per
common share........... $ .03 $ .21 $ .02 $ (.64) $ (.55) $ .04 $ (2.60)
====== ====== ======= ======= ======= ======= ========
------------------------------------------------------------
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------ ------ ------- ------- ------- -----------------
(UNAUDITED) (UNAUDITED)
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit)... $ (808) $ (374) $(2,546) $(4,318) $ 606 $(39,078)
Net property and equipment.. 927 2,009 3,347 13,330 23,689 41,434
Total assets................ 1,272 2,287 3,732 14,291 32,832 54,496
Long-term debt, net of
current maturities......... 37 902 -- 2,944 20,846 1,557
Total stockholders' equity.. 118 538 577 4,533 5,807 8,354
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
XPLOR is an independent energy company engaged in the exploration for and
development of oil and gas reserves, primarily in the Louisiana and Texas Gulf
Coast region. The Company focuses on growth through drilling, combining
sophisticated technologies such as 3-D seismic data and interactive computer
analytical techniques with an experienced technical staff and management. XPLOR
applies a disciplined exploration methodology consisting of traditional
subsurface geology followed by acquisition and analysis of specifically
targeted 3-D seismic data, integrated with sound engineering and economic
principles. This methodology is designed to use 3-D seismic data cost-
effectively to confirm rather than to generate prospects.
XPLOR was formed through the strategic combination of Araxas and the South
Coast Companies in the Combination Transaction. Management believes that the
Combination Transaction will enhance the Company's ability to increase its
reserves, production and cash flow per share by combining the complementary
strengths of Araxas's operating expertise, the South Coast Companies'
geophysical expertise and the two companies' portfolios of exploration
prospects concentrated in the Gulf Coast region. See "The Combination
Transaction."
The Company has grown through exploration, development opportunities and the
acquisition of properties with existing production. In 1995, the Company
acquired substantial working interests in the Adams-Baggett field in Crockett
County, Texas, and in 1996 acquired substantial working interests in Main Pass
35 in the shallow state waters of Louisiana and High Island 30L in the state
waters of Texas. These acquisitions were funded through borrowings and cash
flow from operations.
Over time, the Company has shifted its focus from being primarily a generator
and seller of prospects to that of a working interest owner and operator. In
connection with the Company's acquisition of Main Pass 35, the Company also
acquired Gulfland Industries, a contract operator of offshore platforms. The
Company divested Gulfland Industries in April 1997.
The Company's historical financial statements reflect the financial position of
XPLOR, as successor to Araxas, and the acquired companies from their
acquisition date.
The Company uses the full-cost method of accounting for its oil and gas
properties. Under this method, all acquisition, exploration and development
costs, including any general and administrative costs that are directly
attributable to the Company's acquisition, exploration and development
activities, are capitalized as incurred. The Company records depletion of
capitalized costs and future development costs using the unit-of-production
method. To the extent that such capitalized costs (net of depreciation,
depletion and amortization and related deferred taxes) exceed the present value
(using a 10% discount rate) of estimated future net after-tax cash flows from
proved oil and gas reserves, such excess costs are recorded as additional
depletion. The Company has not been required to make any such write-downs. Once
incurred, a write-down of oil and gas properties is not reversible at a later
date.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been borrowings, equity capital
from private sources and funds generated by operations. The Company's primary
capital requirements are drilling expenditures and 3-D seismic and land
acquisition costs. As of September 30, 1997, the Company had a working capital
deficit of $39.1 million (due to the current classification of the Company's
indebtedness under the Bridge Loan, the Equitable Note and the Combination
Notes) and indebtedness as a percentage of total capitalization of 83%. The
Company intends to use the net proceeds from the Offering to repay indebtedness
and for general corporate purposes, including funding its exploration and
development activities.
27
<PAGE>
Financing Transactions
The Company's borrowings were formerly made under a $42.5 million credit
facility with Stratum. The Company was not in compliance with certain
restrictive covenants of its credit facility with Stratum at December 31, 1996.
The Company obtained waivers to such covenants at December 31, 1996 and through
August 31, 1997.
In September 1997, the Company entered into the Bridge Loan with Credit
Lyonnais and repaid in full and terminated its borrowing arrangements with
Stratum. The Bridge Loan provides for availability of up to $35.0 million, and
bears interest at the Credit Lyonnais short-term commercial loan rate plus 2.5%
per annum, payable quarterly, or, at the option of the Company, at a fixed rate
based on short-term LIBOR plus a margin of 4.3% per annum. At September 30,
1997, $30.8 million was outstanding, bearing interest at a rate of 10% per
annum. The Company is required to repay the portion of the Bridge Loan that
exceeds $20 million with the net proceeds from the Offering, but intends to use
such net proceeds to repay the Bridge Loan in full. The Company expects to
record a charge of approximately $0.6 million to write off the unamortized debt
financing costs of the Bridge Loan upon such repayment. Upon the closing of the
Offering, the Bridge Loan will convert into a revolving credit facility (the
"Credit Facility"), which will provide for a maximum loan amount of $100
million, subject to borrowing base limitations and credit approvals. The
initial borrowing base will provide for availability of up to $20 million. The
principal amount outstanding under the Credit Facility will be due and payable
upon maturity in September 2000. Borrowings under the Credit Facility will bear
interest at the Credit Lyonnais short-term commercial rate or, at the option of
the Company, short-term LIBOR rates plus a margin of 1% per annum. Interest
rates under the Credit Facility are subject to an increase of 0.25% per annum
if funded debt exceeds 40% of total capitalization and, under the LIBOR option,
are subject to an increase of 0.25% per annum if borrowings exceed 50% of the
borrowing base and 0.5% per annum if borrowings exceed 75% of the borrowing
base. The Company's obligations under the agreement governing both the Bridge
Loan and the Credit Facility (the "Credit Agreement") are secured by all of its
oil and gas properties and by the capital stock of its subsidiaries. The
Company's subsidiaries also provide guarantees under the Credit Agreement.
Under the Credit Facility, Credit Lyonnais will make semi-annual borrowing base
determinations, in its sole discretion, based upon the proved oil and gas
properties of the Company. In addition, Credit Lyonnais may redetermine the
borrowing base at any time after December 31, 1997. The Company may also
request borrowing base redeterminations at the Company's cost in addition to
the required semi-annual reviews.
The Company is subject to certain covenants under the terms of the Credit
Agreement and must meet certain financial tests. In particular, the Company
must maintain a minimum tangible net worth of $5.5 million plus 75% of net
income (without deduction for losses) after July 1, 1997 plus 75% of the net
proceeds from the issuance of equity securities and, commencing in March 1998,
must maintain a minimum current ratio of 1 and a minimum fixed charge coverage
ratio of 3 to 1. The Company believes that it is currently in compliance with
those covenants that are currently in effect, and expects that it will be in
compliance with all of such covenants upon the closing of the Offering. The
Credit Agreement prohibits mergers, dividends, dispositions of assets and
changing the nature of the Company's business, and places restrictions on
incurring additional indebtedness and liens and investments.
In the Combination Transaction, the Company issued to former stockholders of
INEXS an aggregate of $3.0 million principal amount of Combination Notes
maturing on the closing of the Offering. The Company has also issued the $1.0
million Rowsey Note maturing on the closing of the Offering. The Company
intends to use a portion of the proceeds from the Offering to repay in full the
Combination Notes and the Rowsey Note. See "Use of Proceeds," "The Combination
Transaction" and "Certain Transactions."
To provide additional working capital for the Company prior to the consummation
of the Bridge Loan, the Company borrowed $5.0 million from Equitable in July
1997. The Equitable Note in respect of such loan bears interest at the rate of
9% per annum and will mature on July 31, 1998. The Company intends to use a
portion of the net proceeds from the Offering to repay the Equitable Note in
full. See "Use of Proceeds."
In connection with the termination of employment of a former employee, the
Company purchased FO&G, which owned small working interests in certain of the
Company's properties. The Company purchased FO&G for
28
<PAGE>
$750,000 in cash and the $2.2 million FO&G Note that bears interest at the rate
of 5.8% per annum and will mature upon the closing of the Offering. The Company
intends to use a portion of the net proceeds from the Offering to repay the
FO&G Note in full. See "Use of Proceeds" and "Certain Transactions."
Capital Expenditures
The Company has budgeted capital expenditures for the last three months of 1997
and for 1998 of approximately $44 million. The capital expenditure budget
includes the planned drilling of 68 gross (17.0 net) wells, the acquisition of
additional 3-D seismic data and further additions to and upgrades of seismic
interpretation hardware and software. The actual number of wells drilled in
this period may differ significantly from these estimates. See "Business--
Significant Properties and Project Areas."
As a result of the Company's active drilling and 3-D seismic acquisition
programs, the Company has experienced and expects to continue to experience
substantial capital requirements. The Company intends to fund its capital
expenditures through the end of 1998 from the unused net proceeds from the
Offering, borrowings under the Credit Facility and cash flow from operations.
Upon consummation of the Offering, the Company expects to have unused net
proceeds from the Offering of approximately $ million available for capital
expenditures (assuming an initial public offering price of $ per share),
and will have $20.0 million of borrowing capacity under the Credit Facility.
The Company expects to fund the balance of such capital expenditures from cash
flow from operations. While the Company believes that the net proceeds from the
Offering, borrowings under the Credit Facility and cash flow from operations
should allow the Company to finance its operations through 1998 based on
current conditions, additional financing may be required in the future to fund
the Company's drilling and 3-D seismic acquisition programs. In the event that
cash flow from operations is insufficient and additional financing is not
available, the Company may be required to curtail its drilling, development and
other activities, and may be unable to drill some of its currently identified
prospects.
Escrow Arrangements
The Company is contractually obligated by the terms of certain purchase
agreements to contribute funds to escrow accounts amounting to $1,556,000 for
the future dismantlement and abandonment of certain oil and gas properties over
the reserve life of these properties. The restricted cash is recorded as an
other asset on the Company's balance sheet. At September 30, 1997, the Company
had funded a total of $1,198,000, and intends to fund the remainder from cash
flow from operations.
29
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
The Combination Transaction was consummated in September 1997 and accounted for
as a purchase of the South Coast Companies by XPLOR, as successor to Araxas,
effective as of September 30, 1997. As a result of the Combination Transaction,
the Company's results of operations reflect a substantial expansion in the size
of its operations compared to the individual historical results of operations
of Araxas and the South Coast Companies. To facilitate an understanding of the
changes in results of operations of the Company's business, the discussion
below is based upon a comparison of the unaudited pro forma operating
information for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997, prepared assuming that the Combination
Transaction, the August 1996 acquisition of Main Pass 35 and the April 1997
divestiture of Gulfland Industries had been consummated on January 1, 1995 and
January 1, 1996, as appropriate.
<TABLE>
<S> <C> <C> <C> <C>
----------------------------------
<CAPTION>
PRO FORMA
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
------- ------- ------- -------
(UNAUDITED)
Dollars in thousands
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues
Oil and gas revenues..................... $ 6,131 $9,778 $ 7,560 $ 7,100
Consulting revenues...................... 878 1,395 1,000 1,282
------- ------- ------- -------
Total revenues......................... 7,009 11,173 8,560 8,382
------- ------- ------- -------
Costs and expenses
Lease operating expenses................. 3,303 3,874 3,027 1,756
Production taxes and gathering fees...... 709 988 746 536
Consulting and workstation fees.......... 332 607 366 381
Depreciation, depletion and amortization. 2,179 2,960 2,152 2,690
General and administrative............... 1,851 2,590 1,700 3,317
Stock-based compensation................. 1,313 -- -- 1,324
------- ------- ------- -------
Total costs and expenses............... 9,687 11,019 7,991 10,004
------- ------- ------- -------
Income (loss) from operations.......... (2,678) 154 569 (1,622)
Other (income) expenses
Interest expense......................... 2,555 3,408 2,443 3,064
Interest income.......................... (531) (259) (126) (87)
Other expense............................ 102 652 225 334
------- ------- ------- -------
Loss before income tax benefit and
extraordinary item.................... (4,804) (3,647) (1,973) (4,933)
Income tax benefit......................... 1,818 480 478 244
------- ------- ------- -------
Loss before extraordinary item......... $(2,986) $(3,167) $(1,495) $(4,689)
======= ======= ======= =======
</TABLE>
Pro Forma Nine Months Ended September 30, 1997 Compared to Pro Forma Nine
Months Ended September 30, 1996
Revenues. Oil and gas revenues decreased $0.5 million, or 6%, from $7.6 million
in the first nine months of 1996 to $7.1 million in the first nine months of
1997. Total production volumes increased 6% from 2,500 MMcfe in the first nine
months of 1996 to 2,649 MMcfe in the first nine months of 1997. Production
volumes for oil and condensate decreased slightly from 238 MBbls in the first
nine months of 1996 to 232 MBbls in the first nine months of 1997, primarily
due to curtailment of production at Main Pass 35 as a result of EPA water
discharge rule changes, offset by production from the High Island 30L field,
which was acquired in late 1996, and from new wells. These EPA rule changes
have been addressed by the Company and production levels have been partially
restored. The Company does not expect these rule changes to adversely affect
production over the long term. Production volumes for gas increased 17% from
1,074 MMcf in the first nine months of 1996 to 1,258 MMcf in the first nine
months of 1997.
30
<PAGE>
This increase was primarily attributable to production from three new wells.
The increase of $0.3 million in revenues from higher production was more than
offset by declines of 18% and 3% in the prices received for oil and gas,
respectively.
As a result of hedging activities, the Company realized an average oil price of
$16.77 per Bbl and an average gas price of $2.39 per Mcf for the nine months
ended September 30, 1997, compared to average prices of $19.80 per Bbl and
$2.59 per Mcf, respectively, that otherwise would have been received. These
hedging activities decreased oil and gas revenues by approximately $1.0 million
and $0.1 million in the nine months ended September 30, 1997 and 1996,
respectively. The hedges, which were required by the terms of the Stratum debt
agreement, were entered into commencing in May 1996. During September 1997, the
Company closed all of its outstanding hedging arrangements. See "--Hedging."
Consulting revenues increased $0.3 million, or 28%, from $1.0 million in the
first nine months of 1996 to $1.3 million in the first nine months of 1997. The
increase was primarily due to a greater level of activity with more geophysical
consultants working for the Company, resulting in higher billable hours, as
well as higher rates.
Expenses. Lease operating expenses decreased from $3.0 million in the first
nine months of 1996 to $1.8 million in the first nine months of 1997, a
decrease of $1.2 million, or 42%, primarily as a result of unusual costs
incurred in the operation of Main Pass 35 in 1996 prior to its acquisition. The
decrease in production taxes and gathering fees from the first nine months of
1996 to the first nine months of 1997 was $0.2 million, or 28%, due to lower
taxable revenues.
Consulting and workstation fees increased slightly from the first nine months
of 1996 to the first nine months of 1997. The increase was primarily due to a
greater number of consultants being employed.
Depreciation, depletion and amortization ("DD&A") was $2.2 million in the first
nine months of 1996, compared to $2.7 million in the first nine months of 1997,
an increase of $0.5 million, or 25%. This increase resulted primarily from the
use of a higher depletion rate ($0.87 per Mcfe in 1997 compared to $0.79 per
Mcfe in 1996) attributable to the decrease in reserve volumes as of September
30, 1997, which was due to production during the period, the exclusion of
certain reserves that were no longer economic at September 30, 1997 prices, and
limited reserve additions during the period due to capital constraints.
General and administrative expenses increased 95% from $1.7 million in the
first nine months of 1996 to $3.3 million in the first nine months of 1997. The
increase was primarily due to an increase in the number of employees and
consultants, as well as bonuses paid in the third quarter of 1997, severance
payments of $0.2 million to employees whose employment was terminated in the
third quarter of 1997, an increase in the cost of independent engineering
services and an increase in office rent.
Stock-based compensation of $1.3 million for the nine months ended September
30, 1997 resulted from the issuance of stock to employees and the settlement of
stock options granted to former employees. There was no similar expense in
1996.
Interest expense increased from $2.4 million in the first nine months of 1996
to $3.1 million in the first nine months of 1997. The increase was primarily
attributable to the higher debt outstanding during the first nine months of
1997 compared to the first nine months of 1996. The incremental debt was
incurred to fund capital expenditures.
Income tax benefit was $0.2 million for the nine months ended September 30,
1997 compared to $0.5 million for the same period in 1996.
Loss Before Extraordinary Item. Loss before extraordinary item was $1.5 million
in the first nine months of 1996, compared to a loss before extraordinary item
of $4.7 million in the first nine months of 1997 as a result of the factors
described above.
31
<PAGE>
Pro Forma Year Ended December 31, 1996 Compared to Pro Forma Year Ended
December 31, 1995
Revenues. Oil and gas revenues increased $3.7 million, or 59%, from $6.1
million in 1995 to $9.8 million in 1996. Total production volumes increased 35%
from 2,402 MMcfe in 1995 to 3,239 MMcfe in 1996. Production volumes for oil and
condensate increased from 272 MBbls in 1995 to 311 MBbls in 1996. This increase
was attributable to one new well brought on in 1996 and the acquisition of the
High Island 30L field. Production volumes for gas increased from 769 MMcf in
1995 to 1,371 MMcf in 1996. This increase was primarily attributable to four
wells brought on in 1996 and late 1995. The increase in total net production in
1996 increased revenues by $1.7 million, or 28%. In addition, the Company
experienced a 17% increase in oil prices and a 45% increase in gas prices
received in 1996 compared to 1995.
As a result of hedging activities, the Company realized an average oil price of
$20.79 per Bbl and an average gas price of $2.41 per Mcf for the year ended
December 31, 1996, compared to average prices of $21.99 per Bbl and $2.58 per
Mcf that otherwise would have been received. These hedging activities decreased
oil and gas revenues by approximately $0.6 million in 1996. The hedges were
entered into in 1996 and were required by the terms of the Stratum debt
agreement.
Consulting revenues increased $0.5 million, or 59%, from $0.9 million in 1995
to approximately $1.4 million in 1996. The increase was primarily due to a
greater level of activity with more geophysical consultants working for the
Company, resulting in higher billable hours, as well as higher rates.
Expenses. Lease operating expenses increased from $3.3 million in 1995 to $3.9
million in 1996, an increase of $0.6 million, or 17%, primarily as a result of
new wells that were brought on in late 1995 and in 1996, as well as the High
Island 30L field acquisition. Likewise, production taxes and gathering fees
increased from $0.7 million in 1995 to $1.0 million in 1996, an increase of
$0.3 million, or 39%, due to greater volumes and resulting revenue increases.
Consulting and workstation fees increased $0.3 million, from $0.3 million in
1995 to $0.6 million in 1996. The increase was primarily due to a greater
number of consultants being employed.
DD&A was $2.2 million in 1995, compared to $3.0 million in 1996, an increase of
$0.8 million, or 36%, based on an assumed depletion rate of $0.79 per Mcfe.
General and administrative expenses increased from $1.9 million in 1995 to $2.6
million in 1996, an increase of $0.7 million, or 40%. This increase was
associated with a larger staff and more activity as the Company underwent
significant growth.
Stock-based compensation of $1.3 million in 1995 resulted from the granting of
stock options to employees. There was no similar expense in 1996.
Interest expense increased by $0.8 million, or 33%, from $2.6 million in 1995
to $3.4 million in 1996. The increase was primarily attributable to the higher
debt outstanding during 1996 compared to 1995. The incremental debt was
incurred to fund capital expenditures.
Interest income decreased $0.2 million from $0.5 million in 1995 to $0.3
million in 1996. The decrease was primarily due to decreasing cash balances.
Other expense increased by $0.6 million from $0.1 million in 1995 to $0.7
million in 1996, primarily as a result of an unrealized loss on securities.
Income tax benefit decreased from $1.8 million in 1995 to $0.5 million in 1996,
a decrease of $1.3 million, or 74%, primarily as a result of the complete use
of deferred tax liabilities as an offset to deferred tax assets.
Net Loss. Net loss was $3.0 million in 1995, compared to $3.2 million in 1996,
as a result of the factors described above.
32
<PAGE>
HISTORICAL RESULTS OF OPERATIONS
The historical results of operations of the Company reflect the results of
Araxas as predecessor to XPLOR and are not combined with the results of
operations of the South Coast Companies.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. Oil and gas revenues increased $2.4 million from $4.1 million for the
nine months ended September 30, 1996 to $6.5 million for the nine months ended
September 30, 1997. Total production volumes increased 63% from 1,521 MMcfe for
the nine months ended September 30, 1996 to 2,473 MMcfe for the nine months
ended September 30, 1997. Production volumes for oil and condensate increased
from 87 MBbls for the nine months ended September 30, 1996 to 212 MBbls for the
same period in 1997. This increase was attributable primarily to production
from Main Pass 35, which was acquired in the latter part of 1996 and accounted
for 111 MBbls of the increase. Production volumes for gas increased 23% from
981 MMcf for the nine months ended September 30, 1996 to 1,202 MMcf for the
same period in 1997. This increase was primarily attributable to three new
wells. The increase in volumes of oil and gas accounted for an increase in
revenues of approximately $3.0 million, offset by a decline of 18% in the price
received for oil.
As a result of hedging activities, the Company realized an average oil price of
$16.50 per Bbl and an average gas price of $2.36 per Mcf for the nine months
ended September 30, 1997, compared to average prices of $19.81 per Bbl and
$2.56 per Mcf that otherwise would have been received. For the same period in
1996, the Company realized an average oil price of $20.05 per Bbl and an
average gas price of $2.34 per Mcf, compared to average prices of $20.61 per
Bbl and $2.43 per Mcf that otherwise would have been received. These hedging
activities decreased oil and gas revenues by approximately $1.0 million and
$0.1 million in the nine months ended September 30, 1997 and 1996,
respectively. The hedges, which were required by the terms of the Company's
debt agreement with Stratum, were entered into commencing in May 1996.
Revenues from offshore services (conducted by Gulfland Industries) were $1.6
million and $0.6 million in the nine months ended September 30, 1997 and 1996,
respectively. The cost of offshore services was $1.7 million and $0.8 million
for the nine months ended September 30, 1997 and 1996, respectively. The
Company did not acquire this business until August 1996, and later disposed of
it in April 1997.
Expenses. Lease operating expenses increased from $0.8 million for the nine
months ended September 30, 1996 to $1.7 million for the same period in 1997, an
increase of $0.9 million, primarily as a result of the greater production due
to the Main Pass 35 and High Island 30L property acquisitions that were
completed in 1996, as well as the new wells that were brought on production
during the latter part of 1996 and in 1997 in other fields. In addition, lease
operating expenses per Mcfe were relatively higher on Main Pass 35 as a result
of the offshore location, the age of the platform and water injection
operations. Production taxes and gathering fees increased from $0.3 million for
the nine months ended September 30, 1996 to $0.5 million for the same period in
1997 due to greater production volumes and resulting revenue increases.
DD&A was $1.3 million for the nine months ended September 30, 1996, compared to
$2.2 million for the nine months ended September 30, 1997, an increase of $0.9
million, or 78%, as a result of higher production volumes. On a per Mcfe basis,
the depletion rate increased 28% from $0.65 for the nine months ended September
30, 1996 compared to $0.83 for the same period in 1997, due primarily to a
decrease in reserves at September 30, 1997, which was due to production during
the period, the exclusion of certain reserves that were no longer economic at
September 30, 1997 prices, and limited reserve additions during the period due
to capital constraints.
General and administrative expenses increased from $1.0 million for the nine
months ended September 30, 1996 to $1.5 million for the nine months ended
September 30, 1997, an increase of $0.5 million. The increase was primarily due
to a larger number of employees and consultants, as well as increased
independent engineering services.
Stock-based compensation of $1.3 million for the nine months ended September
30, 1997 resulted from the issuance of stock to employees and the settlement of
stock options granted to former employees. There was no such expense in 1996.
Interest expense increased $1.6 million, from $1.2 million for the nine months
ended September 30, 1996 to $2.8 million for the same period in 1997. The
increase was primarily attributable to the higher debt outstanding during
33
<PAGE>
1997 compared to 1996 and the higher rate associated with the debt outstanding
during the entire period in 1997. The debt outstanding during the nine months
ended September 30, 1997 was principally incurred in April 1996 to refinance
debt and to acquire assets requiring a cash outlay of approximately $10.3
million.
Extraordinary item--early extinguishment of debt was a loss of $3.9 million for
the nine months ended September 30, 1997, relating to the repayment of the debt
to Stratum in September 1997. The extraordinary item consisted of $3.2 million
of unamortized debt discount and $0.7 million of unamortized debt financing
costs. There was no similar amount in 1996.
Income tax benefit was insignificant for both the nine months ended September
30, 1996 and September 30, 1997, despite pre-tax losses before extraordinary
item of $0.9 million and $4.0 million, respectively, primarily as a result of
net operating losses attributable to tax losses not expected to be realized as
a tax benefit to Araxas.
Net Loss. Net loss was $7.9 million for the nine months ended September 30,
1997, compared to $0.8 million for the same period in 1996, as a result of the
factors described above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Oil and gas revenues increased $4.6 million, from $1.4 million in
1995 to $6.0 million in 1996. Total production volumes increased 202% from 721
MMcfe in 1995 to 2,179 MMcfe in 1996. Production volumes for oil and condensate
increased from 44 MBbls in 1995 to 154 MBbls in 1996. This increase was
attributable primarily to production from Main Pass 35 and High Island 30L,
which were acquired in 1996 and accounted for 90 MBbls of the increase, and
from new wells brought on during 1996. Production volumes for gas increased
from 460 MMcf in 1995 to 1,256 MMcf in 1996. This increase was primarily
attributable to four new wells brought on in 1996 or late 1995. The increase in
total net production in 1996 compared to 1995 increased revenues by $2.9
million. In addition, the Company experienced a 29% increase in oil prices and
a 55% increase in gas prices received in 1996 as compared to 1995.
As a result of hedging activities, the Company realized an average oil price of
$20.68 per Bbl and an average gas price of $2.28 per Mcf for the year ended
December 31, 1996, compared to average prices of $23.12 per Bbl and $2.46 per
Mcf, respectively, that otherwise would have been received. These hedging
activities decreased oil and gas revenues by approximately $0.6 million in
1996. The hedges were entered into in 1996 and were required by the terms of
the Company's debt agreement with Stratum.
Revenues from offshore services were $1.7 million in 1996. The Company entered
this business with the purchase of Gulfland Industries, which was acquired in
connection with Main Pass 35, in August 1996. Cost of offshore services was
$2.2 million in 1996. The Company disposed of this business in April 1997.
Expenses. Lease operating expenses increased from $0.3 million in 1995 to $1.6
million in 1996, an increase of $1.3 million, primarily as a result of the
greater production due to the Main Pass 35 and High Island 30L acquisitions
that were completed in 1996 and the more costly operations in Main Pass 35, as
well as new wells that were brought on production during 1996 in other fields.
Likewise, production taxes and gathering fees increased from $0.1 million in
1995 to $0.6 million in 1996, an increase of $0.5 million, resulting from
greater production volumes and resulting revenue increases.
DD&A was $0.7 million in 1995, compared to $1.7 million in 1996, an increase of
$1.0 million. On a per Mcfe basis, the depletion rate decreased by $0.13 from
$0.78 in 1995 to $0.65 in 1996.
General and administrative expenses increased from $0.9 million in 1995 to $1.5
million in 1996, an increase of $0.6 million, or 73%. The increase was
associated with a larger staff and more activity as the Company experienced
significant growth.
Stock-based compensation of $1.3 million in 1995 resulted from the granting of
stock options to employees. There was no similar expense in 1996.
Interest expense increased $1.6 million, from $0.5 million in 1995 to $2.1
million in 1996. The increase was primarily attributable to the higher debt
outstanding during 1996 compared to 1995 and the higher rate associated
34
<PAGE>
with the debt outstanding in 1996. The debt incurred in 1996 was incurred to
refinance debt and to acquire assets in April 1996 requiring a cash outlay of
approximately $10.3 million.
Other expense increased from $0.1 million in 1995 to $0.7 million in 1996,
primarily as a result of an unrealized loss on securities.
Income tax benefit decreased from $0.9 million in 1995 to $36,000 in 1996,
primarily as a result of net operating losses attributable to tax losses not
expected to be realized as a tax benefit to Araxas.
Net Loss. Net loss was $1.6 million in 1995, compared to $2.5 million in 1996,
as a result of the factors described above.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Oil and gas revenues increased $1.2 million from $0.2 million in 1994
to $1.4 million in 1995. Total production volumes were 721 MMcfe in 1995.
Production volumes for oil and condensate increased to 44 MBbls in 1995, and
production volumes for gas increased to 460 MMcf in 1995. Production volumes
for both oil and gas were insignificant in 1994. The increase in production
volumes was attributable primarily to production from the Adams-Baggett field
and another property, both acquired in 1995, and from new wells brought on
during that year. The increase in total net production in 1995 compared to 1994
increased revenues by $1.2 million.
Expenses. Lease operating expenses increased from $245,000 in 1994 to $296,000
in 1995, an increase of 21%, primarily as a result of the greater production
due to property acquisitions that were completed in 1995, and the new wells
that were brought on production during that year in other fields. Likewise,
production taxes and gathering fees increased from $12,000 in 1994 to $99,000
in 1995 due to greater volumes and resulting revenue increases.
DD&A was $0.1 million in 1994, compared to $0.7 million in 1995. On a per Mcfe
basis, the depletion rate decreased from $0.79 in 1994 to $0.78 in 1995.
General and administrative expenses held constant at approximately $0.9 million
in 1994 and 1995.
Stock-based compensation of $1.3 million in 1995 resulted from the granting of
stock options to employees. There was no similar expense in 1994.
Gains on sales of oil and gas properties were $1.3 million in 1994. During
1994, the Company sold interests in a number of leases, each of which were
significant to the Company, thus requiring the recognition of gain or loss on
the transactions, rather than crediting the full cost pool. In 1995, the
Company began to shift its focus from being primarily a generator and seller of
prospects to that of a participating working interest owner, attempting to
retain greater interests.
Interest expense increased from $0.1 million in 1994 to $0.5 million in 1995.
The increase was primarily attributable to the higher debt outstanding during
1995 compared to 1994. The debt was incurred in connection with the purchase of
properties in 1995.
Income tax benefit was $0.9 million in 1995 as compared to an expense of
$26,000 in 1994, primarily as a result of the use of deferred tax liabilities
as an offset to deferred tax assets.
Net Loss. Net loss was $1.6 million in 1995, compared to net income of $40,000
in 1994, as a result of the factors described above.
HEDGING
The Company's former debt agreement with Stratum required the Company to put
into place significant long-term commodity price arrangements in an effort to
reduce the effects of short-term fluctuations in the price of oil and gas. Such
arrangements were required at the closing of such financing in April 1996 and
at the times of additional
35
<PAGE>
drawdowns thereunder. During the year ended December 31, 1996, the Company
received a fixed price and paid the NYMEX price with respect to 575 MMBtus of
gas and 60 MBbls of oil under commodity price arrangements, realizing losses of
$598,000. During the first nine months of 1997, the Company received a fixed
price and paid the NYMEX price with respect to 589 MMBtus of gas and 257 MBbls
of oil under commodity price arrangements, realizing losses of $906,000. See
"Business--Marketing." The Company repaid the Stratum debt and terminated the
Stratum debt agreement in September 1997, and the Credit Agreement does not
require the Company to maintain hedges. During September 1997, the Company
closed all its outstanding hedging arrangements at a cost to the Company of
$2.8 million. The Company has recorded this cost as a deferred charge, which
will be amortized through 2001 (the life of the commodity price arrangements
that gave rise to the loss) as part of the hedged oil and gas revenues. During
September 1997, the Company recorded $46,000 of the amortization as a reduction
of oil and gas revenues. The total amortization for 1998 is expected to be $0.8
million. The Company currently does not intend to hedge more than one-third of
its production, but may reevaluate its hedging policy from time to time. The
Company may also close out any portion of hedges that may exist from time to
time as determined to be appropriate by management.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by changing oil
and gas prices. Inflation has had a minimal effect on the Company. See "Risk
Factors--Volatility of Oil and Gas Prices."
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 regarding earnings
per share. SFAS No. 128 replaces the presentation of primary earnings per share
("EPS") with the presentation of basic EPS, which excludes dilution and is
computed by dividing income available to common stockholders by the weighted-
average number of shares of common stock outstanding for the period. SFAS No.
128 also requires dual presentation of basic EPS and diluted EPS on the face of
the income statement and requires a reconciliation of the numerators and
denominators of basic EPS and diluted EPS. The Company will adopt SFAS No. 128
in the quarter ended December 31, 1997.
In June 1997, FASB issued SFAS No. 130 regarding reporting comprehensive
income, which establishes standards for reporting and display of comprehensive
income and its components. The components of comprehensive income refer to
revenues, expenses, gains and losses that are excluded from net income under
current accounting standards, including foreign currency translation items,
minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. SFAS No. 130 requires that
all items recognized under accounting standards as components of comprehensive
income be reported in a financial statement displayed in equal prominence with
the other financial statements; the total of other comprehensive income for a
period is required to be transferred to a component of equity that is
separately displayed in a statement of financial condition at the end of an
accounting period. SFAS No. 130 is effective for both interim and annual
periods beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company will adopt SFAS No. 130 for the year ending December 31, 1998.
In June 1997, FASB issued SFAS No. 131 regarding disclosures about segments of
an enterprise and related information. SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for periods beginning after December 15,
1997. The Company will adopt SFAS No. 131 for the year ending December 31,
1998.
The Company believes that adoption of these financial accounting standards will
not have a material effect on its financial condition or results of operations.
36
<PAGE>
BUSINESS
GENERAL
XPLOR is an independent energy company engaged in the exploration for and
development of oil and gas reserves, primarily in the Louisiana and Texas Gulf
Coast region. The Company focuses on growth through drilling, combining
sophisticated technologies such as 3-D seismic data and interactive computer
analytical techniques with an experienced technical staff and management. XPLOR
applies a disciplined exploration methodology consisting of traditional
subsurface geology followed by acquisition and analysis of specifically
targeted 3-D seismic data, integrated with sound engineering and economic
principles. This methodology is designed to use 3-D seismic data cost-
effectively to confirm rather than to generate prospects. See "--Exploration
Methodology."
XPLOR was formed through the strategic combination of Araxas and the South
Coast Companies in the Combination Transaction. Management believes that the
Combination Transaction will enhance the Company's ability to increase its
reserves, production and cash flow per share by combining the complementary
strengths of Araxas's operating expertise, the South Coast Companies'
geophysical expertise and the two companies' portfolios of exploration
prospects concentrated in the Gulf Coast region. See "The Combination
Transaction."
Between December 31, 1994 and September 30, 1997, the Company increased its net
proved reserves from approximately 8 Bcfe to approximately 58 Bcfe. Average net
production increased from 260 Mcfe per day for the year ended December 31, 1994
to approximately 9,700 Mcfe per day for the nine months ended September 30,
1997.
Drilling new wells and interpreting 3-D seismic and other data over existing
fields have together generated approximately 60% of the increase in the
Company's estimated proved reserves from December 31, 1994 to September 30,
1997. The Company drilled 48 gross wells during that time, consisting of 29
exploratory wells, of which 15 were commercially productive, and 19 development
wells, of which 17 of which were commercially productive. The Company also has
added reserves through acquisitions, which accounted for the balance of the
reserve increase from December 31, 1994 to September 30, 1997. During this
period, the Company completed major acquisitions of substantial working
interests in the Adams-Baggett field in Crockett County, Texas and Main Pass 35
in the shallow state waters of Louisiana. The Company's reserve growth has been
achieved at an average finding cost of $0.73 per Mcfe and an average
acquisition cost of $0.70 per Mcfe. Although the Company expects that its
future reserve and production growth will result primarily from its drilling
program, the Company will consider acquisitions with significant growth
potential.
The Company has acquired over 700 square miles of 3-D seismic data and has
leased or optioned acreage in 17 project areas. As of September 30, 1997, XPLOR
had an inventory of 98 exploration and development prospects within these
project areas scheduled to be drilled over the next two years. Prior to the
Offering, capital constraints limited the Company's ability to drill its
prospect inventory. At the closing of this Offering, however, the Company
expects to have $20.0 million available for borrowing under the Credit
Facility, in addition to its cash flow from operations and the unused net
proceeds from the Offering, available for its drilling program. XPLOR has
budgeted total capital expenditures of approximately $44 million for the period
from October 1, 1997 through the end of 1998, which includes funds for drilling
approximately 80% of its currently identified exploration and development
prospects. The Company believes that its current prospect inventory includes
both moderate potential, lower risk prospects and higher potential, higher risk
prospects that, if successful, may result in significant increases in proved
reserves.
The address of the Company's principal executive offices is 10200 Grogans Mill
Road, Suite 500, The Woodlands, Texas 77380, and its telephone number is (281)
364-3700.
37
<PAGE>
STRENGTHS
XPLOR believes it has the following strengths that are integral to its overall
growth strategy:
Experienced Technical Team
The Company has assembled a technical team that has extensive experience in
applying sophisticated exploration techniques and that it believes has the
capacity to adapt to rapidly changing technological demands. The Company
employs 11 geoscientists, consisting of four geologists and seven
geophysicists, all of whom have 15 to 25 years of experience in exploring for
oil and gas. The Company also has an experienced group of engineers who
participate in the evaluation of the Company's potential projects and manage
the Company's drilling and production operations.
Advanced Technology
The Company's experienced technical team applies advanced technology in oil and
gas exploration and has access to the latest enhancements in such technology.
The Company provides its technical team with a sophisticated in-house computer-
based work environment, which enables the team to evaluate and integrate data
efficiently. XPLOR has 10 networked workstations running the latest 3-D design,
modeling, interpretation, mapping, processing and visualization software
applications.
INEXS, the Company's geophysical consulting subsidiary, is an integral part of
the Company's technology base and gives the Company access to the latest
advances in geoscientific technologies. INEXS has specialized in 3-D seismic
interpretation and project management services since 1990 and has interpreted
over 180 3-D seismic surveys for over 133 companies, including major
integrated, foreign national and independent oil and gas companies. INEXS's
clients have drilled more than 100 wells based on INEXS's interpretation work,
over 70% of which the Company believes have been completed as commercial
producers. As a result of this high level of activity, INEXS has formed working
relationships with a number of technology providers. Consequently, INEXS has
participated in the design and testing of new applications, providing the
Company with access to emerging technologies prior to their availability for
general use.
Existing Prospect Inventory and Proved Reserves
As of September 30, 1997, XPLOR had an inventory of 98 exploration and
development prospects scheduled to be drilled within the next two years. The
Company has leased or optioned acreage for all 98 prospects. Of these
prospects, 70 are exploratory and 28 are development. The Company also has
identified additional exploratory prospects in various stages of evaluation,
planning and implementation. The Company had total proved reserves of
approximately 58 Bcfe at September 30, 1997, of which approximately 29 Bcfe
were proved developed. For the nine months ended September 30, 1997, net
production averaged approximately 9,700 Mcfe per day.
Experienced Management
XPLOR's executive management has experience in both traditional exploratory and
operational areas and in the application of the latest technological advances.
The Company's executive management has an average of over 20 years of industry
experience in engineering, geology, geophysics and finance, primarily with
major integrated and large independent oil and gas companies. The Company has
established both short-term and long-term incentive plans for management
designed to align compensation with the interests of stockholders. See
"Management."
38
<PAGE>
BUSINESS STRATEGY
XPLOR intends to increase its oil and gas reserves, production and cash flow
per share by emphasizing the following:
Growth Through Exploration and Development
The Company believes that its future growth in reserves, production and cash
flow per share will result principally from a combination of exploratory and
development drilling on the Company's inventory of prospects. In addition to
its 98 exploration and development prospects scheduled to be drilled over the
next two years, the Company has identified additional exploratory prospects in
various phases of evaluation, planning and implementation. The Company follows
a disciplined methodology for the evaluation of its prospects. See "--
Exploration Methodology."
Prospect Generation
XPLOR seeks to generate internally the majority of the prospects in which it
participates. This focus on internal prospect generation enables the Company to
control the entire process, from idea formulation to management of prospective
risk and drilling decisions. The Company focuses on defining prospects that
have multiple objectives based on subsurface geology before acquiring 3-D
seismic data. The Company's inventory of prospects has also enabled the Company
to trade for additional desirable prospects held by other oil and gas
companies. In addition, third-party evaluations performed by INEXS provide the
Company with opportunities to participate in exploratory prospects with
industry partners. XPLOR may also pursue acquisition opportunities with
significant growth potential.
Balanced Drilling Program
The Company engages in an active drilling program and attempts to maintain a
balanced portfolio of exploratory and development prospects. The Company's
exploratory prospect portfolio consists of both moderate potential, lower risk
prospects and higher potential, higher risk prospects that, if successful, may
result in significant increases in proved reserves. The Company considers
balancing the relationship between risk and reward in its exploration program
an important component of its business strategy. See "--Exploration
Methodology."
Geographic Focus
XPLOR's operating activities are focused onshore and in state waters along the
Gulf Coast, primarily in Louisiana and Texas, where the Company has substantial
technical experience and expertise. Given the region's prolific production
history, the existing infrastructure and the opportunities that have been
created by advances in seismic and drilling technology, the Company believes
that the Gulf Coast represents one of the most attractive exploration regions
in North America. The Company has access to an extensive technical database of
well logs, production information and speculative seismic data for the Gulf
Coast region, and has assembled a technical staff with substantial experience
and expertise in the area. From January 1, 1994 to September 30, 1997, the
Company drilled 42 wells along the Gulf Coast and acquired a database of
geological and engineering data and approximately 400 square miles of 3-D
seismic data in the region.
EXPLORATION METHODOLOGY
The Company follows a disciplined methodology for the evaluation of exploratory
and development prospects. The methodology comprises four phases: (i)
identification of prospects in prolific geological trends with a high density
of potential reservoirs and traps; (ii) data acquisition and quality control;
(iii) data integration and interdisciplinary review; and (iv) final decision-
making based upon a thorough analysis of economic and technical information.
39
<PAGE>
Prospect Identification
The Company focuses on the identification of prospects primarily in the Gulf
Coast region, where its technical staff has substantial experience and
expertise. Once a prospective area has been identified, the Company undertakes
a thorough analysis of pre-existing technical data prior to committing to major
capital expenditures for acreage and 3-D seismic data. The potential prospects
are quantified and compared to nearby fields to determine reserve and economic
potential. To qualify for a 3-D seismic program, the prospective area generally
should meet the following criteria: (i) high prospect density, with numerous
potential reservoirs and traps within a narrowly defined project area; (ii)
attractive economics for finding and developing potential reserves; and (iii)
sufficient unleased acreage or acreage that can be acquired through
negotiation. The Company subjects prospects meeting these criteria to a
preliminary economic analysis, which includes estimates of costs associated
with acreage acquisition, 3-D seismic acquisition, drilling and development,
and estimates of the probability of success. Although the Company's methodology
focuses on its 3-D seismic acquisition program, the Company may also identify
prospects based on its use of other technologies.
Data Acquisition and Quality Control
Once the Company has selected a project area for a 3-D seismic evaluation, the
Company's primary goal is to acquire a complete technical database and high-
quality 3-D seismic data to facilitate the detailed evaluation of prospects and
delineation of targets for exploration drilling. The Company's technical team
designs the 3-D seismic survey to image the objectives properly while taking
into consideration acquisition constraints due to surface conditions and
acreage restrictions. The Company believes that optimal results can be obtained
only through a thorough quality control effort by experienced personnel,
including analysis of proper design, selection of appropriate acquisition
equipment and techniques, field testing of acquisition parameters and selection
of appropriate processing algorithms and parameters.
Integration and Interdisciplinary Approach
The Company seeks to define accurately its prospects and reserve potential by
incorporating 3-D seismic data, well data, geological interpretations, other
geophysical data and analyses, petrophysical data and reservoir data. The
Company integrates the prospect information with drilling data, pressure
information, data relative to lease terms and restrictions, surface conditions,
identified hazards and environmental conditions to design a safe and efficient
well. The Company employs an integrated team concept in an effort to ensure
that a high degree of expertise in each of the disciplines is incorporated, to
ensure that the data are used properly in the technical evaluation and to
optimize the results of each phase of the exploration and development process.
Decision Making
If the technical evaluation has yielded positive results, the Company performs
a final economic analysis on the prospect prior to drilling. This analysis
includes estimates of reserves, production rates, drilling risks, costs and
probability of success. To determine probability of success, the Company
analyzes the quantity and quality of technical data used in the evaluation, as
well as the specific structural and stratigraphic attributes of the prospect
and the relationship of the prospect to analogous fields within the immediate
area.
INEXS
INEXS provides a complete range of geophysical and geological consulting
services, including prospect evaluation, complex 2-D and 3-D modeling, 3-D
seismic survey design, detailed seismic interpretation and fully integrated
field studies. INEXS operates as the project manager of 3-D surveys and as the
outsourced exploration and development department for several clients. INEXS
provides services for the Company and for major integrated, foreign national
and independent oil and gas companies. Since 1990, INEXS has performed over 180
detailed interpretation projects using 2-D and 3-D seismic data, remote sensing
data and available well information. INEXS's clients have drilled more than 100
wells based on INEXS's interpretation work, over 70% of
40
<PAGE>
which the Company believes have been completed as commercial producers. Having
formed working relationships with a number of technology providers, INEXS gains
access to emerging technologies prior to their availability for general use by
participating in the design and testing of new geophysical applications.
INEXS's geologists and geophysicists have from 15 to 25 years experience in the
oil industry. Through the combined backgrounds of its staff, INEXS has
experience in all major petroleum regions of the world.
Although a wholly owned subsidiary of the Company, INEXS maintains a separate
identity from that of XPLOR. This separate identity is designed to maintain the
confidentiality necessary to perform consulting services for its other clients.
Many times, clients of INEXS are interested in finding an industry partner to
participate in their projects, and INEXS, with the consent of its clients,
offers XPLOR the opportunity to participate in such projects. The relationship
with INEXS has in the past provided, and the Company believes that the
relationship will in the future continue to provide, the Company with several
important benefits, including continuing industry relationships with INEXS's
client base, access to advanced exploration technology and an ongoing source of
prospects.
SIGNIFICANT PROPERTIES AND PROJECT AREAS
As of September 30, 1997, XPLOR had 98 prospects in 17 project areas scheduled
to be drilled over the next two years. Of these prospects, 70 are exploration
and 28 are development. The following table sets forth the number of producing
wells as of September 30, 1997, the average production, the exploratory and
development prospect inventory and total estimated proved reserves as of
September 30, 1997 in each region.
------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS PROSPECT
PRODUCING NET DAILY INVENTORY
WELLS(1) PRODUCTION(2) DEVELOPMENT EXPLORATION
--------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
LOUISIANA GULF COAST--TOTAL
NET PROVED RESERVES 50 BCFE
Main Pass 35................ 35 2,875 3 --
Lapeyrouse.................. -- -- 2 4
Lake Boeuf.................. -- -- 2 4
Egan/Jennings............... -- -- 4 14
Lake Raccourci.............. 5 2,475 1 --
Other....................... 15 2,459 5 4
--- ------ --- ---
Total..................... 55 7,809 17 26
--- ------ --- ---
TEXAS GULF COAST--TOTAL NET
PROVED RESERVES 4 BCFE
Falcon...................... -- -- -- 4
South Texas................. -- -- -- 2
Hostetter................... -- -- 6 16
Other....................... 21 1,864 2 13
--- ------ --- ---
Total..................... 21 1,864 8 35
--- ------ --- ---
WEST TEXAS AND OTHER--TOTAL
NET PROVED RESERVES 4 BCFE
Total..................... 99 961 3 9
--- ------ --- ---
175 10,634 28 70
=== ====== === ===
</TABLE>
- --------
(1) Does not include wells in which the Company owns only an overriding royalty
interest.
(2) Represents average daily net production for September 1997 (Mcfe per day).
Set forth below are descriptions of the Company's key project areas where it is
actively exploring for oil and gas and the Company's properties that have
significant existing production. Unless otherwise indicated in the discussion
below, current production statistics are for the month of September 1997.
41
<PAGE>
Louisiana Gulf Coast
The Company has ten active exploration projects in the Louisiana Gulf Coast
region. The Company has an inventory of 26 exploration and 17 development
drilling prospects based in part on its more than 275 square miles of
proprietary 3-D seismic data in the region. These prospects include an
aggregate of 30 drilling prospects associated with the Lapeyrouse, Lake Boeuf
and Egan/Jennings fields. The Company also has significant producing properties
in the region, including Main Pass 35 and Lake Raccourci. As of September 30,
1997, approximately 85% of the Company's proved reserves were concentrated in
the Louisiana Gulf Coast region. The Company has budgeted to drill 15
exploration prospects and 12 development prospects in 1998.
Main Pass 35. In 1996, the Company acquired a 70% working interest in Main Pass
35, located in the shallow state waters of Louisiana approximately 55 miles
southeast of New Orleans. This Company-operated field had average net
production of 480 BOE per day from Upper and Middle Miocene sands for the month
of September 1997. The Company has budgeted approximately $5.7 million through
the end of 1998 for development operations. The Company's 1997 budget includes
the purchase of an additional 25 square miles of 3-D seismic data to enhance
the exploitation of the field as well as to identify exploration opportunities.
Lapeyrouse. The Lapeyrouse project area is located in the coastal marshes of
southeast Louisiana in Terrebonne Parish, approximately 50 miles southwest of
New Orleans. The Company's working interest in this project ranges from 9% in
horizons below approximately 16,000 feet to 36% in shallower horizons. In 1996,
the Company acquired a 30 square mile proprietary 3-D seismic survey over the
project area as part of a larger regional shoot. The Company has completed the
processing and interpretation of the data and expects exploratory drilling to
commence in the first quarter of 1998. The targets consist of several untested
fault blocks of field productive sands and deeper potential reservoirs ranging
in depth from 13,000 to 20,000 feet. The Company has budgeted three exploratory
prospects and one development prospect to be drilled in 1998.
Lake Boeuf. The Lake Boeuf field is located in Lafourche Parish, Louisiana, 20
miles west of New Orleans. During the first half of 1997, the Company completed
a 30 square mile proprietary 3-D seismic survey covering the field and
associated prospects. The field adjoins the Southwest Lake Boeuf and the
Rousseau-Thibodeaux fields, which were discovered in the 1950s. Recent
exploratory efforts using high resolution 3-D seismic surveys have added
significant reserves to these nearby fields. The Company operates the project
with a 45% working interest and has identified several significant exploration
prospects and several prospects for shallower zones within the field. The
Company has budgeted three exploratory prospects and two development prospects
in 1998.
Egan/Jennings. The Company has acquired, processed and interpreted a 38 square
mile proprietary 3-D seismic survey covering both the Egan field and a portion
of the Jennings salt dome immediately west of the Egan field, located in Acadia
Parish, Louisiana. There are 11 structurally trapped objective sands of
Oligocene age ranging in depth from 9,000 to 14,000 feet. The Company has a 25%
working interest in this project and has budgeted nine exploratory and
development wells to be drilled in 1998.
Lake Raccourci. In 1995, the Company consummated a farm-in agreement in the
Lake Raccourci field located in Lafourche Parish, Louisiana, where the Company
has interpreted an existing third-party 3-D seismic survey covering
approximately 55 square miles. Since 1995, the Company has drilled five wells,
all of which have been completed as commercially productive. The Company's
working interest in the field varies from 39% in its two operated wells, both
of which produce from the Upper Miocene, to an average of 7% in its nonoperated
wells. The Company's average net production in Lake Raccourci for the month of
September 1997 was 2.5 MMcfe per day. The Company has identified an additional
development drilling location scheduled to be drilled in 1998.
Texas Gulf Coast
In the Texas Gulf Coast region, the Company has five active exploration
projects, including the Falcon project, the Hostetter project and the South
Texas project. The Company has an inventory of 43 exploratory and development
drilling prospects based in part on its approximately 200 square miles of
proprietary 3-D seismic data existing or
42
<PAGE>
in the process of being acquired in the region. Of this inventory, 19
exploratory and two development prospects are scheduled to be drilled in 1998.
Falcon. The Falcon Project is located in southwest Hardin County near the
Louisiana border. The Company controls over 14,500 acres under seismic options,
and expects to complete a 36 square mile proprietary 3-D seismic project in the
fourth quarter of 1997. The primary objectives in this project are the Yegua
sands ranging from 7,000 to 11,000 feet, and secondary objectives exist in the
shallower Miocene and Frio sands. The Company has identified several prospects
using conventional 2-D seismic data and subsurface well control. The Company
has a 52% working interest in this Company-operated project and expects to
commence exploratory drilling in 1998.
South Texas. The South Texas project areas are located in Duval County. Having
mapped and evaluated extensively this project area using subsurface well
control and 2-D seismic data, the Company has committed to acquire a minimum of
50 square miles of 3-D seismic data scheduled for completion in the first half
of 1998. The objectives include the 13 expanded Upper Wilcox Guerra sands
ranging from 10,000 to 13,000 feet that have demonstrated production to the
southwest at the Guerra field, to the northeast at the Rosita field, to the
southeast at the Muy Grande field and to the north at the East Seven Sisters
field. The Company is the operator of this project and currently has an 86%
working interest, a portion of which the Company expects to trade to an
industry partner, with a targeted working interest for the Company of
approximately 50%.
Hostetter. This exploration and development project, approximately 50 miles
west of Corpus Christi, is located in McMullen, Live Oak and Duval Counties
along the expanded Wilcox trend. The existing proprietary 3-D seismic survey
covers approximately 85 square miles shot over the Bonne Terre field, the
Hostetter field, the Rhode Ranch field and numerous other smaller fields. The
data collected from the survey have been acquired, processed and largely
interpreted, and the Company has identified 22 prospects. The Company has a 15%
working interest in the 30 prospective reservoirs within this project area
ranging from the shallow Frio sands to the deeper Upper Wilcox sands. The
majority of the prospects are located in the Upper Wilcox, in depths ranging
from 7,500 to 16,000 feet.
West Texas
The Company currently participates in three areas in West Texas, including two
exploratory projects in Reeves County and Garza County and production in
Crockett County. The Reeves project, located between Midland and El Paso,
includes a 72,320 acre checkerboard farmout from landowners in the area. The
Company has a 7.5% working interest in a 240 square mile proprietary 3-D
seismic project with targets ranging from the Permian Wolfcamp sands to the
deep Silurian-Devonian age limestones at depths ranging from 13,000 to 20,000
feet. The Garza Project covers several different counties in West Texas and
includes the Miller Ranch producing area. Over 76 square miles of proprietary
3-D seismic data have been acquired. Targets include the San Andres, Strawn and
Ellenburger formations. In the Adams-Baggett field, located in Crockett County,
the Company operates 93 wells that produce from multiple formations in the
Canyon Sand found at depths of approximately 5,000 feet. Net production from
such wells is approximately 881 Mcf per day, and the Company's working interest
is 100%.
General
Although the Company is currently pursuing prospects within the project areas
listed above, there can be no assurance that these prospects will be drilled
within the expected timeframe or at all. The final determination with respect
to the drilling of any scheduled or budgeted wells will be dependent on a
number of factors, including (i) the results of exploration efforts and the
acquisition, review and analysis of the seismic data, (ii) the availability of
sufficient capital resources by the Company and other participants for drilling
the prospects, (iii) the approval of the prospects by other participants after
additional data have been compiled, (iv) economic and industry conditions at
the time of drilling, including prevailing and anticipated prices for gas and
oil and the availability of drilling rigs and crews, (v) the financial
resources and results of the Company and (vi) the permitting for the prospect.
There can be no assurance that these prospects can be successfully developed or
that the scheduled or
43
<PAGE>
budgeted wells discussed will, if drilled, encounter reservoirs of commercially
productive gas or oil. The reserve data set forth above are based upon the
Netherland Sewell Report. There are numerous uncertainties in estimating
quantities of proved reserves, including many factors beyond the control of the
Company. See "Risk Factors--Dependence on Exploratory Drilling Activities," "--
Reserve Replacement Risk" and "--Uncertainty of Reserve Information and Future
Net Revenue Estimates."
OIL AND GAS RESERVES
The following table sets forth estimated net proved oil and gas reserves of the
Company and the present value of estimated future pretax net cash flows related
to such reserves as of December 31, 1996, on a combined basis giving effect to
the Combination Transaction, and as of September 30, 1997. The reserve data and
the present value as of December 31, 1996 and September 30, 1997 were prepared
by Netherland Sewell. For further information concerning Netherland Sewell's
estimates, see Netherland Sewell's letter included as Appendix A to this
Prospectus. The present value of estimated future net revenues before income
taxes was prepared using constant prices as of the calculation date, discounted
at 10% per annum on a pretax basis, and is not intended to represent the
current market value of the estimated oil and gas reserves owned by the
Company. For further information concerning the present value of future net
revenue from these proved reserves, see the Notes to the Consolidated Financial
Statements of Araxas and the South Coast Companies. Also see "Risk Factors--
Uncertainty of Reserve Information and Future Net Revenue Estimates."
--------------------------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996(1) 1997(2)
------------ -------------
Dollars in thousands
<S> <C> <C>
NET PROVED RESERVES(3)
Oil (MBbls)....................................... 3,983 3,570
Gas (MMcf)........................................ 38,518 36,571
Total (MMcfe)..................................... 62,413 57,991
NET PROVED DEVELOPED RESERVES
Oil (MBbls)....................................... 2,650 2,373
Gas (MMcf)........................................ 12,526 14,979
Total (MMcfe)..................................... 28,424 29,215
Estimated future net revenues before income taxes... $172,038 $100,068
Present value of estimated future net revenues
before income taxes(4)............................. $ 96,947 $ 56,668
</TABLE>
- --------
(1) The prices used as of December 31, 1996 averaged $24.23 per Bbl of oil and
$3.97 per Mcf of gas and do not give effect to hedging arrangements required by
the Stratum debt agreement. During September 1997, the Company closed all of
its outstanding hedging arrangements. See "--Marketing" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Hedging." Giving effect to such hedging arrangements, the prices used as of
December 31, 1996 would have been $18.10 per Bbl of oil and $3.49 per Mcf of
gas, and estimated future net revenues before income taxes and present value of
estimated future net revenues before income taxes as of such date would have
been $158,732,000 and $86,534,000, respectively.
(2) The prices used as of September 30, 1997 averaged $19.93 per Bbl of oil and
$2.60 per Mcf of gas.
(3) The declines in proved reserves from December 31, 1996 to September 30,
1997 reflect production during the period and the exclusion of certain reserves
that were no longer economic at September 30, 1997 prices. During this period,
the Company's capital constraints limited additions to proved reserves.
(4) The present value of estimated future net revenues attributable to the
Company's reserves was prepared using constant prices as of the calculation
date (see Note 1), discounted at 10% per annum on a pretax basis.
There are numerous uncertainties inherent in estimating quantities of proved
oil and gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth herein represent estimates only. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact
44
<PAGE>
way, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
As a result, estimates made by different engineers often vary from one another.
In addition, results of drilling, testing and production subsequent to the date
of an estimate may justify revision of such estimates, and such revisions may
be material. Accordingly, reserve estimates are generally different from the
quantities of oil and gas that are ultimately recovered. Furthermore, the
estimated future net revenues from proved reserves and the present value
thereof are based upon certain assumptions, including future prices, production
levels and costs, that may not prove correct.
No estimates of proved reserves comparable to those included herein have been
included in reports to any federal agency other than the Commission.
In accordance with applicable requirements of the Commission, the Netherland
Sewell Reports used oil and gas prices in effect at December 31, 1996 and
September 30, 1997. The prices used in calculating the estimated future net
revenue attributable to proved reserves do not necessarily reflect market
prices for oil and gas production subsequent to such date. There can be no
assurance that all of the proved reserves will be produced and sold within the
periods indicated, that the assumed prices will actually be realized for such
production or that existing contracts will be honored or judicially enforced.
VOLUMES, PRICES AND OIL & GAS OPERATING EXPENSE
The following table sets forth certain historical combined information
regarding the production, average sales prices and average production costs
associated with the Company's oil and gas sales. Such data represent combined
operating data for each of Araxas and the South Coast Companies, but do not
include data for Main Pass 35 prior to its acquisition by Araxas in August
1996.
--------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
1994 1995 1996(1) 1996(1) 1997(1)
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES
Oil and condensate (MBbls)............. 4 55 177 104 232
Gas (MMcf)............................. 74 486 1,304 1,008 1,258
Gas equivalent (MMcfe)................. 98 814 2,368 1,630 2,649
AVERAGE SALES PRICES
Oil and condensate (per Bbl)........... $14.63 $16.36 $20.80 $20.19 $16.77
Gas (per Mcf).......................... 1.83 1.53 2.33 2.36 2.39
AVERAGE OIL & GAS OPERATING EXPENSE (PER
MCFE)(2)................................ $ 2.50 $ 0.55 $ 0.96 $ 0.72 $ 0.87
</TABLE>
- --------
(1) Average sales prices reflect hedging arrangements required by the Stratum
debt agreement. During September 1997, the Company closed all its existing
hedging arrangements. See "--Marketing" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Hedging." If such
hedging arrangements had not been in place, for the year ended December 31,
1996 and the nine months ended September 30, 1996 and 1997, the average sales
prices for oil and condensate per Bbl would have been $22.91, $20.66 and
$19.80, respectively, and the average sales prices for gas per Mcf would have
been $2.50, $2.44 and $2.59, respectively.
(2) Includes direct lifting costs (labor, repairs and maintenance, materials
and supplies), workover costs, insurance and property and severance taxes.
45
<PAGE>
DEVELOPMENT, EXPLORATION AND ACQUISITION COSTS
From December 31, 1994 to September 30, 1997, the Company incurred total
development, exploration and acquisition costs of approximately $48.1 million.
Total exploration, development and acquisition activities from December 31,
1994 to September 30, 1997 have resulted in the addition of approximately 66
Bcfe, net to the Company's interest, of proved reserves at an average reserve
replacement cost of $0.73 per Mcfe. Reserve replacement costs reflect the
proceeds from the sales of unproved prospects.
The following table sets forth certain information regarding the costs incurred
by the Company in the acquisition of proved and unproved properties and in
development and exploration activities.
<TABLE>
<S> <C> <C> <C> <C>
------------------------------
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
1994 1995 1996 1997
------ ------- ------- -------------
Dollars in thousands
<S> <C> <C> <C> <C>
Acquisition costs:
Unproved properties...................... $757 $2,005 $1,102 $ 210
Proved properties........................ -- 7,435 9,468 731
Exploration................................ 1,594 3,323 7,279 4,847
Development................................ -- 2,196 4,469 5,003
------ ------- ------- -------
Total costs incurred....................... $2,351 $14,959 $22,318 $10,791
====== ======= ======= =======
</TABLE>
Costs incurred do not reflect sales of proved properties, which are accounted
for as adjustments of capitalized costs with no gain or loss recognized, unless
such adjustments would significantly alter the relationships between
capitalized costs and proved reserves. The Company's development, exploration
and acquisition costs have historically fluctuated on a year-to-year basis.
Such costs, as measured annually, may not be indicative of the Company's
ability to replace oil and gas reserves economically, because the recognition
of costs may not necessarily coincide with the addition of proved reserves.
DRILLING ACTIVITY
The following table sets forth the drilling activity of the Company for the
years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1997. In the table, "gross" refers to the total wells in which
the Company has a working interest and "net" refers to gross wells multiplied
by the Company's working interest therein.
---------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
SEPTEMBER 30,
1994 1995 1996 1997
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory Wells
Productive...................... 4 0.7 8 1.4 6 0.6 1 0.1
Nonproductive................... 2 0.2 3 0.5 8 0.7 3 0.6
--- --- --- --- --- --- ------ ------
Total......................... 6 0.9 11 1.9 14 1.3 4 0.7
=== === === === === === ====== ======
Development Wells
Productive...................... -- -- 3 0.7 9 1.7 5 0.6
Nonproductive................... -- -- 2 0.5 -- -- -- --
--- --- --- --- --- --- ------ ------
Total......................... -- -- 5 1.2 9 1.7 5 0.6
=== === === === === === ====== ======
</TABLE>
During the period from September 30 to November 15, 1997, the Company completed
drilling or evaluation of 8 gross exploratory wells (1.5 net), of which 7 (1.2
net) were productive, and 2 gross development wells (0.3 net), of which 1 (0.1
net) was productive. As of September 30, 1997, the Company was drilling or
evaluating 7 gross exploratory wells (1.3 net) and 2 gross development wells
(0.2 net).
46
<PAGE>
PRODUCTIVE WELLS
The following table sets forth the number of productive oil and gas wells in
which the Company owned an interest as of September 30, 1997.
---------
<TABLE>
<CAPTION>
TOTAL
GROSS NET
----- -----
<S> <C> <C>
Oil................................................................. 54 27.6
Gas................................................................. 121 94.0
--- -----
Total............................................................. 175 121.6
=== =====
</TABLE>
ACREAGE DATA
The following table sets forth certain information regarding the Company's
developed and undeveloped lease acreage as of September 30, 1997. "Developed
acres" refers to acreage within producing units and "undeveloped acres" refers
to acreage that has not been placed in producing units.
-----------------------------
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
ACRES ACRES
GROSS NET GROSS NET
------ ------ ------ ------
<S> <C> <C> <C> <C>
Louisiana........................................... 7,981 3,335 35,942 6,956
Texas............................................... 20,717 14,895 43,073 6,142
Other............................................... 320 75 1,404 182
------ ------ ------ ------
Total............................................. 29,018 18,305 80,419 13,280
====== ====== ====== ======
</TABLE>
The table does not include 80,113 gross (13,351 net) acres that the Company has
a right to acquire pursuant to various farm-in and seismic option agreements.
MARKETING
The Company's production is marketed to third parties consistent with industry
practices. Typically, oil is sold at the wellhead at field-posted prices plus a
bonus, and gas is sold under contract at a negotiated price based upon factors
normally considered in the industry, such as distance from the well to the
pipeline, well pressure, estimated reserves, quality of gas and prevailing
supply and demand conditions.
The Company's marketing objective is to receive the highest possible wellhead
price for its product. The Company is aided by the presence of significant
infrastructure near its production in the Gulf Coast. The Company takes an
active role in determining the available pipeline alternatives for each
property based upon historical pricing, capacity, pressure, market
relationships, seasonal variances and long-term viability.
There are a variety of factors that affect the market for oil and gas,
including the extent of domestic production and imports of oil and gas, the
proximity and capacity of gas pipelines and other transportation facilities,
demand for oil and gas, the marketing of competitive fuels and the effects of
state and federal regulations on oil and gas production and sales. The Company
has not experienced any difficulties in marketing its oil and gas. The oil and
gas industry also competes with other industries in supplying the energy and
fuel requirements of industrial, commercial and individual customers.
The Company is subject to price fluctuations for gas sold in the spot market
due primarily to seasonality of demand and other factors beyond the Company's
control. Domestic oil prices generally follow worldwide oil prices, which are
subject to price fluctuations resulting from changes in world supply and
demand. The Company's former debt agreement with Stratum required the Company
to put into place significant long-term commodity price arrangements in an
effort to reduce price risk. Such arrangements were required at the closing of
such financing
47
<PAGE>
in April 1996 and at the times of additional drawdowns thereunder. During the
year ended December 31, 1996, the Company received a fixed price and paid the
NYMEX price with respect to 575 MMBtus of gas and 60 MBbls of oil under
commodity price arrangements, realizing losses of $598,000. During the first
nine months of 1997, the Company received a fixed price and paid the NYMEX
price with respect to 589 MMBtus of gas and 257 MBbls of oil under commodity
price arrangements, realizing losses of $906,000. The Company repaid and
terminated the Stratum debt agreement in September 1997, and the Credit
Agreement does not require the Company to maintain hedges. During September
1997, the Company closed all of its outstanding hedging arrangements at a cost
to the Company of $2.8 million. The Company has recorded this cost as a
deferred charge, which is required to be amortized through 2001 (the life of
the commodity price arrangement that gave rise to the loss) as part of the
hedged oil and gas revenues. During September 1997, the Company recorded
$46,000 of the amortization as a reduction of oil and gas revenues. The total
amortization for 1998 is expected to be $0.8 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Hedging." The Company currently does not intend to hedge more than one-third of
its production, but may reevaluate its hedging policy from time to time. The
Company may also close out any portion of hedges that may exist from time to
time as determined to be appropriate by management.
COMPETITION
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of exploratory prospects and
proven properties. The Company's competitors include major integrated oil and
gas companies and numerous independent oil and gas companies, individuals and
drilling and income programs. Many of its competitors are large, well-
established companies that have substantially larger operating staffs and
greater capital resources than those of the Company and that, in many
instances, have been engaged in the oil and gas business for a much longer time
than the Company. Such companies may be able to pay more for exploratory
prospects and productive oil and gas properties and may be able to identify,
evaluate, bid for and purchase a greater number of properties and prospects
than the Company's financial or human resources permit. In addition, such
companies may be able to expend greater resources on the existing and changing
technologies that the Company believes are and will be increasingly important
to the current and future success of oil and gas companies. The Company's
ability to explore for oil and gas prospects and to acquire additional
properties in the future will be dependent upon its ability to conduct its
operations, to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment. The Company believes that
its exploration, drilling and production capabilities and the experience of its
management and technical staff enable it to compete effectively. Many of the
Company's competitors, however, have financial resources and exploration and
development budgets that are substantially greater than those of the Company,
which may adversely affect the Company's ability to compete with these
companies.
REGULATION
The availability of a ready market for oil and gas production depends upon
numerous factors beyond the Company's control. These factors include regulation
of oil and gas production, federal and state regulations governing
environmental quality and pollution control, state limits on allowable rates of
production by well or proration unit, the amount of oil and gas available for
sale, the availability of adequate pipeline and other transportation and
processing facilities and the marketing of competitive fuels. For example, a
productive gas well may be "shut-in" because of an oversupply of gas or lack of
an available gas pipeline in the areas in which the Company may conduct
operations. State and federal regulations generally are intended to prevent
waste of oil and gas, protect rights to produce oil and gas between owners in a
common reservoir, control the amount of oil and gas produced by assigning
allowable rates of production and control contamination of the environment.
Pipelines are subject to the jurisdiction of various federal, state and local
agencies. The following discussion summarizes the regulation of the United
States oil and gas industry. The Company believes that it is in substantial
compliance with such statutes, rules, regulations and governmental orders,
although there can be no assurance that this is or will remain the case. The
following discussion is not intended to constitute a complete discussion of the
various statutes, rules, regulations and governmental orders to which the
Company's operations may be subject.
48
<PAGE>
Regulation of Oil and Gas Exploration and Production
The Company's operations are subject to various types of regulation at the
federal, state and local levels. Such regulation includes requiring permits for
the drilling of wells, maintaining bonding requirements to drill or operate
wells and regulating the location of wells, the method of drilling and casing
wells, the surface use and restoration of properties upon which wells are
drilled, the plugging and abandoning of wells and the disposal of fluids used
in connection with operations. The Company is contractually obligated to
contribute funds to escrow accounts for the future dismantlement and
abandonment of certain oil and gas properties over the reserve life of such
properties. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Escrow Arrangements." The Company's operations are
also subject to various conservation laws and regulations. These include the
regulation of the size of drilling and spacing units or proration units and the
density of wells that may be drilled in and the unitization or pooling of oil
and gas properties. In this regard, some states allow the forced pooling or
integration of tracts to facilitate exploration while other states rely
primarily or exclusively on voluntary pooling of lands and leases. In areas
where pooling is voluntary, it may be more difficult to form units, and
therefore more difficult to develop a project, if the operator owns less than
100% of the leasehold. In addition, state conservation laws establish maximum
rates of production from oil and gas wells, generally prohibit the venting or
flaring of gas and impose certain requirements regarding the ratability of
production. The effect of these regulations may limit the amount of oil and gas
the Company can produce from its wells and may limit the number of wells or the
locations at which the Company can drill. The regulatory burden on the oil and
gas industry increases the Company's costs of doing business and, consequently,
affects its profitability. Inasmuch as such laws and regulations are frequently
expanded, amended and reinterpreted, the Company is unable to predict the
future cost or impact of complying with such regulations.
Regulation of Sales and Transportation of Gas
Historically, the transportation and sale for resale of gas in interstate
commerce have been regulated pursuant to the Natural Gas Act of 1938 (the
"NGA"), the Natural Gas Policy Act of 1978 (the "NGPA") and the regulations
promulgated thereunder by the Federal Energy Regulatory Commission (the
"FERC"). Maximum selling prices of certain categories of gas sold in "first
sales," whether sold in interstate or intrastate commerce, were regulated
pursuant to the NGPA. The Natural Gas Wellhead Decontrol Act (the "Decontrol
Act") removed, as of not later than January 1, 1993, all remaining federal
price controls from gas sold in "first sales." The FERC's jurisdiction over gas
transportation was unaffected by the Decontrol Act. Although sales by
producers, such as the Company, of gas and all sales of crude oil, condensate
and gas liquids can currently be made at market prices, Congress could reenact
price controls in the future.
The Company's sales of gas are affected by the availability, terms and cost of
transportation. The price and terms for access to pipeline transportation are
subject to extensive regulation. In recent years, the FERC has undertaken
various initiatives to increase competition within the gas industry. As a
result of initiatives like FERC Order No. 636, issued in April 1992, the
interstate gas transportation and marketing system has been substantially
restructured to remove various barriers and practices that historically limited
non-pipeline gas sellers, including producers, from effectively competing with
interstate pipelines for sales to local distribution companies and large
industrial and commercial customers. The most significant provisions of Order
No. 636 require that interstate pipelines provide transportation separate or
"unbundled" from their sales service, and require that pipelines provide firm
and interruptible transportation service on an open access basis that is equal
for all gas supplies. In many instances, the result of Order No. 636 and
related initiatives has been to reduce substantially or eliminate the
interstate pipelines' traditional role as wholesalers of gas in favor of
providing only storage and transportation services.
The FERC has announced several important transportation-related policy
statements and proposed rule changes, including a statement of policy and a
request for comments concerning alternatives to its traditional cost-of-service
ratemaking methodology to establish the rates interstate pipelines may charge
for their services. A number of pipelines have obtained FERC authorization to
charge negotiated rates as one such alternative. In February
49
<PAGE>
1997, the FERC announced a broad inquiry into issues facing the gas industry to
assist the FERC in establishing regulatory goals and priorities in the post-
Order No. 636 environment. Similarly, the Texas Railroad Commission has been
reviewing changes to its regulations governing transportation and gathering
services provided by intrastate pipelines and gatherers, and recently
implemented a code of conduct intended to prevent undue discrimination by
intrastate pipelines and gatherers in favor of their marketing affiliates.
Although the changes being considered by these federal and state regulators
would affect the Company only indirectly, they are intended to further enhance
competition in gas markets.
The Company owns certain gas pipelines that it believes meet the standards the
FERC has used to establish a pipeline's status as a gatherer not subject to
FERC jurisdiction under the NGA. State regulation of gathering facilities
generally includes various safety, environmental, and in some circumstances,
nondiscriminatory take requirements, but does not generally entail rate
regulation. Gas gathering may receive greater regulatory scrutiny at both state
and federal levels in the post-Order No. 636 environment.
The Company cannot predict what further action the FERC or state regulators
will take on these matters; the Company does not believe, however, that it will
be affected by any action taken materially differently than other gas producers
with which it competes.
Additional proposals and proceedings that might affect the gas industry are
pending before Congress, the FERC, state commissions and the courts. The gas
industry historically has been very heavily regulated; therefore, there is no
assurance that the less stringent regulatory approach recently pursued by the
FERC and Congress will continue.
Oil Price Controls and Transportation Rates
Sales of crude oil, condensate and gas liquids by the Company are not currently
regulated and are made at market prices. The price the Company receives from
the sale of these products may be affected by the cost of transporting the
products to market. Effective January 1995, the FERC implemented regulations
establishing an indexing system under which oil pipelines will be able to
change their transportation rates, subject to prescribed ceiling limits. The
indexing system generally indexes such rates to inflation, subject to certain
conditions and limitations. The Company is not able at this time to predict the
effects of these regulations, if any, on the transportation costs associated
with oil production from the Company's oil producing operations.
Environmental Regulations
The Company's operations are subject to numerous federal, state and local laws
and regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands within wilderness,
wetlands and other protected areas, require remedial measures to mitigate
pollution from former operations, such as pit closure and plugging abandoned
wells, and impose substantial liabilities for pollution resulting from
production and drilling operations. Public interest in the protection of the
environment has increased dramatically in recent years. The trend of more
expansive and stricter environmental legislation and regulations as applied to
the oil and gas industry could continue, resulting in increased costs of doing
business and consequently affecting profitability. To the extent laws are
enacted or other governmental action is taken that restricts drilling or
imposes more stringent and costly waste handling, disposal and cleanup
requirements, the business and prospects of the Company could be adversely
affected.
The Company generates wastes that may be subject to the federal Resource
Conservation and Recovery Act ("RCRA") and comparable state statutes. The U.S.
Environmental Protection Agency ("EPA") and various state agencies have limited
the approved methods of disposal for certain hazardous and nonhazardous wastes.
50
<PAGE>
Furthermore, certain wastes generated by the Company's oil and gas operations
that are currently exempt from treatment as "hazardous wastes" may in the
future be designated as "hazardous wastes," and therefore be subject to more
rigorous and costly operating and disposal requirements.
The Company currently owns or leases numerous properties that for many years
have been used for the exploration and production of oil and gas. Although the
Company believes that it has used good operating and waste disposal practices,
prior owners and operators of these properties may not have used similar
practices, and hydrocarbons or other wastes may have been disposed of or
released on or under the properties owned or leased by the Company or on or
under locations where such wastes have been taken for disposal. In addition,
many of these properties have been operated by third parties whose treatment
and disposal or release of hydrocarbons or other wastes was not under the
Company's control. These properties and the wastes disposed thereon may be
subject to the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), RCRA and analogous state laws as well as state laws governing
the management of oil and gas wastes. Under such laws, the Company could be
required to remove or remediate previously disposed wastes (including wastes
disposed of or released by prior owners or operators) or property contamination
(including groundwater contamination) or to perform remedial plugging
operations to prevent future contamination.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of
certain pollution control requirements with respect to air emissions from the
operations of the Company. The EPA and states have been developing regulations
to implement these requirements. The Company may be required to incur certain
capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining operating permits and
approvals addressing other air emission-related issues. In addition, the
Company is currently involved in discussions with the Louisiana Department of
Environmental Quality ("LDEQ") regarding the late submittal of a Title V
operating permit application and the installation of necessary air pollution
control equipment. LDEQ has accepted the Company's proposals, and the Company
does not believe that its operations will be materially adversely affected by
these matters or any other future CAA requirements.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as the Company, to prepare and implement
spill prevention, control, countermeasure ("SPCC") and response plans relating
to the possible discharge of oil into surface waters. The Company has
acknowledged the need to update its SPCC plans at certain of its properties and
believes that it will be able to update and implement these plans in the near
future. The Oil Pollution Act of 1990 ("OPA") contains numerous requirements
relating to the prevention of and response to oil spills into waters of the
United States. The OPA subjects owners of facilities to strict joint and
several liability for all containment and cleanup costs and certain other
damages arising from a spill, including, but not limited to, the costs of
responding to a release of oil to surface waters. The OPA also requires owners
and operators of offshore facilities that could be the source of an oil spill
into federal or state waters, including wetlands, to post a bond, letter of
credit or other form of financial assurance in amounts ranging from $10 million
in specified state waters to $35 million in federal outer continental shelf
waters to cover costs that could be incurred by governmental authorities in
responding to an oil spill. Such financial assurances may be increased by as
much as $150 million if a formal assessment indicates such an increase is
warranted. Noncompliance with OPA may result in varying civil and criminal
penalties and liabilities. Operations of the Company are also subject to the
federal Clean Water Act ("CWA") and analogous state laws. In accordance with
the CWA, the state of Louisiana has issued regulations prohibiting discharges
of produced water in state coastal waters effective July 1, 1997. To comply
with these Louisiana regulations, the Company has undertaken extensive physical
and operational modifications to eliminate the discharge of produced water into
Louisiana coastal waters. Although currently in full compliance with
Louisiana's regulations prohibiting the discharge of produced waters into
Louisiana coastal waters, the Company may incur additional capital expenses of
up to $1.0 million and additional operating expenses of up to $200,000 every
two years to remain in compliance with the produced water discharge prohibition
without curtailing production. Pursuant to other requirements of the CWA, the
EPA has adopted regulations concerning discharges of storm water runoff. This
program requires covered facilities to obtain
51
<PAGE>
individual permits, participate in a group permit or seek coverage under an EPA
general permit. While certain of its properties may require permits for
discharges of storm water runoff, the Company believes that it will be able to
obtain, or be included under, such permits, where necessary, and make minor
modifications to existing facilities and operations that would not have a
material effect on the Company. Like OPA, the CWA and analogous state laws
relating to the control of water pollution provide varying civil and criminal
penalties and liabilities for releases of petroleum or its derivatives into
surface waters or into the ground.
CERCLA, also known as the "Superfund" law, and similar state laws impose
liability, without regard to fault or the legality of the original conduct, on
certain classes of persons that are considered to have contributed to the
release of a "hazardous substance" into the environment. These persons include
the owner or operator of the disposal site or sites where the release occurred
and companies that disposed or arranged for the disposal of the hazardous
substances found at the site. Persons who are or were responsible for releases
of hazardous substances under CERCLA may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment, for damages to natural resources and for the
costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the hazardous substances released into the
environment.
The Company also is subject to a variety of federal, state and local permitting
and registration requirements relating to protection of the environment. Except
with respect to certain CAA matters described above, management believes that
the Company is in substantial compliance with current applicable environmental
laws and regulations. Management also believes continued compliance with
existing requirements will not have a material adverse effect on the Company.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks, including the
risk of fire, explosion, blow-out, pipe failure, casing collapse, abnormally
pressured formations and environmental hazards such as oil spills, gas leaks,
ruptures and discharges of toxic gases, the occurrence of any of which could
result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, cleanup responsibilities, regulatory
investigation and penalties and suspension of operations.
In accordance with customary industry practice, the Company maintains insurance
against some, but not all, of the risks described above. The Company maintains
a $1.0 million general liability policy and a related $5.0 million umbrella
liability policy, which covers, among other things, products/completed
operations, personal and advertising injury, fire damage and underground
resources and equipment. The Company also maintains an energy package that
covers (i) physical damage on platforms, associated equipment and pipelines for
up to $5.5 million, (ii) control of well and extra expense for amounts ranging
from $5.0 million for wells drilled to shallower zones to $25.0 million for
wells drilled to deeper zones and in state waters, (iii) marine builders' risk
and offshore construction for up to $10.0 million and (iv) charterer's legal
liability for up to $1.0 million. In addition, the Company's insurance covers
business interruption and loss of revenues in certain limited circumstances,
including force majeure, but does not protect against certain losses related to
environmental matters. There can be no assurance that any insurance obtained by
the Company will be adequate to cover any losses or liabilities. The Company
cannot predict the continued availability of insurance or the availability of
insurance at premium levels that justify its purchase. The occurrence of a
significant event not fully insured or indemnified against could materially and
adversely affect the Company's financial condition and operations.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and gas
industry. The Company's properties are subject to customary royalty interests,
liens incident to operating agreements, liens for current taxes and other
burdens that the Company
52
<PAGE>
believes do not materially interfere with the use of or affect the value of
such properties. As is customary in the industry in the case of undeveloped
properties, little investigation of record title is made at the time of
acquisition (other than a preliminary review of local records). Investigations,
including a title opinion of local counsel, are generally made before
commencement of drilling operations. The Credit Agreement is secured by all of
the Company's oil and gas properties.
EMPLOYEES
At September 30, 1997, the Company had 32 full-time employees and seven
contract employees. As drilling and production activities increase, the Company
intends to hire additional technical, operational and administrative personnel
as appropriate. The Company believes that its relationships with its employees
are good. None of the Company's employees are covered by a collective
bargaining agreement. From time to time, the Company uses the services of
independent consultants and contractors to perform various professional
services, particularly in the areas of acquisition of leases and lease options,
construction, design, well-site surveillance, permitting and environmental
assessment. Field and on-site production operation services, such as pumping,
maintenance, dispatching, inspection and testing, are generally provided by
independent contractors. The Company believes that this use of third-party
service providers has enhanced in the past, and will continue to enhance in the
future, its ability to contain general and administrative expenses.
LEGAL PROCEEDINGS
From time to time the Company is a party to various legal proceedings arising
in the ordinary course of business. The Company is not currently a party to any
litigation that it believes could have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
53
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY OFFICERS AND MANAGEMENT
The following table sets forth the names, ages (as of November 1, 1997) and
titles of the Company's directors, executive officers and certain other key
employees.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIRECTOR'S
TERM
NAME AGE POSITION ENDING
- ---- --- -------- ----------
<S> <C> <C> <C>
Executive Officers and
Directors
Steven W. Nance......... 40 President, Chief Executive Officer and 1998
Director
Ron A. Krenzke.......... 44 Executive Vice President, Chief Operating 1999
Officer and Director
Stephen M. Clark........ 46 Vice President and Chief Financial Officer
W.E. Rowsey, III........ 46 Chairman of the Board and Director 2000
Jack L. Gregory(1)...... 65 Director 1999
Frank M. Weisser(1)..... 50 Director 2000
Other Key Officers and
Managers
Craig S. Davis.......... 41 Vice President--Geophysics
Philip V. Duggan........ 39 Director of Technology Development
Nicola L. Maddox........ 42 Vice President--Land
Alan L. Smith........... 34 Vice President--Operations
</TABLE>
- --------
(1) Appointment will become effective upon closing of the Offering.
The Company's Board of Directors is divided into three classes with staggered
terms of office, initially ending as set forth above. Thereafter, the term for
each class will expire on the date of the third annual stockholders' meeting
for the election of directors following the most recent election of directors
for such class. Each director holds office until the next annual meeting of
stockholders for the election of directors of his class and until his successor
has been duly elected and qualified. Officers serve at the discretion of the
Board of Directors.
Effective upon closing of the Offering, there will be two standing committees
of the Board of Directors: an Audit Committee and a Compensation Committee. The
Audit Committee will recommend the appointment of independent public
accountants to conduct audits of the Company's financial statements, review
with the independent accountants the plan and results of the auditing
engagement, approve other professional services provided by the independent
accountants and evaluate the independence of the accountants. The Audit
Committee will also review the scope and results of procedures for internal
auditing of the Company and the adequacy of the Company's system of internal
accounting controls. The Compensation Committee will approve, or in some cases
recommend to the Board, remuneration arrangements and other compensation plans
involving the Company's directors, executive officers and certain other
employees and consultants whose compensation exceeds specified levels. The
Compensation Committee will also act on the granting of stock options,
including under the Incentive Plan. The members of the Audit and Compensation
Committees will not be employees of the Company.
EXECUTIVE OFFICERS AND DIRECTORS
STEVEN W. NANCE is President, Chief Executive Officer and a director of the
Company. From June 1997 to the consummation of the Combination Transaction, he
was the President and Chief Executive Officer of Araxas, and
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<PAGE>
from January 1997 to June 1997 he was Executive Vice President and Chief
Operating Officer of Araxas. From August 1985 to January 1997, he held various
management and executive positions with Burlington Resources Inc. (formerly
Meridian Oil Inc.). His responsibilities as Vice President of the Gulf
Coast/Offshore Division, which position he held from April 1994 to January
1997, included management of onshore and offshore Gulf of Mexico exploration
and production activities. Mr. Nance holds a B.S. degree in Petroleum
Engineering from Texas Tech University and is a registered Professional
Engineer in the State of Texas. He is the chairman of the Petroleum Industry
Advisory Board for the Department of Petroleum Engineering at Texas Tech
University.
RON A. KRENZKE is Executive Vice President, Chief Operating Officer and a
director of the Company. In 1990, he founded South Coast and co-founded INEXS,
where he served as President and director, respectively, until the consummation
of the Combination Transaction. Prior to 1990, Mr. Krenzke held various
management positions with Mobil Oil Corporation, Monsanto Oil Company and
Amerada Hess. Mr. Krenzke has more than 23 years of experience in the oil and
gas business. He received a B.S. degree in Geophysics from Texas A&M University
and is a member of the Society of Exploration Geophysicists and the American
Association of Petroleum Geologists.
STEPHEN M. CLARK is Vice President and Chief Financial Officer of the Company.
From May 1997 until the consummation of the Combination Transaction, he was the
Chief Financial Officer of Araxas. From May 1994 to May 1997, he was Chief
Financial Officer of the North American Companies of Pittencrieff Resources
plc, an Edinburgh, Scotland based oil and gas company. From May 1990 to April
1994 he served in several positions for Aviva Petroleum, Inc., lastly as Vice
President and Secretary. Mr. Clark holds B.S. and M.S. Accountancy degrees from
the University of Houston and is a Certified Public Accountant.
W. E. ROWSEY, III is Chairman of the Board and a nonemployee director of the
Company. He founded Araxas in 1988, has been the Chairman of the Board since
that time and was President and Chief Executive Officer until June 1997. From
1986 to the present he has served as President and Director of WER Holdings,
Inc. as well as a trustee of family trusts which own oil and gas interests in
Oklahoma and Texas. From 1979 until 1985 he was a stockholder and officer of
Mahan-Rowsey, Inc. ("MR Inc."), an Oklahoma City based independent exploration
and production company that filed for Chapter 11 bankruptcy protection. MR Inc.
was a borrower from Penn Square Bank, a commercial bank in Oklahoma City. Mr.
Rowsey has a B.S. degree in commerce from the University of Virginia and a law
degree from the University of Oklahoma. He is a member of the Oklahoma Bar
Association. From 1988 until 1995 he was a member of the Board of Trustees for
the Muskogee Regional Medical Center, serving as Chairman the last two years.
From 1992 until 1995, he served as Community Director of Bank IV in Muskogee.
Mr. Rowsey has served on various other corporate and civic boards.
JACK L. GREGORY will become a director of the Company upon the closing of the
Offering. He currently serves as President of Gregco Resources, Inc., which he
founded in 1993 to invest in oil and gas exploration and acquisitions. Prior to
1993, he served as Ambassador-At-Large worldwide for British Gas Exploration
and Production, Inc. and had responsibility for their KomiArcticOil Russian
Venture in the Komi Republic. From 1988 until 1992, he was Director and General
Manager for British Gas Exploration and Production, Inc. for the United
Kingdom, Europe, Mid-East and Far-East. From 1967 until 1988, he served in
various executive and management positions with Tenneco Oil Co. Mr. Gregory
received a B.S. degree in Geology from the University of Oklahoma.
FRANK M. WEISSER will become a director of the Company upon the closing of the
Offering. Mr. Weisser co-founded Weisser, Johnson & Co., an energy investment
banking firm, in 1991 and Weisser, Johnson & Co. Capital Corporation in 1992, a
broker-dealer registered with the National Association of Securities Dealers,
Inc. engaged in private financing for the energy industry. He serves as
Managing Director, President and Treasurer of both companies. From 1974 until
1991, he was an investment banker with Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated and Bear, Stearns & Co, Inc.
primarily specializing in financing and merger advice for corporate energy
clients. Mr. Weisser received a B.S. degree in Chemical Engineering from the
University of Texas and M.S. and M.B.A. degrees from the University of
Michigan.
55
<PAGE>
KEY OFFICERS AND MANAGERS
CRAIG S. DAVIS is Vice President--Geophysics of the Company. In 1990, he co-
founded INEXS, where he served as President, and became Vice President of South
Coast, positions which he held until the consummation of the Combination
Transaction. Prior to 1990, Mr. Davis held various positions with Landmark
Graphics Corporation, Monsanto Oil Company and Texaco Inc. Mr. Davis received a
B.S. degree in Geology from Indiana University.
PHILIP V. DUGGAN is Director of Technology Development of the Company. In 1990,
he co-founded INEXS and joined South Coast, and served as Vice President of
each until the consummation of the Combination Transaction. Prior to 1990, Mr.
Duggan held various positions with Landmark Graphics Corporation and ARCO
Exploration and Production Company. Mr. Duggan received a B.S. degree in
Geology from the University of Texas.
NICOLA L. MADDOX is Vice President--Land of the Company. From March 1997 until
the consummation of the Combination Transaction, she was the Vice President of
South Coast. From July 1996 to March 1997, she was the U.S. onshore land
manager for Coastal Oil and Gas Corporation. From 1993 to 1996, she was the
Vice President of Land for Texas Meridian Resources. Prior to that she was a
land manager with Phillips Petroleum Company. Ms. Maddox received a B.A. degree
in Communications from the University of Colorado at Denver.
ALAN L. SMITH is Vice President--Operations of the Company. From March 1997
until the consummation of the Combination Transaction, he was the Operations
Manager of Araxas. From October 1996 to March 1997, Mr. Smith was a petroleum
engineer with Ryder Scott Company, performing reserve and property appraisals
for properties located in, among others, the Gulf of Mexico, the Louisiana and
Texas Gulf Coast and east Texas. From July 1994 to October 1996, he served as
senior staff engineer with Burlington Resources Inc. (formerly Meridian Oil
Inc.). Prior thereto, he served in several operational and engineering
capacities with Vastar Resources, Inc. Mr. Smith received a B.S. degree in
Petroleum Engineering from Texas Tech University.
DIRECTOR COMPENSATION
Directors who are employees of the Company will not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company (a "Nonemployee Director") will receive a fee of $750 for
attendance at each Board of Directors meeting and $500 for each committee
meeting (unless held on the same day as a Board of Directors meeting). All
directors will be reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board of Directors or committees thereof and for other expenses
incurred in their capacity as directors. Nonemployee directors of the Company
will be eligible to participate in the Nonemployee Director Stock Option Plan
(the "Director Plan"). Under the Director Plan, nonemployee directors will
receive annual awards of options to acquire shares of Common Stock at an
exercise price equal to the market price of the Common Stock on the date the
option is awarded. Newly elected or appointed nonemployee directors will
receive options to acquire 10,000 shares of Common Stock, effective as of the
date of their election or appointment. These initial awards shall become
exercisable in three annual installments, with one-third of the shares covered
by the option becoming subject to purchase on the day preceding each successive
annual meeting of stockholders. On the date of each annual meeting of
stockholders following the election or appointment of each nonemployee
director, the director will receive an option to acquire 2,500 shares of Common
Stock, which will become exercisable in full on the day preceding the next
following annual meeting of stockholders. All options awarded under the
Director Plan will become exercisable in full in the event the recipient ceases
to serve as a director due to death or disability. The options will be
nonqualified stock options, and will terminate ten years after the date of
grant or, if earlier, one year after the recipient ceases to serve as a
director.
The Company has reserved 150,000 shares of Common Stock, subject to adjustment,
for use in connection with the Director Plan. In connection with the Offering,
each nonemployee director will receive the initial option to purchase 10,000
shares of Common Stock at a price per share equal to the initial public
offering price per share set forth on the cover page of this Prospectus. This
initial grant will become exercisable in cumulative annual installments of one-
third beginning on the first anniversary of the closing date of the Offering.
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<PAGE>
OFFICER AND DIRECTOR INDEMNIFICATION
The Company's Bylaws provide for the indemnification of its officers and
directors, and the advancement to them of expenses in connection with
proceedings and claims, to the fullest extent permitted by the Delaware General
Corporation Law. The Bylaws include related provisions meant to facilitate the
indemnitee's receipt of such benefits. These provisions cover, among other
things: (i) specification of the method of determining entitlement to
indemnification and the selection of independent counsel that will in some
cases make such determination; (ii) specification of certain time periods by
which certain payments or determinations must be made and actions must be taken
and (iii) the establishment of certain presumptions in favor of an indemnitee.
The benefits of certain of these provisions are available to an indemnitee only
if there has been a change in control (as defined therein). The Company has
entered into indemnification agreements with its directors and officers that
provide for similar protections. In addition, the Company expects to purchase a
directors' and officers' liability insurance policy prior to the consummation
of the Offering.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain summary information concerning the
compensation provided by the Company's predecessors during the year ended
December 31, 1996 to the Chief Executive Officer and the four other most highly
compensated executive officers of the Company's predecessors (collectively, the
"Named Executive Officers"). The principal position listed for each Named
Executive Officer represents his current position with XPLOR.
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C>
---------------------
<CAPTION>
ANNUAL
COMPENSATION(1)
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2)
- --------------------------- ---- -------- --------
<S> <C> <C> <C>
W.E. Rowsey, III .................................... 1996 $157,292 $37,500
Chairman of the Board(3)
Ron A. Krenzke....................................... 1996 138,000 60,296
Executive Vice President
and Chief Operating Officer
Craig S. Davis....................................... 1996 138,000 10,808
Vice President--Geophysics
Philip V. Duggan..................................... 1996 138,000 14,735
Director of Technology Development
John L. Faulkinberry(4).............................. 1996 100,000 34,404
</TABLE>
- --------
(1) Other annual compensation for each Named Executive Officer during each year
presented did not exceed the lesser of $50,000 or 10% of the annual
compensation earned by such individual. In 1996, the Company paid insurance
premiums of less than $100 for term life insurance for each named individual.
(2) Bonuses are reflected in the year in which they are earned and are paid in
the following year.
(3) Effective upon consummation of the Offering, Mr. Rowsey will remain
Chairman of the Board as a nonemployee director of the Company.
(4) Mr. Faulkinberry was employed by Araxas prior to the closing of the
Combination Transaction, but is no longer employed by the Company. See "Certain
Transactions."
57
<PAGE>
EMPLOYMENT AGREEMENTS
In connection with the Combination Transaction, the Company entered into
employment agreements with each of Messrs. Krenzke, Davis and Duggan. The
Company also has entered into employment agreements with Messrs. Nance and
Clark. The following summary of these agreements does not purport to be
complete and is qualified by reference to them, copies of which have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
Effective as of the closing of the Offering, each of these agreements provides
for an annual base salary in the amount, and an annual performance bonus of up
to the percentage of annual base salary, set forth in the table below. The
precise amount of the bonus will be determined based on specific performance
goals established by the Board of Directors.
<TABLE>
<S> <C> <C>
-------------------
<CAPTION>
BONUS
(AS %
NAME SALARY OF SALARY)
- ---- -------- ----------
<S> <C> <C>
Steven W. Nance(1).......................................... $200,000 100%
Ron A. Krenzke(2)........................................... $165,000 75%
Stephen M. Clark............................................ $125,000 40%
Craig S. Davis.............................................. $155,000 40%
Philip V. Duggan............................................ $145,000 40%
</TABLE>
- --------
(1) Effective January 1, 1998, Mr. Nance's base salary will be increased to
$225,000 per year. His bonus for 1997 will be $200,000, subject to certain
conditions.
(2) Mr. Krenzke's bonus for 1997 will be $125,000.
Each agreement also entitles the employee to participate in the Company's
employee benefit plans, executive compensation plans and insurance and welfare
benefit plans in which other officers of the Company participate, including the
Incentive Plan. Each agreement generally provides that the employee's annual
base salary shall be reviewed annually and may be increased as determined by
the Compensation Committee of the Board of Directors.
Each of the agreements has an initial three-year term, and beginning at the end
of the second year (the third year in the case of Messrs. Nance and Clark) of
such initial term, the term will be automatically extended unless either party
has given advance notice that the term not be extended. Each agreement will be
subject to the right of the Company and the employee to terminate the
employee's employment at any time. Upon termination of employment because of
illness or other incapacity, the employee will generally be entitled to (i) a
pro rata share of the employee's incentive compensation based on the number of
days in the year that elapsed prior to termination and (ii) other benefits as
determined by the Company. Upon termination of employment for any other reason
(except under certain limited circumstances defined as "for cause" in the
agreements), or if employment is terminated by the employee subsequent to a
change of control (as defined) or with good reason (as defined), the employee
generally will be entitled to (i) compensation for the remaining term of the
agreement, but in no event less than one year (two years for a change of
control), and (ii) all incentive compensation that would have been paid to the
employee as if all performance goals had been met during the balance of the
term of the agreement, but in no event less than one annual incentive bonus
(two annual incentive bonuses for a change of control). Except in the case of
Mr. Nance and Mr. Clark, upon termination for any reason other than for cause,
the employee will be entitled to immediate vesting of any stock options or
restricted stock awards previously granted to such employee and outstanding as
of the time immediately prior to the date of his termination. The Company will
also pay the employee (other than Mr. Clark) any such amount as may be
necessary to hold the employee harmless from the consequences of any resulting
excise or other similar purpose tax relating to "parachute payments" under the
Internal Revenue Code of 1986, as amended.
Each agreement also provides that, during the term of the agreement and after
termination thereof, the employee shall not impart to any person any of the
Company's proprietary or confidential information, subject to limited
exceptions. In addition, each agreement generally provides that, for six months
following termination of the
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<PAGE>
employee's employment, the employee will not (i) own, operate, be employed by
or participate in a business conducted by a competitor of the Company or (ii)
contact or encourage others to contact any employee of the Company for the
purpose of recruiting such employee for another employer.
Pursuant to his employment agreement, Mr. Nance received a restricted grant of
33,779 shares of Common Stock and options to acquire an additional 129,688
shares of Common Stock. The restricted stock awards become vested and the
options become exercisable in cumulative annual increments of one-third
beginning on January 21, 1998, and become fully vested and exercisable upon a
change of control. The options have an exercise price of $10.78 per share and
expire in January 2007.
Pursuant to his employment agreement, Mr. Clark received options to acquire
69,600 shares of Common Stock in accordance with the Incentive Plan. The
options become exercisable in cumulative annual increments of one-third
beginning on the first anniversary of the closing of the Offering. The options
have an exercise price of $10.78 per share and a term of ten years.
INCENTIVE PLAN
The Company has adopted the Incentive Plan, the objectives of which are to
retain selected employees and independent contractors and consultants of the
Company and reward them for making significant contributions to the success of
the Company by making awards ("Awards") designed to provide participants in the
Incentive Plan with a proprietary interest in the growth and performance of the
Company. Persons eligible for Awards under the Incentive Plan include employees
of the Company and certain nonemployee consultants and other independent
contractors providing services to the Company.
The Compensation Committee of the Company's Board of Directors (the
"Committee") will administer the Incentive Plan. The Committee has exclusive
power to interpret the Incentive Plan and to adopt such rules, regulations and
guidelines for carrying out the Incentive Plan as it may deem necessary or
proper, all of which powers shall be exercised in the best interests of the
Company and in keeping with the objectives of the Incentive Plan. The Committee
may delegate to the President and other senior officers of the Company certain
duties under the Incentive Plan.
The Board of Directors may amend, modify, suspend or terminate the Incentive
Plan for the purpose of meeting or addressing any changes in legal requirements
or for any other lawful purpose, except that no amendment or alteration that
would impair the rights of any participant under any Award previously granted
to such participant shall be made without such participant's consent and no
amendment or alteration shall be effective prior to approval by the Company's
stockholders to the extent such approval is then required by applicable legal
requirements. The Board of Directors may make certain adjustments in the event
of any subdivision or consolidation of outstanding shares of Common Stock or
declaration of a dividend payable in shares of Common Stock or capital
reorganization or reclassification or other transaction involving an increase
or reduction in the number of outstanding shares of Common Stock, any
consolidation or merger of the Company with another corporation or entity or
the adoption by the Company of a plan of exchange affecting the Common Stock or
any distribution to holders of Common Stock of securities or property (other
than normal cash dividends or dividends payable in Common Stock).
Awards may be in the form of (i) rights to purchase a specified number of
shares of Common Stock at a specified price (an "option"), (ii) rights to
receive a payment, in cash or Common Stock, equal to the excess of the fair
market value or other specified value of a number of shares of Common Stock on
the rights exercise date over a specified strike price, (iii) grants of
restricted or unrestricted Common Stock or units denominated in Common Stock
("Stock Awards") and (iv) grants denominated in cash. An option granted to an
employee may be in the form of an incentive stock option that complies with the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended.
The Committee will determine the type or types of Awards to be made to each
participant under the Incentive Plan, and the terms, conditions and limitations
applicable to each such Award. With respect to Stock Awards, such conditions
may include, but are not limited to, continuous service with the
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<PAGE>
Company, achievement of specific business objectives, increases in specified
indices, attaining specified growth rates and other comparable measurements of
performance.
Unless otherwise specifically provided in the related option agreement, each
option granted under the Incentive Plan will provide that if the participant
ceases to be employed by the Company or its affiliates for any reason
whatsoever, the option will immediately terminate to the extent the option is
not vested (or does not become vested as a result of such termination of
employment) on the date the participant terminates employment.
The occurrence of a change of control of the Company shall result in
acceleration of the vesting and exercisability of, and lapse of restrictions
with respect to, all Awards granted under the Incentive Plan. For purposes of
this provision, a "change of control" means (i) any sale by the Company of
substantially all of its assets or (ii) the acquisition by any "person,"
including a "group" as determined in accordance with Section 13(d)(3) under the
Exchange Act, of beneficial ownership, directly or indirectly, of securities of
the Company representing 50% or more of the combined voting power of the
Company's then-outstanding securities. No change of control shall be deemed to
occur, however, if beneficial ownership in the Company's then-outstanding
securities is acquired pursuant to any reorganization of the Company or
recapitalization, spinoff or other transaction if, after giving effect to such
transaction, however structured, at least 50% of the outstanding voting
securities with the ultimate parent entity corporation are beneficially owned
in the aggregate, directly or indirectly through one or more intermediaries, by
the former stockholders of the Company.
The Company has reserved 997,600 shares of Common Stock, subject to adjustment,
for use in connection with the Incentive Plan. Including the options granted to
Mr. Nance and Mr. Clark in connection with their employment agreements, options
under the Incentive Plan have been granted to approximately 30 employees and
contractors of the Company to purchase a total of approximately 476,760 shares
of Common Stock at an exercise price per share equal to $10.78. In addition,
the Company has granted options to purchase an aggregate of 42,224 shares of
Common Stock to certain employees in connection with the Offering at an
exercise price equal to the initial public offering price per share set forth
on the cover page of this Prospectus. All such options have a term of ten years
and become exercisable in cumulative annual increments of one-third of the
total number of shares of Common Stock subject thereto, beginning on the first
anniversary of the closing date of the Offering (or, in the case of Mr. Nance,
beginning on January 21, 1998).
The foregoing description summarizes the principal terms and conditions of the
Incentive Plan, does not purport to be complete and is qualified in its
entirety by reference to the Incentive Plan, a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
INCENTIVE BONUSES
The Company intends to grant incentive bonuses designed to provide all
employees of the Company with short-term cash incentives to meet operational
and financial targets. The amount of bonus paid to an individual will be based
on his or her performance and contribution as well as the overall performance
of the Company. In general, participation levels are related to the
individual's ability to influence the Company's operational or financial
results. Maximum bonus levels for executive officers will be determined by the
Compensation Committee and will range from 40% to 100% of salary, and maximum
bonus levels for other employees will be determined by the executive officers
and will range from 10% to 40% of salary. Total funding of the incentive
bonuses will be subject to approval by the Board of Directors.
OTHER COMPENSATORY ARRANGEMENTS
Overriding Royalty Interests
In the past, the Company has granted overriding royalty interests on prospects
generated and developed by the Company to a pool of professional employees
comprising geoscientists, land personnel and other persons, including executive
officers. The percentage of overriding royalty interest assigned to the pool
pursuant to this
60
<PAGE>
arrangement for a given lease typically has ranged from 2% to 3% of the
Company's total interest in such lease. An individual employee's overriding
royalty interest in a lease was contractual, and such interest was not subject
to forfeiture in the event the employee left the Company.
As a result of the Combination Transaction, there are no outstanding overriding
royalty interests on undrilled prospects held by executive officers or
directors. In the future, the Company intends to assign or grant overriding
royalty interests only to nonexecutive members of the technical team and only
on undrilled prospects on which such members perform technical work. The size
of the grant will be discretionary, designed to reward such employees with
incentive compensation based on the results of the oil and gas drilling
activities conducted by the Company. The Company currently does not expect such
interests in the aggregate to exceed three percent of the Company's net revenue
interest in such prospects.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company will establish a Compensation Committee consisting solely of
nonemployee directors effective upon closing of the Offering. In the past,
matters with respect to the compensation of executive officers of the Company
were determined by the members of the Board of Directors, as a whole.
CERTAIN TRANSACTIONS
STRATUM
In April 1996, Araxas entered into the Stratum debt agreement pursuant to which
it borrowed a total of $26 million. The Stratum debt agreement was repaid in
full and terminated upon the consummation of the Combination Transaction with
the proceeds from the Bridge Loan. In connection with the Stratum debt
agreement, Araxas granted to Stratum an option to acquire common stock of
Araxas. In connection with the Combination Transaction, XPLOR assumed Araxas's
obligations under the option agreement. Stratum has an option to purchase (the
"Stratum Option") 515,991 shares of Common Stock (the "Stratum Option Shares")
at an exercise price of $2.42 per share. The Stratum Option is currently
exercisable and expires on June 30, 1999. In addition, Stratum has certain
registration rights associated with the Stratum Option Shares. See "--
Registration Rights Agreements."
The terms of the Stratum debt agreement also required Araxas to grant to
Stratum overriding royalty interests in exploratory properties drilled or
purchased using funds borrowed from Stratum. During the term of the Stratum
debt agreement, Araxas granted to Stratum overriding royalty interests of up to
5.5% of Araxas's interest in certain of its exploratory and development
properties. In connection with the termination of the Stratum debt agreement,
the Company agreed to grant to Stratum overriding royalty interests of up to 4%
of the Company's interests in certain additional exploratory prospects. As a
result, Stratum holds overriding royalty interests on substantially all of the
Company's properties acquired from Araxas. In the event that any prospects in
which Stratum has an overriding royalty interest are sold by the Company prior
to drilling a test well, Stratum's right to receive an overriding royalty
interest will convert into a right to receive a proportionate share of the net
proceeds from such a sale.
NEW WEST
In 1995, Araxas acquired certain properties in West Texas and along the Texas
Gulf Coast, including the Adams-Baggett field, from New West in exchange for
580,000 shares of Araxas common stock, redeemable preferred stock with an
aggregate redemption value of $1.5 million and the assumption of a note for
$827,000. New West also advanced cash to Araxas pursuant to a promissory note
in the principal amount of $3.7 million. In March 1996, Araxas issued to New
West 122,101 additional shares of Araxas common stock to amend certain
provisions of the note, including reducing the outstanding principal amount to
$3.4 million. Araxas repaid the note in full from borrowings under the Stratum
debt agreement. Araxas also redeemed the redeemable preferred stock held by New
West for 172,469 additional shares of Araxas common stock. In the Combination
Transaction, New West received 874,570 shares of Common Stock in exchange for
its shares of Araxas common stock.
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CREDIT LYONNAIS
In connection with the Bridge Loan, the Company issued to Credit Lyonnais a
warrant (the "Warrant") to purchase a number of shares of Common Stock equal to
5% of the number of shares of Common Stock sold by the Company in this
Offering, including any shares sold by the Company pursuant to the over-
allotment option (a maximum of 242,250 shares), at an exercise price per share
equal to 125% of the initial public offering price per share set forth on the
cover page of this Prospectus. Both the number of shares of Common Stock
subject to the Warrant and the exercise price thereof are subject to adjustment
upon the occurrence of a subdivision or combination of outstanding shares of
Common Stock or a dividend payable in shares of Common Stock. In addition, upon
a reorganization, reclassification, consolidation, merger or sale with respect
to the Company in which the holders of Common Stock receive stock, securities
or assets in exchange for Common Stock, the Company has agreed to make
appropriate provisions to ensure that the holder of the Warrant will receive in
lieu of Common Stock acquirable upon exercise of the Warrant such shares of
stock, securities or assets as may be payable or issued with respect to the
number of shares of Common Stock immediately theretofore acquirable upon
exercise of the Warrant. The Warrant is exercisable, in whole or in part, at
any time after the closing of the Offering up to and including the second
anniversary date thereof. Credit Lyonnais also has certain registration rights
relating to the Common Stock acquired upon exercise of the Warrant. See "--
Registration Rights Agreements."
OTHER
Pursuant to the acquisition agreement for the Combination Transaction, Mr.
Rowsey, Mr. Nance, New West, Stratum (only in the event that Stratum exercises
the Stratum Option) and the other former shareholders of Araxas have certain
rights to acquire additional shares of Common Stock upon payment of par value
(or, in certain cases, additional consideration). The acquisition agreement for
the Combination Transaction provides that, in the event (i) any shares of
restricted Common Stock issued to Mr. Nance are forfeited or otherwise
reacquired by the Company or (ii) the Stratum Option expires without being
exercised, then the former shareholders of Araxas who became shareholders of
Araxas prior to the issuance of the forfeited or reacquired stock or the
granting of the Stratum Option, as applicable, who are holders of Common Stock
at the time of such forfeiture or reacquistion shall be entitled, as a group,
to acquire for the aggregate par value thereof (plus any additional
consideration paid by the Company for such reacquisition or the exercise price
of the Stratum Option) such reacquired shares of Common Stock.
Under the terms of the agreement by which Araxas acquired Main Pass 35 and
Gulfland Industries, the Company has the right, upon the payment of $500,000,
to repurchase from GR, Inc. 137,599 shares of Common Stock issued to GR, Inc.
in connection with such acquisition. The Company has assigned the right to
repurchase such Common Stock to Mr. Rowsey and New West, the shareholders of
Araxas at the time of the original transaction.
In connection with the Combination Transaction, the Company issued a $1.0
million promissory note to each of Messrs. Krenzke, Davis and Duggan, which
notes are secured by a lien on all of the capital stock of INEXS. See "The
Combination Transaction."
Effective September 30, 1997, the Company acquired the capital stock and
certain assets of FO&G from Mr. Faulkinberry for $750,000 in cash and the $2.2
million FO&G Note. The assets acquired included, among other things, the
working interests and overriding royalty interests held by Mr. Faulkinberry
that were granted by the Company in prospects generated and developed by the
Company. In addition, the Company entered into a severance agreement with Mr.
Faulkinberry pursuant to which the Company paid him $50,000, less taxes.
In 1995, South Coast paid to Weisser, Johnson & Co. Capital Corporation
(collectively with Weisser, Johnson & Co., "Weisser Johnson") $150,000 for
financial advisory services. In connection with the Combination Transaction,
the Company paid to Weisser Johnson a financial advisory fee of $150,000. The
Company also has paid to Weisser Johnson a total of $100,000 in retainer fees
in 1997, and has agreed to pay a quarterly retainer of $25,000 until the
closing of the Offering. Mr. Frank M. Weisser, the Managing Director, President
and Treasurer of Weisser Johnson, will become a director of the Company upon
the closing of the Offering.
At the beginning of 1994, the Company owed Mr. Rowsey approximately $455,000
from advances he had made to the Company in 1993. This amount was repaid during
1994, primarily in the form of an allocation for tax purposes
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of property costs to Mr. Rowsey, together with some cash. In connection with
Mr. Rowsey's becoming a nonemployee director of the Company, the Company issued
to Mr. Rowsey the $1.0 million Rowsey Note, which bears no interest and will
mature upon the closing of the Offering.
REGISTRATION RIGHTS AGREEMENTS
The following is a description of registration rights agreements entered into
with certain of the Company's stockholders. All of such stockholders have
agreed to certain restrictions relating to the sale of their Common Stock for a
period of 180 days following the date of this Prospectus. See "Shares Eligible
for Future Sale" and "Underwriting."
Stratum
In connection with the Stratum debt agreement, the Company has agreed that,
upon the request of Stratum, it will file a registration statement under the
Securities Act to register all or a portion of the Stratum Option Shares. The
Company is obligated to effect one such registration. The Company is entitled
to postpone any such registration for up to three months in order to complete
any merger, consolidation, transfer or similar transaction that is in process
at the time such demand is made. In addition, subject to certain conditions and
limitations, Stratum may participate in any registration by the Company
(including any registration effected by the Company for stockholders other than
Stratum and including any shelf registration) of any of its Common Stock. The
Company is not obligated to effect any such registration unless Stratum has
exercised its option with respect to the Stratum Option Shares. The Company is
not obligated to register any Stratum Option Shares if all of the Stratum
Option Shares proposed to be registered may be sold without restriction to the
public without registration under the Securities Act. Stratum's registration
rights are not assignable without the consent of the Company.
Equitable
In connection with the Combination Transaction, the Company entered into a
registration rights agreement with Equitable. The agreement provides that, upon
the request of Equitable or any transferee stockholder (collectively, the
"Equitable Holders") holding an aggregate of a majority of the Common Stock
subject to the agreement (the "Registrable Securities"), the Company will file
a shelf registration statement under the Securities Act to register the
Registrable Securities held by any Equitable Holder that desires to sell
Registrable Securities pursuant to such registration statement. The Company is
obligated to effect one such registration. Such request may be made only after
the closing of the Offering. The Company will not be required to effect such a
registration if, among other things, during a reasonable period of time not to
exceed six months following the closing of the Offering, the representatives of
the Underwriters advise the Company that such a registration would adversely
affect the market for the Common Stock. In addition, subject to certain
conditions and limitations, the agreement provides that any Equitable Holder
may participate in any registration by the Company (including any registration
effected by the Company for stockholders other than Equitable Holders) of any
of its Common Stock. The registration rights covered by the agreement may be
assigned without the consent of the Company. A Registrable Security ceases to
be subject to the agreement when (i) it has been effectively registered under
the Securities Act and disposed of in accordance with the registration
statement covering it, (ii) it is sold pursuant to Rule 144 or Rule 145 under
the Securities Act or (iii) it is eligible for sale pursuant to Rule 144 or
Rule 145 without volume limitations. An aggregate of 714,166 outstanding shares
of Common Stock are subject to the agreement.
Credit Lyonnais
In connection with the Bridge Loan, the Company entered into a registration
rights agreement with Credit Lyonnais. The agreement provides that, if Credit
Lyonnais requests the Company to file a registration statement under the
Securities Act registering all or part, but not less than 75%, of the total
number of shares of Common Stock that may be acquired through the exercise of
the Warrant (the "Warrant Securities"), the Company will file a shelf
registration statement to register all Warrant Securities that Credit Lyonnais
desires to sell pursuant to
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such registration statement. The Company is obligated to effect one such
registration. Such request may be made only after the closing of the Offering.
The Company will not be required to effect such a registration if, among other
things, during a reasonable period of time not to exceed six months following
the closing of the Offering, the representatives of the Underwriters advise the
Company that such a registration would adversely affect the market for the
Common Stock. In addition, subject to certain conditions and limitations, the
agreement provides that Credit Lyonnais may participate in any registration by
the Company (including any registration effected by the Company for
stockholders other than Credit Lyonnais) of any of its Common Stock. The
registration rights covered by the agreement may be assigned without the
consent of the Company. A Warrant Security ceases to be subject to the
agreement when (i) it has been effectively registered under the Securities Act
and disposed of in accordance with the registration statement covering it, (ii)
it is sold pursuant to Rule 144 or Rule 145 under the Securities Act or (iii)
it is eligible for sale pursuant to Rule 144 or Rule 145 without volume
limitations. An aggregate of 215,000 outstanding shares of Common Stock (or
242,250 shares if the Underwriters' over-allotment option is exercised in full)
are subject to the agreement.
Weisser Johnson
Prior to the Combination Transaction, South Coast entered into a registration
rights agreement with Equitable, Messrs. Krenzke, Davis and Duggan, and Weisser
Johnson. In the Combination Transaction, the registration rights of Equitable
and Messrs. Krenzke, Davis and Duggan granted pursuant to this agreement were
terminated. Weisser Johnson's registration rights relate to 200,866 shares of
Common Stock that may be acquired by Weisser Johnson from Messrs. Krenzke,
Davis and Duggan upon exercise of an option granted to Weisser Johnson by such
persons (when so acquired, the "Weisser Johnson Option Shares"). The agreement
provides that, upon the request of the holders of a majority of the Weisser
Johnson Option Shares (collectively, the "Weisser Johnson Holders"), the
Company will file a registration statement under the Securities Act to register
the Weisser Johnson Option Shares held by any Weisser Johnson Holder that
desires to sell Registrable Securities pursuant to such registration statement.
The Weisser Johnson Holders may make unlimited requests for registration
provided that such registration include at least 25% of the Weisser Johnson
Option Shares. The first such request may not be made for a period beginning
six months following the closing of the Offering and ending on the earliest to
occur of, among other things, (x) the second anniversary of the beginning of
the period and (y) the date on which Equitable ceases to own at least 238,056
shares of Common Stock. In addition, subject to certain conditions and
limitations, the agreement provides that a Weisser Johnson Holder may
participate in any registration by the Company of any of its Common Stock. A
Weisser Johnson Option Share ceases to be subject to the agreement when it has
been (i) effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering it or (ii) sold pursuant to
Rule 144 under the Securities Act.
New West
In connection with the Offering, the Company plans to enter into a registration
rights agreement with New West, providing that, upon the request of New West or
any transferee stockholder (collectively the "New West Holders") holding an
aggregate of 75% of the Common Stock subject to the agreement (the "New West
Securities"), the Company will file a shelf registration statement under the
Securities Act to register the Common Stock held by any New West Holder that
desires to sell New West Securities pursuant to such registration statement.
The Company is obligated to effect one such registration. In addition, subject
to certain conditions and limitations, the agreement provides that any New West
Holder may participate in any registration by the Company (including any
registration effected by the Company for holders other than New West Holders)
of any of its Common Stock. The registration rights covered by the agreement
may be assigned without the consent of the Company. A New West Security ceases
to be subject to the agreement when (i) it has been effectively registered
under the Securities Act and disposed of in accordance with the registration
statement covering it, (ii) it is sold pursuant to Rule 144 or Rule 145 under
the Securities Act or (iii) it is eligible for sale pursuant to Rule 144 or
Rule 145 without volume limitations. An aggregate of 874,570 outstanding shares
of Common Stock (774,570 shares if the Underwriters' over-allotment option is
exercised in full) are subject to the agreement.
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Officers and Directors
In connection with the Offering, the Company will enter into a registration
rights agreement among the Company and Messrs. Rowsey, Nance, Krenzke, Davis
and Duggan, whereby such persons may participate in any registration by the
Company (including any registration effected by the Company for stockholders
other than Messrs. Rowsey, Nance, Krenzke, Davis and Duggan). In addition, upon
the request of Mr. Rowsey, the Company will file a registration statement under
the Securities Act to register the Common Stock owned by him. The Company is
obligated to effect one such registration. The registration rights covered by
the agreement may be assigned without the consent of the Company. The Common
Stock covered by the agreement ceases to be subject to the agreement when (i)
it has been effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering it, (ii) it is sold
pursuant to Rule 144 or Rule 145 under the Securities Act or (iii) it is
eligible for sale pursuant to Rule 144 or Rule 145 without volume limitations.
An aggregate of 2,754,768 outstanding shares of Common Stock are subject to the
agreement.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to beneficial ownership
of the Common Stock of the Company as of November 30, 1997, and as adjusted to
reflect the sale of shares of Common Stock in the Offering by (i) all persons
who will be the beneficial owner of 5% or more of the outstanding Common Stock,
(ii) each director and named executive officer, (iii) all officers and
directors of the Company as a group and (iv) New West, the Selling Stockholder.
----------------------------------------------
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE NUMBER OWNED AFTER
OFFERING(1) OF OFFERING(1)
-------------------- SHARES ----------------------
NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
--------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Steven W. Nance(2)(3)... 77,008 1.6% -- 77,008 0.9%
Ron A. Krenzke(2)....... 365,539 7.8% -- 365,539 4.1%
Stephen M. Clark(2)(3).. -- -- -- -- --
W.E. Rowsey,
III(2)(3)(4)........... 1,877,599 39.9% -- 1,877,599 20.8%
Jack Gregory(2)......... -- -- -- -- --
Frank M. Weisser(2)(5).. 200,866 4.3% -- 200,866 2.2%
New West Resources,
Inc.(6)................ 874,570 18.6% 100,000(7) 774,570 9.7%(7)
Equitable Resources,
Inc.(8)................ 714,166 15.2% -- 714,166 7.9%
Stratum Group, L.P.(9).. 515,991 11.0% -- 515,991 5.4%
Craig S. Davis(2)....... 359,438 7.6% -- 359,438 4.0%
Philip V. Duggan(2)..... 256,012 5.4% -- 256,012 2.8%
All directors and
executive officers as a
group (seven
persons)(2)............ 2,679,584 56.9% -- 2,679,584 29.7%
</TABLE>
- --------
* Less than one percent.
(1) Except as otherwise noted and pursuant to applicable community property
laws, each stockholder has sole voting and investment power with respect to the
shares beneficially owned.
(2) The business address of each director and executive officer and Mr. Duggan
is c/o XPLOR Energy, Inc., 10200 Grogans Mill Road, Suite 500, The Woodlands,
Texas 77380.
(3) Does not include options granted to such persons under the Incentive Plan
and the Director Plan that are not yet exercisable. Mr. Nance's holdings
include 43,229 shares of Common Stock issuable upon exercise of options that
become exercisable on January 28, 1998.
(4) Includes (a) 1,740,000 shares owned of record by Rowsey Holdings, L.L.C.,
an Oklahoma limited liability company of which Mr. Rowsey is the Manager, and
with respect to which Mr. Rowsey exercises voting and investment powers and (b)
137,599 shares of Common Stock owned of record by GR, Inc., with respect to
which Mr. Rowsey exercises voting power pursuant to an irrevocable proxy.
(5) Consists of the Weisser Johnson Option Shares.
(6) The address of New West is 500 W. Wall, Suite 400, Midland, Texas 79701.
Pursuant to a registration rights agreement with New West, the Company is
paying the expenses of the Offering, other than underwriting discounts and
commissions attributable to the shares that may be sold by New West. See
"Certain Transactions--Registration Rights Agreements."
(7) Assumes the Underwriters' over-allotment option is exercised in full.
(8) Consists of 459,105 shares of Common Stock held by ERI Investments, Inc.
and 255,061 shares of Common Stock held by 420 Energy Investments, Inc. The
address of Equitable is 420 Boulevard of the Allies, Pittsburgh, Pennsylvania
15219.
(9) The address of Stratum is 650 Fifth Avenue, New York, New York 10022.
Shares shown are the shares issuable upon exercise of the Stratum Option.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, approximately 9,009,413 shares of Common
Stock will be outstanding. The 4,300,000 shares of Common Stock sold in the
Offering will be registered under the Securities Act and will be freely
tradeable without restriction or further registration under the Securities Act,
except for certain manner of sale, volume limitations and other restrictions
with respect to any shares purchased in the Offering by an affiliate of the
Company (a "Company Affiliate"), which will be subject to the resale
limitations of Rule 144 (not including the holding period requirement). Under
Rule 144 a person is an affiliate of an entity if such person directly or
indirectly controls or is controlled by or is under common control with such
entity and may include certain officers and directors, principal stockholders
and certain other stockholders with special relationships. All of the remaining
4,709,413 shares that will be outstanding following the Offering will be owned
by officers and directors of the Company and other persons receiving shares in
the Combination Transaction. In addition, 515,991 shares of Common Stock are
issuable upon exercise of an option granted to Stratum and 215,000 shares of
Common Stock (242,250 shares if the Underwriters' over-allotment option is
exercised in full) are issuable upon exercise of a warrant granted to Credit
Lyonnais. Such shares will constitute "restricted securities" within the
meaning of Rule 144 and may not be resold in a public distribution except
pursuant to an effective registration statement under the Securities Act or an
applicable exemption from registration, including pursuant to Rule 144. The
Company has entered into registration rights agreements with certain of the
Company's current stockholders who own approximately 4,343,504 shares of Common
Stock, and Stratum and Credit Lyonnais, who have options and warrants to
purchase 730,991 shares of Common Stock (758,241 shares if the Underwriters'
over-allotment option is exercised in full), pursuant to which such persons
have received demand and piggyback registration rights that provide for the
registration of the resale of such shares at the Company's expense. See
"Certain Transactions." This Prospectus, however, may not be used in connection
with any resale of shares of Common Stock acquired in the Offering by Company
Affiliates or in the Combination Transaction.
In general, under Rule 144 as currently in effect, if a minimum of one year has
elapsed since the later of the date of acquisition of the restricted securities
from the issuer or from an affiliate of the issuer, a person (or persons whose
shares of Common Stock are aggregated), including persons who may be deemed
Company Affiliates, would be entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of (i) one
percent of the then-outstanding shares of Common Stock (i.e., approximately
90,094 shares immediately after consummation of the Offering) or (ii) the
average weekly trading volume during the four calendar weeks preceding the date
on which notice of the sale is filed with the Commission. Sales under Rule 144
are also subject to certain provisions as to the manner of sale (which
provision is proposed to be eliminated), notice requirements and the
availability of current public information about the Company. In addition,
under Rule 144(k), if a period of at least two years has elapsed since the
later of the date restricted securities were acquired from the Company or the
date they were acquired from a Company Affiliate, a shareholder who is not a
Company Affiliate at the time of sale and who has not been a Company Affiliate
for at least three months prior to the sale would be entitled to sell shares of
Common Stock in the public market immediately without compliance with the
foregoing requirements under Rule 144. Rule 144 does not require the same
person to have held the securities for the applicable periods. The foregoing
summary of Rule 144 is not intended to be a complete description thereof.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Incentive Plan and the Director Plan.
Shares of Common Stock issued pursuant to such plans generally will be
available for sale in the open market by holders who are not Company Affiliates
and, subject to the volume and other limitations of Rule 144, by holders who
are Company Affiliates.
The Company, substantially all of its existing stockholders, Stratum, Credit
Lyonnais and each of the Company's officers and directors have agreed, with
certain limited exceptions, that they will not (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock, any options for the sale of Common Stock, or any securities convertible
into or exercisable or exchangeable for
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Common Stock, or (ii) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences of ownership of Common Stock
for a period of 180 days after the date of this Prospectus, without the prior
written consent of J.P. Morgan Securities Inc. See "Underwriting."
Prior to the Offering, there has been no public market for the Common Stock,
and no prediction can be made of the effect, if any, that sales of Common Stock
or the availability of shares for sale will have on the market price prevailing
from time to time. Following the Offering, sales of substantial amounts of
Common Stock in the public market or otherwise, or the perception that such
sales could occur, could adversely affect the prevailing market price for the
Common Stock.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares of Common
Stock and 10,000,000 shares of preferred stock, par value $.001 per share
("Preferred Stock"). Following consummation of the Offering, there will be
approximately 9,009,413 shares of Common Stock outstanding (assuming the over-
allotment option is not exercised), and no shares of Preferred Stock will be
outstanding. The following summary does not purport to be complete, and
reference is made to the more detailed provisions of the Company's Restated
Certificate of Incorporation (the "Certificate of Incorporation") and Bylaws,
which are filed as exhibits to the registration statement of which this
Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of directors
and in respect of other corporate matters, each share being entitled to one
vote. There are no cumulative voting rights, meaning that the holders of a
majority of the shares voting for the election of directors can elect all the
directors if they choose to do so. The Common Stock carries no preemptive
rights and is not convertible, redeemable or assessable, or entitled to the
benefits of any sinking fund. The holders of Common Stock are entitled to
dividends in such amounts and at such times as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy" for
information regarding dividend policy.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause shares of Preferred Stock to be issued in one or more
series, with the numbers of shares of each series to be determined by it. The
Board of Directors is authorized to fix and determine the powers, designations,
preferences and relative, participating, optional or other rights (including,
without limitation, voting powers, full or limited, preferential rights to
receive dividends or assets upon liquidation, rights of conversion or exchange
into Common Stock, Preferred Stock of any series or other securities,
redemption provisions and sinking fund provisions) between series and between
the Preferred Stock or any series thereof and the Common Stock, and the
qualifications, limitations or restrictions of such rights.
The Company has no present intention to issue shares of Preferred Stock after
consummation of the Offering. Nevertheless, the issuance of shares of Preferred
Stock, or the issuance of rights to purchase such shares, could be used to
discourage an unsolicited acquisition proposal. For instance, the issuance of a
series of Preferred Stock may impede a business combination by including class
voting rights that would enable the holders to block such a transaction; or
such issuance might facilitate a business combination by including voting
rights that would provide a required percentage vote of the stockholders. In
addition, under certain circumstances, the issuance of Preferred Stock could
adversely affect the voting power of the holders of the Common Stock. Although
the Board of Directors is required to make any determination to issue such
stock based on its judgment as to the best interests of the stockholders of the
Company, the Board of Directors could act in a manner that would discourage an
acquisition attempt or other transaction that some or even a majority of the
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then market price
of
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<PAGE>
such stock. The Board of Directors does not at present intend to seek
stockholder approval prior to any issuance of currently authorized stock,
unless otherwise required by law or the rules of any market on which the
Company's securities are traded.
OTHER MATTERS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware
law, directors are accountable to corporations and their stockholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Delaware law enables corporations to limit available relief
to equitable remedies such as injunction or rescission. The Certificate of
Incorporation limits the liability of directors of the Company to the Company
or its stockholders to the fullest extent permitted by Delaware law.
Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for unlawful payments of dividends or unlawful stock repurchases or redemptions
as provided in Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Certificate of Incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and its
stockholders. The Company's Bylaws provide indemnification to the Company's
officers and directors and certain other persons with respect to certain
matters, and the Company has entered into agreements with each of its directors
providing for indemnification with respect to certain matters.
The Certificate of Incorporation provides that stockholders may act only at an
annual or special meeting of stockholders and may not act by written consent.
The Bylaws provide that special meetings of the stockholders can be called only
by a majority of the Board of Directors of the Company.
Pursuant to the Certificate of Incorporation, certain transactions involving,
among other persons, any person who is a beneficial owner of 10% or more of the
aggregate voting power of all outstanding stock of the Company (a "related
person") require either the affirmative vote of the holders of both (i) at
least 80% of the outstanding voting stock and (ii) at least 66 2/3% of the
outstanding voting stock not beneficially owned by the related person, unless a
majority of the directors unaffiliated with such related person approve such
transaction, or the consideration paid by such related person in such
transaction meets certain requirements. Transactions subject to such approval
include certain mergers or consolidations of the Company or sales or transfers
of assets and properties having an aggregate fair market value of $10.0 million
or more.
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered three-year terms.
As a result, approximately one-third of the Company's Board of Directors will
be elected each year. The classified board provision could prevent a party who
acquires control of a majority of the outstanding voting stock of the Company
from obtaining control of the Board of Directors until the second annual
stockholders' meeting following the date the acquiror obtains the controlling
interest. See "Management."
The Certificate of Incorporation provides that the number of directors will be
no greater than 12 nor less than three. The Certificate of Incorporation
further provides that directors may be removed only for cause (as defined in
the Certificate of Incorporation), and then only by the affirmative vote of the
holders of at least a majority of all outstanding voting stock entitled to
vote. This provision, in conjunction with the provisions of the Certificate of
Incorporation authorizing the Board of Directors to fill vacant directorships,
will prevent stockholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees. In
69
<PAGE>
addition, the Bylaws provide that the Compensation Committee will consist
solely of members who are not employees of the Company and the Audit Committee
will include at least a majority of members who are not employees of the
Company.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person became an interested stockholder, the business
combination was approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of two-thirds of the outstanding voting stock of the corporation not owned by
the interested stockholder. Under Section 203, the restrictions described above
also do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person's becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
STOCKHOLDER PROPOSALS
The Company's Bylaws contain provisions requiring that advance notice be
delivered to the Company of any business to be brought by a stockholder before
an annual meeting of stockholders, and providing for certain procedures to be
followed by stockholders in nominating persons for election to the Board of
Directors of the Company. Generally, such advance notice provisions provide
that written notice must be given to the Secretary of the Company by a
stockholder (i) in the event of business to be brought by a stockholder before
an annual meeting, not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company (with
certain exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date) and (ii) in the event of
nominations of persons for election to the Board of Directors by any
stockholder, (a) with respect to an election to be held at the annual meeting
of stockholders, not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company (with
certain exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date) and (b) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, not later than the close of business on the tenth day following the
day on which notice of the date of the special meeting was mailed to
stockholders or public disclosure of the date of the special meeting was made,
whichever first occurs. Such notice must set forth specific information
regarding such stockholder and such business or director nominee, as described
in the Company's Bylaws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Securities
Transfer & Trust, Inc.
70
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Company has
agreed to sell to the Underwriters named below, and each of such Underwriters,
for whom J.P. Morgan Securities Inc., Prudential Securities Incorporated,
Raymond James & Associates, Inc. and Credit Lyonnais Securities (USA) Inc. are
acting as representatives, has severally agreed to purchase from the Company
the respective number of shares of Common Stock set forth opposite their names
below:
---------------
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
J.P. Morgan Securities Inc.....................................
Prudential Securities Incorporated.............................
Raymond James & Associates, Inc................................
Credit Lyonnais Securities (USA) Inc...........................
---------
Total........................................................ 4,300,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and certain other conditions. Under the terms
and conditions of the Underwriting Agreement, the Underwriters are obligated to
take and pay for all such shares of Common Stock, if any are taken. Under
certain circumstances, the commitments of non-defaulting Underwriters may be
increased as set forth in the Underwriting Agreement.
The Underwriters propose initially to offer the shares of Common Stock directly
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the Common Stock, the public offering price and such
concession may be changed.
The Company and the Selling Stockholder have granted to the Underwriters an
option, expiring at the close of business on the 30th day after the date of
this Prospectus, to purchase, in the aggregate, up to 645,000 additional shares
of Common Stock, at the initial public offering price, less the underwriting
discount. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any. To the extent that the Underwriters exercise
their option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the preceding
table bears to the total number of shares of Common Stock initially offered
hereby.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, substantially all of its existing stockholders, Stratum, Credit
Lyonnais and each of the Company's officers and directors have agreed that they
will not (i) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock, any options for the sale of
71
<PAGE>
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences of ownership
of Common Stock, for a period of 180 days after the date of this Prospectus,
without the prior written consent of J.P. Morgan Securities Inc., other than
the Common Stock to be sold in the Offering and any options granted or shares
of Common Stock issued upon the exercise of options granted under existing
employee stock option plans. J.P. Morgan Securities Inc. may provide such
written consent without notice to the Company's stockholders or the Nasdaq
National Market.
The Company intends to pay Credit Lyonnais approximately $34.0 million of the
net proceeds from the Offering to repay the Bridge Loan. See "Use of Proceeds."
Credit Lyonnais is an affiliate of Credit Lyonnais Securities (USA) Inc., a
member of the National Association of Securities Dealers, Inc. ("NASD"),
participating in the distribution of the Offering. The Offering is therefore
being conducted in accordance with Rule 2710(c)(8) of the NASD's Conduct Rules,
and the price at which the Common Stock will be distributed to the public will
be established pursuant to Rule 2720(c)(3) of the Conduct Rules. J.P. Morgan
Securities Inc. is acting as a "qualified independent underwriter" within the
meaning of such rules and is assuming the responsibilities of acting as such in
pricing the Offering and conducting due diligence. J.P. Morgan Securities Inc.
will receive no separate fee for its services as qualified independent
underwriter.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the shares of Common Stock offered hereby
has been determined by agreement between the Company and the Underwriters.
Among the factors considered in making such determination were the history of
and the prospects for the industry in which the Company competes, current and
historical oil and gas prices, an assessment of the Company's management, the
present operations of the Company, the historical results of operations of the
Company and the trend of its revenues and earnings, the prospects for future
earnings of the Company, the general condition of the securities markets at the
time of the Offering and the prices of similar securities of generally
comparable companies.
To facilitate the offering of the Common Stock, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot in connection with
the Offering, creating a short position in the Common Stock for their own
account. In addition, to cover over-allotments or to stabilize the price of the
Common Stock, the Underwriters may bid for, and purchase, shares of Common
Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the Offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities and may
end any of these activities at any time.
The Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "XPLR." There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade in
the public market subsequent to the Offering at or above the initial public
offering price.
At the Company's request, the Underwriters have reserved 215,000 shares of
Common Stock for sale at the initial public offering price to the Company's
employees and other persons having business relationships with the Company.
The Representatives have informed the Company that the Underwriters do not
expect sales to accounts over which the Underwriters exercise discretionary
authority to exceed 5% of the total number of shares of Common Stock offered by
them.
72
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered by
this Prospectus will be passed upon for the Company by Baker & Botts, L.L.P.,
Houston, Texas, and for the Underwriters by Vinson & Elkins L.L.P., Houston,
Texas.
EXPERTS
The respective Consolidated Financial Statements of XPLOR and its subsidiaries
as of December 31, 1996 and 1995, and for each of the years in the three-year
period ended December 31, 1996, and of the South Coast Companies as of December
31, 1996 and 1995, and for the years then ended, have been included herein and
in the registration statement of which this Prospectus is a part (the
"Registration Statement") in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The Statements of Revenues and Direct Operating Expenses and notes of Main Pass
35 included in the Prospectus and in the Registration Statement have been
audited by BDO Seidman, LLP, independent certified public accountants, to the
extent and for the periods set forth in their reports appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon
such reports given upon the authority of said firm as experts in auditing and
accounting.
The letter report of Netherland, Sewell & Associates, Inc. included as Appendix
A to this Prospectus and certain information with respect to the Company's oil
and gas reserves derived therefrom have been included herein in reliance upon
such firm as experts with respect to such matters.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Exchange Act. Upon completion of the Offering, the Company will be subject
to the informational requirements of the Exchange Act, and in accordance
therewith, will be required to file periodic reports and other information with
the Commission. Such information can be inspected without charge after the
Offering at the public reference facilities of the Commission at its principal
office at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material may also be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains an Internet web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company has filed the Registration Statement on Form S-1 with the
Commission under the Securities Act with respect to the Offering. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
including the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement, exhibits and schedules. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and, with respect to each such contract or document filed
as an exhibit to the Registration Statement, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
and each such statement is qualified in all respects by such reference. A copy
of the Registration Statement, including the exhibits and schedules thereto,
may be inspected and copies thereof may be obtained as described in the
preceding paragraph with respect to periodic reports and other information to
be filed by the Company under the Exchange Act.
73
<PAGE>
GLOSSARY OF CERTAIN INDUSTRY TERMS
The definitions set forth below shall apply to the indicated terms as used in
this Prospectus. All volumes of gas referred to herein are stated at the legal
pressure base of the state or area where the reserves exist and at 60 degrees
Fahrenheit and in most instances are rounded to the nearest major multiple.
"Bbl" One stock tank barrel, or 42 U.S. gallons liquid
volume, used herein in reference to crude oil or
other liquid hydrocarbons.
"Bcf" Billion cubic feet.
"Bcfe" Billion cubic feet equivalent, determined using the
ratio of six Mcf of gas to one Bbl of crude oil,
condensate or gas liquids.
"BOE" Barrels of oil equivalent, determined using the ratio
of six Mcf of gas to one Bbl of crude oil, condensate
or gas liquids.
"Btu" or "British
Thermal Unit" The quantity of heat required to raise the
temperature of one pound of water by one degree
Fahrenheit.
"Development well" A well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon
known to be productive.
"Exploratory well" A well drilled to find and produce oil or gas
reserves not classified as proved, to find a new
reservoir in a field previously found to be
productive of oil or gas in another reservoir or to
extend a known reservoir.
"Farm-in" or "farm-out" An agreement whereunder the owner of a working
interest in an oil and gas lease assigns the working
interest or a portion thereof to another party who
desires to drill on the leased acreage. Generally,
the assignee is required to drill one or more wells
in order to earn its interest in the acreage. The
assignor usually retains a royalty or reversionary
interest in the lease. The interest received by an
assignee is a "farm-in" while the interest
transferred by the assignor is a "farm-out."
"Field" An area consisting of a single reservoir or multiple
reservoirs all grouped on or related to the same
individual geological structural feature and/or
stratigraphic condition.
"Finding costs" Costs associated with acquiring and developing proved
oil and gas reserves which are capitalized by the
Company pursuant to generally accepted accounting
principles, including all costs involved in acquiring
acreage, geological and geophysical work and the cost
of drilling and completing wells.
"Gross acres" or
"gross wells" The total acres or wells, as the case may be, in
which a working interest is owned.
"MBbls" One thousand barrels of crude oil or other liquid
hydrocarbons.
"Mcf" One thousand cubic feet.
"Mcfe" One thousand cubic feet equivalent, determined using
the ratio of six Mcf of gas to one Bbl of crude oil,
condensate or gas liquids.
"MMBtus" One million British Thermal Units.
"MMcf" One million cubic feet.
74
<PAGE>
"MMcfe" One million cubic feet equivalent, determined using
the ratio of six Mcf of gas to one Bbl of crude oil,
condensate or gas liquids, which approximates the
relative energy content of crude oil, condensate and
gas liquids as compared to gas. Prices have
historically been higher or substantially higher for
crude oil than gas on an energy equivalent basis.
"Overriding royalty
interest" A royalty interest that is carved out of a lessee's
working interest under an oil and gas lease.
"Productive well"
or "producing well" A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that
proceeds from the sale of such production exceed
production expenses and taxes.
"Project" A defined geographic area in which one or more
prospects have been identified and selected for data
acquisition, evaluation or drilling.
"Prospect" A hydrocarbon-bearing or potentially hydrocarbon-
bearing feature identified through analysis of
engineering, geological and geophysical data.
"Proved developed
nonproducing reserves" Proved developed reserves expected to be recovered
from zones behind casing in existing wells.
"Proved developed
producing reserves" Proved developed reserves that are expected to be
recovered from completion intervals currently open in
existing wells and able to produce to market.
"Proved developed
reserves" Proved reserves that can be expected to be recovered
from existing wells with existing equipment and
operating methods.
"Proved reserves" The estimated quantities of crude oil, gas and gas
liquids that geological and engineering data
demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs
under existing economic and operating conditions.
"Proved undeveloped
reserves" Proved reserves that are expected to be recovered
from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is
required for recompletion.
"PV-10 Value" When used with respect to oil and gas reserves, the
estimated future gross revenue to be generated from
the production of proved reserves, net of estimated
production and future development costs, using prices
and costs in effect as of the date indicated, without
giving effect to nonproperty-related expenses such as
general and administrative expenses, debt service and
future income tax expense or to depreciation,
depletion and amortization, discounted using an
annual discount rate of 10%.
"Reservoir" A porous and permeable underground formation
containing an accumulation or producible oil and/or
gas that is confined by impermeable rock or water
barriers and is individual and separate from other
reservoirs.
"Royalty interest" An interest in an oil and gas property entitling the
owner to a share of oil or gas production free of
costs of production.
"3-D seismic" Advanced technology method used in the detection of
structural features and potential accumulations of
hydrocarbons identified through a three-dimensional
picture of the subsurface created by the collection
and measurement of the intensity and timing of sound
waves transmitted into the earth as they reflect back
to the surface.
75
<PAGE>
"Undeveloped acreage" Lease acreage on which wells have not been drilled or
completed to a point that would permit the production
of commercial quantities of oil and gas regardless of
whether such acreage contains proved reserves.
"Working interest" The operating interest that gives the owner the right
to drill, produce and conduct operating activities on
the property and a share of production.
76
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
XPLOR ENERGY, INC.
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and as of
September 30, 1997 (unaudited)........................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996 and for the Nine Months Ended September 30, 1996 and
1997 (unaudited)......................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996 and for the Nine Months Ended September
30, 1997 (unaudited)..................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and for the Nine Months Ended September 30, 1996 and
1997 (unaudited)......................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
SOUTH COAST EXPLORATION COMPANY, SOCO EXPLORATION, L.P. AND INTERACTIVE
EXPLORATION SOLUTIONS, INC.
Independent Auditors' Report.............................................. F-24
Combined Balance Sheets as of December 31, 1995 and 1996 and as of
September 30, 1997 (unaudited)........................................... F-25
Combined Statements of Earnings for the Years Ended December 31, 1995 and
1996 and for the Nine Months Ended September 30, 1996 and 1997
(unaudited).............................................................. F-26
Combined Statements of Stockholders'/Partners' Equity for the Years Ended
December 31, 1995 and 1996 and for the Nine Months Ended September 30,
1997 (unaudited)......................................................... F-27
Combined Statements of Cash Flows for the Years Ended December 31, 1995
and 1996 and for the Nine Months Ended September 30, 1996 and 1997
(unaudited).............................................................. F-28
Notes to Combined Financial Statements.................................... F-29
MAIN PASS 35
Independent Auditors' Report.............................................. F-38
Statement of Revenues and Direct Operating Expenses for the Year Ended
December 31, 1995 and for the Eight Months Ended August 31, 1996......... F-39
Notes to Financial Statements............................................. F-40
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
XPLOR Energy, Inc.:
We have audited the accompanying consolidated balance sheets of XPLOR Energy,
Inc. (successor to Araxas Energy Corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of XPLOR
Energy, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
September 24, 1997, except as to note 2
which is as of November 20, 1997
F-2
<PAGE>
XPLOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C> <C>
-------------------------------------
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
ASSETS ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............ $ 418,947 $ 917,619 $ 667,009
Investment in marketable securities--
pledged............................. -- 2,624,119 --
Accounts receivable.................. 461,625 3,213,284 4,282,718
Prepaid expenses and other........... 79,656 29,516 144,380
Account receivable, stockholder...... -- -- 413,540
----------- ----------- -----------
Total current assets............... 960,228 6,784,538 5,507,647
Property and equipment, at cost:
Oil and gas properties, full cost
method.............................. 13,876,290 24,188,415 43,713,685
Pipeline and equipment............... -- 1,529,943 1,529,943
Furniture and fixtures and other..... 328,264 495,659 954,149
----------- ----------- -----------
14,204,554 26,214,017 46,197,777
Less accumulated depreciation,
depletion and amortization.......... (874,045) (2,524,542) (4,764,043)
----------- ----------- -----------
Net property and equipment......... 13,330,509 23,689,475 41,433,734
Other assets:
Account receivable, stockholder...... -- 620,000 206,460
Restricted cash--escrow agreements... -- 1,016,109 1,198,309
Goodwill............................. -- -- 1,375,555
Deferred charges..................... -- -- 3,567,209
Debt financing costs, net............ -- 721,810 1,207,226
----------- ----------- -----------
-- 2,357,919 7,554,759
----------- ----------- -----------
$14,290,737 $32,831,932 $54,496,140
=========== =========== ===========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt. $ 2,733,333 $ 576,449 $39,210,550
Accounts payable..................... 1,548,473 4,537,509 3,677,494
Prepayments received from joint
owners.............................. 652,053 288,793 245,582
Other payables and accrued
liabilities......................... 344,256 775,854 1,452,233
----------- ----------- -----------
Total current liabilities.......... 5,278,115 6,178,605 44,585,859
Long-term debt, net of current maturi-
ties.................................. 2,943,667 20,845,893 1,556,667
Deferred taxes......................... 35,957 -- --
Redeemable preferred stock, $.01 par
value, $150 per share liquidation
preference, 100,000 shares authorized;
8.5% Redeemable Preferred Stock,
10,000 shares issued and outstanding
at December 31, 1995 and none issued
and outstanding at December 31, 1996
and June 30, 1997, respectively....... 1,500,000 -- --
Commitments and contingencies
Stockholders' equity
Common stock, par $.001 per share;
30,000,000 shares authorized;
2,320,000, 2,752,169 and 4,709,413
issued and outstanding at December
31, 1995 and 1996 and September 30,
1997, respectively.................. 2,320 2,752 4,709
Paid-in capital...................... 5,659,042 8,484,472 18,935,362
Accumulated deficit.................. (1,128,364) (2,679,790) (10,586,457)
----------- ----------- -----------
Total stockholders' equity......... 4,532,998 5,807,434 8,353,614
----------- ----------- -----------
$14,290,737 $32,831,932 $54,496,140
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
XPLOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas revenues.. $ 190,178 $ 1,376,281 $ 6,043,259 $4,069,444 $ 6,536,341
Offshore services..... -- -- 1,744,664 636,221 1,580,807
----------- ----------- ----------- ---------- -----------
Total revenues...... 190,178 1,376,281 7,787,923 4,705,665 8,117,148
----------- ----------- ----------- ---------- -----------
Costs and expenses:
Lease operating
expenses............. 244,863 295,818 1,613,863 780,952 1,714,294
Production taxes and
gathering fees....... 12,391 98,976 555,416 324,868 487,314
Cost of offshore
services............. -- -- 2,193,925 774,291 1,688,775
Depreciation,
depletion and
amortization......... 134,137 740,957 1,714,201 1,257,130 2,239,501
General and
administrative....... 919,787 867,300 1,500,920 1,004,269 1,519,748
Stock-based
compensation......... -- 1,313,000 -- -- 1,323,722
----------- ----------- ----------- ---------- -----------
Total costs and
expenses........... 1,311,178 3,316,051 7,578,325 4,141,510 8,973,354
----------- ----------- ----------- ---------- -----------
Income (loss) from
operations......... (1,121,000) (1,939,770) 209,598 564,155 (856,206)
Other (income) expenses:
Gain on sale of oil
and gas properties... (1,319,997) -- -- -- --
Interest expense...... 117,011 500,271 2,075,591 1,191,144 2,823,108
Interest income....... (1,109) (16,911) (24,309) (17,295) (43,704)
Other expense......... 17,272 95,788 658,135 241,876 362,092
----------- ----------- ----------- ---------- -----------
(1,186,823) 579,148 2,709,417 1,415,725 3,141,496
----------- ----------- ----------- ---------- -----------
Income (loss) before
income tax benefit
(expense) and
extraordinary item..... 65,823 (2,518,918) (2,499,819) (851,570) (3,997,702)
Income tax benefit (ex-
pense)................. (25,684) 949,231 35,957 35,957 --
----------- ----------- ----------- ---------- -----------
Income (loss) before
extraordinary item..... 40,139 (1,569,687) (2,463,862) (815,613) (3,997,702)
Extraordinary item-early
extinguishment of debt. -- -- -- -- 3,908,965
----------- ----------- ----------- ---------- -----------
Net income (loss)....... 40,139 (1,569,687) (2,463,862) (815,613) (7,906,667)
Preferred stock divi-
dends.................. -- -- (67,507) (67,507) --
Preferred stock redemp-
tion discount.......... -- -- 979,943 979,943 --
----------- ----------- ----------- ---------- -----------
Net income (loss)
applicable to common
stock.................. $ 40,139 $(1,569,687) $(1,551,426) $ 96,823 $(7,906,667)
=========== =========== =========== ========== ===========
Net income (loss) per
common share before
extraordinary item..... $ 0.02 $ (0.64) $ (0.55) $ 0.04 $ (1.31)
=========== =========== =========== ========== ===========
Net income (loss) per
common share........... $ 0.02 $ (0.64) $ (0.55) $ 0.04 $ (2.60)
=========== =========== =========== ========== ===========
Weighted average common
and dilutive common
equivalent shares
outstanding............ 2,021,474 2,437,803 2,829,019 2,760,109 3,040,183
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
XPLOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------
<CAPTION>
RETAINED
EARNINGS/
COMMON STOCK PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... 1,740,000 $1,740 $ 760 $ 535,739 $ 538,239
Other................... -- -- -- (1,108) (1,108)
Net income.............. -- -- -- 40,139 40,139
--------- ------ ----------- ------------ -----------
Balance at December 31,
1994................... 1,740,000 1,740 760 574,770 577,270
Dividend of property to
stockholder............ -- -- -- (133,447) (133,447)
Stock issued for
acquisition of
properties............. 580,000 580 4,345,282 -- 4,345,862
Employee stock option... -- -- 1,313,000 -- 1,313,000
Net loss................ -- -- -- (1,569,687) (1,569,687)
--------- ------ ----------- ------------ -----------
Balance at December 31,
1995................... 2,320,000 2,320 5,659,042 (1,128,364) 4,532,998
Preferred stock divi-
dend................... -- -- -- (67,507) (67,507)
Stock issued for release
of collateral.......... 122,101 122 220,661 -- 220,783
Stock option issued to
lender................. -- -- 1,258,256 -- 1,258,256
Stock issued for
redemption of preferred
stock, accrued
dividends and interest. 172,469 172 846,651 979,943 1,826,766
Stock issued for
acquisition of
properties and assets
of Gulfland Resources.. 137,599 138 499,862 -- 500,000
Net loss................ -- -- -- (2,463,862) (2,463,862)
--------- ------ ----------- ------------ -----------
Balance at December 31,
1996................... 2,752,169 2,752 8,484,472 (2,679,790) 5,807,434
Stock issued pursuant to
employment contracts... 171,819 172 1,501,177 -- 1,501,349
Cancellation of stock
option................. -- -- (671,743) -- (671,743)
Stock issued for South
Coast acquisition...... 1,785,425 1,785 9,621,456 -- 9,623,241
Net loss................ -- -- -- (7,906,667) (7,906,667)
--------- ------ ----------- ------------ -----------
Balance at September 30,
1997 (unaudited)....... 4,709,413 $4,709 $18,935,362 $(10,586,457) $ 8,353,614
========= ====== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
XPLOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)....... $ 40,139 $(1,569,687) $ (2,463,862) $ (815,613) $ (7,906,667)
Adjustments to
reconcile net income
(loss) to net cash
(used in) provided by
operating activities:
Depreciation,
depletion and
amortization.......... 134,137 740,957 1,714,201 1,257,130 2,239,501
Extraordinary item-
debt extinguishment... -- -- -- -- 3,908,965
Compensation exchanged
for stock............. -- -- -- -- 1,323,722
Employee stock option
compensation.......... -- 1,313,000 -- -- --
Deferred income tax
expense (benefit)..... 27,952 (949,231) (35,957) (35,957) --
Net gain on sale of
oil and gas
properties............ (1,319,997) -- -- -- --
Common stock issued
for collateral
release and interest
expense............... -- -- 376,750 376,750 --
Net unrealized gains
on securities......... -- -- -- 34,043 (462,999)
Net realized loss on
securities............ -- -- -- -- 578,452
Amortization of debt
discount.............. -- -- 368,598 -- 420,000
Amortization of
deferred costs........ -- -- -- -- 148,553
Loss on disposal of
leaseholds............ -- 52,098 9,064 9,064 --
Unrealized loss on
marketable
securities............ -- -- 462,999 -- --
Imputed interest....... -- -- 21,202 8,030 24,565
Changes in assets and
liabilities:
Accounts receivable.. (127,968) (370,969) (2,635,401) (3,082,114) (843,515)
Prepaid expenses and
other............... 69,794 (20,986) 50,140 (623,855) (108,142)
Prepayments from
joint interest
owners.............. -- 652,053 (363,260) -- (43,211)
Other payable and
accrued
liabilities......... 1,072,189 566,894 3,110,740 3,330,962 (1,427,162)
----------- ----------- ------------ ------------ ------------
Net cash provided by
(used in) operating
activities......... (103,754) 414,129 615,214 (458,440) (2,147,938)
----------- ----------- ------------ ------------ ------------
Cash flows from
investing activities:
Capital expenditures
and acquisition of
properties............. (2,382,160) (5,515,976) (19,075,204) (15,105,493) (7,655,112)
Payments on escrow
agreements............. -- -- (206,000) -- (182,200)
Deferred costs.......... -- -- -- -- (485,996)
Proceeds from sales of
oil and gas
properties............. 2,230,534 2,166,025 1,136,363 998,396 124,109
Proceeds from sales of
securities............. -- -- -- -- 2,508,666
----------- ----------- ------------ ------------ ------------
Net cash used in
investing
activities......... (151,626) (3,349,951) (18,144,841) (14,107,097) (5,690,533)
----------- ----------- ------------ ------------ ------------
Cash flows from
financing activities:
Proceeds from
borrowings............. 1,337,615 5,000,000 25,463,023 21,705,152 41,128,396
Debt issuance costs..... -- -- (769,300) (665,361) (1,329,941)
Payments of long-term
debt................... (1,031,868) (1,755,748) (6,665,424) (5,446,398) (29,425,494)
Deferred hedge
settlement............. -- -- -- -- (2,785,115)
Other................... (1,108) -- -- -- 15
----------- ----------- ------------ ------------ ------------
Net cash provided by
financing
activities......... 304,639 3,244,252 18,028,299 15,593,393 7,587,861
----------- ----------- ------------ ------------ ------------
Net increase
(decrease) in cash
and cash
equivalents........ 49,259 308,430 498,672 1,944,736 (250,610)
Cash and cash
equivalents at
beginning of period.... 61,258 110,517 418,947 418,947 917,619
----------- ----------- ------------ ------------ ------------
Cash and cash
equivalents at end of
period................. $ 110,517 $ 418,947 $ 917,619 $ 2,363,683 $ 667,009
=========== =========== ============ ============ ============
Supplemental disclosures
of cash flow
information:
Cash paid during the
year for interest...... $ 113,574 $ 194,215 $ 1,659,503 $ 539,233 $ --
Noncash investing and
financing activities:
Stock issued for
acquired companies.... -- -- -- -- 9,623,241
Liabilities incurred
in acquisitions....... -- -- -- -- 4,730,000
Stock issued pursuant
to employment
contracts............. -- -- -- -- 1,501,334
Cancellation of stock
options............... -- -- -- -- (671,743)
Deferred costs
incurred in
acquisition........... -- -- -- -- 344,220
Net liabilities
assumed in
acquisition........... -- -- -- -- 288,982
Property received in
acquisition........... -- -- -- -- (11,560,887)
Goodwill recorded in
acquisition........... -- -- -- -- (1,375,555)
Property received in
exchange for debt..... -- -- -- -- (891,870)
Other deferred costs... -- -- -- -- (664,000)
Acquisition of oil and
gas properties with
common and redeemable
preferred stock....... -- 7,435,077 -- -- --
Dividend of property
to stockholder........ -- 133,447 -- -- --
Stock issued for
release of
collateral............ -- -- 220,783 220,783 --
Stock option issued
for debt account...... -- -- 1,258,256 1,258,256 --
Stock issued for
redemption of
preferred stock,
accrued dividends and
interest payable...... -- -- 1,826,766 1,826,766 --
Sale of properties in
exchange for
marketable
securities............ -- -- 3,087,118 3,087,118 --
Acquisition of
properties............ -- -- 119,232 119,232 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Organization
The consolidated financial statements include the accounts of XPLOR Energy,
Inc. (XPLOR) and its wholly-owned subsidiaries (collectively, the Company).
Effective in September 1997, XPLOR succeeded to the operations of Araxas Energy
Corporation (AEC) and its wholly-owned subsidiaries, Araxas Exploration, Inc.
(AEI), Araxas SPV-1 (SPV) and Gulfland Industries, Inc. (GII). The unaudited
balance sheet as of September 30, 1997 also includes the accounts of South
Coast Exploration Company (South Coast), SOCO Exploration, L.P. (SOCO) and
Interactive Exploration Solutions, Inc. (INEXS) (collectively, the South Coast
entities), following the acquisition of the South Coast entities by the Company
as of September 30, 1997 for accounting purposes. Such acquisition was
accounted for as a purchase. See Note (12) for a description of other
transactions consummated in connection with such transaction. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company conducts oil and gas exploration, drilling and development
operations along the Texas and Louisiana Gulf Coasts and in Alabama. Prior to
its divestiture in April 1997, GII provided contract operating services to the
Company and third parties in the Gulf of Mexico.
Revenue Recognition
Owners of oil and gas properties often take more or less production from a
property than entitled to based on their ownership percentages in the property,
which results in a condition known in the industry as a production imbalance.
The Company follows the sales method of accounting for production imbalances.
Under this method, the Company recognizes revenues on production as it is taken
and delivered to its purchasers. The Company's oil and gas imbalances were not
significant at December 31, 1995 and 1996.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of less than ninety days to be cash and cash equivalents.
Investment Securities
The Company classifies its debt and equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold until maturity. All other securities
not included in the trading or held-to-maturity categories are classified as
available-for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-
maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains
and losses on trading securities are included in earnings. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific identification
basis.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is charged to
F-7
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
earnings and a new cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the related held-to-
maturity security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.
Property and Equipment
The Company follows the full cost method of accounting for oil and gas
properties, whereby all productive and nonproductive property acquisition,
exploration and development costs are capitalized. Such capitalized costs
include lease acquisition costs, delay rentals, geophysical, geological and
other costs, drilling, completion and other related costs and direct general
and administrative expenses associated with property acquisition, exploration
and development activities. Capitalized general and administrative costs
include internal costs such as salaries and related benefits paid to employees
to the extent that they are directly engaged in such activities, as well as all
other directly identifiable general and administrative costs associated with
such activities, and do not include any costs related to production, general
corporate overhead, or similar activities. Capitalized internal general and
administrative costs were $462,000 in 1994, $187,000 in 1995 and $857,000 in
1996.
All capitalized costs of oil and gas properties and estimated future
development and dismantlement costs are amortized using the unit-of-production
method based on the ratio of current production to total proved recoverable oil
and natural gas reserves. Investment in unproved properties and major
development projects are not amortized until proved reserves associated with
the projects can be determined or until impairment occurs. Unevaluated costs of
$58,000 and $933,000 were excluded from amortization at December 31, 1995 and
1996, respectively. Unevaluated properties are assessed quarterly to determine
whether any impairment has occurred. If the results of an assessment indicate
that the properties are impaired, the amount of the impairment is added to the
capitalized cost to be amortized. Abandonments of properties are accounted for
as adjustments to capitalized costs with no loss recognized.
Depreciation, depletion and amortization expense per equivalent thousand cubic
feet of production was $0.79 in 1994, $0.78 in 1995 and $0.65 in 1996.
In accordance with the full cost method of accounting, the net capitalized
costs of oil and gas properties less related deferred income taxes for each
cost center are limited to the sum of the estimated future net revenues from
the properties at current prices less estimated future expenditures, discounted
at 10%, and unevaluated costs not being amortized, less income tax effects
related to differences between the financial and tax bases of the properties,
computed on a quarterly basis.
Depletion expense and limits to capitalized costs are based on estimates of oil
and gas reserves which are inherently imprecise and assume current prices for
future net revenues. Accordingly, it is reasonably possible that the estimates
of reserves quantities and future net revenues could differ materially in the
near term from amounts currently estimated.
Gains and losses on sales of oil and gas properties are not recognized in
income unless the sale involves a significant portion of the reserves. A gain
of $1,319,997 was recorded in 1994.
All other property and equipment are stated at original cost. Depreciation on
other property and equipment is calculated on the straight-line method over the
estimated useful lives of the assets which range from 5 to 15 years.
Dismantlement, Restoration and Environmental Costs
The estimated costs, net of salvage value, of dismantling facilities and site
remediation on projects with limited lives or facilities that are required to
be dismantled by contract, regulation or law, and the estimated costs of
F-8
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
restoration and reclamation of land associated with such projects are accrued
on a unit-of-production basis during operations. Such costs are included in
depreciation, depletion and amortization charges in the current period.
The Company is subject to extensive federal, state and local environmental laws
and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release or
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for
expenditures of a noncapital nature are recorded when environmental assessment
and/or remediation is probable, and the costs can be reasonably estimated.
Impairment of Long-Lived Asset and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement
requires that long-lived assets, other than oil and gas properties under the
full cost method, and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not
have any impact on the Company's financial position or results of operations.
Capitalized Interest
The Company capitalizes interest on expenditures made in connection with major
exploration and development projects that are not subject to current
amortization. Interest is capitalized only for the period that activities are
in progress to bring these projects to their intended use. There was no
interest capitalized in the three years ended December 31, 1996.
Restricted Cash--Escrow Agreements
The Company is contractually obligated by the terms of purchase agreements to
contribute funds to escrow accounts amounting to $1,556,000 for the future
dismantlement and abandonment of certain oil and gas properties over the
reserve life of these properties. The restricted cash is recorded as an other
asset.
Debt Financing Costs
Costs incurred in obtaining debt financing have been capitalized and are being
amortized over the term of the respective loan.
Derivative Financial Instruments
The Company applies hedge accounting for those derivative financial instruments
that are designated as a hedge. In order to qualify as a hedge, price movements
in the underlying commodity derivative must be highly correlated with the
hedged commodity. Monthly cash settlements of oil and gas price swaps are
reported as a component of revenue and cash flows from operations. The
settlements are based on the difference between the fixed swap price and the
New York Mercantile Exchange closing prices for each month during the life of
the swaps. Gains or losses attributable to the termination of a swap contract
are deferred on the balance sheet and recognized in revenue
F-9
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
when the hedged crude oil and natural gas is sold. There were no terminations
during 1996, 1995 or 1994. When a derivative financial instrument ceases to
qualify as a hedge, or is not so designated, the change in fair value of the
derivative financial instrument is recognized in earnings currently.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Stock Options
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995
and future years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provision of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Earnings Per Share
The weighted average number of common shares outstanding for the computation of
earnings per share reflects the assumed exercise of dilutive stock awards,
options and warrants. In accordance with SEC accounting requirements, stock
awards, options and warrants issued at a discount to the expected offering
price and within the preceding year of the filing of the Company's registration
statement for its public offering are reflected as outstanding common shares
for all periods presented.
Use of Estimates
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 regarding earnings per share. SFAS No. 128 replaces the presentation of
primary earnings per share (EPS) with the presentation of basic EPS, which
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of shares of common stock
outstanding for the period. SFAS No. 128 also requires dual
F-10
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
presentation of basic EPS and diluted EPS on the face of the income statement
and requires a reconciliation of the numerators and denominators of basic EPS
and diluted EPS. The Company will adopt SFAS No. 128 for the quarter ended
December 31, 1997.
In June 1997, FASB issued SFAS No. 130 regarding reporting comprehensive
income, which establishes standards for reporting and display of comprehensive
income and its components. The components of comprehensive income refer to
revenues, expenses, gains and losses that are excluded from net income under
current accounting standards, including foreign currency translation items,
minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. SFAS No. 130 requires that
all items recognized under accounting standards as components of comprehensive
income be reported in a financial statement displayed in equal prominence with
the other financial statements; the total of other comprehensive income for a
period is required to be transferred to a component of equity that is
separately displayed in a statement of financial condition at the end of an
accounting period. SFAS No. 130 is effective for both interim and annual
periods beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company will adopt SFAS No. 130 for the fiscal year ending December 31,
1998.
In June 1997, FASB issued SFAS No. 131 regarding disclosures about segments of
an enterprise and related information. SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for periods beginning after December 15,
1997. The Company will adopt SFAS No. 131 for the fiscal year ending December
31, 1998.
The Company believes that adoption of these financial accounting standards will
not have a material effect on its financial condition or results of operations.
Interim Financial Statements
The interim financial statements of the Company included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
In the opinion of the Company, all adjustments, consisting of normal recurring
accruals, necessary to present fairly the information in the accompanying
interim financial statement have been included. The results of operations for
such interim periods are not necessarily indicative of the results for the full
year.
(2) STOCK SPLIT
In November 1997, XPLOR paid a stock dividend to effect a 23.2-for-one split of
its common stock. As a result of the stock split, the number of outstanding
shares of common stock was increased to 4,709,413 shares outstanding from
202,992 shares outstanding immediately prior to the stock split. The
stockholders' equity accounts on the accompanying balance sheets have been
restated to give retroactive recognition to the stock split for all periods
presented. In addition, all references to number of shares of common stock and
per share amounts have been restated throughout these financial statements.
(3) INVESTMENT IN MARKETABLE SECURITIES
In connection with the sale of certain oil and gas properties in 1996, the
Company received $3,087,118 in marketable equity securities as proceeds from
the sale.
F-11
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
The carrying value and estimated market value of securities at December 31,
1996 are as follows:
--------------------------
<TABLE>
<CAPTION>
GROSS
UNREALIZED
COST LOSSES FAIR VALUE
<S> <C> <C> <C>
Corporate equity securities held for trading... $3,087,118 $462,999 $2,624,119
========== ======== ==========
</TABLE>
The gross unrealized loss of $462,999 was included in other expense at December
31, 1996.
These securities were subsequently sold in 1997 for a realized loss of
$578,452.
(4) ACQUISITION OF OIL AND GAS PROPERTIES
During 1996, the Company acquired the interest in the Main Pass 35 field and
related pipeline assets held by Gulfland Resources, Inc. (GRI) and all of the
stock of GII for approximately $7,700,000 cash, a non-interest-bearing note for
$620,000 and 137,599 shares of the stock of the Company, then valued at $3.63
per share (the Gulfland Acquisition). The Company has also agreed to form a
limited liability company, AXEX, LLC (AXEX) that would be assigned the right to
receive revenues from a certain production handling and operating agreement,
with AXEX owned 99% by GRI and 1% by the Company, until approximately
$2,000,000 is received by GRI, at which time the ownership of AXEX reverts
entirely to the Company (The AXEX Obligation). The AXEX Obligation has been
accounted for as a contingent liability, with payments to GRI recorded as
additional costs of the Gulfland Acquisition as incurred. Pursuant to terms of
the Gulfland Acquisition agreements, the Company has the right, under certain
conditions, to reacquire the 137,599 shares of the Company's stock for the sum
of $500,000 through July 6, 1999.
On the same day as the Gulfland Acquisition was closed, the Company acquired,
for $1,383,000 cash, additional interests in the Main Pass 35 field from
another party. These two acquisitions (collectively, the Main Pass 35
Acquisition) resulted in the purchase of approximately 18.8 Bcfe in proved
reserves. Further, the Company also made another purchase of approximately 1.0
Bcfe for cash of $882,000.
During 1995, the Company acquired oil and gas properties representing 4.5 Bcfe
of proved reserves from New West Resources, Inc. (NWR). The purchase price of
approximately $7,400,000 consisted of 580,000 shares of common stock,
$1,500,000 in redeemable preferred stock and an $827,000 notes payable to the
seller (the NWR Acquisition). The acquisition was accounted for as a purchase
effective as of May 1995.
The following summarized pro forma (unaudited) information assumes the South
Coast merger (see Note 13) and the Main Pass 35 Acquisition had occurred on
January 1, 1995 and January 1, 1996, respectively.
<TABLE>
<S> <C> <C>
----------------
<CAPTION>
DECEMBER 31,
1995 1996
------- -------
<S> <C> <C>
Revenues................................................................ $ 7,009 $12,917
Net loss................................................................ (2,986) (3,445)
Net loss per share...................................................... $ (0.69) $ (0.54)
======= =======
</TABLE>
The pro forma results are not necessarily indicative of those that would have
occurred had the acquisitions taken place at the beginning of 1995 or 1996,
respectively. The above amounts reflect adjustments for interest on the
incremental debt financing and the notes payable issued as part of the purchase
price and depreciation on revalued property and equipment and do not reflect
the April 1997 disposition of GII.
F-12
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(5) LONG-TERM DEBT
The Company's long-term debt is as follows:
<TABLE>
<S> <C> <C> <C>
-----------------------------------
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
$35,000,000 bridge loan facility with
Credit Lyonnais, New York Branch
(Credit Lyonnais), interest based on
the short-term London Interbank Offered
Rates (LIBOR) plus a margin of 4.3%
(10% at September 30, 1997) payable at
the underlying LIBOR maturity(a)....... $30,750,000
Note payable due July 31, 1998, to ERI
Investments, Inc. (ERI Note), an
affiliate of an owner of the Company,
unsecured, interest at 9% payable at
maturity............................... 5,000,000
Employee Note, payable at the earlier of
December 31, 1998 or $2,200,000 payable
at the date of the IPO or upon merger
or sale of a significant portion of the
Company's assets or stock, unsecured,
bears interest at 5.81%, payable at
maturity............................... 1,350,000
Shareholder notes, payable on September
24, 1998, discounted at 12%, payable at
maturity............................... 2,680,000
$42,500,000 revolving line of credit
with Stratum Group Energy Partners,
L.P., a private financing company
(Stratum), with interest at prime plus
2.5% (10.75% at December 31, 1996)
resulting in an 18% effective rate net
of discount. Repayment is based on the
cash flow of the Company, and is
collateralized by all oil and gas
properties and equipment, accounts
receivable and marketable securities;
due in dates ranging from August 2002
to August 2003......................... -- $23,647,598
Less discount for override and options
(b).................................... -- (3,587,408)
Note payable to stockholder due in
annual installments of principal and
interest beginning July 1997;
discounted at 10%; due July 1999....... -- 535,152 559,717
Note payable to stockholder due in
twelve quarterly installments beginning
December 31, 1995 at prime plus 9%
(17.5%); secured by certain oil and gas
properties (c)......................... $3,350,000 --
Note payable due May 1, 1996, with
interest payable monthly at 15%;
secured by certain oil and gas
properties............................. 1,500,000 --
Note payable due in two installments:
$400,000 on February 1, 1997 and
$427,000 on February 1, 1998; interest
at prime (8.5%) with interest payable
annually on February 1; note guaranteed
by NWR................................. 827,000 827,000 427,500
---------- ----------- -----------
5,677,000 21,422,342 40,767,217
Less current maturities................. 2,733,333 576,449 39,210,550
---------- ----------- -----------
$2,943,667 $20,845,893 $1,556,667
========== =========== ===========
</TABLE>
- --------
(a)See Note 13 for certain information regarding the Credit Agreement with
Credit Lyonnais.
F-13
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(b)As an inducement to Stratum, the Company provided Stratum with a 5.5%
overriding royalty interest on its existing oil and gas properties. Similarly,
the Company granted Stratum an option to purchase 15% of the common stock of
the Company at such date for $1,250,000. This option is exercisable at any
time beginning January 1, 1997 through the expiration of the option on June
30, 1999. The estimated fair value of the override and the option was recorded
as a discount to the debt and is being amortized over the life of the loan.
(c) This note was retired in 1996 with the proceeds from the revolving line of
credit.
The Company was not in compliance with certain restrictive covenants of the
revolving line of credit at December 31, 1996. The Company obtained waivers to
such covenants at December 31, 1996 and through August 31, 1997. In September
1997, this indebtedness was refinanced with Credit Lyonnais through May 1998
and accordingly is reflected as long-term debt at December 31, 1996.
Estimated aggregate maturities of long-term debt (prior to the Credit Lyonnais
refinancing) for the four years following December 31, 1996 are as follows:
<TABLE>
<S> <C>
-----------
<CAPTION>
YEAR ENDED AMOUNT
DECEMBER 31, -----------
<S> <C>
1997.............................................................. $ 576,449
1998.............................................................. 5,118,409
1999.............................................................. 11,790,614
2000.............................................................. 3,936,870
-----------
$21,422,342
===========
</TABLE>
(6) REDEEMABLE PREFERRED STOCK
In conjunction with the NWR Acquisition in May 1995, AEC issued 10,000 shares
of redeemable preferred stock with a redemption value of $150 a share,
redeemable at the option of the stockholder in lots of 2,500 shares annually
from December 31, 1997 through December 31, 2002. The preferred stock began
accruing dividends January 1, 1996 at an amount equal to the prime rate and
was payable upon redemption of the stock. In July 1996, the Company negotiated
the settlement of the redeemable preferred shares of $1,500,000 and related
accrued dividends of $67,000 and accrued interest payable of $259,000 on a
note payable to the preferred stockholder in exchange for the issuance of
172,469 common shares which represents 4.7% of the total outstanding shares of
the Company.
(7) INCOME TAXES
Income tax expense (benefit) represents deferred income taxes for each of the
three years ended December 31, 1996.
Total income taxes were different than the amounts computed by applying the
statutory income tax rate to income (loss) before income taxes. The sources of
these differences are as follows:
<TABLE>
<S> <C> <C> <C>
----------------------------
<CAPTION>
1994 1995 1996
------- --------- ---------
<S> <C> <C> <C>
Income tax computed at statutory rate............ $23,038 $(881,621) $(874,937)
Adjustments resulting from:
State income taxes (net of federal income tax
effect)....................................... 1,975 (75,568) (74,995)
Change in valuation allowance.................. -- -- 824,653
Other, net..................................... 671 7,958 89,322
------- --------- ---------
Total income tax expense (benefit)............... $25,684 $(949,231) $ (35,957)
======= ========= =========
</TABLE>
F-14
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities (assets) at December 31, 1995 and 1996 are as
follows:
<TABLE>
<S> <C> <C>
------------------------
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Oil and gas exploration and development costs..... $ 2,192,226 $ 1,748,537
----------- -----------
Gross deferred tax liabilities.................. 2,192,226 1,748,537
----------- -----------
Net operating loss carryforward................... (1,657,329) (1,806,070)
Stock option compensation......................... (498,940) (498,940)
Unrealized losses on equity securities............ -- (175,940)
Organization costs................................ -- (92,240)
----------- -----------
Gross deferred tax assets......................... (2,156,269) (2,573,190)
Less valuation allowance.......................... -- 824,653
----------- -----------
Net deferred tax assets......................... (2,156,269) (1,748,537)
=========== ===========
Net deferred tax liabilities...................... $ 35,957 --
=========== ===========
</TABLE>
The Company recorded a valuation allowance for deferred tax assets in 1996 of
$824,653. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities in making this
assessment. In order to fully realize all deferred tax assets, the Company will
need to generate future taxable income of approximately $4,700,000 prior to the
expiration of the net operating loss carryforwards in 2012. The amount of the
deferred tax assets considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced.
(8) CONTINGENCIES
The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in the
aggregate, material to the Company's consolidated financial condition, results
of operations or liquidity.
(9) EMPLOYEE BENEFITS
The Company has entered into employment agreements with several key employees.
The agreements provide for bonuses payable to the employees based on several
different factors, including employee performance, revenues of the Company and
property sales. At December 31, 1996, the Company has accrued approximately
$34,000 in bonuses. There were no accrued bonuses at December 31, 1995.
Based on these employment agreements, the Company also assigns overriding
royalties to several key employees on certain exploration prospects. The amount
of the override reserved for employees ranges from 2% to 3% of the Company's
interest, and such amounts are deducted from revenue when earned.
Also pursuant to the employment agreements, three employees were granted in
1995 immediately exercisable options to purchase 248,936 shares of the
outstanding stock of the Company. These options all have three year terms and
are forfeited if the employee leaves the Company without having exercised them.
In connection with
F-15
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
this grant the Company recognized $1,313,000 in compensation expense in 1995,
because the exercise price of the options was less than the estimated fair
value at the date of grant.
(10) LEASE COMMITMENTS
The Company has entered into various noncancelable operating lease agreements,
primarily for office rent and office equipment. As of December 31, 1996, future
minimum payments under these lease agreements are as follows:
<TABLE>
<S> <C>
----------
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
<S> <C>
1997................................................................ $ 220,488
1998................................................................ 228,186
1999................................................................ 228,186
2000................................................................ 228,186
2001................................................................ 244,488
Thereafter.......................................................... 1,018,685
----------
$2,168,219
==========
</TABLE>
Rental expense for 1994, 1995 and 1996 was approximately $56,000, $84,000 and
$220,000, respectively.
(11) STOCK OPTIONS
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock-based compensation. Had compensation costs been determined
based on the fair value at the grant dates for awards consistent with the
method of SFAS No. 123, the Company's pro forma net loss and loss per share
would have been unchanged for the year ended December 31, 1996 and would have
been as follows for the year ended December 31, 1995:
<TABLE>
<S> <C>
-----------
<CAPTION>
1995
-----------
<S> <C>
Net loss
As reported..................................................... $(1,569,687)
Pro forma....................................................... (1,641,201)
Primary earnings per share
As reported..................................................... (0.64)
Pro forma....................................................... (0.67)
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the minimum value method and the following assumptions were used for the grants
issued in 1995:
<TABLE>
<S> <C>
--------------
Risk free rate................................................... 5.88% to 6.86%
Expected life of options......................................... 3 years
</TABLE>
F-16
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
A summary of the Company's employee stock options at December 31, 1995 and
1996, and changes during the years ended on those dates, is presented below:
<TABLE>
<S> <C> <C> <C> <C>
-------------------------------------------------
<CAPTION>
1995 1996
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year........................ -- -- 248,936 $1.71
Granted...................... 248,936 $1.71
Exercised.................... -- -- -- --
Forfeited.................... -- -- -- --
Outstanding at end of year... 248,936 1.71 248,936 1.71
Options exercisable at end of
year........................ 248,936 1.71 248,936 1.71
</TABLE>
The following table summarizes information about employee stock options
outstanding at December 31, 1996:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
RANGE OF WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- -------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.51-
1.90 248,936 1.4 years $1.71 248,936 $1.71
</TABLE>
(12) HEDGING ACTIVITIES AND FINANCIAL INSTRUMENTS
In 1996, the Company entered into commodity price swap agreements as required
by the terms of its credit facility with its Lender. These agreements provide
for the Company to receive or make payments to the Lender on the differential
between a fixed price and variable indexed price on a monthly basis. Gains and
losses related to the swap agreements are recognized as an adjustment to
revenues when the transaction occurs.
The Company is receiving fixed prices of from $17.82 to $18.16 per Bbl of oil,
covering a total of 1,460,000 Bbls over the life of the swaps, from May 1996
through December 2001. The Company also entered into two gas price swaps,
receiving fixed prices of $2.04 and $2.0725 per MMBtu, covering a total of
3,225,000 MMBtus over the life of the swaps, from May 1996 through December
2001. As of December 31, 1996, the swapped volumes represent approximately 76%
and 18%, respectively, of the estimated future oil and gas production of the
Company during the remaining term of the swaps. Oil and gas revenues were
decreased by $598,000 in 1996 as a result of these swaps. The price swaps were
terminated in September 1997. See Note 13.
These swaps expose the Company to counterparty credit risk to the extent the
counterparty is unable to meet its monthly settlement commitment to the
Company. The risk is ameliorated by the credit relationship and outstanding
borrowings from the lender.
Determination of Fair Values of Financial Instruments
Fair value for cash, short-term investments, receivables, payables and long-
term debt approximates carrying value. The Company was exposed to an unrealized
loss of $3,744,000 to terminate the oil and gas price swaps held at December
31, 1996. These swaps were terminated in connection with the debt refinancing
with Credit Lyonnais as discussed below.
(13) SUBSEQUENT EVENTS
In April 1997 the Company sold all of the stock of GII to D-O-R Production
Management, L.L.C. (DOR), a limited liability company in which the Company
retained a 25% nonmanaging member interest. The investment in DOR is accounted
for using the cost recovery method.
F-17
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
On July 7, 1997, in anticipation of the transactions contemplated by the
Acquisition Agreement, the Company borrowed $5,000,000 from ERI Investments,
Inc., a company affiliated with one of the owners of South Coast and SOCO,
evidenced by a promissory note (the ERI Note). The ERI Note is unsecured,
matures on July 31, 1998 and bears interest at 9% payable at maturity.
On August 19, 1997, an agreement was entered into by XPLOR, a Delaware
corporation formed July 2, 1997 to effect the non-taxable merger, AEC, South
Coast, INEXS, SOCO and certain owners of the stock of AEC, South Coast, INEXS
and SOCO (the Acquisition Agreement), which provided for the acquisition by AEC
and its subsidiaries of South Coast, INEXS and SOCO, with XPLOR as the new
parent company. The Acquisition Agreement was closed on September 24, 1997,
with XPLOR issuing stock to the previous owners of AEC, South Coast, INEXS, and
SOCO. In addition, three notes of $1,000,000 each were created by XPLOR payable
to the principals of INEXS and secured by the stock of INEXS (the INEXS
Shareholder Notes). The INEXS Shareholder Notes are payable on or before
September 24, 1998 and do not bear interest. The Acquisition Agreement has been
accounted for as a purchase, effective September 30, 1997, of South Coast,
INEXS and SOCO by XPLOR, as successor to AEC and 67% stockholders of XPLOR.
Accordingly, the September 30, 1997 unaudited balance sheet includes amounts
for the South Coast Companies. The results of operations for the South Coast
Companies will be included in the Company's statement of operations from that
date.
<TABLE>
<S> <C>
Dollars in thousands, except per share data
Issuance of 1,785,425 shares of XPLOR common stock to South
Coast valued at an estimated fair value of $5.39 per share. $9,623
Issuance of Combination Notes to principals of South Coast,
net of discount of $320.................................... 2,680
Negative working capital assumed............................ 289
Estimated transaction costs................................. 344
-------
Total purchase price...................................... $12,936
=======
<CAPTION>
FAIR HISTORICAL
VALUE COST
------- ----------
<S> <C> <C>
Purchase allocation:
Oil and gas properties ................................... 11,249 9,058
Office equipment and other................................ 312 312
INEXS goodwill............................................ 1,375 --
------- -------
Total..................................................... $12,936 $ 9,370
======= =======
</TABLE>
Also on September 24, 1997, the Company entered into a credit agreement with
Credit Lyonnais secured by all of the oil and gas properties of the Company and
the stock of all significant subsidiaries (the Credit Agreement) and repaid the
balance owed under its revolving line of credit with Stratum (the Stratum
Debt). The Company was required by the terms of the Stratum Debt to maintain
certain oil and gas commodity price swaps. Those swaps were liquidated on
September 24, 1997, resulting in losses of $2,785,000, which have been deferred
and will be amortized over the life of the underlying swap agreements, through
2001 and included in the measurement of the hedged oil and gas revenues.
The Credit Agreement provides a bridge loan through May 24, 1998, as well as a
revolving loan following and contingent upon the partial repayment of the
bridge loan. The bridge loan is for an amount of up to $35,000,000 and bears
interest at the Credit Lyonnais short-term commercial loan rate plus 2.5% per
annum, payable quarterly, or, at the option of the Company, a fixed rate based
on short-term London Interbank Offered Rates
F-18
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(LIBOR) plus a margin of 4.3% per annum, payable at the underlying LIBOR
maturities. At September 30, 1997, the LIBOR rate, including margin, that was
in effect was 10% and the outstanding amount under the Credit Agreement was
$30,750,000, leaving an amount of $4,250,000 available. Interest rates for
advances under the bridge loan will increase by 1% per annum at March 24, 1998
and by 2% per annum at April 24, 1998. The Credit Agreement contemplates the
Company will complete an initial public offering of XPLOR's stock (the IPO),
and requires that some of the IPO proceeds will be used to repay some or all of
the bridge loan, so that the remaining outstanding borrowings will be not
greater than the amount available under the revolving loan. In connection
therewith, approximately $0.6 million of unamortized debt financing costs will
be written off when the bridge loan is retired at the expected IPO date. The
revolving loan is for a three-year period, to September 24, 2000, and is for an
amount of up to $20,000,000, subject to a semi-annually redetermined borrowing
base which is predicated on the Company's oil and gas reserves. The first
borrowing base redetermination will be as of March 31, 1998. As of September
30, 1997 the borrowing base was $20,000,000. Advances under the revolving loan
will bear interest at the Credit Lyonnais short-term commercial rate, payable
quarterly, or, at the option of the Company, short-term LIBOR rates plus a
margin of 1.0% per annum, payable at the underlying LIBOR maturities. Rates
under the revolving loan are subject to an increase of 0.25% per annum if
funded debt exceeds 40% of total capitalization and, under the LIBOR option,
are subject to an increase of 0.25% per annum if borrowings exceed 50% of the
borrowing base and 0.5% per annum if borrowings exceed 75% of the borrowing
base. The Company paid an arrangement/structuring fee of $1,000,000 for the
bridge loan and will pay a fee of 0.643% for draws under the bridge loan. These
amounts have been capitalized at September 30, 1997, along with certain legal,
engineering and consulting expenses. The Company also pays a quarterly
commitment fee of 0.5% under the bridge loan and 0.375% under the revolving
loan for amounts available but not borrowed. The Company is subject to certain
covenants under the terms of the Credit Agreement and must meet certain
financial tests. In particular, the Company must maintain a minimum tangible
net worth of $5.5 million plus 75% of net income (without deduction for losses)
after July 1, 1997 plus 75% of the net proceeds from the issuance of equity
securities and, commencing in March 1998, must maintain a minimum current ratio
of 1 and a minimum fixed charge coverage ratio of 3 to 1. The Credit Agreement
prohibits mergers, dividends, dispositions of assets and changing the nature of
the Company's business, and places restrictions on incurring additional
indebtedness and liens and investments.
If the IPO is not consummated prior to May 1998, the Company will be required
to refinance the bridge loan at that time or alternatively seek additional
sources of equity or debt financing. There can be no assurance the Company will
be able to successfully negotiate such equity or debt financing.
In connection with the Credit Agreement, the Company entered into a warrant
agreement with Credit Lyonnais that provides for the issuance to Credit
Lyonnais of a number of shares of the Company's stock equal to 5% of the number
of shares issued by the Company pursuant to the IPO (the Warrant Agreement).
The Warrant Agreement allows for the exercise, in whole or part, for two years
from the date of the effectiveness of the IPO and requires the payment of an
amount per share of 125% of the public offering price determined in the IPO.
The Warrant Agreement provides for adjustment to the number of shares subject
to the warrant in the event of stock splits and for corporate transactions with
third parties. The fair value of the contingent option will be recognized as a
discount on the bridge loan and credited to additional paid-in capital at the
IPO date.
In conjunction with the Acquisition Agreement, certain former employees left
the Company and related agreements were entered into to effect the termination
of their employment contracts. Pursuant to those agreements, 110,200 shares of
the Company's stock were issued at par value to former employees in exchange
for their outstanding stock options. In addition, the Company entered into an
agreement with one of the former employees to purchase the stock of a company
owned by the employee, the principal assets of which are working
F-19
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
interests in properties in which AEC already owns interests, and to cancel that
employee's stock options for consideration of $2,950,000. Of this amount,
$750,000 was paid at closing and a note for $2,200,000 was given by the Company
for the balance (the Employee Note). The Employee Note is unsecured, bears
interest at 5.81%, payable at maturity, and matures at the earlier of December
31, 1998 or the date of the IPO or upon merger or sale of a significant portion
of the Company's assets or stock (Other Sale). If no IPO or Other Sale has been
closed by December 31, 1998, the principal amount due on the Employee Note will
be $1,350,000, which shall be immediately payable. Oil and gas properties will
be increased by $886,390 ($1,736,390 upon completion of the IPO) for its
allocable portion of the proceeds. In addition, certain current employees were
granted 61,619 shares pursuant to their contracts. In conjunction with these
transactions, stock-based compensation of $1,323,722 was recognized for the
nine months ended September 30, 1997.
In October 1997, in connection with a former executive officer's becoming a
nonemployee director of the Company, the Company issued to such executive
officer a $1.0 million note (the Rowsey Note), which bears no interest, matures
upon closing of the IPO and will be expensed as compensation.
The Rowsey Note, ERI Note, the INEXS Shareholder Notes and Employee Note are
subordinated to the Credit Agreement.
The Company has filed a registration statement with the SEC to register shares
expected to be sold in an initial public offering. The following pro forma
supplemental earnings per share information assumes that a portion of the
proceeds from such offering will be used to retire the Company's outstanding
indebtedness for the periods presented and excludes the costs of the
extinguishment of debt in 1997.
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Year ended December 31, 1996..................................... $ 0.07
======
Nine months ended September 30, 1997............................. $(0.16)
======
</TABLE>
(14) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
Included herein is information with respect to oil and gas acquisition,
exploration, development and production activities, which is based on estimates
of year-end oil and gas reserve quantities and estimates of future development
costs and production schedules. The prices used in the reserve estimates are
prices the Company was receiving at each year end except where fixed and
determinable price escalations or oil and gas hedges are provided by contract.
Reserve quantities and future production at December 31, 1996 are based upon
reserve reports prepared by the independent petroleum engineering firm of
Netherland, Sewell & Associates, Inc. The reserve estimates as of December 31,
1994 and 1995 were derived from the reports of certain independent engineers.
These estimates are inherently imprecise and subject to substantial revision.
The Company cautions that there are many uncertainties inherent in estimating
proved reserve quantities, and in projecting future production rates and the
timing of future development expenditures, including many factors beyond the
control of the producer. Accordingly, these estimates are subject to change as
additional information becomes available. Reservoir engineering is a subjective
process of estimating underground accumulations of oil and gas that cannot be
measured in an exact way, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Results of drilling, testing and production
subsequent to the date of an estimate may justify revision of the estimate.
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered.
Estimates of future net cash flows from proved reserves of oil and gas were
made in accordance with SFAS No. 69, Disclosures about Oil and Gas Producing
Activities. The estimates are based on prices the Company was receiving at the
respective date. Estimated future cash inflows are reduced by estimated future
development and production costs based on year-end cost levels, assuming
continuation of existing economic conditions, and by estimated
F-20
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
future tax expense. Tax expense is calculated by applying the existing
statutory tax rates, including any known future changes. The results of these
disclosures should not be construed to represent the fair market value of the
Company's oil and gas properties. A market value determination would include
many additional factors including: (i) anticipated future increases and
decreases in oil and gas prices and production and development costs; (ii) an
allowance for return on investment; (iii) the value of additional reserves not
considered proved at the present, which may be recovered as a result of further
exploration and development activities; and (iv) other business risks.
In computing the present value of the estimated future net cash flows, a
discount factor of 10% was used pursuant to SEC regulations to reflect the
timing of those net cash flows. Present value, regardless of the discount rate
used, is materially affected by assumptions about timing of future production,
which may prove to be inaccurate. The following reserve value data represent
estimates only, which are subject to uncertainty given the current energy
markets.
Capitalized Costs and Oil and Gas Producing Activities
The following table sets forth the aggregate amounts of capitalized costs
relating to the Company's oil and gas producing activities and the aggregate
amount of related accumulated depreciation, depletion and amortization as of
the dates indicated.
<TABLE>
<S> <C> <C>
------------------------
<CAPTION>
DECEMBER 31,
1995 1996
----------- -----------
<S> <C> <C>
Proved properties..................................... $13,818,000 $23,255,000
Unproved properties................................... 58,000 933,000
Less accumulated depreciation and amortization........ (708,000) (2,213,000)
----------- -----------
Net capitalized costs................................. $13,168,000 $21,975,000
=========== ===========
</TABLE>
Costs incurred in Oil and Gas Producing Activities
The following table reflects the costs incurred in oil and gas property
acquisition, exploration and development activities during the periods
indicated.
<TABLE>
<S> <C> <C> <C>
----------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Property acquisition costs:
Proved properties.......................... -- $ 7,435,000 $ 9,468,000
Unproved properties........................ $ 757,000 2,005,000 1,102,000
Exploration costs............................ 1,594,000 1,448,000 2,234,000
Development costs............................ -- 2,017,000 4,329,000
---------- ----------- -----------
$2,351,000 $12,905,000 $17,133,000
========== =========== ===========
</TABLE>
F-21
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
Results of Operations for Producing Activities
<TABLE>
<S> <C> <C> <C>
-------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Revenues from oil and gas producing activities. $190,000 $1,376,000 $6,043,000
Production costs............................... 257,000 395,000 2,169,000
Depreciation, depletion and amortization....... 73,000 612,000 1,569,000
Income tax expense (benefit)................... (48,000) 125,000 784,000
-------- ---------- ----------
Results of operations from producing activities
(excluding corporate overhead and interest
costs)........................................ $(92,000) $ 244,000 $1,521,000
======== ========== ==========
</TABLE>
The following table sets forth the Company's interest in estimated total proved
oil and gas reserves for years ended December 31, 1994, 1995, and 1996:
<TABLE>
<S> <C> <C>
---------------------
<CAPTION>
OIL
(BBLS) GAS (MCF)
--------- ----------
<S> <C> <C>
Balance, December 31, 1993.............................. 550,300 748,800
Revisions of previous estimates......................... (215,200) 113,100
Discoveries and extensions.............................. 124,700 3,914,200
Production.............................................. (3,700) (74,300)
--------- ----------
Balance, December 31, 1994.............................. 456,100 4,701,900
Revisions of previous estimates......................... (247,200) (2,747,400)
Discoveries and extensions.............................. 420,700 5,855,500
Purchases of reserves................................... 6,000 4,464,000
Production.............................................. (43,500) (460,400)
--------- ----------
Balance, December 31, 1995.............................. 592,100 11,813,600
Revisions of previous estimates......................... (167,400) (1,431,500)
Discoveries and extensions.............................. 564,000 17,038,100
Purchases of reserves................................... 3,015,200 1,723,900
Sales of reserves....................................... (175,000) (279,700)
Production.............................................. (153,700) (1,256,500)
--------- ----------
Balance, December 31, 1996.............................. 3,675,200 27,607,900
========= ==========
Proved developed reserves, December 31, 1994 ......... 5,400 87,900
Proved developed reserves, December 31, 1995.......... 197,400 10,133,500
Proved developed reserves, December 31, 1996.......... 2,599,200 12,390,900
</TABLE>
Proved reserves are estimated quantities of natural gas, crude oil, and
condensate which geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed reserves are
proved reserves that can be expected to be recovered through existing wells and
existing equipment and operating methods.
F-22
<PAGE>
XPLOR ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
Standardized Measure of Discounted Future Net Cash Flows
The following table reflects the Standardized Measure of Discounted Future Net
Cash Flows relating to the Company's interest in proved oil and gas reserves as
of December 31, 1994, 1995 and 1996. As described in the notes to the financial
statements, pursuant to the Stratum Debt, the Company was a party to several
long-term commodity price swaps for oil and gas. As of December 31, 1996, the
swaps covered 76% and 18%, respectively, of the Company's estimated future oil
and gas production over the life of the swaps. The fixed prices to be received
under the swaps were significantly lower than the pro forma unhedged year end
prices the Company was receiving at December 31, 1996. Accordingly, the 1996
pro forma unhedged column below presents the Standardized Measure of Discounted
Future Net Cash Flows, reflecting the elimination of the price swaps (See Note
12):
<TABLE>
<S> <C> <C> <C> <C>
-------------------------------------------------
<CAPTION>
PRO FORMA
DECEMBER 31, UNHEDGED
1994 1995 1996 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Future cash inflows.......... $17,360,000 $39,788,000 $188,233,000 $202,332,000
Future production costs...... 2,040,000 8,138,000 49,480,000 50,591,000
Future development costs..... 1,383,000 1,522,000 14,853,000 14,535,000
----------- ----------- ------------ ------------
Future net cash inflows
before income taxes......... 13,937,000 30,128,000 123,900,000 137,206,000
Future income taxes.......... 4,457,000 7,216,000 37,268,000 42,458,000
----------- ----------- ------------ ------------
Future net cash flows........ 9,480,000 22,912,000 86,632,000 94,748,000
10% discount................. 3,177,000 7,837,000 34,040,000 35,593,000
----------- ----------- ------------ ------------
Standardized measure of
discounted future net cash
inflows..................... $ 6,303,000 $15,075,000 $52,592,000 $ 59,155,000
=========== =========== ============ ============
</TABLE>
Principal changes in the Standardized Measure of Discounted Future Net Cash
Flows attributable to the Company's proved oil and gas reserves for the periods
indicated are as follows. The 1996 pro forma unhedged column below includes the
elimination of the price swaps:
<TABLE>
<S> <C> <C> <C> <C>
-------------------------------------------------
<CAPTION>
PRO FORMA
UNHEDGED
1994 1995 1996 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at beginning of
year....................... $3,523,000 $6,303,000 $15,075,000 $15,075,000
Sales of oil and gas, net of
production costs........... 67,000 (981,000) (3,874,000) (3,874,000)
Net change in sales and
transfer prices, net of
production costs........... 2,282,000 496,000 (1,735,000) 7,548,000
Discoveries and extensions,
net of future production
and development costs...... 3,985,000 10,996,000 35,744,000 40,621,000
Changes in estimated future
development costs.......... (372,000) (2,321,000) (2,310,000) (2,310,000)
Development costs incurred
that reduced future
development costs.......... 848,000 3,365,000 3,774,000 3,774,000
Revisions of quantity esti-
mates...................... (1,835,000) (6,629,000) (2,671,000) (4,654,000)
Accretion of discount....... 352,000 881,000 1,748,000 1,748,000
Net change in income taxes.. (1,640,000) 97,000 (13,998,000) (18,230,000)
Purchase of reserves in
place...................... -- 2,609,000 22,143,000 29,531,000
Sale of reserves in place... -- -- 1,507,000 1,506,000
Changes in production rates
(timing) and other......... (907,000) 259,000 (2,811,000) (11,580,000)
---------- ----------- ----------- -----------
Net increase (decrease)... 2,780,000 8,772,000 37,517,000 44,080,000
---------- ----------- ----------- -----------
Balances at end of year. $6,303,000 $15,075,000 $52,592,000 $59,155,000
========== =========== =========== ===========
</TABLE>
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors and Partners
South Coast Exploration Company, SOCO
Exploration, L.P. and Interactive
Exploration Solutions, Inc.:
We have audited the accompanying combined balance sheets of South Coast
Exploration Company, SOCO Exploration, L.P. and Interactive Exploration
Solutions, Inc. (collectively, the South Coast Companies) as of December 31,
1996 and 1995, and the related combined statements of earnings,
shareholders'/partners' equity, and cash flows, for the years then ended. These
combined financial statements are the responsibility of the South Coast
Entities management. Our responsibility is to express an opinion on these
combined 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 combined financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
combined financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the South
Coast Companies as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
September 24, 1997
F-24
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<S> <C> <C>
----------------------
<CAPTION>
DECEMBER 31,
1995 1996
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash............................................. $4,278,378 $2,245,368
Accounts receivable.............................. 314,281 650,058
Prepaid expenses................................. -- 6,722
---------- ----------
Total current assets........................... 4,592,659 2,902,148
Property and equipment:
Oil and gas properties (full-cost method)........ 2,054,463 7,238,972
Office equipment and other....................... 80,009 205,947
---------- ----------
2,134,472 7,444,919
Less: accumulated depreciation, depletion and
amortization.................................... (236,815) (492,764)
---------- ----------
Net property and equipment..................... 1,897,657 6,952,155
Other assets....................................... 13,615 19,567
---------- ----------
$6,503,931 $9,873,870
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'/PARTNERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities......... $ 840,946 $1,017,057
Credit line payable.............................. 26,000 --
---------- ----------
Total current liabilities...................... 866,946 1,017,057
Deferred income taxes.............................. 40,554 135,629
---------- ----------
Total liabilities.............................. 907,500 1,152,686
Commitments and contingencies
Shareholders'/partners' equity:
Partners' equity................................. 279,884 3,225,547
Common stock, $.01 par value; 1,000,000 and
100,000 shares of SCEC and INEXS authorized, re-
spectively; 100,000 and 10,000 shares of SCEC
and INEXS, respectively, issued and outstanding
at December 31, 1996 and 1995, respectively..... 1,100 1,100
Additional paid-in capital....................... 4,711,311 4,711,311
Retained earnings................................ 604,136 783,226
---------- ----------
Total shareholders'/partners' equity........... 5,596,431 8,721,184
---------- ----------
$6,503,931 $9,873,870
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-25
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<S> <C> <C> <C> <C>
-----------------------------------------
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas revenues.............. $ 263,590 $ 686,221 $ 442,184 $ 564,260
Consulting revenues............... 878,452 1,395,503 999,693 1,281,488
--------- --------- --------- ---------
Total operating revenues........ 1,142,042 2,081,724 1,441,877 1,845,748
Operating expenses:
Lease operating expenses.......... 34,149 68,558 54,699 42,153
Production taxes and gathering
fees............................. 15,315 28,915 17,870 49,090
Consulting and workstation fees... 332,493 606,961 366,308 380,412
Depreciation, depletion and
amortization..................... 176,329 256,238 184,390 262,398
General and administrative
expenses......................... 983,525 1,089,754 695,304 1,797,303
--------- --------- --------- ---------
Total operating expenses........ 1,541,811 2,050,426 1,318,571 2,531,356
--------- --------- --------- ---------
Operating income (loss)......... (399,769) 31,298 123,306 (685,608)
Other income (expenses):
Interest income (expense)......... 513,836 234,766 (108,598) 43,742
Other income (expense)............ (6,097) 5,954 (17,095) 27,919
--------- --------- --------- ---------
Total other income.............. 507,739 240,720 (125,693) 71,661
--------- --------- --------- ---------
Net income (loss) before income
taxes.......................... 107,970 272,018 248,999 (613,947)
Income tax expense (benefit)........ 40,554 95,075 78,589 (122,132)
--------- --------- --------- ---------
Net income (loss)............... $ 67,416 $ 176,943 $ 170,410 $(491,815)
========= ========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-26
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
COMBINED STATEMENTS OF SHAREHOLDERS'/PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------
<CAPTION>
PARTNERS'
EQUITY SHAREHOLDERS' EQUITY
EQUITABLE ADDITIONAL TOTAL
CAPITAL COMMON STOCK PAID-IN RETAINED SHAREHOLDERS'/
CORPORATION SHARES AMOUNT CAPITAL/(DEFICIT) EARNINGS PARTNERS' EQUITY
----------- ------- ------ ----------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1995................... $ -- 80,000 $ 800 $ (62,467) $535,265 $ 473,598
Issuance of common
stock.................. -- 30,000 300 4,773,778 -- 4,774,078
Contributions........... 281,339 -- -- -- -- 281,339
Net earnings (loss)..... (1,455) -- -- -- 68,871 67,416
---------- ------- ------ ---------- -------- ----------
Balances
at December 31, 1995... 279,884 110,000 1,100 4,711,311 604,136 5,596,431
Contributions........... 2,947,810 -- -- -- -- 2,947,810
Net earnings (loss)..... (2,147) -- -- -- 179,090 176,943
---------- ------- ------ ---------- -------- ----------
Balances
at December 31, 1996... 3,225,547 110,000 1,100 4,711,311 783,226 8,721,184
Contributions........... 213,977 -- -- -- -- 213,977
Net earnings (loss)..... (12,042) -- -- -- (491,815) (503,453)
---------- ------- ------ ---------- -------- ----------
Balances at September
30, 1997 (unaudited)... $3,427,482 110,000 $1,100 $4,711,311 $291,411 $8,431,304
========== ======= ====== ========== ======== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-27
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------------------
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)....... $ 67,416 $ 176,943 $ 170,410 $ (491,815)
Adjustments to reconcile
net earnings to net
cash provided by
operating activities:
Depreciation, depletion
and amortization...... 176,329 256,238 184,390 262,398
Other income........... -- -- -- (27,919)
Deferred income taxes.. 40,554 95,075 66,022 (135,629)
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable.. (116,358) (390,576) 8,320 424,138
Decrease (increase) in
prepaid expenses and
other assets......... 439,148 42,125 (6,722) --
Increase (decrease) in
accounts payable and
accrued liabilities.. 685,186 176,111 424,570 (218,738)
----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities......... 1,292,275 355,916 846,990 (187,565)
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Capital expenditures.... (2,048,979) (5,801,371) (3,825,083) (2,830,797)
Proceeds from sale of
oil and gas properties. -- 490,635 -- --
----------- ----------- ----------- -----------
Net cash used in
investing
activities......... (2,048,979) (5,310,736) (3,825,083) (2,830,797)
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Partner contributions... 281,339 2,947,810 1,776,484 747,411
Distribution received
from partnership....... -- -- -- 47,486
Proceeds from issuance
of common stock........ 4,774,078 -- -- --
Principal payments on
notes payable.......... (19,080) -- -- --
Principal payments on
credit line............ (9,000) (26,000) (26,000) --
----------- ----------- ----------- -----------
Net cash provided by
financing
activities......... 5,027,337 2,921,810 1,750,484 794,897
----------- ----------- ----------- -----------
Net increase
(decrease) in cash
and cash
equivalents........ 4,270,633 (2,033,010) (1,227,609) (2,223,465)
Cash and cash equivalents
balance at beginning of
year..................... 7,745 4,278,378 4,278,378 2,245,368
----------- ----------- ----------- -----------
Cash and cash equivalents
balance at end of year... $ 4,278,378 $ 2,245,368 $ 3,050,769 $ 21,903
=========== =========== =========== ===========
Supplemental disclosures
of cash flow information:
Cash paid for interest.. $ 3,217 $ 101 $ 101 $ --
</TABLE>
See accompanying notes to combined financial statements.
F-28
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Purpose
South Coast Exploration Company, SOCO Exploration, L.P. and Interactive
Exploration Solutions, Inc. (collectively, the Company) are three business
entities with common ownership.
South Coast Exploration Company (SCEC) was formed in 1990 for exploration and
production of hydrocarbon reserves throughout the Gulf Coast areas of Texas and
Louisiana and the Permian Basin in West Texas. SCEC was wholly-owned by Ron A.
Krenzke, Philip V. Duggan and Craig S. Davis until July 1995, when Equitable
Capital Corporation (Equitable) purchased a 30% interest in SCEC for
$5,000,000.
Interactive Exploration Solutions, Inc. (INEXS) was also formed in 1990 by Ron
A. Krenzke, Philip V. Duggan and Craig S. Davis. INEXS provides geophysical and
geological interpretation consulting services to exploration and production
companies. INEXS is wholly-owned by the founders.
SOCO Exploration, L.P. (SOCO) was formed in 1995 as a limited partnership to
acquire interests in oil and gas properties. SCEC is the general partner of
SOCO with a 1% interest and Equitable owns the remaining 99% limited partner
interest.
In September 1997, SCEC, INEXS and SOCO became wholly owned subsidiaries of
XPLOR Energy, Inc., a Delaware corporation formed July 2, 1997 (XPLOR). See
Note 9.
Principles of Combination
The combined financial statements include the accounts of SCEC, SOCO and INEXS.
The stockholders' equity of SCEC and INEXS and partners' capital of SOCO are
presented together due to the commonality of the stockholders and partners of
SCEC, SOCO and INEXS. All material intercompany accounts and transactions have
been eliminated in the combination.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of less than ninety days to be cash and cash equivalents.
Investments
Investments where the Company has ownership interest of less than 50% are
accounted for on the equity method; all investments with an ownership interest
of less the 20% are accounted for on the cost method.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition, exploration and
development of oil and gas reserves, including directly related internal costs
and geological and geophysical costs, are capitalized.
F-29
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production
method using estimates of proved reserves. Investment in unproved properties
and major development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment occurs. If
the results of an assessment indicate the properties are impaired, the amount
of the impairment is added to the capitalized cost to be amortized.
In addition, capitalized costs are subject to a "ceiling test," which basically
limits such costs to the aggregate of the "estimated present value" discounted
at a 10% interest rate of future net revenues from proved reserves, based on
current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments
would significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income. Abandonments of properties are accounted for as adjustments of
capitalized costs with no loss recognized.
Other Property and Equipment
Other property and equipment consists of furniture, office equipment and
computer hardware and software. The computer hardware and software are
depreciated on a straight-line basis over the estimated useful life of five
years and all other assets are depreciated on a double-declining basis over the
estimated useful life of the assets ranging from five to seven years. Assets
are grouped and evaluated for potential impairment based on the ability to
identify separate cash flows generated therefrom.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
SOCO is a limited partnership. As a result, SOCO's net income or loss for
federal income tax purposes is included in the tax return of the individual
partners, and may vary substantially from income or loss reported for financial
purposes. Accordingly, no recognition has been given to federal income taxes
for SOCO's operations.
The tax basis of the SOCO partnership net assets is approximately $2,655,000 at
December 31, 1996.
Revenue Recognition
Owners of oil and gas properties often take more or less production from a
property than entitled to based on their ownership percentages in the property.
This results in a condition known in the industry as a production imbalance.
The Company follows the sales method of accounting for production imbalances.
Under this method, the Company recognizes revenues on production as it is taken
and delivered to its purchasers. The Company's oil and gas imbalances are not
significant at December 31, 1995 and 1996.
F-30
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
Segment Information
The total identifiable assets of INEXS were $279,000 and $474,000 at December
31, 1995 and 1996, respectively. Depreciation was $10,000 and $15,000 for the
years ended December 31, 1995 and 1996, respectively. There were no capital
expenditures in 1995, and capital expenditures were $122,000 for the year ended
December 31, 1996.
The Company recognizes consulting revenue as service is provided.
Fair Value of Financial Instruments
Fair value estimates of the Company's financial instruments are made at
discrete points in time based on relevant market information. These estimates
may be subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision. The
Company believes that the carrying amounts of its current assets and
liabilities approximate the fair value of such items.
The carrying value of cash and cash equivalents approximates its fair value
because of the short-term maturity of these instruments.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities as well as reserve information which affects
the depletion calculation and the computation of the full cost ceiling
limitation to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
Earnings Per Share
Earnings per common share computations are not included because the information
is not meaningful.
Interim Financial Statements
The interim financial statements of the Company included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
In the opinion of the Company, all adjustments, consisting of normal recurring
accruals, necessary to present fairly the information in the accompanying
interim financial statements have been included. The results of operations for
such interim periods are not indicative of the results for the full year.
F-31
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130 regarding reporting
comprehensive income, which establishes standards for reporting and display of
comprehensive income and its components. The components of comprehensive income
refer to revenues, expenses, gains and losses that are excluded from net income
under current accounting standards, including foreign currency translation
items, minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. SFAS No. 130 requires that
all items recognized under accounting standards as components of comprehensive
income be reported in a financial statement displayed in equal prominence with
the other financial statements; the total of other comprehensive income for a
period is required to be transferred to a component of equity that is
separately displayed in a statement of financial condition at the end of an
accounting period. SFAS No. 130 is effective for both interim and annual
periods beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company will adopt SFAS No. 130 for the fiscal year ending December 31,
1998.
In June 1997, FASB issued SFAS No. 131 regarding disclosures about segments of
an enterprise and related information. SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for periods beginning after December 15,
1997. The Company will adopt SFAS No. 131 for the fiscal year ending December
31, 1998.
The Company believes that adoption of these financial accounting standards will
not have a material effect on its financial condition or results of operations.
(3) INVESTMENTS
Through INEXS, the Company has a 25% percent investment in INEXS One Limited
Partnership (INEXS LP1) that is accounted for using the equity method. INEXS
serves as the general partner of this partnership. INEXS LP1 rents time to
INEXS on the 3-D seismic workstations owned by the partnership. This investment
includes undistributed earnings (losses) of approximately $(6,100) and $5,900
in 1995 and 1996, respectively. Subsequent to December 31, 1996, INEXS entered
into an agreement with the partners of INEXS LP1 to purchase all of the
workstations from this partnership for approximately $165,000. Upon execution
of the purchase agreement, the partnership will be dissolved.
Summarized financial data for the years ended and as of December 31, 1995 and
1996 is not presented as the Company's ownership interest in INEXS LP1 is not
material to its current operations.
(4) CREDIT FACILITY
In 1995, the Company obtained a revolving credit facility from Southwest Bank
of Texas totaling $75,000. The outstanding principal balance accrues interest
at a varying rate per annum that is 1.5% above the prime lending rate. Under
the debt agreement, all amounts outstanding at any year end are due in January.
The Company had $26,000 and no amount outstanding under the facility at
December 31, 1995 and 1996, respectively.
F-32
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(5) RELATED PARTY TRANSACTIONS
INEXS LP1, an affiliate of INEXS, charges rent for the time spent by INEXS
consultants on the 3D seismic workstations owned by the partnership. For the
years ended December 31, 1995 and 1996, INEXS LP1 charged $101,555 and
$165,156, respectively in workstation fees to INEXS. There were no amounts
payable to INEXS LP1 as of December 31, 1995. As of December 31, 1996, $44,685
is payable to INEXS LP1 for December workstation fees.
(6) INCOME TAXES
Total income taxes were different than the amounts computed by applying the
statutory income tax rate (34%) to earnings before income taxes. The reasons
for this difference are as follows:
<TABLE>
<CAPTION>
---------------
1995 1996
------- -------
<S> <C> <C>
Tax computed at statutory rate................................. $36,710 $92,486
Adjustments resulting from:
Non-deductible expenses and other............................ 3,844 2,589
------- -------
Total income taxes......................................... $40,554 $95,075
======= =======
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at December 31, 1995 and 1996 are presented
below:
<TABLE>
<CAPTION>
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Net operating loss carry forwards........................ $ 167,988 $ 457,153
--------- ---------
Gross deferred tax assets.............................. 167,988 457,153
--------- ---------
Basis differences in property and equipment.............. (208,542) (592,782)
--------- ---------
Gross deferred tax liabilities......................... (208,542) (592,782)
--------- ---------
Net deferred tax liability............................. $ (40,554) $(135,629)
========= =========
</TABLE>
In assessing the reliability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. No such valuation allowance was established at
December 31, 1995 and 1996. The net deferred tax assets relate to net operating
loss carryforwards which will begin to expire in 2010 if not previously
utilized.
F-33
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(7) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has a noncancelable operating lease for its office space which will
expire in September 2001. The Company will be required to make future payments
in connection with the lease agreement as follows for the years ending:
--------
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C>
1997.................................................................. $ 95,178
1998.................................................................. 108,444
1999.................................................................. 108,672
2000.................................................................. 108,900
Thereafter............................................................ 72,600
--------
$493,794
========
</TABLE>
Rent expense under operating leases was $88,868 and $78,700 in 1995 and 1996,
respectively.
Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(8) STOCK OPTIONS
Weisser, Johnson & Co., a third-party financial advisor (Weisser), holds
options to acquire from certain principals of the Company 18.75% of the shares
of common stock or any other interest in SCEC which such principals obtained
after Equitable purchased a 30% interest in SCEC in July of 1995, plus 18.75%
of any options, warrants or other rights to acquire securities in SCEC which
management received at the time of the Equitable stock purchase (13,125 shares
of SCEC's common stock in total). These options have a term of seven years from
the date of closing (expiring September 8, 2002) and an exercise price of 95%
of the implicit valuation of the equity or other interest in the context of
such financing. This represents a right to purchase 13,125 shares of the common
stock of SCEC, subject to adjustment, from the principals for $2,078,125. SCEC
management holds a proxy under certain circumstances to exercise voting rights
on any securities in SCEC received by Weisser under these options until the
earlier of five years or until SCEC securities are publicly traded. The options
issued to Weisser were accounted for as a capital transaction of the Company.
F-34
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(9) SUBSEQUENT EVENTS
On August 19, 1997, an agreement was entered into by XPLOR Energy, Inc., a
Delaware corporation formed July 2, 1997 (XPLOR), Araxas Energy Corporation
(AEC), SCEC, INEXS, SOCO and certain owners of the stock of AEC, SCEC, INEXS
and SOCO (the Acquisition Agreement), which provided for the combination of AEC
and its subsidiaries with SCEC, INEXS and SOCO, with XPLOR as the parent
company. The Acquisition Agreement was closed on September 24, 1997, with XPLOR
issuing stock to the previous owners of AEC, SCEC, INEXS and SOCO. In addition,
three notes of $1,000,000 each were created by XPLOR, payable to the principals
of INEXS and secured by the stock of INEXS (the INEXS Shareholder Notes). The
INEXS Shareholder Notes are payable on or before September 24, 1998 and do not
bear interest. The Acquisition Agreement has been accounted for as a purchase,
effective September 30, 1997, of SCEC, INEXS and SOCO by XPLOR, as successor to
AEC. In connection with the Acquisition Agreement, Weisser's option to purchase
common stock of SCEC was converted into the right to purchase common stock of
XPLOR.
(10) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Reserve Quantity Information
Total proved and proved developed oil and gas reserves of the Company at
December 31, 1996 have been estimated by an independent petroleum engineer in
accordance with guidelines established by the Securities and Exchange
Commission (SEC). No comparable estimates were available for subsequent or
prior periods. Therefore, reserves for December 31, 1995 have been calculated
by adjusting the December 31, 1996 amounts for the respective period's
activities and consequently, no revisions of previous estimates have been
reflected. All reserve estimates are based on economic and operating conditions
existing at December 31, 1996. The future net cash flows from the production of
these proved reserve quantities were computed by applying current prices of oil
and gas, at year end (with consideration of price changes only to the extent
provided by contractual arrangements) to estimated future production of proved
oil and gas reserves less the estimated future expenditures (based on current
costs) to be incurred in developing and producing the proved reserves. All of
the Company's properties are located in the Gulf Coast areas of Texas and
Louisiana and the Permian Basin in West Texas.
Capitalized Costs Relating to Oil and Gas Producing Activities
<TABLE>
<S> <C> <C>
----------------------
<CAPTION>
DECEMBER 31,
1995 1996
---------- ----------
<S> <C> <C>
Proved properties....................................... $1,425,230 $5,787,978
Unproved properties..................................... 629,233 1,450,994
---------- ----------
2,054,463 7,238,972
Accumulated depreciation, depletion and amortization.... (168,428) (405,602)
---------- ----------
$1,886,035 $6,833,370
========== ==========
</TABLE>
Costs Incurred in Oil and Gas Property, Acquisition, Exploration and
Development Activities
<TABLE>
<S> <C> <C>
---------------------
<CAPTION>
YEARS ENDED
DECEMBER 31,
1995 1996
---------- ----------
<S> <C> <C>
Exploration costs......................................... $1,875,587 $5,045,149
Development costs......................................... 178,876 139,360
---------- ----------
$2,054,463 $5,184,509
========== ==========
</TABLE>
F-35
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
Results of Operations for Gas and Oil Producing Activities
<TABLE>
<S> <C> <C>
-------------------
<CAPTION>
YEARS ENDED
DECEMBER 31,
1995 1996
--------- --------
<S> <C> <C>
Revenues.................................................. $ 263,590 $686,221
Lifting costs--lease operating expense and production
taxes.................................................... (49,464) (97,473)
General operating expense................................. (385,452) (396,370)
Depreciation, depletion and amortization.................. (168,428) (237,174)
--------- --------
Results of operations from producing activities........... $(339,754) $(44,796)
========= ========
</TABLE>
Reserve Quantity Information
<TABLE>
<S> <C> <C>
-------------------
<CAPTION>
OIL GAS
(BBLS) (MCF)
------- ----------
<S> <C> <C>
Year ended December 31, 1995:
Proved Developed and Undeveloped Reserves:
Beginning of year...................................... 28,500 77,300
Extensions and discoveries............................. 20,800 4,500
Production............................................. (12,100) (25,700)
------- ----------
End of year............................................ 37,200 56,100
======= ==========
Year ended December 31, 1996:
Proved Developed and Undeveloped Reserves:
Beginning of year...................................... 37,200 56,100
Extensions and discoveries............................. 306,300 10,899,800
Production............................................. (23,600) (46,100)
------- ----------
End of year............................................ 307,300 10,909,800
======= ==========
</TABLE>
Standardized Measures of Discounted Future Net Cash Flows
<TABLE>
<S> <C> <C>
-----------------------
<CAPTION>
DECEMBER 31,
1995 1996
---------- -----------
<S> <C> <C>
Future cash inflows................................... $3,373,721 $48,474,800
Future development costs.............................. (237,184) (9,287,200)
Future production costs............................... (569,473) (4,355,600)
---------- -----------
Future net cash inflows before income taxes........... 2,567,064 34,832,000
Future income taxes................................... (475,558) (10,619,702)
---------- -----------
Future net cash inflows............................... 2,091,506 24,212,298
10% annual discount................................... (229,218) (11,670,252)
---------- -----------
Standardized measure of discounted future net cash
inflows.............................................. $1,862,288 $12,542,046
========== ===========
</TABLE>
F-36
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
Principles Sources of Changes in the Standardized Measure of Discounted Future
Net Cash Flows
<TABLE>
<S> <C> <C>
------------------------
<CAPTION>
YEARS ENDED
DECEMBER 31,
1995 1996
----------- -----------
<S> <C> <C>
Standardized measure of discounted future net cash
flows:
Beginning of year.................................. $ 1,601,535 $ 1,862,288
Extensions and discoveries less related cost....... 832,355 15,608,000
Revisions of previous quantity estimates less
related costs..................................... -- 32,097
Net change in income taxes......................... (357,476) (4,250,278)
Net changes in prices and production costs......... -- 180,761
Acquisition/development costs incurred during
period and changes in estimated future development
costs............................................. -- (43,926)
Sales of oil and gas produced during period, net of
lifting costs..................................... (214,126) (588,748)
Accretion of discount.............................. -- 186,229
Other.............................................. -- (444,377)
----------- -----------
$ 1,862,288 $12,542,046
=========== ===========
</TABLE>
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
XPLOR Energy, Inc.
We have audited the accompanying statement of revenues and direct operating
expenses of the property acquired by XPLOR Energy, Inc. (Main Pass 35) for the
eight month period ended August 31, 1996 and the year ended December 31, 1995.
This statement is the responsibility of XPLOR Energy, Inc. Our responsibility
is to express an opinion on the statement 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statement was prepared as described in Note 1 for the purpose
of complying with certain rules and regulations of the Securities and Exchange
Commission (SEC) for inclusion in certain SEC regulatory reports and filings of
XPLOR Energy, Inc. and are not intended to be a complete presentation of the
revenues and direct operating expenses of the property.
In our opinion, the statement referred to in the first paragraph of this report
presents fairly, in all material respects, the revenues and direct operating
expenses of the property as described in Note 1 for the eight month period
ended August 31, 1996 and year ended December 31, 1995, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Grand Rapids, Michigan
October 2, 1997
F-38
<PAGE>
MAIN PASS 35
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
-------------------
<TABLE>
<CAPTION>
EIGHT MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, AUGUST 31,
1995 1996
------------ ------------
<S> <C> <C>
Dollars in thousands
Oil, gas and facilities revenues...................... $4,752 $3,548
Lease operating expenses.............................. 3,567 2,736
------ ------
Revenues in excess of direct operating expenses....... $1,185 $ 812
====== ======
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
MAIN PASS 35
NOTES TO FINANCIAL STATEMENT
(1) BASIS OF PRESENTATION
The accompanying statements of revenues and direct operating expenses
(Statement) were prepared from the historical accounting records of an oil and
gas consulting service and an oil and gas partnership (accrual basis,
successful efforts method of accounting for oil and gas activities, in
accordance with generally accepted accounting principles). The Statement
represents 70% of the operations of Main Pass 35, consistent with the ownership
interests of the property for the eight month period ended August 31, 1996.
Gross revenues and direct operating expenses included herein are not
necessarily representative of future operations. Additionally, the Statement
does not include depreciation, depletion and amortization, administrative and
general expenses, interest expense, or federal and state income taxes.
Complete financial statements, including a balance sheet, are not presented as
Main Pass 35 was not maintained as a separate business unit, and assets,
liabilities or indirect operating costs applicable to Main Pass 35 were not
segregated. It is not practicable to identify all assets, liabilities or
indirect operating costs applicable to Main Pass 35.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
Estimated Quantities of Proved Oil and Gas Reserves (unaudited)
Reserve information presented below is based on the January 1, 1997 reserve
report prepared by an independent petroleum engineer. The year ended December
31, 1995 and the eight month period ended August 31, 1996 information has been
computed by adjusting the January 1, 1997 reserve report for production and
known purchases.
Proved reserves are estimated quantities of crude oil, natural gas and natural
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed reserves are those
which are expected to be recovered through existing wells with existing
equipment and operating methods.
Below are the net quantities of proved reserves and proved developed reserves
for the Main Pass 35 property:
<TABLE>
<S> <C> <C>
-------------
<CAPTION>
OIL GAS
(MBBLS) (MMCF)
------- ------
<S> <C> <C>
Proved reserves, December 31, 1994.............................. 3,379 2,030
Production...................................................... (232) (300)
----- -----
Proved reserves, December 31, 1995.............................. 3,147 1,730
Production...................................................... (157) (74)
----- -----
Proved reserves, August 31, 1996................................ 2,990 1,656
===== =====
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (unaudited)
The "Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves" (Standardized Measure) is a disclosure requirement
under Statement of Financial Accounting Standards (SFAS) No. 69. The
Standardized Measure does not purport to present the fair market value of the
proved oil and gas reserves. This would require consideration of expected
future economic and operating conditions, which are not taken into account in
calculating the Standardized Measure.
F-40
<PAGE>
MAIN PASS 35
NOTES TO FINANCIAL STATEMENT--(CONTINUED)
Under the Standardized Measure, the year ended December 31, 1995 and the eight
month period ended August 31, 1996 future cash flows were estimated by applying
December 31, 1995 and August 31, 1996 prices, respectively, adjusted for fixed
and determinable escalations, to the estimated future production of proved
reserves. Future cash inflows for the year ended December 31, 1995 and the
eight month period ended August 31, 1996 were reduced by estimated future
production, development and dismantlement costs based on the year ended
December 31, 1995 and the eight month period ended August 31, 1996 costs,
respectively, to determine pre-tax cash inflows. Future net cash inflows were
discounted using a 10% annual discount rate to arrive at the Standardized
Measure. No deduction has been made for general and administrative expenses,
interest or provisions for depreciation, depletion or amortization, or for
taxes on income.
The following Standardized Measure and changes in the Standardized Measure are
based on the reserve estimate performed as of December 31, 1996, using the
appropriate year-end prices and costs.
Set forth below is the Standardized Measure (before income taxes) relating to
proved oil and gas reserves:
<TABLE>
<S> <C> <C>
--------------------
<CAPTION>
EIGHT MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, AUGUST 31,
1995 1996
------------ ------------
<S> <C> <C>
Dollars in thousands
Future cash inflows.................................. $62,860 $65,855
Future production and development costs.............. 36,394 36,468
------- -------
Future net cash inflows.............................. 26,466 29,387
10% annual discount for estimated timing of cash
flows............................................... 10,454 11,995
------- -------
Standardized Measure (before income taxes) of
discounted future net cash flows.................... $16,012 $17,392
======= =======
</TABLE>
The Standardized Measure of discounted future net cash flows is based on the
following oil and gas prices:
<TABLE>
<S> <C> <C>
-------------------
<CAPTION>
EIGHT MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, AUGUST 31,
1995 1996
------------ ------------
<S> <C> <C>
Oil (per Bbl)......................................... $18.15 $20.51
Gas (per Mcf)......................................... 2.98 2.43
====== ======
</TABLE>
The following is an analysis of the changes in the Standardized Measure (before
income taxes):
<TABLE>
<S> <C> <C>
---------------------
<CAPTION>
EIGHT MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, AUGUST 31,
1995 1996
------------ ------------
<S> <C> <C>
Dollars in thousands
Standardized Measure (before income taxes),
beginning of year................................. $12,972 $16,012
Sales and transfers of oil and gas produced, net of
production costs.................................. (857) (564)
Net change in sales and transfer prices, net of
production costs.................................. 4,388 1,275
Accretion of discount.............................. 1,297 1,066
Changes in timing of production and other.......... (1,788) (397)
------- -------
Standardized Measure (before income taxes), end of
year.............................................. $16,012 $17,392
======= =======
</TABLE>
F-41
<PAGE>
EXHIBIT A
[LETTERHEAD OF NETHERLAND, SEWELL & ASSOCIATES APPEARS HERE]
October 13, 1997
Mr. S. W. Nance
XPLOR Energy, Inc.
10200 Grogans Mill Road, Suite 500
The Woodlands, Texas 77380
Dear Mr. Nance:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of September 30, 1997, to the XPLOR Energy Inc. (XPLOR)
interest in certain oil and gas properties located in Alabama, Louisiana, and
Texas as listed in the accompanying tabulations. The XPLOR interest is the
result of the combined interests of Araxas Energy Corporation and South Coast
Exploration Company. This is an update of our report which sets forth our
estimates of reserves and future revenue to the XPLOR interest as of December
31, 1996. For the purposes of this report, projections for the top 90 percent
of the properties based on present worth have been reviewed and updated. The
remainder of the projections have been "rolled forward" from our estimates as
of December 31, 1996. This report has been prepared using constant prices and
costs and conforms to the guidelines of the Securities and Exchange Commission
(SEC).
We estimate the net reserves and future net revenue to the XPLOR interest, as
of September 30, 1997, to be:
<TABLE>
<CAPTION>
NET RESERVES FUTURE NET REVENUE
-------------------- --------------------------
OIL GAS PRESENT WORTH
CATEGORY (BARRELS) (MCF) TOTAL AT 10%
- -------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing..................... 1,814,729 10,659,118 $ 32,030,800 $22,117,300
Non-Producing................. 557,899 4,319,916 15,844,000 8,220,400
Proved Undeveloped.............. 1,197,231 21,592,460 52,193,000 26,330,600
--------- ---------- ------------ -----------
Total Proved................ 3,569,859 36,571,494 $100,067,800 $56,668,300
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the
contract temperature and pressure bases.
The estimated reserves and future revenue shown in this report are for proved
developed producing, proved developed non-producing, and proved undeveloped
reserves. In accordance with SEC guidelines, our estimates do not include any
value for probable or possible reserves which may exist for these properties.
This report does not include any value which could be attributed to interests
in undeveloped acreage beyond those tracts for which undeveloped reserves have
been estimated.
Future gross revenue to the XPLOR interest is prior to deducting state
production taxes and ad valorem taxes. Future net revenue is after deducting
these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes; future net revenue for the offshore
properties is also after deducting
A-1
<PAGE>
abandonment costs. In accordance with SEC guidelines, the future net revenue
has been discounted at an annual rate of 10 percent to determine its "present
worth." The present worth is shown to indicate the effect of time on the value
of money and should not be construed as being the fair market value of the
properties.
For the purposes of this report, a field inspection of the properties has not
been performed nor has the mechanical operation or condition of the wells and
their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability. Our
estimates of future revenue do not include any salvage value for the lease and
well equipment nor the cost of abandoning the onshore properties. Future
revenue estimates for offshore properties also do not include any salvage value
for the lease and well equipment, but do include XPLOR's estimates of the costs
to abandon the wells, platforms, and production facilities at Main Pass Block
35 Field. These abandonment costs are included in the operating expenses as a
monthly payment to an escrow account for the Main Pass Block 35 Field. No
payment to an escrow account is included for the High Island 30L Field as the
abandonment escrow account is fully funded.
Oil prices used in this report were provided by XPLOR and are the actual prices
received for each field as of September 30, 1997. Where actual oil prices were
not available, a September 30, 1997 South Louisiana Sweet index price of $20.35
per barrel or a West Texas Intermediate index price of $19.75 per barrel was
used, adjusted by field for regional price differentials. Gas prices used in
this report were provided by XPLOR and are the September 1997 prices received
for each field. Where actual gas prices were not available, September 1997
regional spot prices were used, adjusted for transportation fees. Oil and gas
prices for all properties are held constant in accordance with SEC guidelines.
Lease and well operating costs are based on operating expense records of XPLOR.
These costs include the per-well overhead expenses allowed under joint
operating agreements along with costs estimated to be incurred at and below the
district and field levels. As requested, this report includes the income XPLOR
is currently receiving for transporting oil and gas for other operators and is
shown as negative operating costs. Headquarters general and administrative
overhead expenses of XPLOR are not included. Lease and well operating costs are
held constant in accordance with SEC guidelines. Capital costs are included as
required for workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the XPLOR
interest. Therefore, our estimates of reserves and future revenue do not
include adjustments for the settlement of any such imbalances; our projections
are based on XPLOR receiving its net revenue interest share of estimated future
gross gas production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. A substantial portion of these reserves are for behind
pipe zones, undeveloped locations, and producing wells that lack sufficient
production history upon which performance-related estimates of reserves can be
based. Therefore, these reserves are based on estimates of reservoir volumes
and recovery efficiencies along with analogies to similar production. As such
reserve estimates are usually subject to greater revision than those based on
substantial production and pressure data, it may be necessary to revise these
estimates up or down in the future as additional performance data become
available. The sales rates, prices received for the reserves, and costs
incurred in recovering such reserves may vary from assumptions included in this
report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
In evaluating the information at our disposal concerning this report, we have
excluded from our consideration all matters as to which legal or accounting,
rather than engineering and geological, interpretation may be controlling. As
in all aspects of oil and gas evaluation, there are uncertainties inherent in
the interpretation of engineering and geological data; therefore, our
conclusions necessarily represent only informed professional judgments.
A-2
<PAGE>
The titles to the properties have not been examined by Netherland, Sewell &
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from
XPLOR Energy, Inc. and the nonconfidential files of Netherland, Sewell &
Associates, Inc. and were accepted as accurate. We are independent petroleum
engineers, geologists, and geophysicists; we do not own an interest in these
properties and are not employed on a contingent basis. Basic geologic and field
performance data together with our engineering work sheets are maintained on
file in our office.
Very truly yours,
[SIGNATURE APPEARS HERE]
A-3
<PAGE>
[LOGO OF XPLOR ENERGY APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses (other than underwriting discounts and
commission) of the issuance and distribution of the securities being
registered, all of which shall be paid by the Company:
------
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.......... $ 22,478
NASD Filing Fee.............................................. 7,917.50
Nasdaq National Market Fees.................................. *
Printing Expenses............................................ *
Legal Fees and Expenses...................................... *
Engineering Fees and Expenses................................ *
Accountants' Fees and Expenses............................... *
Blue Sky Fees and Expenses................................... 5,000
Transfer Agent and Registrar Fees............................ *
Miscellaneous Expenses....................................... *
---------
Total.................................................... 1,300,000
=========
</TABLE>
* To be furnished by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation),
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement or
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner that he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including action or suit 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 except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses that the Court of Chancery or such other court
shall deem proper.
II-1
<PAGE>
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under subsections
(a) and (b) of Section 145 (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in subsections (a) and (b). Such determination shall be made (1) by the board
of directors by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding or (2) if such a quorum is not
obtainable or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion or (3) by the
stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys' fees)
incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it ultimately is determined that he is not
entitled to be indemnified by the corporation as authorized in Section 145.
Such expenses (including attorneys' fees) incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the board of
directors deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement of
expenses provided by, or granted pursuant to, the other subsections of Section
145 shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in this official capacity and as to action in another capacity
while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement of
expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Certificate of Incorporation
The Certificate of Incorporation of the Company provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Restated Certificate of Incorporation by the stockholders of
the Company shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.
II-2
<PAGE>
Bylaws
The Bylaws of the Company provide that each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she, or a person of whom he or she is the legal
representative, is or was or has agreed to become a director or officer of the
Company or is or was serving or has agreed to serve at the request of the
Company as a director, officer, employee or agent of another corporation or of
a partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in any other
capacity while serving or having agreed to serve as a director or officer,
shall be indemnified and held harmless by the Company to the fullest extent
authorized by the DGCL, as the same exists or may thereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than said law
permitted the Company to provide prior to such amendment) against all expense,
liability and loss (including, without limitation, attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to serve in the capacity which initially entitled such person to indemnity
thereunder, and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that the Company shall indemnify any such
person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was
authorized by the board of directors of the Company. The Bylaws further provide
that the right to indemnification conferred thereby shall be a contract right
and shall include the right to be paid by the Company the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the DGCL requires, the payment of such expenses incurred by a
current, former or proposed director or officer in his or her capacity as a
director or officer or proposed director or officer (and not in any other
capacity in which service was or is or has been agreed to be rendered by such
person while a director or officer, including, without limitation, service to
an employee benefit plan) in advance of the final disposition of a proceeding,
shall be made only upon delivery to the Company of an undertaking, by or on
behalf of such indemnified person, to repay all amounts so advanced if it shall
ultimately be determined that such indemnified person is not entitled to be
indemnified under the Bylaws or otherwise. In addition, the Bylaws provide that
the Company may, by action of its board of directors, provide indemnification
to employees and agents of the Company, individually or as a group, with the
same scope and effect as the indemnification of directors and officers provided
for in the Bylaws.
The Bylaws include related provisions meant to facilitate the indemnitee's
receipt of such benefits. These provisions cover, among other things: (i)
specification of the method of determining entitlement to indemnification and
the selection of independent counsel that will in some cases make such
determination; (ii) specification of certain time periods by which certain
payments or determinations must be made and actions must be taken; and (iii)
the establishment of certain presumptions in favor of an indemnitee. The
benefits of certain of these provisions are available to an indemnitee only if
there has been a change in control (as defined therein).
Indemnification Agreements
The Company has entered into Indemnification Agreements with each of its
directors. The Indemnification Agreements provide that the Company shall
indemnify the director and hold him harmless from any losses and expenses
which, in type or amount, are not insured under the directors and officers'
liability insurance maintained by the Company, and generally indemnify the
director against losses and expenses as a result of a claim or claims made
against him for any breach of duty, neglect, error, misstatement, misleading
statement, omission or other act done or wrongfully attempted by the director
or any of the foregoing alleged by any claimant or any claim against the
director solely by reason of his being a director or officer of the Company,
subject to certain exclusions. The Indemnification Agreements also provide
certain procedures regarding the right to indemnification and for the
advancement of expenses.
II-3
<PAGE>
Underwriting Agreement
The Underwriting Agreement provides for the indemnification of the directors
and officers of the Company in certain circumstances.
Insurance
The Company expects to obtain a policy of liability insurance to insure its
officers and directors against losses resulting from certain acts committed by
them in their capacities as officers and directors of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In March 1995, Araxas, the Company's predecessor, acquired oil and gas
properties from New West for consideration that included 25,000 shares of
Araxas common stock, redeemable preferred stock with an aggregate redemption
value of $1.5 million and the assumption of a note for $827,000. New West also
advanced cash to Araxas pursuant to a promissory note in the principal amount
of $3.7 million. The preferred stock was subsequently redeemed by Araxas in
exchange for an additional 7,434 shares of Araxas common stock. Araxas also
issued to New West an additional 5,263 shares of Araxas common stock to amend
certain provisions of the promissory note. In April 1996, Araxas granted to
Stratum an option to purchase 22,241 shares of Araxas common stock in
connection with a debt agreement entered into by the Company and Stratum. In
July 1996, Araxas acquired the interest in the Main Pass 35 field and related
assets held by Gulfland Resources, Inc. for consideration that included 5,931
shares of Araxas common stock, $7.7 million in cash and a promissory note in
principal amount of $620,000. The issuances of common stock by Araxas in these
transactions were exempt from the registration requirements under the
Securities Act by virtue of Section 4(2) thereof as transactions not involving
any public offering.
In September 1995, South Coast entered into a stock purchase agreement with
Equitable pursuant to which Equitable acquired 30,000 shares of South Coast
common stock. The issuance of common stock by South Coast in this transaction
was exempt from the registration requirements under the Securities Act by
virtue of Section 4(2) thereof as a transaction not involving any public
offering.
In connection with the Combination Transaction, the Company (i) acquired all of
the outstanding capital stock of Araxas, South Coast and INEXS, and all of the
outstanding limited partnership interests of SOCO, (ii) issued to the owners of
the outstanding capital stock of Araxas 2,785,948 shares of Common Stock and
(iii) issued to the owners of the outstanding capital stock and limited
partnership interests of the South Coast Companies 1,785,425 shares of Common
Stock and $3.0 million principal amount of Combination Notes. The issuance of
the Company's Common Stock in the Combination Transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof as a transaction not involving any public offering.
Prior to the consummation of this Offering, the Company declared a dividend of
22.2 shares of Common Stock for each share of Common Stock (the "Stock Split").
All share amounts set forth in the preceding paragraph have been adjusted to
reflect the Stock Split. The Stock Split is exempt from the registration
requirements of the Securities Act as it will not involve a "sale" as defined
in Section 2(3) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+1.1 --Form of Underwriting Agreement.
*2.1 --Acquisition Agreement and Plan of Organization, dated as of August
19, 1997, by and among Araxas, XPLOR (formerly Araxas Holdings, Inc.),
South Coast, INEXS, SOCO, ERI Investments, Inc., 420 Energy
Investments, Inc., and W.E. Rowsey, III, R.A. Krenzke, Craig Davis,
Phil Duggan and the trusts identified therein. Pursuant to Item
601(b)(2) of Regulation S-K, the Company agrees to furnish
supplementally to the Commission upon request a copy of any omitted
schedule to this agreement.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+3.1 --Restated Certificate of Incorporation of the Company.
+3.2 --Bylaws of the Company.
+4.1 --Form of certificate representing Common Stock.
+5.1 --Opinion of Baker & Botts, L.L.P.
*10.1 --Credit Agreement, dated as of September 24, 1997, between Araxas
SPV-I, Inc. and Credit Lyonnais, as agent.
10.2 --Guaranty dated as of September 24, 1997 executed by XPLOR, Araxas,
Araxas Exploration, Inc., South Coast, INEXS and SOCO for the benefit
of Credit Lyonnais.
10.3 --Subordination Agreement dated as of September 24, 1997 by and
between Craig S. Davis, Philip V. Duggan, Ron A. Krenzke, Credit
Lyonnais and the Company.
10.4 --Subordination Agreement dated as of September 24, 1997 by and
between Equitable, Credit Lyonnais, XPLOR and Araxas.
*10.5 --XPLOR Energy, Inc. Long-Term Incentive Plan.
*10.6 --First Amendment to XPLOR Energy, Inc. Long-Term Incentive Plan.
10.7 --Stock Option Agreement, dated as of August 6, 1996, between Araxas
and Stratum.
10.8 --Letter Agreement, dated as of September 24, 1997, between Araxas and
Stratum, amending the Stock Option Agreement.
10.9 --Stock Purchase Warrant issued as of September 24, 1997 by the
Company to Credit Lyonnais.
10.10 --Release and Termination Agreement, dated as of September 24, 1997,
among South Coast, Weisser Johnson and Ron A. Krenzke, Craig S. Davis
and Philip V. Duggan.
10.11 --Registration Rights Agreement, dated as of September 24, 1997,
between the Company and Credit Lyonnais.
10.12 --Registration Rights Agreement, dated as of September 24, 1997,
between the Company and Equitable.
10.13 --Registration Agreement, dated as of September 1, 1995, between South
Coast, Ron A. Krenzke, Craig S. Davis and Philip V. Duggan, Equitable
and Weisser Johnson.
10.14 --Promissory Note dated July 7, 1997 between the Company and
Equitable.
10.15 --Promissory Note dated September 24, 1997 between the Company and Ron
A. Krenzke.
10.16 --Promissory Note dated September 24, 1997 between the Company and
Philip V. Duggan.
10.17 --Promissory Note dated September 24, 1997 between the Company and
Craig S. Davis.
*10.18 --Employment Agreement, dated as of June 18, 1997, between the Company
and Steven W. Nance.
*10.19 --Employment Agreement, dated as of September 24, 1997, between the
Company and Ron A. Krenzke.
*10.20 --Employment Agreement, dated as of July 22, 1997, between the Company
and Stephen M. Clark.
*10.21 --Employment Agreement, dated as of September 24, 1997, between the
Company and Philip V. Duggan.
*10.22 --Employment Agreement, dated as of September 24, 1997, between the
Company and Craig S. Davis.
10.23 --Severance Agreement, dated as of September 24, 1997, between the
Company and John L. Faulkinberry.
10.24 --Stock Acquisition Agreement, dated as of September 24, 1997, between
the Company and John L. Faulkinberry.
10.25 --Promissory Note dated September 24, 1997 between the Company and
John L. Faulkinberry and Greta G. Faulkinberry.
+10.26 --Form of Indemnification Agreement between the Company and each of
its officers and directors.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+10.27 --Amendment No. 1 dated , 1997 to Credit Agreement between Araxas
SPV-I, Inc. and Credit Lyonnais, as Agent.
+10.28 --Registration Rights Agreement, dated as of , 1997, between the
Company and New West.
+10.29 --Registration Rights Agreement, dated as of , 1997, among the
Company and Messrs. Rowsey, Nance, Krenzke, Davis and Duggan.
+10.30 --XPLOR Energy, Inc. Non-Employee Director Stock Option Plan.
*21.1 --Subsidiaries of the Company.
23.1 --Consent of KPMG Peat Marwick LLP.
*23.2 --Consent of BDO Seidman LLP.
*23.3 --Consent of Netherland, Sewell & Associates, Inc.
+23.4 --Consent of Baker & Botts, L.L.P. (included in Exhibit 5.1).
23.5 --Consent of Frank M. Weisser.
23.6 --Consent of Jack L. Gregory.
*24.1 --Powers of Attorney (included on signature page).
27.1 --Financial Data Schedule.
</TABLE>
* Previously filed.
+ To be filed by amendment.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the financial statements or notes thereto
included in this Registration Statement.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters, at
the closing specified in the Underwriting Agreement, certificates representing
the shares of Common Stock offered hereby in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.
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 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.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as a part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS
DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF
TEXAS, ON THE 1ST DAY OF DECEMBER, 1997.
XPLOR ENERGY, INC.
/s/ Steven W. Nance
By:__________________________________
Steven W. Nance
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON DECEMBER 1, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Steven W. Nance President, Chief Executive Officer and
____________________________________ Director
Steven W. Nance (Principal Executive Officer)
/s/ Stephen M. Clark Vice President and Chief Financial
____________________________________ Officer
Stephen M. Clark (Principal Financial and Accounting
Officer)
* Director
____________________________________
Ron A. Krenzke
* Director
____________________________________
W.E. Rowsey, III
</TABLE>
/s/ Steven W. Nance
*By:______________________
Steven W. Nance
Attorney in Fact
II-7
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
+1.1 --Form of Underwriting Agreement.
*2.1 --Acquisition Agreement and Plan of Organization, dated
as of August 19, 1997, by and among Araxas, XPLOR
(formerly Araxas Holdings, Inc.), South Coast, INEXS,
SOCO, ERI Investments, Inc., 420 Energy Investments,
Inc., and W.E. Rowsey, III, R.A. Krenzke, Craig Davis,
Phil Duggan and the trusts identified therein.
Pursuant to Item 601(b)(2) of Regulation S-K, the
Company agrees to furnish supplementally to the
Commission upon request a copy of any omitted schedule
to this agreement.
+3.1 --Restated Certificate of Incorporation of the Company.
+3.2 --Bylaws of the Company.
+4.1 --Form of certificate representing Common Stock.
+5.1 --Opinion of Baker & Botts, L.L.P.
*10.1 --Credit Agreement, dated as of September 24, 1997,
between Araxas SPV-I, Inc. and Credit Lyonnais, as
agent.
10.2 --Guaranty dated as of September 24, 1997 executed by
XPLOR, Araxas, Araxas Exploration, Inc., South Coast,
INEXS and SOCO for the benefit of Credit Lyonnais.
10.3 --Subordination Agreement dated as of September 24,
1997 by and between Craig S. Davis, Philip V. Duggan,
Ron A. Krenzke, Credit Lyonnais and the Company.
10.4 --Subordination Agreement dated as of September 24,
1997 by and between Equitable, Credit Lyonnais, XPLOR
and Araxas.
*10.5 --XPLOR Energy, Inc. Long-Term Incentive Plan.
*10.6 --First Amendment to XPLOR Energy, Inc. Long-Term
Incentive Plan.
10.7 --Stock Option Agreement, dated as of August 6, 1996,
between Araxas and Stratum.
10.8 --Letter Agreement, dated as of September 24, 1997,
between Araxas and Stratum, amending the Stock Option
Agreement.
10.9 --Stock Purchase Warrant issued as of September 24,
1997 by the Company to Credit Lyonnais.
10.10 --Release and Termination Agreement, dated as of
September 24, 1997, among South Coast, Weisser Johnson
and Ron A. Krenzke, Craig S. Davis and Philip V.
Duggan.
10.11 --Registration Rights Agreement, dated as of September
24, 1997, between the Company and Credit Lyonnais.
10.12 --Registration Rights Agreement, dated as of September
24, 1997, between the Company and Equitable.
10.13 --Registration Agreement, dated as of September 1,
1995, between South Coast, Ron A. Krenzke, Craig S.
Davis and Philip V. Duggan, Equitable and Weisser
Johnson.
10.14 --Promissory Note dated July 7, 1997 between the
Company and Equitable.
10.15 --Promissory Note dated September 24, 1997 between the
Company and Ron A. Krenzke.
10.16 --Promissory Note dated September 24, 1997 between the
Company and Philip V. Duggan.
10.17 --Promissory Note dated September 24, 1997 between the
Company and Craig S. Davis.
*10.18 --Employment Agreement, dated as of June 18, 1997,
between the Company and Steven W. Nance.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
*10.19 --Employment Agreement, dated as of September 24, 1997,
between the Company and Ron A. Krenzke.
*10.20 --Employment Agreement, dated as of July 22, 1997,
between the Company and Stephen M. Clark.
*10.21 --Employment Agreement, dated as of September 24, 1997,
between the Company and Philip V. Duggan.
*10.22 --Employment Agreement, dated as of September 24, 1997,
between the Company and Craig S. Davis.
10.23 --Severance Agreement, dated as of September 24, 1997,
between the Company and John L. Faulkinberry.
10.24 --Stock Acquisition Agreement, dated as of September
24, 1997, between the Company and John L.
Faulkinberry.
10.25 --Promissory Note dated September 24, 1997 between the
Company and John L. Faulkinberry and Greta G.
Faulkinberry.
+10.26 --Form of Indemnification Agreement between the Company
and each of its officers and directors.
+10.27 --Amendment No. 1 dated , 1997 to Credit Agreement
between Araxas SPV-I, Inc. and Credit Lyonnais, as
Agent.
+10.28 --Registration Rights Agreement, dated as of ,
1997, between the Company and New West.
+10.29 --Registration Rights Agreement, dated as of ,
1997, among the Company and Messrs. Rowsey, Nance,
Krenzke, Davis and Duggan.
+10.30 --XPLOR Energy, Inc. Non-Employee Director Stock Option
Plan.
*21.1 --Subsidiaries of the Company.
23.1 --Consent of KPMG Peat Marwick LLP.
*23.2 --Consent of BDO Seidman LLP.
*23.3 --Consent of Netherland, Sewell & Associates, Inc.
+23.4 --Consent of Baker & Botts, L.L.P. (included in Exhibit
5.1).
23.5 --Consent of Frank M. Weisser.
23.6 --Consent of Jack L. Gregory.
*24.1 --Powers of Attorney (included on signature page).
27.1 --Financial Data Schedule.
</TABLE>
* Previously filed.
+ To be filed by amendment.
<PAGE>
EXHIBIT 10.2
GUARANTY
THIS GUARANTY is executed as of September 24, 1997, by each of the
undersigned (collectively, "GUARANTORS", for the benefit of CREDIT LYONNAIS NEW
YORK BRANCH (in its capacity as Agent for the Lenders now or in the future party
to the Credit Agreement described below, "AGENT").
ARAXAS SPV-I, INC, an Oklahoma corporation ("BORROWER"), Agent, and Lenders
have executed that certain Credit Agreement (as renewed, extended, amended, or
restated, the "CREDIT AGREEMENT") dated of even date herewith. Each Guarantor
either (i) owns directly, or through other Guarantors, all of the issued and
outstanding capital stock of Borrower, or (ii) is an affiliate of Borrower and
is a wholly-owned subsidiary, directly or indirectly, of the ultimate parent of
Borrower. The execution and delivery of this guaranty are requirements to
Agent's and Lenders' execution of the Credit Agreement and other Loan Documents,
are integral to the transactions contemplated by the Loan Documents, and are
conditions precedent to Lenders' obligations to extend any credit under the
Credit Agreement.
ACCORDINGLY, for adequate and sufficient consideration, each Guarantor
jointly and severally guarantees to Agent and Lenders the prompt payment of the
Guaranteed Debt (defined below) at -- and at all times after -- its maturity (by
acceleration or otherwise) as follows:
1. DEFINITIONS. Terms defined in the Credit Agreement have the same
meanings when used -- unless otherwise defined -- in this guaranty. As used in
this guaranty:
AGENT is defined in the preamble to this guaranty and includes its
successor appointed under SECTION 13 of the Credit Agreement and acting as agent
for Lenders under the Loan Documents.
BORROWER is defined in the recitals to this guaranty and includes,
without limitation, Borrower, Borrower as a debtor-in-possession, and any
receiver, trustee, liquidator, conservator, custodian, or similar party
appointed for Borrower or for all or substantially all of Borrower's assets
under any Debtor Law.
CREDIT AGREEMENT is defined in the recitals to this guaranty.
GUARANTEED DEBT means the Obligation, as defined in the Credit
Agreement, and all present and future costs, attorneys' fees, and expenses
reasonably incurred by Agent or any Lender to enforce Borrower's, any
Guarantor's, or any other obligor's payment of any of the Obligation, including,
without limitation, all present and future amounts that would become due but for
the operation of (S)(S) 502 or 506 or any other provision of Title 11 of the
United States Code and all present and future accrued and unpaid interest
(including, without limitation, all post-petition interest if Borrower or any
Guarantor voluntarily or involuntarily becomes subject to any Debtor Law).
<PAGE>
GUARANTORS is defined in the preamble to this guaranty.
SUBORDINATED DEBT means all present and future obligations of Borrower
to any Guarantor, whether those obligations are (a) direct, indirect, fixed,
contingent, liquidated, unliquidated, joint, several, or joint and several, (b)
due or to become due to any Guarantor, (c) held by or are to be held by any
Guarantor, (d) created directly or acquired by assignment or otherwise, or (e)
evidenced in writing.
2. GUARANTY. This is an absolute, irrevocable, and continuing guaranty,
and the circumstance that at any time or from time to time the Guaranteed Debt
may be paid in full does not affect the obligation of any Guarantor with respect
to the Guaranteed Debt incurred after that. This guaranty remains in effect
until the Guaranteed Debt is fully paid and performed, each LC has expired or
been canceled, and all commitments to lend or issue LCs under the Credit
Agreement have terminated. Agent, in its own discretion or at the direction of
the Determining Lenders, shall have sole and exclusive authority to enforce this
guaranty. No Guarantor may rescind or revoke its obligations with respect to
the Guaranteed Debt. Notwithstanding any contrary provision in this guaranty,
however, each Guarantor's maximum liability under this guaranty is limited, to
the extent, if any, required so that its liability is not subject to avoidance
under any Debtor Law.
3. CONSIDERATION. Each Guarantor represents and warrants that (a) the
value of the consideration received and to be received by it is reasonably worth
at least as much as its liability under this guaranty and (b) that liability may
reasonably be expected to directly or indirectly benefit it.
4. CUMULATIVE RIGHTS. If any Guarantor becomes liable for any
indebtedness owing by Borrower to Agent or any Lender, other than under this
guaranty, that liability shall not be in any manner impaired or affected by this
guaranty. The Rights of Agent or Lenders under this guaranty are cumulative of
any and all other Rights that Agent or Lenders may ever have against each
Guarantor. The exercise by Agent or Lenders of any Right under this guaranty or
otherwise does not preclude the concurrent or subsequent exercise of any other
Right.
5. PAYMENT UPON DEMAND. If a Default exists, each Guarantor shall -- on
demand and without further notice of dishonor and without any notice having been
given to any Guarantor previous to that demand of either the acceptance by Agent
or Lenders of this guaranty or the creation or incurrence of any Guaranteed Debt
- -- pay the amount of the Guaranteed Debt then due and payable to Agent for
Lenders. It is not necessary for Agent or Lenders, in order to enforce that
payment by any Guarantor, first or contemporaneously to institute suit or
exhaust remedies against Borrower or others liable on any Guaranteed Debt or to
enforce Rights against any collateral securing any Guaranteed Debt.
6. SUBORDINATION. The Subordinated Debt is expressly subordinated to the
full and final payment of the Guaranteed Debt. Each Guarantor agrees not to
accept any payment of any Subordinated Debt from Borrower if a Default or
Potential Default exists. If any Guarantor receives
2
<PAGE>
any payment of any Subordinated Debt in violation of the foregoing, that
Guarantor shall hold that payment in trust for Agent and Lenders and promptly
turn it over to Agent, in the form received (with any necessary endorsements),
to be applied to the Guaranteed Debt.
7. SUBROGATION AND CONTRIBUTION. Until no Lender is obligated to lend or
issue LCs under the Credit Agreement, all LCs have expired or been canceled, and
the Guaranteed Debt has been fully paid and performed (the "DEFERMENT DATE") (a)
no Guarantor may assert, enforce, or otherwise exercise any Right of subrogation
to any of the Rights or Liens of Agent or Lenders or any other beneficiary
against Borrower or any other obligor on the Guaranteed Debt or any collateral
or other security or any Right of recourse, reimbursement, subrogation,
contribution, indemnification, or similar Right against Borrower or any other
obligor on any Guaranteed Debt or any guarantor of it, (b) each Guarantor defers
all of the foregoing Rights (whether they arise in equity, under contract, by
statute, under common Law, or otherwise) until the Deferment Date, and (c) each
Guarantor defers the benefit of, and any Right to participate in, any collateral
or other security given to Agent or Lenders or any other beneficiary to secure
payment of any Guaranteed Debt until the Deferment Date.
8. NO RELEASE. No Guarantor's obligations under this guaranty may be
released, diminished, or affected by the occurrence of any one or more of the
following events: (a) Any taking or accepting of any other security or assurance
for any Guaranteed Debt; (b) any release, surrender, exchange, subordination,
impairment, or loss of any collateral securing any Guaranteed Debt; (c) any full
or partial release of the liability of any other obligor on the Obligation; (d)
the modification of, or waiver of compliance with, any terms of any other Loan
Document; (e) the insolvency, bankruptcy, or lack of corporate or partnership
power of any other obligor at any time liable for any Guaranteed Debt, whether
now existing or occurring in the future; (f) any renewal, extension, or
rearrangement of any Guaranteed Debt or any adjustment, indulgence, forbearance,
or compromise that may be granted or given by Agent or any Lender to any other
obligor on the Obligation; (g) any neglect, delay, omission, failure, or refusal
of Agent or any Lender to take or prosecute any action in connection with the
Guaranteed Debt; (h) any failure of Agent or any Lender to notify any Guarantor
of any renewal, extension, or assignment of any Guaranteed Debt, or the release
of any security or of any other action taken or refrained from being taken by
Agent or any Lender against Borrower or any new agreement between Agent, any
Lender, and Borrower, it being understood that neither Agent nor any Lender is
required to give any Guarantor any notice of any kind under any circumstances
whatsoever with respect to or in connection with any Guaranteed Debt, other than
any notice required to be given to Guarantors by Law or elsewhere in this
guaranty; (i) the unenforceability of any Guaranteed Debt against any other
obligor because it exceeds the amount permitted by Law, the act of creating it
is ultra vires, the officers creating it exceeded their authority or violated
their fiduciary duties in connection with it, or otherwise; or (j) any payment
of the Obligation to Agent or Lenders is held to constitute a preference under
any Debtor Law or for any other reason Agent or any Lender is required to refund
that payment or make payment to someone else (and in each such instance this
guaranty will be reinstated in an amount equal to that payment).
3
<PAGE>
9. WAIVERS. Each Guarantor waives (a) all defenses to the enforcement of
this guaranty (and Rights which may be asserted as defenses to the enforcement
of this guaranty), other than complete and final payment, including, but not
limited to, (i) any Right to revoke this Guaranty with respect to future
indebtedness; (ii) any Right to require Agent or Lenders to do any of the
following before any Guarantor is obligated to pay the Guaranteed Debt or before
Agent or Lenders may proceed against that Guarantor: (A) sue or exhaust remedies
against Borrower and other guarantors or obligors, (B) sue on an accrued right
of action in respect of any of the Guaranteed Debt or bring any other action,
exercise any other right, or exhaust all other remedies, or (C) enforce rights
against Borrower's assets or the collateral pledged by Borrower to secure the
Guaranteed Debt; (iii) any right relating to the timing, manner, or conduct of
Agent's or Lenders' enforcement of rights against Borrower's assets or the
collateral pledged by Borrower to secure the Guaranteed Debt; (iv) if Guarantors
and Borrower (or a third party) have each pledged assets to secure the
Guaranteed Debt, any right to require Agent and Lenders to proceed first against
the other collateral before proceeding against collateral pledged by any
Guarantor; (v) notice that this Guaranty has been accepted by Agent and Lenders
and notice of any indebtedness to which this Guaranty may apply; (vi) any right
of any Guarantor to receive notice from Agent or Lenders of changes which affect
the creditworthiness of Borrower, and (vii) except as required hereby,
presentation, presentment, demand for payment, protest, notice of protest,
notice of dishonor or nonpayment of any indebtedness, notice of intent to
accelerate, notice of acceleration, notice of any suit or other action by Lender
against Borrower, any Guarantor or any other Person and any notice to any party
liable for the obligation which is the subject of the suit or action, and (b)
each of the foregoing rights or defenses regardless of whether they arise under
(i) Section 34.01 et seq. of the Texas Business and Commerce Code, as amended,
(ii) Section 17.001 of the Texas Civil Practice and Remedies Code, as amended,
(iii) Rule 31 of the Texas Rules of Civil Procedure, as amended, or (iv) common
law, in equity, under contract, by statute, or otherwise.
10. CREDIT AGREEMENT PROVISIONS. Each Guarantor acknowledges that certain
(a) representations and warranties in the Credit Agreement are applicable to it
and confirms that each such representation and warranty is true and correct, (b)
covenants, agreements, and other provisions in the Credit Agreement (INCLUDING,
WITHOUT LIMITATION, INDEMNIFICATION AND RELATED PROVISIONS IN SECTION 8.12 OF
THE CREDIT AGREEMENT) are applicable to it or are imposed upon it and agrees to
promptly and properly comply with or be bound by each of them, AND (C) IT
IRREVOCABLY CONSENTS TO AND APPROVES THE VENUE, SERVICE OF PROCESS, AND WAIVER
OF JURY TRIAL PROVISIONS OF SECTION 14.11 OF THE CREDIT AGREEMENT.
11. RELIANCE AND DUTY TO REMAIN INFORMED. Each Guarantor confirms that it
has executed and delivered this guaranty after reviewing the terms and
conditions of the Loan Documents and such other information as it has deemed
appropriate in order to make its own credit analysis and decision to execute and
deliver this guaranty. Each Guarantor confirms that it has made its own
independent investigation with respect to Borrower's creditworthiness and is not
executing and delivering this guaranty in reliance on any representation or
warranty by Agent or any Lender as to that creditworthiness. Each Guarantor
expressly assumes all responsibilities to remain informed of the financial
condition of Borrower and any circumstances affecting Borrower's ability
4
<PAGE>
to perform under the Loan Documents to which it is a party or any collateral
securing any Guaranteed Debt.
12. NO REDUCTION. The Guaranteed Debt may not be reduced, discharged, or
released because or by reason of any existing or future offset, claim, or
defense (except for the defense of complete and final payment of the Guaranteed
Debt) of Borrower or any other obligor against Agent or Lenders or against
payment of the Guaranteed Debt, whether that offset, claim, or defense arises in
connection with the Guaranteed Debt or otherwise. Those claims and defenses
include, without limitation, failure of consideration, breach of warranty,
fraud, bankruptcy, incapacity/infancy, statute of limitations, lender liability,
accord and satisfaction, usury, forged signatures, mistake, impossibility,
frustration of purpose, and unconscionability.
13. LOAN DOCUMENT. This guaranty is a Loan Document and is subject to the
applicable provisions of SECTIONS 1 AND 14 of the Credit Agreement, all of which
are incorporated into this guaranty by reference the same as if set forth in
this guaranty verbatim.
14. COMMUNICATIONS. For purposes of SECTION 14.2 of the Credit Agreement,
each Guarantor's address and telecopy number are the same as Borrower's.
15. AMENDMENTS, ETC. No amendment, waiver, or discharge to or under this
guaranty is valid unless it is in writing and is signed by the party against
whom it is sought to be enforced and is otherwise in conformity with the
requirements of SECTION 14.8 of the Credit Agreement.
16. ENTIRETY. THIS GUARANTY AND THE OTHER LOAN DOCUMENTS TO WHICH ANY
GUARANTOR IS A PARTY REPRESENT THE FINAL AGREEMENT BETWEEN THAT GUARANTOR,
AGENT, AND LENDERS WITH RESPECT TO THE SUBJECT MATTER OF THIS GUARANTY AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
17. AGENT AND LENDERS. Agent is the agent for each Lender under the
Credit Agreement. All Rights granted to Agent under or in connection with this
guaranty are for each Lender's ratable benefit. Agent may, without the joinder
of any Lender, exercise any Rights in Agent's or Lenders' favor under or in
connection with this guaranty. Agent's and each Lender's Rights and obligations
vis-a-vis each other may be subject to one or more separate agreements between
those parties. However, no Guarantor is required to inquire about any such
agreement or is subject to any terms of it. Therefore, neither any Guarantor nor
its successors or assigns is entitled to any benefits or provisions of any such
separate agreement or is entitled to rely upon or raise as a defense any party's
failure or refusal to comply with the provisions of it.
18. PARTIES. This guaranty benefits Agent, Lenders, and their respective
successors and assigns and binds each Guarantor and its successors and assigns.
Upon appointment of any successor Agent under the Credit Agreement, all of the
Rights of Agent under this guaranty
5
<PAGE>
automatically vests in that new Agent as successor Agent on behalf of Lenders
without any further act, deed, conveyance, or other formality other than that
appointment. The Rights of Agent and Lenders under this guaranty may be
transferred with any assignment of the Guaranteed Debt. The Credit Agreement
contains provisions governing assignments of the Guaranteed Debt and of Rights
and obligations under this guaranty.
EXECUTED as of the date first stated above.
XPLOR ENERGY, INC., a Delaware corporation
By: /s/ Steven W. Nance
---------------------------------
Name: Steven W. Nance
Title: President
ARAXAS ENERGY CORPORATION, an Oklahoma
corporation
By: /s/ Steven W. Nance
---------------------------------
Name: Steven W. Nance
Title: President
ARAXAS EXPLORATION, INC., an Oklahoma
corporation
By: /s/ W. E. Rowsey
---------------------------------
Name: W. E. Rowsey
Title: President
SOUTH COAST EXPLORATION COMPANY, a
Texas corporation
By: /s/ R. A. Krenzke
---------------------------------
Name: R. A. Krenzke
Title: President
<PAGE>
INTERACTIVE EXPLORATION SOLUTIONS, INC.,
a Texas corporation
By: /s/ R. A. Krenzke
-----------------------------------
Name: R. A. Krenzke
Title: Vice President
SOCO EXPLORATION, L.P., a Texas limited
partnership
By: South Coast Exploration Company, its
sole general partner
By: /s/ R. A. Krenzke
-------------------------------
Name: R. A. Krenzke
Title: President
7
<PAGE>
EXHIBIT 10.3
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT (this "AGREEMENT") dated as of September 24,
1997, is by and between CRAIG S. DAVIS, PHILIP V. DUGGAN and RON A. KRENZKE,
individually and as Agent for the holders of the hereinafter defined Subordinate
Notes (together with their respective successors and assigns, collectively
referred to herein as "SUBORDINATE LENDERS"), CREDIT LYONNAIS NEW YORK BRANCH, a
duly licensed branch under the New York Banking Law of a foreign banking
corporation organized under the laws of the Republic of France, as Agent for the
Lenders described therein (together with any successors and assigns, "SENIOR
LENDER"), and XPLOR ENERGY, INC., a Delaware corporation ("BORROWER").
Capitalized terms used herein but not otherwise defined herein shall have the
meanings ascribed to such terms in the Senior Credit Agreement (as hereinafter
defined).
R E C I T A L S
- - - - - - - -
1. Araxas SPV-1, Inc., an Oklahoma corporation and a wholly-owned second
tier subsidiary of Borrower ("ARAXAS SPV") and Senior Lender have executed that
certain Credit Agreement dated of even date herewith (the "SENIOR CREDIT
AGREEMENT"), pursuant to which Senior Lender agreed to extend credit to Araxas
SPV in a principal amount not to exceed $35,000,000.00.
2. The obligations of Araxas SPV to Senior Lender pursuant to the Senior
Credit Agreement are also evidenced by that certain Promissory Note dated of
even date herewith, executed by Araxas SPV and payable to the order of Credit
Lyonnais New York Branch in the original principal amount of $100,000,000.00
(the "SENIOR NOTE").
3. The obligations of Araxas SPV pursuant to the Senior Credit Agreement
and the Senior Note are secured by, among other collateral, the liens and
security interests created by that certain Security Agreement dated of even date
herewith executed by Araxas SPV, Borrower, Araxas Exploration, Inc., South Coast
Exploration Company, SOCO Exploration, L.P. and Interactive Exploration
Solutions, Inc. (collectively, the "OBLIGORS") for the benefit of Senior Lender
(the "SENIOR SECURITY INSTRUMENT") covering, among other things, all of the
capital stock of Interactive Exploration Solutions, Inc. together with all
general intangibles related thereto and all products and proceeds thereof as
more particularly described in the Senior Security Instrument (the "PROPERTY").
4. All of the indebtedness evidenced by the Senior Credit Agreement and
the Senior Note and secured by the Senior Security Instrument, and all other
obligations, liabilities, and indebtedness of Araxas SPV to Senior Lender,
whether now existing or hereafter arising between Araxas SPV and Senior Lender,
is referred to herein as the "SENIOR INDEBTEDNESS" and all of the documents
evidencing or securing the Senior Indebtedness are referred to herein as the
"SENIOR LOAN DOCUMENTS."
5. Contemporaneously with the execution hereof, Borrower will become
indebted to Subordinate Lenders in the aggregate principal amount of
$3,000,000.00 (the "SUBORDINATE LOANS")
<PAGE>
as evidenced by those three certain Promissory Notes of even date herewith
executed by Borrower each in the original principal amount of $1,000,000.00 and
payable to the order of Craig S. Davis, Philip V. Duggan and Ron A. Krenzke,
respectively (collectively, the "SUBORDINATE NOTES").
6. Borrower has guaranteed the obligations of Araxas SPV under the Senior
Credit Agreement pursuant to the terms and conditions of that certain Guaranty
(the "GUARANTY") of even date herewith executed by the Obligors (other than
Araxas SPV) in favor of Senior Lender.
7. The obligations of Borrower under the Subordinate Notes will be secured
by liens and security interests in the Property granted by Borrower to Ron A.
Krenzke, as agent for the holders of the Subordinate Notes pursuant to the terms
of the Subordinate Notes.
8. All of the indebtedness of Borrower and all of the obligations created,
evidenced or secured by the Subordinate Notes and the other Subordinate Loan
Documents (defined below), and all other obligations, liabilities, and
indebtedness of Borrower to any Subordinate Lender, whether now existing or
hereafter arising between Borrower and such Subordinate Lender, is referred to
herein as the "SUBORDINATE INDEBTEDNESS," and all of the documents evidencing,
securing, or executed pursuant to the Subordinate Indebtedness are referred to
herein as the "SUBORDINATE LOAN DOCUMENTS."
9. Each Subordinate Lender acknowledges that because Araxas SPV is a
wholly-owned second tier subsidiary of Borrower that the loan or advance of
monies or other extensions of credit to Araxas SPV by Senior Lender is of value
to each such Subordinate Lender.
10. Senior Lender is unwilling to make the loan under the Senior Credit
Agreement unless Subordinate Lenders enter into this Agreement.
NOW, THEREFORE, in order to induce Senior Lender to make the loans under
the Senior Credit Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound hereby agrees as follows:
1. DEFINITIONS. The following terms shall have the meanings herein
specified unless the context otherwise requires (such meanings to apply to such
terms in both the singular and plural forms):
"ENFORCEMENT ACTION" means the commencement of the exercise of any remedies
against Borrower including, without limitation, the commencement of any
litigation or proceeding, the commencement of any foreclosure proceeding, the
exercise of any power of sale, the sale by advertisement, the taking of a deed
or assignment in lieu of foreclosure, the obtaining of a receiver or the taking
of any other enforcement action against, or the taking of possession or control
of, the Property, but specifically excluding (a) any requests and demands made
upon Borrower by delivery of notices to Borrower, (b) any assertion or
enforcement of any right of any Subordinate Lender to receive payment from
proceeds of a foreclosure sale of the Property incident to foreclosure of the
2
<PAGE>
liens or security interests created by the Senior Loan Documents which may
remain after payment of costs and expenses of such foreclosure and payment and
satisfaction in full of the Senior Indebtedness, and (c) the filing of claims in
any Insolvency Proceeding concerning Borrower as may be required to protect and
preserve the right of any Subordinate Lender to participate in such Insolvency
Proceeding as creditor and to participate in distributions of assets of Borrower
in such Insolvency Proceeding with respect to the Subordinate Indebtedness after
payment and satisfaction in full of the Senior Indebtedness, but subject in all
respects to the rights of Senior Lender under and as provided in this Agreement
and without in any way impairing or affecting the right of Senior Lender to
require performance and observance by each Subordinate Lender of or the
obligations of such Subordinate Lender to perform and observe the covenants,
undertakings, and agreements of such Subordinate Lender under and as provided in
this Agreement.
"INSOLVENCY PROCEEDING" means any proceeding under Title 11 of the United
States Code (11 U.S.C. Sec. 101 et. seq.) or any other insolvency, liquidation,
reorganization, or other similar proceeding concerning Borrower, any action for
the dissolution of Borrower, any proceeding Judicial or otherwise) concerning
the application of the assets of Borrower, for the benefit of its creditors, the
appointment of or any proceeding seeking the appointment of a trustee, receiver,
or other similar custodian for all or any substantial part of the assets of
Borrower or any other action concerning the adjustment of the debts of Borrower,
the cessation of business by Borrower, except following a sale, transfer, or
other disposition of all or substantially all of the assets of Borrower in a
transaction permitted under the Senior Loan Documents.
"MATURITY DATE" means the earlier of (a) the Bridge Stated-Termination Date
(as defined in the Senior Credit Agreement) as such date may be extended by
Senior Lender (subject to SECTION 5(A) below), and (b) the date on which the
Bridge Stated-Termination Date has been accelerated by Senior Lender following
the occurrence of a Default (as defined in the Senior Credit Agreement);
provided, however, that if the Facility Conversion Date (as defined in the
Senior Credit Agreement) shall have occurred on or prior to May 24, 1998, the
Maturity Date shall mean the earlier of (x) the Revolving Stated-Termination
Date (as defined in the Senior Credit Agreement) as such date may be extended by
Senior Lender (subject to Section 5(a) below), and (y) the date on which the
Revolving Stated-Termination Date has been accelerated by Senior Lender
following the occurrence of a Default (as defined in the Senior Credit
Agreement).
"PLAN VOTING RIGHTS" means, with respect to any person, the rights of such
person to vote to approve or reject any plan of reorganization in respect of
Borrower in an Insolvency Proceeding.
2. STANDBY; SUBORDINATION.
(A) SUBORDINATION OF LOAN. Each Subordinate Lender hereby agrees that the
Subordinate Indebtedness is and shall be subordinate, to the extent and in the
manner hereinafter set forth, to the prior indefeasible payment in full of the
Senior Indebtedness. Except as specifically provided in SECTION 2(F), no
payment shall be made by or on behalf of Borrower for or on account of any
Subordinate Indebtedness, and no Subordinate Lender shall take or receive from
Borrower, directly or indirectly, in cash or other property or by setoff or in
any other manner, including,
3
<PAGE>
without limitation, from or by way of collateral, payment of all or any of the
Subordinate Indebtedness, unless and until the Senior Indebtedness shall have
been indefeasibly paid in full. In the event of any distribution, division, or
application, partial or complete, voluntary or involuntary, by operation of law
or otherwise, of all or any part of the assets of Borrower or the proceeds
thereof (including any assets now or hereafter securing any Subordinate
Indebtedness) to creditors of Borrower or upon any indebtedness of Borrower, as
a result of the liquidation, dissolution, or other winding up, partial or
complete, of Borrower, or as a result of any receivership, insolvency, or
bankruptcy proceeding, or assignment for the benefit of creditors or marshaling
of assets, or as a result of any proceeding by or against Borrower for any
relief under any bankruptcy or insolvency law or laws relating to the relief of
debtors, readjustment of indebtedness, arrangements, reorganizations,
compositions, or extensions, or as a result of the sale of all or substantially
all of the assets of Borrower, then and in any such event:
(I) Senior Lender shall be entitled to receive payment in full of all
Senior Indebtedness before any Subordinate Lender shall be entitled to
receive any payment or other distributions on, or with respect to, the
Subordinate Indebtedness;
(II) Any payment or distribution of any kind or character, whether in cash,
securities, or other property, which but for these provisions would be
payable or deliverable upon or with respect to the Subordinated
Indebtedness, shall instead be paid or delivered directly to Senior Lender
for the benefit of the holders of the Senior Indebtedness for application
on the Senior Indebtedness, whether then due or not due, until all of the
Senior Indebtedness shall have first been fully and indefeasibly paid in
full and Senior Lender shall have no further commitment to extent any
credit to Borrower;
(III) Each Subordinate Lender shall duly and promptly take such action as
may reasonably be requested by Senior Lender to assist in the collection of
the Subordinate Indebtedness for the account of any holder of the Senior
Indebtedness, including, without limitation, the filing of appropriate
proofs of claim with respect to the Subordinated Indebtedness and the
voting of such claims; and
(IV) In the event that any Subordinate Lender shall not have filed a claim
in any bankruptcy, insolvency, or similar proceeding with respect to
Borrower at least sixty (60) days prior to the expiration of the time to
file such claims, then Senior Lender, on behalf of such Subordinate Lender,
shall be authorized to file a claim with respect to the Subordinate
Indebtedness.
(B) SUBORDINATION OF LIEN. Each Subordinate Lender hereby subordinates any
and all liens, pledges and security interests in the Property to any and all
liens, pledges and security interests of Senior Lender in the Property.
(C) STANDSTILL; LIMITATION ON SUBORDINATE LENDERS' RIGHTS.
(I) Notwithstanding any Subordinate Lender's rights under applicable
law or any provision of the Subordinate Loan Documents to the
contrary, each Subordinate Lender hereby acknowledges and agrees that
such Subordinate Lender shall not (1) accelerate the Subordinate
Indebtedness or any portion thereof, or (2) take any
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Enforcement Action until the indefeasible satisfaction in full of the
Senior Indebtedness. Each Subordinate Lender hereby waives any right
it may have to require that Senior Lender marshal any assets of
Borrower in favor of any Subordinate Lender and each Subordinate
Lender agrees that it shall not acquire, by subrogation or otherwise,
any lien, estate, right, or other interest in the Property or the
proceeds therefrom that is or may be equal or prior to any Senior Loan
Document until the indefeasible payment in full of the Senior
Indebtedness.
(II) Until the indefeasible satisfaction in full of the Senior
Indebtedness, each Subordinate Lender hereby covenants and agrees that
such Subordinate Lender will not acquiesce in, petition, or otherwise
invoke or cause any other person to invoke the process of the United
States of America, any state or other political subdivision thereof or
any other jurisdiction, any entity exercising executive, legislative,
judicial, regulatory, or administrative functions of or pertaining to
government for the purpose of commencing or sustaining a case against
Borrower, under a Federal or state bankruptcy, insolvency, or similar
law or appointing a receiver, liquidator, assignee, trustee,
custodian, sequestrator, or other similar official of Borrower or all
or any part of its property or assets or ordering the winding-up or
liquidation of the affairs of Borrower.
(D) NON-INTERFERENCE BY SUBORDINATE LENDERS. No Subordinate Lender shall
institute any judicial or administrative proceeding against Borrower or Senior
Lender which directly or indirectly would interfere with or delay the exercise
by Senior Lender of its rights and remedies in respect of the Property or any
part thereof or under the Senior Loan Documents, this Agreement or the Guaranty.
Without limiting the generality of the foregoing, in the event of a bankruptcy
or insolvency of Borrower, no Subordinate Lender shall object to or oppose any
efforts by Senior Lender to obtain relief from the automatic stay under Section
362 of the United States Bankruptcy Code or to seek to cause such entity's
bankruptcy estate to abandon the Property (or any portion thereof) that is
subject to the Senior Security Instrument.
(E) ASSIGNMENT OF VOTING RIGHTS. Each Subordinate Lender hereby
absolutely, irrevocably, and unconditionally assigns and sets over to such
Senior Lender all of such Subordinate Lender's Plan Voting Rights in any
Insolvency Proceeding respecting Borrower. Senior Lender, however, acknowledges
and agrees that it will not exercise any such Plan Voting Rights of Subordinate
Lender in favor of any plan of reorganization which would result in or have the
effect of lowering the payment priority of the claims evidenced by the
Subordinate Loan Documents below that which such claims would otherwise be
entitled based on the ranking and priority of claims at the commencement of such
Insolvency Proceeding (a "PRIORITY REDUCTION"); provided, however, that Senior
Lender may exercise such Plan Voting Rights of Subordinate Lender in favor of a
plan of reorganization containing any Priority Reduction resulting from (i)
administrative claims and claims in favor of persons providing post-petition
financing in such Insolvency Proceedings and approved by the applicable court,
or (ii) a judicial determination made in such Insolvency Proceeding or ancillary
proceedings relating thereto approving or ordering such Priority Reduction under
applicable law, including, without limitation, principles of equitable
subordination or other equitable remedies available to the debtor, trustee or
other creditors in such Insolvency Proceeding.
5
<PAGE>
(F) PAYMENTS ON SUBORDINATE INDEBTEDNESS. Notwithstanding any provision
contained herein to the contrary, until the Maturity Date and provided no
Default or Potential Default (as each of such terms are defined in the Senior
Credit Agreement) has occurred and is continuing, Subordinate Lenders may
receive and retain the outstanding principal balance of the Subordinate Notes on
the maturity date thereof.
(G) DISTRIBUTIONS HELD IN TRUST. If any Subordinate Lender shall receive
any cash distributions in respect of, or other proceeds of, the Property
(including, without limitation, (i) any distribution arising directly or
indirectly from any lien of Senior Lender being avoided, declared to be
fraudulent, or otherwise set aside under the provisions of any law governing
fraudulent conveyances or transfers, and (ii) any distribution arising directly
or indirectly by reason of or in connection with an Insolvency Proceeding), in
excess of what such Subordinate Lender is entitled to pursuant to the
Subordinate Loan Documents and SECTION 2(F) (or would have been entitled to if
such Insolvency Proceeding had not occurred or if any such lien had not been
avoided, declared to be fraudulent, or otherwise set aside under the provisions
of any law governing fraudulent conveyances or transfers), then such Subordinate
Lender shall hold the same in trust, as trustee, for the benefit of Senior
Lender and shall promptly deliver the same to or at the direction of Senior
Lender, for the benefit of Senior Lender in precisely the form received (except
for the endorsement or assignment thereof by such Subordinate Lender without
recourse or warranty), it being understood that it is the intention of the
parties that until the Senior Indebtedness (without regard to any modifications
thereof arising by reason of or in connection with an Insolvency Proceeding) is
repaid in full, Senior Lender shall receive all proceeds relating to any
realization upon, distribution in respect of, or interest in any of the Property
as and to the extent set forth in the Senior Loan Documents. In the event any
Subordinate Lender fails to make any such endorsement or assignment, Senior
Lender, or any of its officers or employees, is hereby irrevocably authorized to
make the same.
3. REPRESENTATIONS. Each Subordinate Lender represents and warrants to
Senior Lender that:
(A) Such Subordinate Lender has all necessary power and authority to
execute, deliver, and perform its obligations under this Agreement.
(B) All action on the part of such Subordinate Lender that is required for
the authorization, execution, delivery, and performance of this Agreement has
been duly and effectively taken.
(C) This Agreement has been duly executed and delivered by such Subordinate
Lender and constitutes the legal, valid, and binding obligation of such
Subordinate Lender, enforceable against such Subordinate Lender in accordance
with the terms thereof.
4. AGREEMENT BY BORROWER. Borrower agrees that Senior Lender and
Subordinate Lenders may share information that each may acquire with respect to
Borrower or the Property and
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<PAGE>
consents to the transfer of such information, whether financial or otherwise,
between them, without having to obtain Borrower's consent.
5. AGREEMENTS BY SUBORDINATE LENDERS. Each Subordinate Lender agrees
that so long as the Senior Credit Agreement is outstanding:
(A) Senior Lender and Borrower may from time-to-time enter into
modifications, renewals, extensions, and replacements of the Senior Credit
Agreement and the Senior Loan Documents without the further consent of, or
notice to, such Subordinate Lender.
(B) Such Subordinate Lender shall not make any further loans or advances to
Borrower.
(C) Such Subordinate Lender shall not amend the Subordinate Loan Documents
without Senior Lender's prior written consent.
6. DEFAULTS AND NOTICES. The parties agree that:
(A) The occurrence of a Default or an event of default under the Senior
Loan Documents shall not, in and of itself, constitute a default under the
Subordinate Loan Documents.
(B) The occurrence of a default under the Subordinate Loan Documents shall
constitute a default under the Senior Loan Documents.
(C) Senior Lender shall provide Subordinate Lenders with copies of all
written notices which are sent to Borrower under the Senior Loan Documents
(including notices of default and notices of intention to exercise remedies
under the Senior Loan Documents), simultaneously with the sending of such
notices to Borrower.
(D) Subordinate Lenders shall provide Senior Lender with copies of all
written notices which are sent to Borrower under the Subordinate Loan Documents
(including notices of default and notices of intention to exercise remedies
under the Subordinate Loan Documents), simultaneously with the sending of such
notices to Borrower.
(E) Senior Lender shall have the right, but not the obligation, to cure any
monetary default by Borrower under the Subordinate Loan Documents at any time on
or before the thirtieth (30th) day following the expiration of any grace,
notice, or cure period available to Borrower for any monetary default under the
Subordinate Loan Documents and written notice thereof from the applicable
Subordinate Lender to Senior Lender. Senior Lender shall have the right, but
not the obligation, to cure any nonmonetary default by Borrower under the
Subordinate Loan Documents at any time on or before the (i) sixtieth (60th) day
following the expiration of any grace, notice, or cure period available to
Borrower for any non-monetary default under the Subordinate Loan Documents and
written notice thereof from the applicable Subordinate Lender to Senior Lender,
and (ii) the sixtieth (60th) day thereafter, if such nonmonetary default is not
susceptible of being cured within sixty (60) days of expiration of Borrower's
nonmonetary cure period under the Subordinate Loan Documents.
7
<PAGE>
7. INSTRUMENT LEGEND. Any instrument evidencing any of the Subordinate
Indebtedness shall, on the date hereof, be inscribed with a legend conspicuously
indicating that payment thereof is subordinated to the claims of Senior Lender
pursuant to the terms of this Agreement, and a certified copy thereof will be
delivered to Senior Lender on the date hereof. Any instrument evidencing any of
the Subordinate Indebtedness, or any portion thereof, which is hereafter
executed by Borrower, will, on the date thereof, be inscribed with the aforesaid
legend and a copy thereof will be delivered to Senior Lender on the date of its
execution or within five (5) days thereafter.
8. CONTINUING NATURE OF SUBORDINATION. This Agreement shall continue to
be effective until the Senior Indebtedness shall have been fully discharged or
the termination of this Agreement. This is a continuing agreement of
subordination.
9. SUBORDINATE LENDERS' WAIVERS. All of the Senior Indebtedness shall be
deemed to have been made or incurred in reliance upon this Agreement. Each
Subordinate Lender expressly waives all notices of the acceptance by Senior
Lender of the subordination and other provisions of this Agreement and all other
notices not specifically required pursuant to the terms of this Agreement
whatsoever, and each Subordinate Lender expressly waives reliance by Senior
Lender upon the subordination and other agreements contained herein. Each
Subordinate Lender agrees that Senior Lender has made no warranties or
representations with respect to the due execution, legality, validity,
completeness, or enforceability of the Senior Loan Documents, or the
collectability of the Senior Indebtedness, that Senior Lender shall be entitled
to manage and supervise loans to Borrower in accordance with applicable law and
its usual practices, modified from time-to-time as Senior Lender deems
appropriate under the circumstances, without regard to the existence of any
rights that any Subordinate Lender may now or hereafter have in or to any of the
assets of Borrower, and that Senior Lender shall have no liability to any
Subordinate Lender for, and each Subordinate Lender waives any claim which such
Subordinate Lender may now or hereafter have against Senior Lender arising out
of, any and all actions which Senior Lender, in good faith, takes or omits to
take (including, without limitation, actions with respect to the creation,
perfection or continuation of liens or security interests in collateral or
security, actions with respect to the occurrence of default, actions with
respect to the foreclosure upon, sale, release, or depreciation of, or failure
to realize upon, any collateral or security and actions with respect to the
collection of any claim for all or any part of the Senior Indebtedness from any
account debtor, guarantor, or any other party and actions with respect to any
bankruptcy proceeding or the extension of credit by Senior Lender to Borrower in
any such proceeding) with respect to the Senior Loan Documents, or any other
agreement related thereto or to the collection of the Senior Indebtedness or the
valuation, use protection or release of collateral or security for the Senior
Indebtedness.
10. SENIOR LENDER'S WAIVERS. No waiver shall be deemed to be made by
Senior Lender of any of their rights hereunder, unless the same shall be in
writing signed on behalf of Senior Lender, and each waiver, if any, shall be a
waiver only with respect to the specific instance involved and shall in no way
impair the rights of Senior Lender or the obligations of any Subordinate Lender
to Senior Lender in any other respect at any other time.
8
<PAGE>
11. INFORMATION CONCERNING FINANCIAL CONDITION OF BORROWER. Each
Subordinate Lender hereby assumes responsibility for keeping itself informed of
the financial condition of Borrower, any and all endorsers and any and all
guarantors of the Senior Indebtedness and the Subordinate Indebtedness and of
all other circumstances bearing upon the risk of nonpayment of the Senior
Indebtedness and the Subordinate Indebtedness that diligent inquiry would
reveal, and such Subordinate Lender hereby agrees that Senior Lender shall have
no duty to advise such Subordinate Lender of information known to Senior Lender
regarding such condition or any such circumstances.
12. PRIORITIES. The subordinations and priorities specified hereinabove
are applicable irrespective of the time or order of attachment or perfection of
any security interest or other interests referred to herein, the time or order
of filing of financing statements or mortgages, the acquisition of purchase
money or other security interests, or the time of giving or failure to give
notice of the acquisition or expected acquisition of purchase money or other
security interests. The subordinations and priorities specified herein are not
conditioned upon the non-avoidability or perfection of Senior Lender's security
interests in any collateral for the Senior Indebtedness.
13. CONTROLLING AGREEMENTS. In the event of any conflict between the
terms and conditions of this Agreement and the terms and provisions of the
Senior Loan Documents or the Subordinate Loan Documents, then the terms and
provisions of this Agreement shall control.
14. NO THIRD-PARTY BENEFICIARY. Nothing in this Agreement, express or
implied, is intended or shall be construed to confer upon, or to give to, any
party other than the parties hereto and their respective successors and assigns,
any right, remedy, or claim under or by reason of this Agreement or any
covenant, condition, or stipulation thereto; and the covenants, stipulations,
and agreements contained in this Agreement are and shall be for the sole and
exclusive benefit of the parties hereto and their respective successors and
assigns.
15. MISCELLANEOUS.
(A) SEVERABILITY. In case any one or more of the provisions contained in
this Agreement shall be invalid, illegal, or unenforceable in any respect, the
validity, legality, and enforceability of the remaining provisions contained
herein shall not in any way be affected and/or impaired thereby.
(B) NOTICES. All notices, demands, certificates, or other communications
hereunder shall be in writing and shall be deemed sufficiently given or served
for all purposes when delivered personally, when sent by certified or registered
mail, postage prepaid, return receipt requested or by private courier service,
in each case, with the proper address as indicated below. Each party may, by
written notice given to the other parties, designate any other address or
addresses to which notices, certificates or other communications to them shall
be sent as contemplated by this Agreement. Until otherwise so provided by the
respective parties, all notices, certificates and communications to each of them
shall be addressed as follows:
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<PAGE>
SENIOR LENDER: Credit Lyonnais New York Branch
1000 Louisiana, Suite 5360
Houston, Texas 77002
Attention: Mr. John M. Falbo
Vice President and Group Manager
Telecopy No.: (713) 751-0307
SUBORDINATE Craig S. Davis
LENDERS: 426 Wycliffe Dr.
Houston, Texas 77079
Philip V. Duggan
8329 Winningham
Houston, Texas 77055
Ron A. Krenzke
2136 Dryden
Houston, Texas 77030
BORROWER: XPLOR Energy, Inc.
10200 Grogans Mills Road, Suite 500
Houston, Texas 77380
Attention: Mr. Stephen M. Clark
Chief Financial Officer
Telecopy No.: (281) 364-3707
(C) SUCCESSORS AND ASSIGNS. Whenever in this Agreement any party hereto is
named or referred to, the successors and assigns of such party shall be deemed
to be included and all rights, benefits, covenants, promises, and agreements in
this Agreement by or on behalf of the respective parties hereto shall bind and
inure to the benefit of the respective successors and assigns of such parties,
whether so expressed or not.
(D) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each executed counterpart constituting an original but all
counterparts together constituting only one instrument.
(E) GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas applicable to
contracts made and to be performed in such state; provided that with respect to
obligations running solely between Borrower, Araxas SPV and Senior Lender, the
applicable law shall be determined in the same manner as is provided in the
Senior Credit Agreement and the Guaranty.
(F) AMENDMENTS. No amendment or waiver of any provision of this Agreement
shall be effective unless the same shall be in writing and signed by the party
or parties against whom it
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is to be enforced, and any such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given. No delay on the
part of Senior Lender or any Subordinate Lender in the exercise of any right,
power, or remedy shall operate as a waiver thereof, nor shall any single or
partial waiver by either Senior Lender or such Subordinate Lender of any right,
power, or remedy preclude any further exercise thereof, or the exercise of any
other right, power or remedy.
(G) SURVIVAL. This Agreement shall remain in full force and effect until
payment in full of the Senior Indebtedness.
(H) ENTIRETY. This Agreement, including the documents referred to herein,
embodies the entire agreement and understanding of the parties hereto and
supersedes all prior agreements and understandings of the parties hereto
relating to the subject matter herein contained.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto on the date first above written.
SUBORDINATE LENDERS:
/s/ Craig S. Davis
----------------------------------
Craig S. Davis
/s/ Philip V. Duggan
-----------------------------------
Philip V. Duggan
/s/ Ron A. Krenzke
------------------------------------
Ron A. Krenzke, individually and as
Agent for the holders of the
Subordinate Notes
11
<PAGE>
SENIOR LENDER:
CREDIT LYONNAIS NEW YORK BRANCH, AS
AGENT
By: /s/ Pascal Poupelle
------------------------------------
Name: Pascal Poupelle
Title: Executive Vice President
BORROWER:
XPLOR ENERGY, INC.
By: /s/ Steven W. Nance
------------------------------------
Name: Steven W. Nance
Title: President
12
<PAGE>
ACKNOWLEDGMENT PAGE TO SUBORDINATION AGREEMENT
STATE OF TEXAS (S)
(S)
COUNTY OF MONTGOMERY (S)
Before me, a Notary Public, on this day personally appeared CRAIG S. DAVIS,
known to me to be the person whose name is subscribed to the foregoing
instrument and acknowledged to me that he executed the same for the purposes and
consideration therein expressed.
Given under my hand and seal of office this 24th day of September, 1997
/s/ Patricia S. Anderson
----------------------------------
Notary Public Signature
(PERSONALIZED SEAL)
STATE OF TEXAS (S)
(S)
COUNTY OF MONTGOMERY (S)
Before me, a Notary Public, on this day personally appeared PHILIP V.
DUGGAN, known to me to be the person whose name is subscribed to the foregoing
instrument and acknowledged to me that he executed the same for the purposes and
consideration therein expressed.
Given under my hand and seal of office this 24th day of September, 1997
/s/ Patricia S. Anderson
----------------------------------
Notary Public Signature
(PERSONALIZED SEAL)
STATE OF TEXAS (S)
(S)
COUNTY OF MONTGOMERY (S)
Before me, a Notary Public, on this day personally appeared RON A. KRENZKE,
known to me to be the person whose name is subscribed to the foregoing
instrument and acknowledged to me that he executed the same for the purposes and
consideration therein expressed.
Given under my hand and seal of office this 24th day of September, 1997
/s/ Patricia S. Anderson
----------------------------------
Notary Public Signature
(PERSONALIZED SEAL)
13
<PAGE>
ACKNOWLEDGMENT PAGE TO SUBORDINATION AGREEMENT
STATE OF NEW YORK (S)
(S)
COUNTY OF NEW YORK (S)
This instrument was acknowledged before me on September 24, 1997 by Pascal
Poupelle, Executive Vice President of CREDIT LYONNAIS NEW YORK BRANCH, a duly
licensed branch under the New York Banking Law of a foreign banking corporation
organized under the laws of the Republic of France, on behalf of such
corporation.
/s/ Breige Lavery
-------------------------------
Notary Public Signature
(PERSONALIZED SEAL)
14
<PAGE>
ACKNOWLEDGMENT PAGE TO SUBORDINATION AGREEMENT
STATE OF TEXAS (S)
(S)
COUNTY OF MONTGOMERY (S)
This instrument was acknowledged before me on September 24, 1997 by Steven
W. Nance, President of XPLOR Energy, Inc., a Delaware corporation on behalf of
said corporation.
/s/ Patricia S. Anderson
----------------------------------
Notary Public Signature
(PERSONALIZED SEAL)
15
<PAGE>
EXHIBIT 10.4
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT (this "AGREEMENT") dated as of September 24,
1997, is by and between ERI INVESTMENTS, INC. (together with any successors and
assigns, "SUBORDINATE LENDER"), CREDIT LYONNAIS NEW YORK BRANCH, a duly licensed
branch under the New York Banking Law of a foreign banking corporation organized
under the laws of the Republic of France, as Agent for the Lenders described
therein (together with any successors and assigns, "SENIOR LENDER"), and XPLOR
Energy, Inc., a Delaware corporation (formerly known as Araxas Holdings, Inc.)
("XPLOR") and ARAXAS ENERGY CORPORATION, an Oklahoma Corporation ("ENERGY")
(XPLOR and Energy are collectively referred to herein as "BORROWER").
Capitalized terms used herein but not otherwise defined herein shall have the
meanings ascribed to such terms in the Senior Credit Agreement (as hereinafter
defined).
R E C I T A L S
- - - - - - - -
1. Araxas SPV-1, Inc., an Oklahoma corporation and a wholly-owned second
tier subsidiary of XPLOR and a wholly-owned first tier subsidiary of Energy
("ARAXAS SPV") and Senior Lender have executed that certain Credit Agreement
dated of even date herewith (the "SENIOR CREDIT AGREEMENT"), pursuant to which
Senior Lender agreed to extend credit to Araxas SPV in a principal amount not to
exceed $35,000,000.00.
2. The obligations of Araxas SPV to Senior Lender pursuant to the Senior
Credit Agreement are also evidenced by that certain Promissory Note dated of
even date herewith, executed by Araxas SPV and payable to the order of Credit
Lyonnais New York Branch in the original principal amount of $100,000,000.00
(the "SENIOR NOTE").
3. The obligations of Araxas SPV pursuant to the Senior Credit Agreement
and the Senior Note are secured by, among other collateral, the liens and
security interests created by the following documents each dated of even date
herewith:(a) that certain Deed of Trust, Security Agreement, Financing
Statement, and Assignment of Production executed by Araxas SPV for the benefit
of Senior Lender; (b) that certain Mortgage of Mineral Interests executed by
Araxas SPV for the benefit of Senior Lender; (c) that certain Security Agreement
executed by Araxas SPV, as Debtor, for the benefit of Senior Lender, as Secured
Party; (d) that certain Deed of Trust, Security Agreement, Financing Statement,
and Assignment of Production executed by South Coast Exploration Company, a
Texas corporation and an Affiliate of Araxas SPV ("SOUTH COAST") for the benefit
of Senior Lender; (e) that certain Mortgage of Mineral Interests executed by
South Coast for the benefit of Senior Lender; (f) that certain Security
Agreement executed by South Coast, as Debtor, for the benefit of Senior Lender,
as Secured Party; (g) that certain Deed of Trust, Security Agreement, Financing
Statement, and Assignment of Production executed by SOCO Exploration, L.P., a
Texas limited liability company and an Affiliate of Araxas SPV ("SOCO") for the
benefit of Senior Lender; (h) that certain Mortgage of Mineral Interests
executed by SOCO for the benefit of Senior Lender and (i) that certain Security
Agreement executed by SOCO, as Debtor, for the benefit of Senior Lender, as
Secured Party (collectively, the "SENIOR MORTGAGE") covering oil and gas
<PAGE>
interests, real and personal property as more particularly described on exhibits
attached to the Senior Mortgage (the "PROPERTY").
4. All of the indebtedness evidenced by the Senior Credit Agreement and
the Senior Note and secured by the Senior Mortgage, and all other obligations,
liabilities, and indebtedness of Araxas SPV to Senior Lender, whether now
existing or hereafter arising between Araxas SPV and Senior Lender, up to and
including the aggregate principal amount of $35,000,000.00 plus all accrued and
unpaid interest thereon and all other fees, expenses or other amounts payable to
Agent or any Lender under any of the Senior Loan Documents (as hereinafter
defined) is referred to herein as the "SENIOR INDEBTEDNESS" and all of the
documents evidencing or securing the Senior Indebtedness are referred to herein
as the "SENIOR LOAN DOCUMENTS."
5. Subordinate Lender made a loan (the "SUBORDINATE LOAN") to Borrower
pursuant to a Promissory Note dated July 7, 1997, executed by Borrower and
payable to the order of Subordinate Lender in the original principal amount of
$5,000,000.00 (the "SUBORDINATE NOTE").
6. Borrower has guaranteed the obligations of Araxas SPV under the Senior
Credit Agreement pursuant to the terms and conditions of that certain Guaranty
(the "GUARANTY") of even date herewith by Borrower, among others, in favor of
Senior Lender.
7. All of the indebtedness of Borrower and all of the obligations created
or evidenced by the Subordinate Note and the other Subordinate Loan Documents
(defined below), and all other obligations, liabilities, and indebtedness of
Borrower to Subordinate Lender, whether now existing or hereafter arising
between Borrower and Subordinate Lender, is referred to herein as the
"SUBORDINATE INDEBTEDNESS," and all of the documents evidencing, securing, or
executed pursuant to the Subordinate Indebtedness are referred to herein as the
"SUBORDINATE LOAN DOCUMENTS."
8. Subordinate Lender acknowledges that because Araxas SPV is a wholly-
owned second tier subsidiary of XPLOR and a wholly-owned first tier subsidiary
of Energy that the loan or advance of monies or other extensions of credit to
Araxas SPV by Senior Lender is of value to Subordinate Lender.
9. Senior Lender is unwilling to make the loan under the Senior Credit
Agreement unless Subordinate Lender enters into this Agreement.
NOW, THEREFORE, in order to induce Senior Lender to make the loans under
the Senior Credit Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound hereby agrees as follows:
1. DEFINITIONS. The following terms shall have the meanings herein
specified unless the context otherwise requires (such meanings to apply to such
terms in both the singular and plural forms):
2
<PAGE>
"ENFORCEMENT ACTION" means the commencement of the exercise of any remedies
against Borrower including, without limitation, the commencement of any
litigation or proceeding, the commencement of any foreclosure proceeding, the
exercise of any power of sale, the sale by advertisement, the taking of a deed
or assignment in lieu of foreclosure, the obtaining of a receiver or the taking
of any other enforcement action against, or the taking of possession or control
of, the Property, but specifically excluding (a) any requests and demands made
upon Borrower by delivery of notices to Borrower, (b) any assertion or
enforcement of any right of Subordinate Lender to receive payment from proceeds
of a foreclosure sale of the Property incident to foreclosure of the liens or
security interests created by the Senior Loan Documents which may remain after
payment of costs and expenses of such foreclosure and payment and satisfaction
in full of the Senior Indebtedness, and (c) the filing of claims in any
Insolvency Proceeding concerning Borrower as may be required to protect and
preserve the right of Subordinate Lender to participate in such Insolvency
Proceeding as creditor and to participate in distributions of assets of Borrower
in such Insolvency Proceeding with respect to the Subordinate Indebtedness after
payment and satisfaction in full of the Senior Indebtedness, but subject in all
respects to the rights of Senior Lender under and as provided in this Agreement
and without in any way impairing or affecting the right of Senior Lender to
require performance and observance by Subordinate Lender of or the obligations
of Subordinate Lender to perform and observe the covenants, undertakings, and
agreements of Subordinate Lender under and as provided in this Agreement.
"INSOLVENCY PROCEEDING" means any proceeding under Title 11 of the United
States Code (11 U.S.C. Sec. 101 et. seq.) or any other insolvency, liquidation,
reorganization, or other similar proceeding concerning Borrower, any action for
the dissolution of Borrower, any proceeding (judicial or otherwise) concerning
the application of the assets of Borrower, for the benefit of its creditors, the
appointment of or any proceeding seeking the appointment of a trustee, receiver,
or other similar custodian for all or any substantial part of the assets of
Borrower or any other action concerning the adjustment of the debts of Borrower,
the cessation of business by Borrower, except following a sale, transfer, or
other disposition of all or substantially all of the assets of Borrower in a
transaction permitted under the Senior Loan Documents.
"MATURITY DATE" means the earlier of (a) the Bridge Stated-Termination Date
(as defined in the Senior Credit Agreement) as such date may be extended by
Senior Lender (subject to SECTION 5(A) below), and (b) the date on which the
Bridge Stated-Termination Date has been accelerated by Senior Lender following
the occurrence of a Default (as defined in the Senior Credit Agreement);
provided, however, that if the Facility Conversion Date (as defined in the
Senior Credit Agreement) shall have occurred on or prior to May 24, 1998, the
Maturity Date shall mean the earlier of (x) the Revolving Stated-Termination
Date (as defined in the Senior Credit Agreement) as such date may be extended by
Senior Lender (subject to Section 5(a) below), and (y) the date on which the
Revolving Stated-Termination Date has been accelerated by Senior Lender
following the occurrence of a Default (as defined in the Senior Credit
Agreement).
"PERMITTED INTEREST PAYMENTS" means regularly scheduled payments of
interest on the Subordinated Note that are payable prior to the Maturity Date.
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"PLAN VOTING RIGHTS" means, with respect to any person, the rights of such
person to vote to approve or reject any plan of reorganization in respect of
Borrower in an Insolvency Proceeding.
2. STANDBY; SUBORDINATION.
(A) SUBORDINATION OF LOAN. Subordinate Lender hereby agrees that the
Subordinate Indebtedness is and shall be subordinate, to the extent and in the
manner hereinafter set forth, to the prior indefeasible payment in full of the
Senior Indebtedness. Except as specifically provided in SECTION 2(E), no
payment shall be made by or on behalf of Borrower for or on account of any
Subordinate Indebtedness, and Subordinate Lender shall not take or receive from
Borrower, directly or indirectly, in cash or other property or by setoff or in
any other manner, including, without limitation, from or by way of collateral,
payment of all or any of the Subordinate Indebtedness, unless and until the
Senior Indebtedness shall have been indefeasibly paid in full. In the event of
any distribution, division, or application, partial or complete, voluntary or
involuntary, by operation of law or otherwise, of all or any part of the assets
of Borrower or the proceeds thereof (including any assets now or hereafter
securing any Subordinate Indebtedness) to creditors of Borrower or upon any
indebtedness of Borrower, as a result of the liquidation, dissolution, or other
winding up, partial or complete, of Borrower, or as a result of any
receivership, insolvency, or bankruptcy proceeding, or assignment for the
benefit of creditors or marshaling of assets, or as a result of any proceeding
by or against Borrower for any relief under any bankruptcy or insolvency law or
laws relating to the relief of debtors, readjustment of indebtedness,
arrangements, reorganizations, compositions, or extensions, or as a result of
the sale of all or substantially all of the assets of Borrower, then and in any
such event:
(I) Senior Lender shall be entitled to receive payment in full of all
Senior Indebtedness before Subordinate Lender shall be entitled to receive
any payment or other distributions on, or with respect to, the Subordinate
Indebtedness;
(II) Any payment or distribution of any kind or character, whether in
cash, securities, or other property, which but for these provisions would
be payable or deliverable upon or with respect to the Subordinated
Indebtedness, shall instead be paid or delivered directly to Senior Lender
for the benefit of the holders of the Senior Indebtedness for application
on the Senior Indebtedness, whether then due or not due, until all of the
Senior Indebtedness shall have first been fully and indefeasibly paid in
full and Senior Lender shall have no further commitment to extent any
credit to Borrower;
(III) Subordinate Lender shall duly and promptly take such action as
may reasonably be requested by Senior Lender to assist in the collection of
the Subordinate Indebtedness for the account of any holder of the Senior
Indebtedness, including, without limitation, the filing of appropriate
proofs of claim with respect to the Subordinated Indebtedness and the
voting of such claims; and
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(IV) In the event that Subordinate Lender shall not have filed a claim
in any bankruptcy, insolvency, or similar proceeding with respect to
Borrower at least sixty (60) days prior to the expiration of the time to
file such claims, then Senior Lender, on behalf of Subordinate Lender,
shall be authorized to file a claim with respect to the Subordinate
Indebtedness.
(B) STANDSTILL; LIMITATION ON SUBORDINATE LENDER RIGHTS.
(I) Notwithstanding Subordinate Lender's rights under applicable law
or any provision of the Subordinate Loan Documents to the contrary,
Subordinate Lender hereby acknowledges and agrees that, (A) prior to the
Maturity Date, so long as Subordinate Lender receives the principal and
interest payments on the Subordinate Note permitted under Section 2[(e)]
when due or within the time period during which Senior Lender may cure any
failure to pay such amounts in accordance with Section 6(e) hereof, and (B)
after the Maturity Date, Subordinate Lender shall not (1) accelerate the
Subordinate Indebtedness or any portion thereof, or (2) take any
Enforcement Action until the indefeasible satisfaction in full of the
Senior Indebtedness. Subordinate Lender hereby waives any right it may
have to require that Senior Lender marshal any assets of Borrower in favor
of Subordinate Lender and Subordinate Lender agrees that it shall not
acquire, by subrogation or otherwise, any lien, estate, right, or other
interest in the Property or the proceeds therefrom that is or may be equal
or prior to any Senior Loan Document until the indefeasible payment in full
of the Senior Indebtedness.
(II) Until the indefeasible satisfaction in full of the Senior
Indebtedness, Subordinate Lender hereby covenants and agrees that, (A)
prior to the Maturity Date, so long as Subordinate Lender receives the
principal and interest payments on the Subordinate Note permitted under
Section 2[(e)] when due or within the time period during which Senior
Lender may cure any failure to pay such amounts in accordance with Section
6(e) hereof, and (B) after the Maturity Date, Subordinate Lender will not
acquiesce in, petition, or otherwise invoke or cause any other person to
invoke the process of the United States of America, any state or other
political subdivision thereof or any other jurisdiction, any entity
exercising executive, legislative, judicial, regulatory, or administrative
functions of or pertaining to government for the purpose of commencing or
sustaining a case against Borrower, under a Federal or state bankruptcy,
insolvency, or similar law or appointing a receiver, liquidator, assignee,
trustee, custodian, sequestrator, or other similar official of Borrower or
all or any part of its property or assets or ordering the winding-up or
liquidation of the affairs of Borrower.
(C) NON-INTERFERENCE BY SUBORDINATE LENDER. Subordinate Lender shall not
institute any judicial or administrative proceeding against Borrower or Senior
Lender which directly or indirectly would interfere with or delay the exercise
by Senior Lender of its rights and remedies in respect of the Property or any
part thereof or under the Senior Loan Documents, this Agreement or the Guaranty.
Without limiting the generality of the foregoing, in the event of a bankruptcy
or
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insolvency of Borrower, Subordinate Lender shall not object to or oppose any
efforts by Senior Lender to obtain relief from the automatic stay under Section
362 of the United States Bankruptcy Code or to seek to cause such entity's
bankruptcy estate to abandon the Property (or any portion thereof) that is
subject to the Senior Mortgage.
(D) ASSIGNMENT OF VOTING RIGHTS. Subordinate Lender hereby absolutely,
irrevocably, and unconditionally assigns and sets over to Senior Lender all of
Subordinate Lender's Plan Voting Rights in any Insolvency Proceeding respecting
Borrower. Senior Lender, however, acknowledges and agrees that it will not
exercise any such Plan Voting Rights of Subordinate Lender in favor of any plan
of reorganization which would result in or have the effect of lowering the
payment priority of the claims evidenced by the Subordinate Loan Documents below
that which such claims would otherwise be entitled based on the ranking and
priority of claims at the commencement of such Insolvency Proceeding (a
"PRIORITY REDUCTION"); provided, however, that Senior Lender may exercise such
Plan Voting Rights of Subordinate Lender in favor of a plan of reorganization
containing any Priority Reduction resulting from (i) administrative claims and
claims in favor of persons providing post-petition financing in such Insolvency
Proceedings and approved by the applicable court, or (ii) a judicial
determination made in such Insolvency Proceeding or ancillary proceedings
relating thereto approving or ordering such Priority Reduction under applicable
law, including, without limitation, principles of equitable subordination or
other equitable remedies available to the debtor, trustee or other creditors in
such Insolvency Proceeding.
(E) PAYMENTS ON SUBORDINATE INDEBTEDNESS. Notwithstanding any provision
contained herein to the contrary, until the Maturity Date, Subordinate Lender
may receive and retain (i) Permitted Interest Payments from Borrower, and (ii)
provided no Default or Potential Default (as each of such terms are defined in
the Senior Credit Agreement) has occurred and is continuing, the outstanding
principal balance of the Subordinate Note on the maturity date thereof.
(F) DISTRIBUTIONS HELD IN TRUST. If Subordinate Lender shall receive any
cash distributions in respect of, or other proceeds of, the Property (including,
without limitation, (i) any distribution arising directly or indirectly from any
lien of Senior Lender being avoided, declared to be fraudulent, or otherwise set
aside under the provisions of any law governing fraudulent conveyances or
transfers, and (ii) any distribution arising directly or indirectly by reason of
or in connection with an Insolvency Proceeding), in excess of what Subordinate
Lender is entitled to pursuant to the Subordinate Loan Documents and SECTION
2(E) (or would have been entitled to if such Insolvency Proceeding had not
occurred or if any such lien had not been avoided, declared to be fraudulent, or
otherwise set aside under the provisions of any law governing fraudulent
conveyances or transfers), then Subordinate Lender shall hold the same in trust,
as trustee, for the benefit of Senior Lender and shall promptly deliver the same
to or at the direction of Senior Lender, for the benefit of Senior Lender in
precisely the form received (except for the endorsement or assignment thereof by
such Subordinate Lender without recourse or warranty), it being understood that
it is the intention of the parties that until the Senior Indebtedness (without
regard to any modifications thereof arising by reason of or in connection with
an Insolvency Proceeding) is repaid in full, Senior Lender shall receive all
proceeds relating to any realization upon, distribution in
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respect of, or interest in any of the Property as and to the extent set forth in
the Senior Loan Documents. In the event Subordinate Lender fails to make any
such endorsement or assignment, Senior Lender, or any of its officers or
employees, is hereby irrevocably authorized to make the same.
3. REPRESENTATIONS. Subordinate Lender represents and warrants to Senior
Lender that:
(A) Subordinate Lender has all necessary power and authority to execute,
deliver, and perform its obligations under this Agreement.
(B) All action on the part of Subordinate Lender that is required for the
authorization, execution, delivery, and performance of this Agreement has been
duly and effectively taken.
(C) This Agreement has been duly executed and delivered by Subordinate
Lender and constitutes the legal, valid, and binding obligation of Subordinate
Lender, enforceable against Subordinate Lender in accordance with the terms
thereof.
4. AGREEMENT BY BORROWER. Borrower agrees that Senior Lender and
Subordinate Lender may share information that each may acquire with respect to
Borrower or the Property and consents to the transfer of such information,
whether financial or otherwise, between them, without having to obtain
Borrower's consent.
5. AGREEMENTS BY SUBORDINATE LENDER. Subordinate Lender agrees that so
long as the Senior Credit Agreement is outstanding:
(A) Senior Lender and Borrower may from time-to-time enter into
modifications, renewals, extensions, and replacements of the Senior Credit
Agreement and the Senior Loan Documents without the further consent of, or
notice to, Subordinate Lender.
(B) Subordinate Lender shall not make any further loans or advances to
Borrower.
(C) Subordinate Lender shall not amend the Subordinate Loan Documents
without Senior Lender's prior written consent.
6. DEFAULTS AND NOTICES. The parties agree that:
(A) The occurrence of a Default or an event of default under the Senior
Loan Documents shall not, in and of itself, constitute a default under the
Subordinate Loan Documents.
(B) The occurrence of a default under the Subordinate Loan Documents shall
constitute a default under the Senior Loan Documents.
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<PAGE>
(C) Senior Lender shall provide Subordinate Lender with copies of all
written notices which are sent to Borrower under the Senior Loan Documents
(including notices of default and notices of intention to exercise remedies
under the Senior Loan Documents), simultaneously with the sending of such
notices to Borrower.
(D) Subordinate Lender shall provide Senior Lender with copies of all
written notices which are sent to Borrower under the Subordinate Loan Documents
(including notices of default and notices of intention to exercise remedies
under the Subordinate Loan Documents), simultaneously with the sending of such
notices to Borrower.
(E) Senior Lender shall have the right, but not the obligation, to cure any
monetary default by Borrower under the Subordinate Loan Documents at any time on
or before the thirtieth (30th) day following the expiration of any grace,
notice, or cure period available to Borrower for any monetary default under the
Subordinate Loan Documents and written notice thereof from Subordinate Lender to
Senior Lender. Senior Lender shall have the right, but not the obligation, to
cure any non-monetary default by Borrower under the Subordinate Loan Documents
at any time on or before the (i) sixtieth (60th) day following the expiration of
any grace, notice, or cure period available to Borrower for any non-monetary
default under the Subordinate Loan Documents and written notice thereof from
Subordinate Lender to Senior Lender, and (ii) the sixtieth (60th) day
thereafter, if such non-monetary default is not susceptible of being cured
within sixty (60) days of expiration of Borrower's non-monetary cure period
under the Subordinate Loan Documents.
7. INSTRUMENT LEGEND. Any instrument evidencing any of the Subordinate
Indebtedness shall, on the date hereof, be inscribed with a legend conspicuously
indicating that payment thereof is subordinated to the claims of Senior Lender
pursuant to the terms of this Agreement, and a certified copy thereof will be
delivered to Senior Lender on the date hereof. Any instrument evidencing any of
the Subordinate Indebtedness, or any portion thereof, which is hereafter
executed by Borrower, will, on the date thereof, be inscribed with the aforesaid
legend and a copy thereof will be delivered to Senior Lender on the date of its
execution or within five (5) days thereafter.
8. CONTINUING NATURE OF SUBORDINATION. This Agreement shall continue to
be effective until the Senior Indebtedness shall have been fully discharged or
the termination of this Agreement. This is a continuing agreement of
subordination.
9. SUBORDINATE LENDER'S WAIVERS. All of the Senior Indebtedness shall be
deemed to have been made or incurred in reliance upon this Agreement.
Subordinate Lender expressly waives all notices of the acceptance by Senior
Lender of the subordination and other provisions of this Agreement and all other
notices not specifically required pursuant to the terms of this Agreement
whatsoever, and Subordinate Lender expressly waives reliance by Senior Lender
upon the subordination and other agreements contained herein. Subordinate
Lender agrees that Senior Lender has made no warranties or representations with
respect to the due execution, legality, validity, completeness, or
enforceability of the Senior Loan Documents, or the collectability of the Senior
8
<PAGE>
Indebtedness, that Senior Lender shall be entitled to manage and supervise loans
to Borrower in accordance with applicable law and its usual practices, modified
from time-to-time as Senior Lender deems appropriate under the circumstances,
without regard to the existence of any rights that Subordinate Lender may now or
hereafter have in or to any of the assets of Borrower, and that Senior Lender
shall have no liability to Subordinate Lender for, and Subordinate Lender waives
any claim which Subordinate Lender may now or hereafter have against Senior
Lender arising out of, any and all actions which Senior Lender, in good faith,
takes or omits to take (including, without limitation, actions with respect to
the creation, perfection or continuation of liens or security interests in
collateral or security, actions with respect to the occurrence of default,
actions with respect to the foreclosure upon, sale, release, or depreciation of,
or failure to realize upon, any collateral or security and actions with respect
to the collection of any claim for all or any part of the Senior Indebtedness
from any account debtor, guarantor, or any other party and actions with respect
to any bankruptcy proceeding or the extension of credit by Senior Lender to
Borrower in any such proceeding) with respect to the Senior Loan Documents, or
any other agreement related thereto or to the collection of the Senior
Indebtedness or the valuation, use protection or release of collateral or
security for the Senior Indebtedness.
10. SENIOR LENDER'S WAIVERS. No waiver shall be deemed to be made by
Senior Lender of any of their rights hereunder, unless the same shall be in
writing signed on behalf of Senior Lender, and each waiver, if any, shall be a
waiver only with respect to the specific instance involved and shall in no way
impair the rights of Senior Lender or the obligations of Subordinate Lender to
Senior Lender in any other respect at any other time.
11. INFORMATION CONCERNING FINANCIAL CONDITION OF BORROWER. Subordinate
Lender hereby assumes responsibility for keeping itself informed of the
financial condition of Borrower, any and all endorsers and any and all
guarantors of the Senior Indebtedness and the Subordinate Indebtedness and of
all other circumstances bearing upon the risk of nonpayment of the Senior
Indebtedness and the Subordinate Indebtedness that diligent inquiry would
reveal, and Subordinate Lender hereby agrees that Senior Lender shall have no
duty to advise Subordinate Lender of information known to Senior Lender
regarding such condition or any such circumstances.
12. PRIORITIES. The subordinations and priorities specified hereinabove
are applicable irrespective of the time or order of attachment or perfection of
any security interest or other interests referred to herein, the time or order
of filing of financing statements or mortgages, the acquisition of purchase
money or other security interests, or the time of giving or failure to give
notice of the acquisition or expected acquisition of purchase money or other
security interests. The subordinations and priorities specified herein are not
conditioned upon the non-avoidability or perfection of Senior Lender's security
interests in any collateral for the Senior Indebtedness.
13. CONTROLLING AGREEMENTS. In the event of any conflict between the
terms and conditions of this Agreement and the terms and provisions of the
Senior Loan Documents or the Subordinate Loan Documents, then the terms and
provisions of this Agreement shall control.
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14. NO THIRD-PARTY BENEFICIARY. Nothing in this Agreement, express or
implied, is intended or shall be construed to confer upon, or to give to, any
party other than the parties hereto and their respective successors and assigns,
any right, remedy, or claim under or by reason of this Agreement or any
covenant, condition, or stipulation thereto; and the covenants, stipulations,
and agreements contained in this Agreement are and shall be for the sole and
exclusive benefit of the parties hereto and their respective successors and
assigns.
15. MISCELLANEOUS.
(A) SEVERABILITY. In case any one or more of the provisions contained in
this Agreement shall be invalid, illegal, or unenforceable in any respect, the
validity, legality, and enforceability of the remaining provisions contained
herein shall not in any way be affected and/or impaired thereby.
(B) NOTICES. All notices, demands, certificates, or other communications
hereunder shall be in writing and shall be deemed sufficiently given or served
for all purposes when delivered personally, when sent by certified or registered
mail, postage prepaid, return receipt requested or by private courier service,
in each case, with the proper address as indicated below. Each party may, by
written notice given to the other parties, designate any other address or
addresses to which notices, certificates or other communications to them shall
be sent as contemplated by this Agreement. Until otherwise so provided by the
respective parties, all notices, certificates and communications to each of them
shall be addressed as follows:
SENIOR LENDER: Credit Lyonnais New York Branch
1000 Louisiana, Suite 5360
Houston, Texas 77002
Attention: Mr. John M. Falbo
Vice President and Group Manager
Telecopy No.: (713) 751-0307
SUBORDINATE LENDER: ERI Investments, Inc.
911 Washington Street
Wilmington, Delaware 19801
Attention: Johanna O'Loughlin
Telecopy No.: (412) 553-5757
With a copy to: Jeff Swoveland
Telecopy No. (412) 553-5853
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BORROWER: XPLOR Energy, Inc.
10200 Grogans Mill Road, Suite 500
Houston, Texas 77380
Attention: Mr. Stephen M. Clark
Chief Financial Officer
Telecopy No.: (281) 364-3707
Araxas Energy Corporation
10200 Grogans Mills Road, Suite 500
Houston, Texas 77380
Attention: Mr. Stephen M. Clark
Chief Financial Officer
Telecopy No.: (281) 364-3707
(C) SUCCESSORS AND ASSIGNS. Whenever in this Agreement any party hereto is
named or referred to, the successors and assigns of such party shall be deemed
to be included and all rights, benefits, covenants, promises, and agreements in
this Agreement by or on behalf of the respective parties hereto shall bind and
inure to the benefit of the respective successors and assigns of such parties,
whether so expressed or not.
(D) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each executed counterpart constituting an original but all
counterparts together constituting only one instrument.
(E) GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas applicable to
contracts made and to be performed in such state; provided that with respect to
obligations running solely between Borrower, Araxas SPV and Senior Lender, the
applicable law shall be determined in the same manner as is provided in the
Senior Credit Agreement and the Guaranty.
(F) AMENDMENTS. No amendment or waiver of any provision of this Agreement
shall be effective unless the same shall be in writing and signed by the party
or parties against whom it is to be enforced, and any such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given. No delay on the part of Senior Lender or Subordinate Lender in
the exercise of any right, power, or remedy shall operate as a waiver thereof,
nor shall any single or partial waiver by either Senior Lender or Subordinate
Lender of any right, power, or remedy preclude any further exercise thereof, or
the exercise of any other right, power or remedy.
(G) SURVIVAL. This Agreement shall remain in full force and effect until
payment in full of the Senior Indebtedness.
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(H) ENTIRETY. This Agreement, including the documents referred to herein,
embodies the entire agreement and understanding of the parties hereto and
supersedes all prior agreements and understandings of the parties hereto
relating to the subject matter herein contained.
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IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto on the date first above written.
SUBORDINATE LENDER:
ERI INVESTMENTS, INC.
By: /s/ Jeffrey C. Swoveland
------------------------
Name: Jeff Swoveland
Title: President
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SIGNATURE PAGE TO SUBORDINATION AGREEMENT
SENIOR LENDER:
CREDIT LYONNAIS NEW YORK BRANCH, AS
AGENT
By: /s/ Pascal Poupelle
---------------------------
Name: Pascal Poupelle
Title: Executive Vice President
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SIGNATURE PAGE TO SUBORDINATION AGREEMENT
BORROWER:
XPLOR ENERGY, INC.
By: /s/ Steven W. Nance
------------------------------
Name: Steven W. Nance
Title: President
ARAXAS ENERGY CORPORATION
By: /s/ Steven W. Nance
-------------------------------
Name: Steven W. Nance
Title: President
15
<PAGE>
ACKNOWLEDGMENT PAGE TO SUBORDINATION AGREEMENT
STATE OF PENNSYLVANIA (S)
(S)
COUNTY OF ALLEGHENY (S)
This instrument was acknowledged before me on September 24, 1997 by Jeffrey
C. Swoveland of ERI INVESTMENTS, INC. a Delaware corporation, on behalf of such
corporation.
/s/ Janice A. Haas
----------------------------------
Notary Public Signature
(PERSONALIZED SEAL)
16
<PAGE>
ACKNOWLEDGMENT PAGE TO SUBORDINATION AGREEMENT
STATE OF NEW YORK (S)
(S)
COUNTY OF NEW YORK (S)
This instrument was acknowledged before me on September 24, 1997 by Pascal
Poupelle, Executive Vice President of CREDIT LYONNAIS NEW YORK BRANCH, a duly
licensed branch under the New York Banking Law of a foreign banking corporation
organized under the laws of the Republic of France, on behalf of such
corporation.
/s/ Breige Lavery
---------------------------------
Notary Public Signature
(PERSONALIZED SEAL)
17
<PAGE>
ACKNOWLEDGMENT PAGE TO SUBORDINATION AGREEMENT
STATE OF TEXAS (S)
(S)
COUNTY OF MONTGOMERY (S)
This instrument was acknowledged before me on September 24th, 1997 by
Steven W. Nance, President of XPLOR Energy, Inc., a Delaware corporation on
behalf of said corporation.
/s/ Patricia S. Anderson
----------------------------------
Notary Public Signature
(PERSONALIZED SEAL)
18
<PAGE>
ACKNOWLEDGMENT PAGE TO SUBORDINATION AGREEMENT
STATE OF TEXAS (S)
(S)
COUNTY OF MONTGOMERY (S)
This instrument was acknowledged before me on September 24, 1997 by Steven
W. Nance, President of Araxas Energy Corporation, an Oklahoma corporation on
behalf of said corporation.
/s/ Patricia S. Anderson
----------------------------------
Notary Public Signature
(PERSONALIZED SEAL)
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EXHIBIT 10.7
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement"), is made as of the 6th
day of August, 1996, by and between Araxas Energy Corporation, an Oklahoma
corporation, having its principal executive office and place of business at
10200 Grogans Mill Road, Suite 500, The Woodlands, Texas 77380 ("Araxas"), and
Stratum Group, L.P., a Delaware limited partnership ("Stratum"), with offices at
650 Fifth Avenue, 24th Floor, New York, New York 10019.
W I T N E S S T H:
- - - - - - - - -
WHEREAS, Araxas desires, pursuant to the terms of this Agreement, to
grant Stratum the right to purchase shares of common stock of Araxas, par value
$0.01 per share (the "Araxas Common Stock") in accordance with the terms of this
Agreement in consideration for payment on the Closing Date by Stratum of
$40,000.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions herein contained, the receipt and sufficiency of which are hereby
expressly acknowledged, the parties hereto agree as follows:
Section 1. Definitions. Capitalized terms used herein and not
otherwise defined herein shall have the meaning given to them in the Loan
Agreement.
Section 2. Grant of Stock Option. (a) Araxas hereby grants to Stratum,
its successors and assigns the right to purchase, at the option of Stratum and
on the terms and conditions hereinafter set forth, up to 15% (the "Percentage
Interest") of the total outstanding shares of Araxas Common Stock (which on
August 6, 1996 equaled 20,934.47 shares) (the "Stock Option"), exercisable in
accordance with the provisions of this Agreement at any time beginning on
January 1, 1997 and ending on June 30, 1999 (the "Expiration Date").
(b) Notwithstanding the foregoing, the Stock option shall become
exercisable immediately if, at any time between the date of this Agreement and
January 1, 1997, any one of the following events occurs:
(i) an initial public offering registered pursuant to the Securities
Act of 1933, as amended (the "Securities Act") of any shares of Araxas
Common Stock (whether such offering is by stockholders of Araxas, by Araxas
itself or both) (the "IPO"); or
(ii) a merger or consolidation of Araxas in which its shareholders do
not retain a majority of the voting power in the surviving corporation, or
a sale of all or substantially all of Araxas's assets.
<PAGE>
Section 3. Exercise and Payment of the Stock Option. (a) Subject
to the terms and conditions of this Agreement, Stratum may exercise all or any
part (in increments of 1% and not less) of the Stock Option by delivery of
written notice to Araxas. Any such notice shall state that Stratum is electing
to exercise the Stock Option and shall specify the percentage of the total
outstanding shares of Araxas Common Stock in respect of which the Stock Option
is being exercised.
(b) Upon receipt of a notice of exercise pursuant to Section 3(a),
Araxas shall take any and all actions as may be necessary to effect the valid
and legally binding transfer to Stratum of shares of Araxas Common Stock as to
which such exercise relates. Shares of Araxas Common Stock deliverable upon
exercise of the Stock Option shall be referred to as the "Option Shares".
(c) The Exercise Price shall be $83,333 for each one percent (1%) of
the total outstanding shares of Araxas Common Stock acquired by Stratum.
Section 4. Termination. Any unexercised portion of this Stock
Option shall automatically and without notice terminate and become null and void
on the Expiration Date.
Section 5. Anti-Dilution. In the event Araxas issues additional
shares of Araxas Common Stock or exchanges shares of Araxas Common Stock for the
stock of a successor person or entity to Araxas at any time after the date of
this Agreement, whether as a result of a reorganization, merger, consolidation,
spin-off, stock-split, stock issuance or otherwise, the type and amount of the
equity interest subject to the Stock Option shall be adjusted appropriately, and
proper provision shall be made in the agreements or other documentation
governing such reorganization or other event, so that Stratum shall receive,
upon exercise of the Stock Option, the same Percentage Interest of Araxas Common
Stock (or equivalent interest in any successor entity); provided, however, that
the number of Option Shares will not be increased to the extent that any
issuances of shares of Araxas Common Stock are made in exchange for fair value
(as measured by the Reserve Adjusted Book Value Per Share of Araxas Common Stock
(as defined below)) to such persons or entities that are not the holders of any
shares of Araxas Common Stock on the Closing Date. For purposes of this Section
5, "Reserve Adjusted Book Value Per Share" shall mean the book value per share
of Araxas Common Stock determined in accordance with generally accepted
accounting principles, consistently applied, but with the oil and gas properties
(including exploratory properties) of Araxas and its subsidiaries being valued
at an amount equal to the present value of the estimated future net revenues
therefrom determined using the price, cost, discount rate and other assumptions
then applicable for disclosure of such value as required by the Securities and
Exchange Commission (the "Commission") and with any other assets being valued
using a cash flow multiple and/or formula that would be used to determine the
fair value of such assets within the applicable industry in arm's-length
transactions).
Section 6. Representations and Warranties. Araxas represents and
warrants to Stratum that the execution and delivery of this Agreement by Araxas
has been duly authorized by all necessary corporate and other actions and
constitutes the valid and legally binding obligation of
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Araxas, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and similar laws
relating to or affecting creditors' rights and to general equity principles.
Section 7. Covenants. Araxas covenants and agrees that, at any time
after the date of this Agreement and until the Expiration Date, it will comply
with the following covenants:
(a) In the event Araxas raises equity capital, it shall raise equity
capital only in the form of common stock issued by Araxas and Araxas shall cause
its subsidiaries not to issue any equity securities.
(b) Araxas shall not consolidate with or merge with any other person
or entity or convey, transfer or lease all or substantially all of its assets in
a single transaction or series of transactions to any person or entity, if
Araxas is not the successor formed by such consolidation or the survivor of such
merger or the person that acquires by conveyance, transfer or lease all or
substantially all of such assets, unless such successor, survivor or person
shall have executed and delivered to Stratum a written instrument evidencing its
assumption of the due and punctual performance and observance of Araxas's
obligations under this Agreement.
Section 8. Demand Registration Rights. (a) Following the IPO, Stratum may,
at any time and from time to time, make a written request for registration under
the Securities Act of all or part of the Option Shares (a "Demand
Registration"). Such request will specify the number of Option Shares proposed
to be sold and will also specify the intended method of disposition thereof. A
registration will not count as a Demand Registration until it has become
effective under the Securities Act and, if applicable, the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
(b) Notwithstanding the provisions of Section 8(a) above:
(i) Araxas shall not be obligated to effect more than one Demand
Registration pursuant to Section 8(a);
(ii) Araxas may postpone any Demand Registration for up to three
months to complete any merger, consolidation, transfer or other similar
transaction that is in process at the time a request for Demand
Registration is made pursuant to Section 8(a);
(iii) Notwithstanding the provisions of Section 11 below, Araxas
shall not be obligated to pay any expenses associated with any Demand
Registration other than the initial Demand Registration;
(iv) Araxas shall not be obligated to effect a Demand Registration if
at the time such Demand Registration is requested the Araxas Common Stock
is not registered under
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Section 12 of the Exchange Act unless Araxas is otherwise obligated to file
reports under Section 15 of the Exchange Act; and
(v) Araxas shall not be obligated to effect a Demand Registration
unless Stratum shall have exercised the Stock Option with respect to the
Option Shares to be registered on or before the effective date of such
registration.
(c) If Stratum so elects, the offering of the Option Shares pursuant
to such Demand Registration shall be in the form of an underwritten offering.
Stratum shall select the book-running and other managing underwriters in
connection with such offering and any additional investment bankers and managers
to be used in connection with the offering. Such book running and other
managing underwriters shall be reasonably satisfactory to Araxas.
Section 9. Piggy-Back and Shelf Registration Rights. (a) If
Araxas or any security holder of Araxas proposes to register any securities of
Araxas under the Securities Act and if the registration form proposed to be used
may be used for the registration of the Araxas Common Stock, Araxas will
thereupon give prompt written notice to Stratum of its intention to proceed with
the registration and, upon the written request of Stratum made within [30] days
after the receipt of any such notice, Araxas will use its best efforts to cause
all Option Shares specified in such request to be included in such registration
(hereinafter a "Piggy-Back Registration").
(b) If at any time Araxas proposes to register any of its securities
and the Securities Act shall then permit the registration thereunder for the
future sale of Araxas Common Stock, Araxas will give written notice to Stratum
of its intention to do so (hereinafter, a "Shelf Registration" and collectively
with a Piggy Back Registration, an "Incidental Registration") and, upon the
written request of Stratum made within [30] days after the receipt of any such
notice, Araxas will use its best efforts to include among the securities which
it then proposes to register, and to cause to be registered under such laws and
regulations, all Option Shares specified in such request and, upon any such
registration becoming effective, Araxas will give notice thereof in writing to
Stratum.
(c) The rights of Stratum to exercise, or the exercise by the Stratum
of, Piggy Back Registration or Shelf Registration are in addition to, and are
not, and will not be, in any way conditioned by, Stratum's Demand Registration
rights or the exercise thereof.
(d) Araxas shall not be obligated to effect an Incidental Registration
unless Stratum shall have exercised the Stock Option with respect to the Option
Shares to be registered on or before the effective date of such registration.
Section 10. Cut-Back Provisions. If a Demand Registration or an
Incidental Registration is in connection with an underwritten public offering,
and if the book-running and managing underwriters advise Araxas in writing that
in their opinion the amount of securities requested to be included in such
registration exceeds the amount of such securities which can be sold
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in such offering, Araxas will include in such offering the amount of securities
requested to be included which in the opinion of such underwriters can be sold
as follows:
(a) in the case of a Demand Registration, the amount of Option Shares
to be offered and sold for the account of Stratum shall be reduced, but only
after the amount of securities, if any, to be offered and sold for the account
of Araxas and any other holders with registration rights who are seeking to sell
in such offering has been reduced to zero; or
(b) in case of an Incidental Registration, (i) first, all of the
securities shall be included which are proposed to be sold by Araxas, and (ii)
second, the Option Shares which are proposed to be sold by Stratum shall be
included pro rata with other holders with registration rights who are seeking to
sell in such offering.
Section 11. Registration Procedures. (a) Whenever Araxas is
required by the provisions of Sections 8 or 9 above to effect the registration
of any of the Option Shares under the Securities Act, Araxas will, at its sole
expense (except for fees of Stratum's counsel, its accountants and its
underwriters, referred to in clause (i) below, in connection with such
registration) and as expeditiously as is possible:
(i) prepare and file with the Commission a registration statement with
respect to such securities (which, in the case of a Demand Registration,
will be on any form for which Araxas then qualifies and which counsel for
Araxas shall deem appropriate and available for the sale of the Araxas
Common Stock to be registered thereunder in accordance with the intended
method of distribution thereof, and use reasonable efforts to cause such
filed registration statement to become and remain effective for a period of
not less than 90 days) and in connection with any such registration
(whether a Demand Registration or an Incidental Registration) Araxas will
give Stratum, its underwriters, if any, their respective counsel and
accountants the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will give
each of them such access to its books and records and such opportunities to
discuss the business of Araxas with its officers and the independent public
accountants who have certified its financial statements as shall be
necessary in the opinion of the Stratum's and such underwriters' respective
counsel, to conduct a reasonable investigation within the meaning of the
Securities Act;
(ii) prepare and file with the Commission such amendments and
supplements to any such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and the prospectus current and to comply with the
provisions of the Securities Act and the Exchange Act with respect to the
sale of all securities covered by such registration statement whenever the
seller of such securities shall desire to sell the same;
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(iii) furnish to Stratum such numbers of copies of preliminary
prospectuses and prospectuses and each supplement or amendment thereto and
such other documents as Stratum or any underwriters of Stratum may
reasonably request in order to facilitate the sale or other disposition of
the Option Shares being sold by Stratum in conformity with (A) the
requirements of the Securities Act and (B) Stratum's proposed method of
distribution;
(iv) register or qualify the Araxas Common Stock covered by such
registration statement under the securities or blue sky laws of such
jurisdictions within the United States as Stratum shall request, and do
such other reasonable acts and things as may be required of it to enable
Stratum to consummate the sale or other disposition in such jurisdictions
of the Option Shares; provided, however, that Araxas shall not be required
to (A) qualify as a foreign corporation or consent to a general and
unlimited service of process in any such jurisdiction or (B) qualify as a
dealer in securities; and provided further that, if the federal
registration is in connection with an underwritten offering, Araxas shall
not be required to register or qualify in any jurisdiction not included in
the underwriting;
(v) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security
holders as soon as reasonably practicable, but not later than sixteen (16)
months after the effective date of the registration statement, an earnings
statement covering a period of at least twelve (12) months beginning after
the effective date of the registration statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act;
(vi) (A) notify Stratum at any time when a prospectus relating to the
registration is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of which,
the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under
which they were made, at the request of Stratum promptly prepare and
furnish to Stratum a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include 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 not misleading in the light of the circumstances under which they
were made; and (B) in the event Araxas shall give such notice and the
registration to which such prospectus relates is a Demand Registration,
Araxas shall extend the period during which such registration statement
shall be maintained effective as provided in Section 11(a)(i) hereof by the
number of days during the period from and including the date of the giving
of such notice to the date when Araxas shall make available to Stratum such
supplemented or amended prospectus;
(vii) after the filing of any registration statement (whether with
respect to a Demand Registration or an Incidental Registration), Araxas
will promptly notify Stratum of
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any stop order issued or, to the knowledge of Araxas, threatened to be
issued by the Commission and take all necessary actions required to prevent
the entry of such stop order or to remove it if entered;
(viii) Araxas will enter into customary agreements (including an
underwriting-agreement in customary form and satisfactory in form and
substance to Araxas in its reasonable judgment) and take such other actions
as are reasonably required in order to expedite or facilitate the sale of
the Option Shares;
(ix) keep Stratum advised in writing as to initiation and progress of
any registration;
(x) Araxas shall list the Option Shares on each national securities
exchange on which any shares of Araxas Common Stock may at any time be
listed, and shall maintain, as long as any other shares of Araxas Common
Stock shall be so listed, such listing of the Option Shares; and Araxas
shall list on each national securities exchange, and shall maintain such
listing of, any other shares of capital stock of Araxas issuable upon the
exercise of the Stock Option if and so long as any shares of capital stock
of the same class shall be listed on such national securities exchange by
Araxas; and
(xi) if any Option Shares require registration or approval of any
governmental authority before such Option Shares may be validly and
lawfully issued, Araxas will in good faith and with reasonable dispatch
after notice of exercise to Araxas, secure such registration or approval;
provided that in no event shall Option Shares be issued, and Araxas shall
have the authority to suspend the exercise of the Stock Option to purchase
Option Shares requiring such registration or approval, until such
registration or approval shall have been obtained. Any portion of the Stock
Option as to which exercise is requested during such suspension shall be
exercisable at the Exercise Price and upon the other conditions in effect
on the date of exercise. If any such period of suspension continues past
the Expiration Date, Araxas shall recognize, upon the removal of such
suspension, the exercise of the Stock Option for which notice had been
received on or before the Expiration Date.
Section 12. Sale Without Registration. In no event shall Araxas be
obligated to register any Option Shares if, in the opinion of counsel to Araxas,
in form and substance reasonably acceptable to Stratum, all of the Option Shares
proposed to be registered immediately may be sold publicly without restrictions
without registration under the Securities Act.
Section 13. Indemnity. In connection with any registration or
qualification of securities under Sections 8 or 9 above, Araxas agrees to
indemnify Stratum and each officer and director of Stratum and each person or
entity, if any, who controls Stratum within the meaning of Section 15 of the
Securities Act, and each underwriter, if any, of the Option Shares and each
person who controls any such underwriter within the meaning of Section 15 of the
Securities Act, against all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation)
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caused by any untrue, or alleged untrue, statement of a material fact contained
in any registration statement, preliminary prospectus, prospectus or
notification or offering circular (as amended or supplemented if Araxas shall
have furnished any amendments or supplements thereto) or caused by any omission,
or alleged omission, to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages, liabilities or expenses are caused by
any untrue statement or alleged untrue statement or omission or alleged omission
based on information furnished in writing to Araxas by Stratum expressly for use
therein.
Section 14. Information by Stratum. Upon the exercise of the
registration rights pursuant to this Agreement, Stratum agrees to supply Araxas
with such information as may be required by applicable law for Araxas to
register or qualify the Option Shares, and Stratum agrees to indemnify and hold
harmless Araxas and each of its officers who signs such registration statement
and each person or entity, if any, who controls Araxas within the meaning of
Section 15 of the Securities Act, and each underwriter, if any, of such Option
Shares and each person who controls any such underwriter within the meaning of
Section 15 of the Securities Act, against all losses, claims, damages or
liabilities which are caused by any untrue, or alleged untrue statement of a
material fact contained in information furnished in writing to Araxas by Stratum
expressly for use therein.
Section 15. Governing Law. This Agreement and all rights arising
hereunder shall be construed and determined in accordance with the internal laws
of the State of New York, and the performance thereof shall be governed and
enforced in accordance with such laws. In the event any controversy arises out
of or relates to this Agreement, representatives of Araxas and Stratum shall
first meet in New York, New York and attempt to negotiate a resolution of their
dispute. In the event such negotiation shall fail to resolve any such conflict,
the parties hereby agree to submit to arbitration administered by the American
Arbitration Association under its then current Commercial Arbitration Rules.
Any such controversy shall be submitted in New York, New York to a panel of
three (3) arbitrators, one chosen by each party and the third under the American
Arbitration Rules. At least two (2) of the arbitrators shall have oil and gas
industry related experience. The arbitrators will have no authority to award
punitive or other damages not measured by the prevailing party's actual damages
and may not, in any event, make any ruling, finding, or award that does not
conform to the terms and conditions of this Agreement. The parties shall
faithfully observe this Agreement and such rules, and will abide by and perform
any award rendered by the arbitrators, and a judgment of any court having
jurisdiction may be entered on the award. In any action which may be instituted
against Araxas arising out of or relating to this Agreement, Araxas hereby
consents to the service of process in connection with any action by the mailing
thereof by registered or certified mail to Araxas's address set forth above.
The provisions of this Section 14 are a material inducement for Stratum entering
into the Agreement and the transactions contemplated herein. Araxas hereby
acknowledges that it has reviewed the provisions of this Section 15 with its
independent legal counsel.
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Section 16. Amendments and Waivers. Any provision of this Agreement
may be amended or waived if, and only if, such amendment or waiver is in writing
and signed, in the case of an amendment, by Stratum and Araxas, or in the case
of a waiver, by the party against whom the waiver is to be effective. No
failure or delay by either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies provided by law.
Section 17. Assignments. Stratum shall not, during the term of
this Agreement, assign, transfer or otherwise dispose of any of its rights
hereunder to a person other than an affiliate of Stratum, without the prior
written consent of Araxas.
Section 18. Termination of Warrant Issuance Agreement. The Warrant
Issuance Agreement dated as of April 4, 1996 between Araxas and Stratum is
hereby terminated.
Section 19. Counterparts. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument.
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IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement
to be executed and delivered by their respective authorized officers as of the
date first above written.
ARAXAS ENERGY CORPORATION
By: /s/ William E. Rowsey
-------------------------------------
Name: William E. Rowsey
Title: President
STRATUM GROUP, L.P.
By: /s/ Joseph M. Rinaldi
---------------------------------------
Name: Joseph M. Rinaldi
Title: President
10
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EXHIBIT 10.8
September 24, 1997
Araxas Energy Corporation
XPLOR Energy, Inc.
10200 Grogans Mill Road, Suite 500
The Woodlands, Texas 77380
Attention: Steven W. Nance, President
Chief Executive Officer
Gentlemen:
Reference is made to the letter agreement of even date, among Stratum
Group Energy Partners, L.P. ("Group"), Araxas SPV-1, Inc. ("Borrower") and
affiliates of Borrower ("Termination Agreement"). The Termination Agreement
establishes the conditions for prepayment of the indebtedness of Borrower owed
to Group, and satisfaction and release of all of the rights, duties and
liabilities of the parties to the Master Agreement (as defined in the
Termination Agreement).
Reference also is made to the Acquisition Agreement (defined in the
Termination Agreement), pursuant to which all of the outstanding shares of
common stock, par value $0.01 per share ("Common Stock"), of Araxas Energy
Corporation ("Energy") will, at the closing of the Acquisition Agreement, be
acquired by XPLOR Energy, Inc. (formerly known as Araxas Holdings, Inc.
"Holdings"), and to the Stock Option Agreement dated as of August 6, 1996
("Option Agreement"), between Energy and Stratum Group, L.P. ("Stratum"). The
rights of Stratum under the Option Agreement to acquire shares of Common Stock
of Energy are referred to collectively herein as the "Stock Option".
Capitalized terms used but not otherwise defined herein have the meanings
assigned to them in the Option Agreement.
This letter agreement is being executed and delivered by the parties
pursuant to the Termination Agreement.
Stratum, Energy and Holdings agree that in the event of the closing of
the transactions contemplated by the Acquisition Agreement ("Closing"):
(1) Holdings shall assume and acquire all of Energy's obligations and
rights under the Option Agreement, which is hereby amended to remove, effective
as of the Closing, the requirements in 2(b)(i) and (ii) thereof that Stratum
exercise the Stock Option upon the occurrence of either of the events set forth
in 2(b)(i) or (ii), to remove, effective as of the closing of the IPO, the
covenant in Section 7(a) that Energy may raise equity capital only in the form
of Common Stock issued by Energy, and to incorporate, effective as of the
Closing, the additional terms set forth in paragraphs (2)-(8) hereof. Effective
from and after the Closing, any reference in the Option Agreement and below to
Energy and Common Stock shall be interpreted in a manner consistent with
<PAGE>
Araxas Energy Corporation
XPLOR Energy, Inc.
September 24, 1997
Page 2
this paragraph (1) to mean Holdings and the common stock, par value $0.001 per
share, of Holdings, respectively.
(2) Upon exercise of the Stock Option in accordance with the Option
Agreement (as amended hereby), Stratum may purchase up to a number of shares of
Common Stock of Energy equal to the Option Shares, as determined and adjusted
from time to time pursuant to Section 5 of the Option Agreement and the
provisions of this letter agreement. By way of illustration of the operation of
such formula adjustments to the number of Option Shares underlying the Stock
Option, if the Stock Option were exercised in full on the date hereof, Stratum
would be entitled to purchase the number of newly issued shares of the Common
Stock of Energy calculated pursuant to Attachment 1 hereto.
The term "Option Shares" shall mean the number of shares of Energy
Common Stock that represents fifteen percent (15%) of the sum of (i) the number
of shares of Energy Common Stock outstanding as of the date of this letter
agreement, (ii) shares of Energy Common Stock issued after the date hereof and
before the Stock Option is exercised (or the Option Shares are fixed under
paragraph 8 hereof), (iii) shares of Energy Common Stock issuable after the date
hereof pursuant to stock options granted before the Stock Option is exercised
(and before the Option Shares are fixed pursuant to paragraph 8 hereof), and
(iv) shares of Common Stock of Energy issued pursuant to exercise of the Stock
Option; provided, however, shares issued or issuable pursuant to clauses (ii)
and (iii) hereof shall be included in calculating such sum only to the extent
the issuance of the shares of Common Stock of Energy is or would be "Dilutive"
(as defined below) to Stratum. For purposes of the Option Agreement and this
letter agreement, the issuance of Energy Common Stock to a third party would be
Dilutive, and the number of shares that Stratum is entitled to purchase as of
the date of exercise of the Stock Option would be increased, if such issuance of
Energy Common Stock is made in exchange for value that is less than the Reserve
Adjusted Book Value Per Share of such shares, as determined pursuant to Section
5 of the Option Agreement and this letter agreement. Notwithstanding the
foregoing, in the event that any stock option grantee whose stock option
previously was treated as Dilutive to Stratum forfeits the options they hold to
acquire Energy Common Stock, or any outstanding Common Stock is reacquired by
Energy, and Stratum as of the date of such forfeiture or reacquisition has not
yet exercised the Stock Option (and the Option Shares have not been fixed
pursuant to paragraph 8 hereof), the number of shares of Energy Common Stock
that Stratum will be entitled to purchase upon its exercise of the Stock Option
will be adjusted to reduce the number of Option Shares immediately after such
forfeiture or reacquisition event to take into account the above antidilution
adjustment attributable to the issuance of such forfeited options or reacquired
shares, as the case may be.
<PAGE>
Araxas Energy Corporation
XPLOR Energy, Inc.
September 24, 1997
Page 3
(3) For purposes of determining whether any shares of Energy Common
Stock issuable pursuant to exercise of an employee stock option would be issued
for a value at least equal to the Reserve Adjusted Book Value Per Share of
Energy Common Stock, the determination of Reserve Adjusted Book Value Per Share
(and Dilution, if any) will be conducted as of the date of the grant of the
option and not the date, if any, upon which the option is exercised.
(4) In connection with the determination of whether any shares of
Energy Common Stock have been issued for a value at least equal to their Reserve
Adjusted Book Value Per Share, (i) the oil and gas reserve and other asset
adjustments shall be calculated based on Section 5 of the Option Agreement
except that (A) the most recent report of the independent petroleum engineering
firm engaged by Energy shall be updated for current price information and lease
operating costs, and material changes in reserve quantities of which Energy is
aware, and (B) except as provided in Section 5 of the Stock Option Agreement,
the book value of Energy Common Stock shall be based upon financial information
of Energy as of the end of the most recent month (whether audited or not); and
(ii) if Stratum disagrees with the calculation of the Reserve Adjusted Book
Value Per Share of Energy, Stratum may, at its own expense, upon written notice
delivered to Energy within fifteen (15) days after receipt of the Reserve
Adjusted Book Value Per Share as determined by Energy obtain (C) the report of
one of Netherland Sewell & Associates, Inc., Ryder Scott Company and Cawley,
Gillespie & Associates, Inc., regarding the value of the oil and gas properties
of Energy and its subsidiaries, and/or (D) the audit report of an independent
accounting firm selected by Stratum from a list approved by Energy of the top
six (6) independent accounting firms with national practices having offices in
Houston, Texas, with respect to the most recent monthly financial statements of
Energy. If Stratum obtains such an engineering report and/or audit report, the
results of such report(s) shall be controlling in determining the Reserve
Adjusted Book Value Per Share of Energy Common Stock, provided that such report,
and the revised Reserve Adjusted Book Value Per Share as calculated by Stratum's
experts, are delivered to Energy within ninety (90) days of receipt by Stratum
of the notice of Energy of its calculation of Reserve Adjusted Book Value Per
Share.
(5) Stratum agrees that the shares of capital stock of Holdings issued
at the Closing, pursuant to the Acquisition Agreement, to the shareholders of
Energy and the South Coast Owners (defined in the Acquisition Agreement) will
not be Dilutive to Stratum, and, accordingly, no adjustment under Section 5 of
the Option Agreement (or this letter agreement) may be made to increase the
Option Shares.
(6) If, in connection with the IPO, the lead underwriter of the IPO
requests in writing that Stratum refrain from selling shares of common stock
that Stratum may acquire as a result of its exercise of the Stock Option,
Stratum will comply with such request, provided that in
<PAGE>
Araxas Energy Corporation
XPLOR Energy, Inc.
September 24, 1997
Page 4
no event will (i) the period of time during which Stratum must refrain from
selling such shares extend for more than 180 days after the IPO, or (b) Stratum
be subject to restrictions on the sale of Holdings common stock that are more
stringent than those applicable to W.E. Rowsey, III, Steven W. Nance and/or New
West Resources, Inc. and its affiliates (collectively, "New West"); provided,
however, Holdings will use its best efforts to cause the Registrable Securities
(defined below) to be registered pursuant to the registration statement relating
to the IPO, to permit such shares to be offered in the IPO in the same manner as
Holdings proposes to offer its shares. The term "Registrable Securities" means
the number of Option Shares to the extent purchased pursuant to the terms of the
Option Agreement and this letter agreement, and, with respect to which, Stratum
requests be registered pursuant to the IPO registration statement.
Notwithstanding the foregoing, the shares proposed to be sold in the IPO by
Stratum may be reduced by Holdings based on a written opinion received by
Holdings from the managing underwriter in the IPO to the effect that to include
the shares would adversely affect Holdings' financing plans or the IPO (any such
cut-back shall be effected on a pro rata basis with the shares (if any) proposed
to be sold in the IPO for the account of New West); provided, however, if shares
of Holdings common stock are being offered for the account of persons other than
Stratum and New West, such reduction shall first be made from the shares of
Holdings common stock intended to be offered by such other persons.
(7) After the Closing, and within 45 days of the end of each month
until the IPO, Holdings will provide Stratum copies of the unaudited
consolidated balance sheet and statements of income and cash flow of Holdings
and its subsidiaries for such month, and will provide production volume, copies
of any reserve reports relating to the Properties and other similar information
with respect to the overriding royalty payments made to Stratum's affiliate, as
is reasonably requested by Stratum (and, with respect to which, Stratum will
enter into a confidentiality agreement with Holdings to protect the interest of
Holdings as reasonably requested by Holdings). In addition, Holdings will make
its executive officers available as reasonably requested by Stratum to review
the results of operations and the business plans of Holdings and its
subsidiaries.
(8) On the date Holdings files with the Securities and Exchange
Commission a Form S-1 registration statement, the number of Option Shares and
the exercise price shall be permanently fixed as of such date, based upon the
terms of the Option Agreement and this letter agreement, without giving effect
to the shares of Holdings capital stock issued in the IPO or after the IPO;
provided, however, the number of Option Shares shall be subject to adjustment in
accordance with the Option Agreement and this letter agreement if any shares of
the common stock of Holdings are issued after the filing of such registration
statement but prior to the closing of the IPO at a price that is Dilutive.
<PAGE>
Araxas Energy Corporation
XPLOR Energy, Inc.
September 24, 1997
Page 5
(9) Stratum has no present intention or plan, nor is there any
contract or other arrangement enforceable against Stratum, that would require it
to exercise the Option at Closing and immediately sell the shares acquired
thereby.
(10) To the extent the provisions of this letter agreement and the
Option Agreement conflict, the provisions of this letter agreement shall
control. This letter agreement may be signed in multiple counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
If you are in agreement with the foregoing, please so indicate by
signing in the space provided below.
STRATUM GROUP, L.P.
By: /s/ Joseph M. Rinaldi
-----------------------------------------
Joseph M. Rinaldi,
President and Chief Executive Officer
STRATUM GROUP ENERGY PARTNERS, L.P.
By: Stratum Corp., its general partner
By: /s/ Joseph M. Rinaldi
------------------------------------------
Joseph M. Rinaldi,
President and Chief Executive Officer
<PAGE>
Araxas Energy Corporation
XPLOR Energy, Inc.
September 24, 1997
Page 6
AGREED TO AND ACCEPTED BY:
Araxas Energy Corporation
XPLOR Energy, Inc.
By: /s/ Steven W. Nance
--------------------------------
Steven W. Nance,
President and Chief Executive Officer
<PAGE>
Araxas Energy Corporation
XPLOR Energy, Inc.
September 24, 1997
Page 7
ATTACHMENT 1
------------
To Letter Agreement dated September 27, 1997 Between Stratum and Araxas
9-18-97
-------
Billy 75,000
NWR 37,697
GR, Inc. 5,931
Nance 1,456
Englert (proposed) 2,375
Doss (proposed) 2,375
Pool (proposed) 1,200
-------
126,034
Stratum [(126,034 / .85) - (126,034)] 22,241
-------
148,275
=======
<PAGE>
EXHIBIT 10.9
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE SUBJECT TO
CERTAIN RESTRICTIONS CONTAINED IN PART 8 HEREOF WITH RESPECT TO THEIR
TRANSFER, AND THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH
SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH
TRANSFER.
XPLOR ENERGY, INC.
STOCK PURCHASE WARRANT
----------------------
September 24, 1997 Certificate No. W-1
This Stock Purchase Warrant ("Warrant") is issued as of the 24th day of
September, 1997, by XPLOR Energy, Inc., a Delaware corporation (the "Company"),
to Credit Lyonnais New York Branch, a duly licensed branch under the New York
Banking Law of a foreign banking corporation organized under the laws of the
Republic of France (the "Registered Holder").
WHEREAS, a subsidiary of the Company and the Registered Holder are parties
to that certain Credit Agreement dated September 24, 1997 pursuant to which the
Company agreed to issue to the Registered Holder warrants to purchase shares of
Common Stock; and
WHEREAS, the Company intends to complete an initial public offering of the
Common Stock (the "Offering") in the near future.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Registered
Holder agree as follows.
Part 1. Issuance and Sale of Warrants.
The Company hereby grants to the Registered Holder or its registered
assigns the right to purchase from the Company a number of shares of Common
Stock equal to five percent (5%) of the total number of shares of Common Stock
offered by the Company in the Offering (including any shares of Common Stock
offered by the Company pursuant to any over-allotment option granted to the
underwriters of the Offering), at a price per share equal to one hundred twenty-
five percent (125%) of the "price to public" price per share (i.e., before
underwriter's discount) set forth in the final prospectus relating to the
Offering (the "Initial Exercise Price"). This Warrant shall expire and be
cancelled if the Offering has not occurred by May 24, 1998. Certain capitalized
terms used herein
-1-
<PAGE>
are defined in Part 6 hereof. The amount and kind of securities purchasable
pursuant to the rights granted hereunder and the purchase price for such
securities are subject to adjustment pursuant to the provisions contained in
this Warrant.
Part 2. Exercise of Warrant.
2A. Exercise Period. The Registered Holder may exercise, in whole or in
part (but not as to a fractional share of Common Stock), the purchase rights
represented by this Warrant at any time and from time to time after the
completion of the Offering to and including that date which is the second
anniversary thereof (the "Exercise Period").
2B. Exercise Procedure.
(i) This Warrant will be deemed to have been exercised when the Company has
received all of the following items (the "Exercise Time"):
(a) a completed Exercise Agreement, as described in paragraph 2C below,
executed by the Person exercising all or part of the purchase rights represented
by this Warrant (the "Purchaser");
(b) this Warrant;
(c) if this Warrant is not registered in the name of the Purchaser, an
Assignment or Assignments in the form set forth in Exhibit II hereto evidencing
the assignment of this Warrant to the Purchaser, in which case the Registered
Holder will have complied with the provisions set forth in Part 8 hereof; and
(d) a check payable to the Company in an amount equal to the product of the
Exercise Price (as such term is defined in Part 3 hereof) multiplied by the
number of shares of Common Stock being purchased upon such exercise.
(ii) Certificates for shares of Common Stock purchased upon exercise of
this Warrant will be delivered by the Company to the Purchaser within five (5)
business days after the date of the Exercise Time. Unless this Warrant has
expired or all of the purchase rights represented hereby have been exercised,
the Company will prepare a new Warrant, substantially identical hereto,
representing the rights formerly represented by this Warrant which have not
expired or been exercised and will, within such five-day period, deliver such
new Warrant to the Person designated for delivery in the Exercise Agreement.
(iii) The Common Stock issuable upon the exercise of this Warrant will
be deemed to have been issued to the Purchaser at the Exercise Time, and the
Purchaser will be deemed for all purposes to have become the record holder of
such Common Stock at the Exercise Time.
-2-
<PAGE>
(iv) The issuance of certificates for shares of Common Stock upon exercise
of this Warrant will be made without charge to the Registered Holder or the
Purchaser for any issuance tax in respect thereof or other cost incurred by the
Company in connection with such exercise and the related issuance of shares of
Common Stock. Each share of Common Stock issuable upon exercise of this Warrant
will, upon payment of the Exercise Price therefor, be fully paid and
nonassessable and free from all liens and charges with respect to the issuance
thereof.
(v) The Company will not close its books against the transfer of this
Warrant or of any share of Common Stock issued or issuable upon the exercise of
this Warrant in any manner which interferes with the timely exercise of this
Warrant. The Company will from time to time take all such action as may be
necessary to assure that the par value per share of the unissued Common Stock
acquirable upon exercise of this Warrant is at all times equal to or less than
the Exercise Price then in effect.
2C. Exercise Agreement. Upon any exercise of this Warrant, the Exercise
Agreement will be substantially in the form set forth in Exhibit I hereto,
except that if the shares of Common Stock are not to be issued in the name of
the Person in whose name this Warrant is registered, the Exercise Agreement will
also state the name of the Person to whom the certificates for the shares of
Common Stock are to be issued, and if the number of shares of Common Stock to be
issued does not include all the shares of Common Stock purchasable hereunder, it
will also state the name of the Person to whom a new Warrant for the unexercised
portion of the rights hereunder is to be delivered. Such Exercise Agreement
will be dated the actual date of execution thereof.
2D. Fractional Shares. If a fractional share of Common Stock would, but
for the provisions of paragraph 2A, be issuable upon exercise of the rights
represented by this Warrant, the Company will, within seven (7) days after the
date of the Exercise Time, deliver to the Purchaser a check payable to the
Purchaser in lieu of such fractional share in an amount equal to the difference
between Market Price of such fractional share as of the date of the Exercise
Time and the Exercise Price of such fractional share.
Part 3. Adjustment of Exercise Price and Number of Shares. After the
Offering, the Initial Exercise Price shall be subject to adjustment from time to
time as provided in this Part 3 (such price or such price as last adjusted
pursuant to the terms hereof, as the case may be, is herein called the "Exercise
Price"), and the number of shares of Common Stock obtainable upon exercise of
this Warrant shall be subject to adjustment from time to time as provided in
this Part 3.
3A. Subdivision or Combination of Common Stock. If the Company at any
time after the Offering subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the number of shares of Common
Stock obtainable upon exercise of this Warrant will be proportionately
increased. If the Company at any time after the Offering combines (by reverse
stock split or otherwise) one or more classes of its outstanding shares of
Common Stock into a smaller number of shares, the number of shares of Common
Stock obtainable upon exercise of this Warrant will be proportionately
-3-
<PAGE>
decreased. In the event of any adjustment of the total number of shares of
Common Stock obtainable upon the exercise of the unexercised portion of the
Warrant pursuant to this Part 3A, the Exercise Price shall be adjusted to be the
amount resulting from dividing the number of shares of Common Stock covered by
the Warrant immediately after such adjustment into the total amount payable upon
exercise of the Warrant in full immediately prior to such adjustment. Such
adjustment shall be made successively whenever any event listed above shall
occur.
3B. Reorganization, Reclassification, Consolidation, Merger or Sale. Any
capital reorganization, reclassification, consolidation, merger or sale of all
or substantially all of the Company's assets to another Person, which is
effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for Common Stock, is referred to herein as an
"Organic Change." After the Offering and prior to the consummation of any
Organic Change, the Company will make appropriate provision (in form and
substance satisfactory to the Registered Holder) to insure that the Registered
Holder will thereafter have the right to acquire and receive in lieu of or
addition to the shares of Common Stock immediately theretofore acquirable and
receivable upon the exercise of such holder's Warrant, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore acquirable and
receivable upon exercise of such holder's Warrant had such Organic Change not
taken place.
3C. Certain Events. If any event occurs of the type contemplated by the
provisions of this Part 3 but not expressly provided for by such provisions,
then the Company's board of directors will make an appropriate adjustment in the
number of shares of Common Stock obtainable upon exercise of this Warrant so as
to protect the rights of the holders of the Warrants.
3D. Notices.
(i) Immediately upon any adjustment of the Exercise Price, the Company will
give written notice thereof to the Registered Holder.
(ii) The Company will give written notice to the Registered Holder at least
twenty (20) days prior to the date on which the Company closes its books or
takes a record (A) with respect to any dividend or distribution upon the Common
Stock, (B) with respect to any pro rata subscription offer to holders of Common
Stock or (C) for determining rights to vote with respect to any Organic Change,
dissolution or liquidation.
(iii) The Company will also give written notice to the Registered Holder at
least twenty (20) days prior to the date on which any Organic Change,
dissolution or liquidation will take place.
Part 4. Definitions. The following terms have meanings set forth below:
"Common Stock" means the Company's Common Stock, par value $0.001 per
share.
-4-
<PAGE>
"Market Price" means as to any security the average of the closing prices
of such security's sales on all domestic securities exchanges on which such
security may at the time be listed, or, if there have been no sales on all such
exchanges on any day, the average of the closing bid and asked prices on all
such exchanges at the end of such day, or, if on any day such security is not so
listed, the closing sale price on such day in the Nasdaq Stock Market, or if
there is no closing sale price the average of the representative bid and asked
prices quoted in the Nasdaq Stock Market as of 4:00 P.M., New York time, on such
day, or, if on any day such security is not quoted in the Nasdaq Stock Market,
the average of the highest bid and lowest asked prices on such day in the
domestic over-the-counter market as reported by the OTC Bulletin Board, in each
such case averaged over a period of twenty-one (21) days consisting of the day
as of which "Market Price" is being determined and the twenty (20) consecutive
business days prior to such day; provided that if such security is listed on any
domestic securities exchange the term "business days" as used in this sentence
means business days on which such exchange is open for trading. If at any time
such security is not listed on any domestic securities exchange or quoted in the
Nasdaq Stock Market or the domestic over-the-counter market, the "Market Price"
will be the fair value thereof determined jointly by the Company and the
Registered Holder; provided that if such parties are unable to reach agreement
within a reasonable time, such fair value will be determined by an appraiser
jointly selected by the Company and the Registered Holder. The Company and the
Registered Holder shall each pay one half of the fee of any such appraiser.
"Person" means an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
Part 5. No Voting Rights, Limitations of Liability. This Warrant will
not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Registered Holder to purchase Common Stock, and no enumeration
herein of the rights or privileges of the Registered Holder shall give rise to
any liability of such holder for the Exercise Price of Common Stock acquirable
by exercise hereof or as a stockholder of the Company.
Part 6. Warrant Transferable. Subject to the transfer conditions
referred to in the legend endorsed hereon, this Warrant and all rights hereunder
are transferable, in whole or in part, without charge to the Registered Holder,
upon surrender of this Warrant with a properly executed Assignment (in the form
of Exhibit II hereto) at the principal office of the Company. The parties
hereto are simultaneously entering into that certain Registration Rights
Agreement of even date herewith (the "Rights Agreement"). All benefits of the
Rights Agreement belong to the Registered Holder and will transfer to its
successors or assigns.
Part 7. Warrant Exchangeable for Different Denominations. This Warrant
is exchangeable, upon the surrender hereof by the Registered Holder at the
principal office of the Company, for new Warrants of like tenor representing in
the aggregate the purchase rights hereunder, and each of such new Warrants will
represent such portion of such rights as is designated by the Registered Holder
at the time of such surrender. The date the Company initially issues this
Warrant will be deemed
-5-
<PAGE>
to be the date of issuance hereof regardless of the number of times new
certificates representing the unexpired and unexercised rights formerly
represented by this Warrant shall be issued. All Warrants representing portions
of the rights hereunder are referred to herein as the "Warrants."
Part 8. Replacement. Upon receipt of evidence reasonable satisfactory to
the Company (an affidavit of the Registered Holder will be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing this Warrant, and in the case of any such loss, theft or destruction,
upon receipt of indemnity reasonably satisfactory to the Company (provided that
if the holder is the initial holder, its own agreement will be satisfactory),
or, in the case of any such mutilation upon surrender of such certificate, the
Company will (at its expense) execute and deliver in lieu of such certificate a
new certificate of like kind representing the same rights represented by such
lost, stolen, destroyed or mutilated certificate and dated the date of such
lost, stolen, destroyed or mutilated certificate.
Part 9. Notices. Except as otherwise expressly provided herein, all notices
referred to in this Warrant will be in writing and will be delivered personally
or by registered or certified mail, return receipt requested, postage prepaid
and will be deemed to have been given when so delivered or mailed (i) to the
Company, at its principal executive offices, and (ii) to the Registered Holder
of this Warrant, at such holder's address as it appears in the records of the
Company (unless otherwise indicated by any such holder).
Part 10. Amendment and Waiver. Except as otherwise provided herein, the
provisions of this Warrant may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of the Registered
Holder; provided that no such action may change the Exercise Price of the
Warrants or the number of shares or class of stock obtainable upon exercise of
each Warrant.
Part 11. Descriptive Headings; Governing Law. The descriptive headings of
the several parts and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. The construction, validity
and interpretation of this Warrant will be governed by the laws of the State of
Texas.
-6-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and
attested by its duly authorized officers under its corporate seal and to be
dated as of the date first set forth above.
XPLOR ENERGY, INC.
By: /s/ Steven W. Nance
-------------------
Name: Steven W. Nance
---------------
Title: President
---------
[Corporate Seal]
Attest:
/s/ W. E. Rowsey, III
- ------------------------
Title: Secretary
---------
-7-
<PAGE>
EXHIBIT I
---------
EXERCISE AGREEMENT
------------------
To: _____________________________ Dated: _____________________________
The undersigned, pursuant to the provisions set forth in the attached
Warrant (Certificate No. W-1), hereby agrees to subscribe for and purchase
___________ shares of the Common Stock covered by such Warrant and makes payment
herewith in full therefor at the price per share provided by such Warrant.
Signature: ____________________________
Address: ______________________________
______________________________
-8-
<PAGE>
EXHIBIT II
----------
ASSIGNMENT
----------
FOR VALUE RECEIVED, __________ hereby sells, assigns and transfers all of
the rights of the undersigned under the attached Warrant (Certificate No. W-1)
with respect to the number of shares of the Common Stock covered thereby set
forth below, unto:
NAMES OF ASSIGNEE ADDRESS NO. OF SHARES
- ----------------- ------- -------------
Signature: ____________________________
Witness: ______________________________
-9-
<PAGE>
EXHIBIT 10.10
RELEASE AND TERMINATION AGREEMENT
This Release and Termination Agreement (the "Agreement") is executed as of
the 24th day of September, 1997, by and among South Coast Exploration Company
("South Coast"), Weisser, Johnson & Co. Capital Corporation ("Weisser Capital"),
Weisser, Johnson & Co. ("Weisser Co."), Ron A. Krenzke ("Krenzke"), Craig S.
Davis ("Davis") and Philip V. Duggan ("Duggan").
RECITALS
WHEREAS, as of September 1, 1995, South Coast, Weisser Co., Krenzke, Davis
and Duggan entered into an Option Agreement (the "Option Agreement") in which
Krenzke, Davis and Duggan granted Weisser Co. an option to purchase certain
shares of South Coast;
WHEREAS, as of December 16, 1996, South Coast and Weisser Capital entered
into a Letter Agreement (the "Letter Agreement") which specified agreements
between the parties concerning the assistance of Weisser Capital to South Coast
as its financial advisor in connection with possible business combinations and
transactions contemplated by South Coast;
WHEREAS, pursuant to Section 10.02(i) of the Acquisition Agreement and Plan
of Organization (the "Acquisition Agreement") dated as of August 19, 1997, by
and among Araxas Energy Corporation, an Oklahoma corporation, Araxas Holdings,
Inc., and the other parties named in the Acquisition Agreement, South Coast
agreed that prior to the closing of the Acquisition Agreement it would have the
Option Agreement and Letter Agreement waived, released, settled or discharged
without any payment or other consideration paid or incurred by the South Coast
Entities (as defined in the Acquisition Agreement) (except as contemplated in
the Disclosure Schedule of the South Coast Entities); and
<PAGE>
WHEREAS, Weisser Co. and Weisser Capital have agreed to release and
terminate the Option Agreement and the Letter Agreement, respectively, subject
to the conditions of this Agreement.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Weisser Co. and Weisser Capital, respectively, hereby terminate the
Option Agreement and the Letter Agreement and release and discharge all of their
rights and interests held by them pursuant to the provisions of the Option
Agreement and the Letter Agreement and all documents relating to the
transactions contemplated by such agreements.
2. In exchange for the release of the Option Agreement and the Letter
Agreement Krenzke, Davis and Duggan agree to grant Weisser Co. an option (the
"Option") to purchase certain shares of Common Stock of XPLOR Energy, Inc.
("XPLOR") received by Krenzke, Davis and Duggan pursuant to the transactions
contemplated in the Acquisition Agreement. This Option expires on September 1,
2002 and represents the right to purchase an aggregate total of 8,658 shares of
the Common Stock of XPLOR from Krenzke, Davis and Duggan. The terms of the
Option are specifically set forth in a new option agreement executed by Krenzke,
Davis, Duggan and Weisser Co. attached to this Agreement as Exhibit "A."
3. South Coast shall also pay Weisser Capital a fee of $150,000 for
advising fees owed to Weisser Capital pursuant to the Letter Agreement, which
fee shall be payable at the closing of the Credit Agreement (the "Credit
Agreement") between Araxas SPV-1, Inc. and Credit Lyonnais New
-2-
<PAGE>
York Branch dated as of September 24, 1997, or at such other time as agreed to
between the parties to this Agreement.
4. South Coast shall also pay to Weisser Capital on each October 1,
January 1, April 1, and July 1, beginning on October 1, 1997 and until the
Common Stock of XPLOR is either traded on a public securities exchange or this
Section 4 is terminated upon reasonable notice to Weisser Capital: (a) $25,000
and (b) all reasonable out-of-pocket expenses incurred by Weisser Capital in
connection with its transactions with South Coast.
5. Weisser Co. agrees to grant its proxy to Krenzke to exercise voting
rights on any XPLOR Common Stock received by exercise of the Option until
December 15, 1998, or the date on which the Common Stock of XPLOR is traded on a
public securities exchange. Until the time XPLOR's Common stock is publicly
traded, Weisser Co. shall also grant to Krenzke, Davis and Duggan, in the event
that Weisser Co. decides to sell any or all of its interests in any XPLOR Common
Stock held by it, a right to purchase the interests offered for sale at the
sales price specified by Weisser Co. on a pro rata basis. Each of Krenzke,
Davis and Duggan will have thirty (30) days from Weisser Co.'s written notice of
the intention to sell and at least fifteen (15) days from Weisser Co.'s written
notice of the sale price to commit to purchase the interests, and an additional
thirty (30) days from such commitment to pay the purchase price to Weisser Co.
If any of Krenzke, Davis or Duggan declines to purchase his pro rata portion of
the offered interests, Weisser Co. may sell such interests left unpurchased at
or above the specified sales price, but not at a lower price.
6. South Coast agrees to continue to indemnify Weisser Capital in
accordance with the indemnification provision (the "Indemnification Provisions")
attached to this Agreement as
-3-
<PAGE>
Exhibit "B," which indemnification Provisions are incorporated herein and made a
part hereof for all purposes.
7. The parties agree that any dispute hereunder, other than matters
relating to the indemnification provisions attached hereto, shall be submitted
to arbitration under the commercial arbitration rules of the American
Arbitration Association. The decision of such arbitrator or panel of
arbitrators shall be conclusive and binding upon the parties. Such proceeding
shall be promptly entered into in Houston, Texas and may be governed by and
conducted in accordance with the laws of the State of Texas.
8. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY
THE LAWS OF THE STATE OF TEXAS APPLICABLE TO AGREEMENTS MADE AND TO BE FULLY
PERFORMED THEREIN.
9. The benefits of this Agreement shall inure to the respective successors
and assigns of the parties hereto and of the indemnified parties hereunder and
their successors and assigns and representatives, and the obligations and
liabilities assumed in this Agreement by the parties hereto shall be binding
upon their respective successors and assigns.
10. For the convenience of the parties, any number of counterparts of this
Agreement may be executed by the parties hereto. Each such counterpart shall
be, and shall be deemed to be, an original instrument, but all such counterparts
taken together shall constitute one and the same Agreement. This Agreement may
not be modified or amended except in writing signed by the parties hereto.
***************
-4-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
first above written by the parties or the authorized representative of the
parties.
WEISSER, JOHNSON & CO. CAPITAL CORPORATION
By: /s/ Frank M. Weisser
-----------------------------------
Frank M. Weisser, Managing Director
WEISSER, JOHNSON & CO.
By: /s/ Frank M. Weisser
-----------------------------------
Frank M. Weisser, Managing Director
SOUTH COAST EXPLORATION COMPANY
By: /s/ Ron A. Krenzke
-----------------------------------
Ron A. Krenzke, President
/s/ Craig S. Davis
-----------------------------------
Craig S. Davis
/s/ Ron A. Krenzke
-----------------------------------
Ron A. Krenzke
/s/ Philip V. Duggan
-----------------------------------
Philip V. Duggan
-5-
<PAGE>
EXHIBIT "B"
INDEMNIFICATION PROVISIONS
South Coast Exploration Company (the "Company") agrees to indemnify and
hold harmless, Weisser, Johnson & Co. Capital Corporation (the "Advisor")
against any and all losses, claims, damages, liabilities, obligations,
penalties, judgments, awards, costs, expenses and disbursements (and any and all
actions, suits, proceedings and investigations in respect thereof and any and
all legal and other costs, expenses or disbursements in giving testimony or
furnishing documents in response to a subpoena or otherwise), including, without
limitation, the costs, expenses and disbursements, as and when incurred, of
investigations, preparing or defending any such action, suit, proceeding or
investigation (whether or not in connection with litigation in which the Advisor
is a party), directly or indirectly, caused by, relating to, based upon, arising
out of or in connection with (a) the Advisor acting for the Company, including,
without limitation, any act or omission by the Advisor in connection with its
acceptance of or the performance or nonperformance of its obligations under the
agreement dated December 16, 1996, between the Advisor and the Company, as it
may be amended from time to time (the "Agreement"), (b) any untrue statement or
alleged untrue statement of a material fact contained in, or omissions or
alleged omissions from information furnished by the Company to the Advisor;
provided, however, such indemnity agreement shall not apply to any portion of
any such loss, claim, damage, obligation, penalty, judgment by a court of
competent jurisdiction (not subject to further appeal) to have resulted
primarily and directly from the gross negligence or willful misconduct of the
Advisor. The Company also agrees that the Advisor shall not have any liability
(whether direct or indirect, in contract or tort or otherwise) to the Company or
to any person (including, without limitation, Company shareholders) claiming
through the Company for or in connection with the engagement of the Advisor,
except to the extent of any such liability that is found in a final judgment by
a court of competent jurisdiction (not subject to further appeal) to have
resulted primarily and directly from the Advisor's gross negligence or willful
misconduct.
These Indemnification Provisions shall be in addition to any liability
which the Company may otherwise have to the Advisor and shall extend to
affiliated entities, directors, officers, employees, legal counsel, agents and
controlling persons (within the meaning of the federal securities laws). All
references to the Advisor in these Indemnification Provisions shall be
understood to include any and all of the foregoing.
If any action, suit, proceeding or investigation is commenced, as to which
the Advisor proposes to demand indemnification, it shall notify the Company with
reasonable promptness; provided, however, that any failure by the Advisor to
notify the Company shall not relieve the Company from its obligations hereunder.
The Advisor shall have the right to retain counsel of its own choice to
represent it, and the Company shall pay the fees, expenses and disbursements of
such counsel; and such counsel shall, to the extent consistent with its
professional responsibilities,
<PAGE>
cooperate with the Company and any counsel designated by the Company. The
Company shall be liable for any settlement of any claims against the Advisor
made with the Company's written consent, which consent shall not be unreasonably
withheld. The Company shall not, without the prior written consent of the
Advisor, settle or compromise any claim, or permit a default or consent to the
entry of any judgment in respect thereof, unless such settlement, compromise or
consent includes, as an unconditional item thereof, the giving by the claimant
to the Advisor of an unconditional release from all liability in respect of such
claim.
In order to provide for just and equitable contribution, if a claim for
indemnification pursuant to these Indemnification Provisions is made but it is
found in a final judgment by a court of competent jurisdiction (not subject to
further appeal) that such indemnification may not be enforced in such case, even
though the express provisions hereof provide for indemnification in such case,
then the Company, on the one hand, and the Advisor, on the other hand, shall
contribute to the losses, claims, damages, obligations, penalties, judgments,
awards, liabilities, costs, expenses and disbursements to which the indemnified
person may be subject in accordance with the relative benefits received by the
Company, on the one hand, and the Advisor on the other hand, and also the
relative fault of the Company, on the one hand, and the Advisor on the other
hand, in connection with the statements, acts or omissions which resulted in
such losses, claims, damages, obligations, penalties, judgments, awards,
liabilities, costs, expenses and disbursements and the relevant equitable
considerations shall also be considered. No person found liable for a
fraudulent misrepresentation shall be entitled to contribution from any person
who is not also found liable for such fraudulent misrepresentation.
Notwithstanding the foregoing, the Advisor shall not be obligated to contribute
any amount hereunder that exceeds the amount of fees previously received by the
Advisor pursuant to the Agreement.
Neither termination nor completion of the engagement of the Advisor
referred to above shall affect these Indemnification Provisions which shall then
remain operative and in full force and effect.
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EXHIBIT 10.11
XPLOR ENERGY, INC.
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is being executed and delivered on this
24th day of September, 1997, to be effective as of such date (this "Agreement"),
by and between XPLOR Energy, Inc., a Delaware corporation (the "Company"), and
Credit Lyonnais New York Branch, a duly licensed branch under the New York
Banking Law of a foreign bank corporation organized under the laws of the
Republic of France ("Stockholder").
W I T N E S S E T H:
WHEREAS, the Company and Stockholder entered into that certain Stock
Purchase Warrant of even date herewith (the "Warrant").
NOW, THEREFORE, in consideration of the premises and the mutual terms,
covenants and conditions herein contained, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
ARTICLE I
REGISTRATION RIGHTS
The Company and Stockholder covenant and agree as follows:
1.1 Definitions. For purposes of this Agreement:
(a) The terms "register," "registered" and "registration" refer to a
registration of securities effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act (as
defined below), and the declaration or ordering of effectiveness of such
registration statement or document.
(b) The term "Registrable Securities" means (i) the Common Stock owned
by Stockholder as a result of exercising all or a portion of its rights
under the Warrant, and (ii) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such Common Stock.
(c) The term "Restricted Securities" means the Registrable Securities
upon original issuance thereof, subject to the provisions of Section 1.2
hereof.
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(d) The term "Person" means an individual, partnership, corporation,
limited liability company, trust or unincorporated organization, or
government or agency or political subdivision thereof.
(e) The term "Board" means the Board of Directors of the Company.
(f) The term "Commission" means the Securities and Exchange
Commission.
(g) The term "Securities Act" means the Securities Act of 1933, as
amended, and the term "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(h) The term "Best Efforts" means a Person's good faith best efforts
in accordance with reasonable commercial practice.
1.2 Securities Subject to this Agreement. The securities entitled to the
benefits of this Agreement are the Registrable Securities but with respect to
any particular Registrable Security, only so long as such security continues to
be a Restricted Security. A Registrable Security ceases to be a Restricted
Security when (a) it has been effectively registered under the Securities Act
and disposed of in accordance with the registration statement covering it, (b)
it is sold pursuant to Rule 144 or Rule 145 (or any similar provision then in
force) under the Securities Act or (c) it is eligible for sale pursuant to Rule
144 or Rule 145 (or any similar provision then in force) under the Securities
Act without any volume limitations.
1.3 Registration on Request.
(a) If, at any time after the consummation of an initial public
offering ("IPO") of Common Stock (the "IPO Date"), the Company shall
receive a written request from Stockholder that the Company file a
registration statement under the Securities Act covering the registration
of all or part (but not less than seventy-five percent (75%) of the total
number of shares of Common Stock that may be acquired as a result of the
exercise of the entire Warrant) of the Registrable Securities, then the
Company shall, subject to the limitations of Sections 1.5 and 1.7 hereof,
effect the registration of all Registrable Securities that Stockholder
requests to be registered as soon as practicable after the receipt by the
Company of such written request by means of a shelf registration statement
on any appropriate form under the Securities Act for an offering to be made
on a continuous basis pursuant to Rule 415 under the Securities Act. The
Company agrees to use its Best Efforts to keep such shelf registration
statement continuously effective, in the case of a registration statement
on Form S-3, for a period of 120 days, and for a period of 60 days in the
case of any other shelf registration statement, following the date on which
such shelf registration statement is declared effective (plus the number of
days of any discontinuance described below).
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(b) If the requesting Stockholder intends to distribute the
Registrable Securities covered by the request by means of an underwriting,
it shall so advise the Company as a part of its request made pursuant to
this Section 1.3.
(c) The Company is obligated to effect one registration pursuant to
this Section 1.3, in addition to any registrations in which the Stockholder
may participate pursuant to the other provisions of this Agreement. A
registration shall not be deemed to have been effected (i) unless it has
become effective and remained effective for the period specified in Section
1.3(a) or, if earlier, until the Registrable Securities registered under
such registration statement have been sold, or (ii) if, after it has become
effective, such registration is terminated by a stop order, injunction or
other order of the Commission or other governmental agency or court.
(d) If none of the Registrable Securities registered pursuant to any
shelf registration pursuant to this Section 1.3 are to be sold in an
underwritten offering, shares of Common Stock other than the Registrable
Securities may be included among the securities covered by the registration
statement effected pursuant to this Section 1.3. If any of the Registrable
Securities registered pursuant to this Section 1.3 are to be sold in an
underwritten offering, shares of Common Stock other than the Registrable
Securities may be included among the securities covered by the registration
statement subject to the right to exclude such other securities under
Section 1.3(e).
(e) If any of the Registrable Securities registered pursuant to any
shelf registration pursuant to this Section 1.3 are to be sold in an
underwritten offering, and the managing underwriter or underwriters deliver
an opinion to the Company and the requesting Stockholder that the total
number of shares of Common Stock which Stockholder and any other Persons
intend to include in such offering exceeds the number of shares that can be
sold in such offering, then there shall be included in such underwritten
offering the number of shares of Common Stock which in the opinion of such
underwriters can be sold, and such shares shall be allocated pro rata among
the holders of shares of Common Stock to be sold on the basis of the number
of shares of Common Stock to be registered; provided, that if shares of
Common Stock are being offered for the account of other Persons pursuant to
Section 1.3 (including the Company) as well as Stockholder, a reduction in
number of shares shall first be made from the shares intended to be offered
by such Persons other than the Stockholder. Anything in this Agreement to
the contrary notwithstanding, in the event that the Stockholder requests
registration of their Registrable Securities pursuant to this Section 1.3
and shares representing 50% or more of the Registrable Securities requested
to be included by Stockholder are excluded from the offering by the
managing underwriter or underwriters thereof, then such registration shall
not constitute, or be counted as, the registration requested by the
Stockholder pursuant to Section 1.3 hereof.
(f) Notwithstanding the foregoing, the Company shall not be required
to register any Registrable Securities pursuant to this Section 1.3: (i)
during a reasonable period of
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time, not to exceed six months, following the IPO Date, if the Company has
been advised by the managing underwriters for the IPO that a registration
of Registrable Securities pursuant to this Section 1.3 would adversely
affect the market for the Common Stock, (ii) during a reasonable period of
time (not to exceed 120 days) with respect to which the Board of Directors
of the Company has determined that a registration of Registrable Securities
pursuant to this Section 1.3 would adversely affect the Company because of
a material nonpublic acquisition or similar material transaction that is
pending or imminent, or (iii) if, within the six-month period preceding the
date Company receives the written request of Stockholder requesting
registration pursuant to Section 1.3, Common Stock of Company was
registered under the Securities Act for sale for the account of any Person
pursuant to an effective registration statement, and the Stockholder was
offered any opportunity to have the Registrable Securities included therein
and declined to request that a majority of such shares be included.
1.4 Company Registration. At any time the Company proposes to register
(including for this purpose a registration effected by the Company for
stockholders other than the Stockholder) any shares of its Common Stock under
the Securities Act for sale (other than registration of the Common Stock for
issuance or sale (a) pursuant to Section 1.3 hereof or (b) in connection with
(i) employee or non-employee director compensation or benefit programs, (ii) an
exchange offer or an offering of securities solely to the existing stockholders
or employees of the Company or (iii) an acquisition, merger or other business
combination using a registration statement on Form S-4 or any successor or other
appropriate form), the Company will give prompt written notice (which, in any
event, shall be given no less than 15 days prior to the filing of a registration
statement with respect to such offering) to the Stockholder of its intention so
to do and, upon the written request of Stockholder sent within 15 days after the
effective date of any such notice, the Company will, subject to the provisions
of Sections 1.5 and 1.7 hereof, use its Best Efforts to cause all Registrable
Securities as to which Stockholder shall have so requested registration, to be
registered under the Securities Act, all to the extent necessary to permit the
sale in such offering of the Registrable Securities so registered on behalf of
Stockholder in the same manner as the Company (or stockholder other than
Stockholder, as the case may be) proposes to offer its shares of Common Stock.
The Company shall use its Best Efforts to cause the managing underwriter or
underwriters of a proposed underwritten offering to permit the Registrable
Securities requested by the Stockholder to be included in the registration for
such offering on the same terms and conditions as the shares of Common Stock of
the Company included therein. Notwithstanding the forgoing, if the managing
underwriter or underwriters of such offering deliver an opinion to the Company
and the requesting Stockholder that the total number of shares of Common Stock
which the requesting Stockholder or the Company, and any other Person, intend to
include in such offering will in the good faith opinion of such managing
underwriter or underwriters materially and adversely affect the success of such
offering, then the number of shares of Common Stock to be offered for the
account of the Stockholder shall be reduced pro rata based upon the number of
shares of Common Stock proposed to be sold by the Stockholder and other Persons
(excluding Company) to the extent necessary to reduce the total number of shares
of Common Stock to be included in such offering to the number of shares
recommended by such managing underwriter.
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1.5 Obligations of the Company. If and whenever the Company is required
by the provisions of this Agreement to use its Best Efforts to effect the
registration of any Registrable Securities, the Company shall as expeditiously
as reasonably practicable:
(a) Prepare and file with the Commission a registration statement on
an appropriate form under the Securities Act and use its Best Efforts to
cause such registration statement to become effective; provided, that
before filing a registration statement or prospectus or any amendments or
supplements thereto, including documents incorporated by reference after
the initial filing of any registration statement, as soon as practicable,
the Company will finish to the requesting Stockholder and the underwriters,
if any, copies of all such documents proposed to be filed, which documents
will be subject to the review of the requesting Stockholder and the
underwriters, and the Company will not file any registration statement or
amendment thereto, or any prospectus or any supplement thereto (including
such documents incorporated by reference) to which the requesting
Stockholder or the underwriters, if any, shall reasonably object in the
light of the requirements of the Securities Act and any other applicable
laws and regulations.
(b) Prepare and file with the Commission such amendments and post-
effective amendments to a registration statement as may be necessary to
keep such registration statement effective for the applicable period; cause
the related prospectus to be filed pursuant to Rule 424(b) under the
Securities Act; cause such prospectus to be supplemented by any required
prospectus supplement and, as so supplemented, to be filed pursuant to Rule
424(b) under the Securities Act; and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement during the applicable period in accordance with
the intended methods of disposition set forth in such registration
statement or supplement to such prospectus.
(c) Notify the requesting Stockholder and the managing underwriters,
if any, promptly, and (if requested by any such Person) confirm such
advice in writing, (i) when a prospectus or any prospectus supplement or
post-effective amendment has been filed, and, with respect to a
registration statement or any post-effective amendment, when the same has
become effective, (ii) of any request by the Commission for amendments or
supplements to a registration statement or related prospectus or for
additional information, (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of a registration statement or the
initiation of any proceeding for that purpose, (iv) if at any time the
representations and warranties of the Company contemplated by Section
1.5(l) cease to be true and correct, (v) of the receipt by the Company of
any notification with respect to the suspension or qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation
of any proceeding for such purpose, (vi) of the happening of any event
which requires the making of any changes in a registration statement or
related prospectus so that such documents will not 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
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<PAGE>
misleading and (vii) of the Company's reasonable determination that a post-
effective amendment to a registration statement would be appropriate or
that there exist circumstances not yet disclosed to the public which make
further sales under such registration statement inadvisable pending such
disclosures and post-effective amendment.
(d) Make reasonable efforts to obtain the withdrawal of any order
suspending the effectiveness of a registration statement, or the lifting of
any suspension of the qualification of any of the Registrable Securities
for sale in any jurisdiction, at the earliest possible moment.
(e) If requested by the managing underwriters or Stockholder in
connection with an underwritten offering, immediately incorporate in a
prospectus supplement or post-effective amendment such information as the
managing underwriters and Stockholder agree should be included therein
relating to such sale and distribution of Registrable Securities,
including, without limitation, information with respect to the number of
shares of Registrable Securities being sold to such underwriters and the
purchase price being paid therefor by such underwriters and with respect to
any other terms of the underwritten (or best efforts underwritten) offering
of the Registrable Securities to be sold in such offering; make all
required filings of such prospectus supplement or post-effective amendment
as soon as notified of the matters to be incorporated in such prospectus
supplement or post-effective amendment; and supplement or make amendments
to any registration statement if requested by Stockholder or any
underwriter of such Registrable Securities.
(f) Furnish to Stockholder requesting registration and each managing
underwriter, if any, without charge, at least one signed copy of the
registration statement, any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference).
(g) Deliver without charge to Stockholder requesting registration and
the underwriters, if any, as many copies of the prospectus or prospectuses
(including each preliminary prospectus) and any amendment or supplement
thereto as such Persons may reasonably request; and the Company consents to
the use of such prospectus or any amendment or supplement thereto by
Stockholder and the underwriters, if any, in connection with the offer and
sale of the Registrable Securities covered by such prospectus or any
amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, register
or qualify or cooperate with the Stockholder requesting registration, the
underwriters, if any, and respective counsel in connection with the
registration or qualification of such Registrable Securities for offer and
sale under the securities or Blue Sky laws of such jurisdictions as
Stockholder or an underwriter reasonably requests in writing; keep each
such registration or qualification effective during the period such
registration statement is required to be kept
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effective and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by the applicable registration statement; provided, however, that
the Company will not be required in connection therewith or as a condition
thereto to qualify generally to do business or subject itself to general
service of process in any such jurisdiction where it is not then so
subject.
(i) Cooperate with Stockholder and the managing underwriters, if any,
to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold and not bearing any
restrictive legends; and enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriters may
request at least two business days prior to any sale of Registrable
Securities to the underwriters.
(j) Use its Best Efforts to cause the Registrable Securities covered
by the applicable registration statement to be registered with or approved
by such other governmental agencies or authorities as may be necessary, if
any, to consummate the disposition of such Registrable Securities.
(k) Upon the occurrence of any event contemplated by Section 1.5(c)
(ii) - (vii) above, prepare a supplement or post-effective amendment to the
applicable registration statement or related prospectus or any document
incorporated therein by reference or file any other required document so
that, as thereafter delivered to the purchaser of the Registrable
Securities being sold thereunder, such prospectus will not contain an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading.
(l) Enter into such agreements (including an underwriting agreement)
and take all such other actions in connection therewith in order to
expedite or facilitate the disposition of such Registrable Securities and
in such connection, whether or not an underwriting agreement is entered
into and whether or not the Registrable Securities to be covered by such
registration are to be offered in an underwritten offering: (i) make such
representations and warranties to the Stockholder with respect to the
registration statement, prospectus and documents incorporated by reference,
if any, in form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and updates
thereof with respect to the registration statement and the prospectus in
the form, scope and substance which are customarily delivered in
underwritten offerings; (iii) in the case of an underwritten offering,
enter into an underwriting agreement in form, scope and substance as is
customary in underwritten offerings and obtain opinions of counsel to the
Company and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the managing underwriters
and the Stockholder) addressed to Stockholder and the underwriters, if any,
covering the matters customarily covered in opinions delivered in
underwritten offerings and such other matters as may be reasonably
requested by
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Stockholder and such underwriters; (iv) obtain "cold comfort" letters and
updates thereof from the Company's independent certified public accountants
addressed to Stockholder and the underwriters, if any, such letters to be
in customary form and covering matters of the type customarily covered in
"cold comfort" letters by accountants in connection with underwritten
offerings; (v) if any underwriting agreement is entered into, the same
shall set forth in full the indemnification provisions and procedures
customarily included in underwriting agreements in underwritten offerings;
and (vi) the Company shall deliver such documents and certificates as may
be requested by Stockholder and the managing underwriters, if any, to
evidence compliance with clause (i) above and with any customary conditions
contained in the underwriting agreement or other agreement entered into by
the Company. The above shall be done at each closing under such
underwriting or similar agreement or as and to the extent required
thereunder.
(m) Make available for inspection by a representative of Stockholder
requesting registration, any underwriter participating in any disposition
pursuant to such registration, and any attorney or accountant retained by
Stockholder or such underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all information reasonably
requested by any such representative, underwriter, attorney or accountant
in connection with such registration; provided, that any records,
information or documents that are designated by the Company in writing as
confidential shall be kept confidential by such Persons unless disclosure
of such records, information or document sis required by court or
administrative order.
(n) Otherwise use its Best Efforts to comply with all applicable rules
and regulations of the Commission and make generally available to its
security holders earning statements satisfying the provisions of Section
11(a) of the Securities Act, no later than 90 days after the end of any 12-
month period (i) commencing at the end of any fiscal quarter in which
Registrable Securities are sold by underwriters in a firm or best efforts
underwritten offering and (ii) beginning with the first day of the
Company's first fiscal quarter next succeeding each sale of Registrable
Securities after the effective date of a registration statement, which
statements shall cover said 12-month periods.
(o) In connection with any registration of Registrable Securities, the
Company may require Stockholder to furnish to the Company such information
regarding itself and the distribution of such securities as the Company may
from time to time reasonably request in writing.
Stockholder agrees by acquisition of Registrable Securities that, upon
receipt of any notice from the Company of the happening of any event of the
kind described in Section 1.5(c) (ii)-(vii) hereof, Stockholder will
forthwith discontinue disposition of Registrable Securities covered by such
registration statement or prospectus until Stockholder's receipt of the
copies of the supplemented or amended prospectus contemplated by Section
1.5(c)(i)
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hereof, or until it is advised in writing by the Company that the use of
the applicable prospectus may be resumed, and has received copies of any
additional or supplemental filing which are incorporated by reference in
such prospectus, and, if so directed by the Company, the Stockholder will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in the Stockholder's possession, of the
prospectus covering such Registrable Securities current at the time of
receipt of such notice. In the event the Company shall give any such
notice, the time period mentioned in Section 1.3(a) shall be extended by
the number of days during the time period from and including the date of
the giving of such notice pursuant to Section 1.5(c) hereof to and
including the date when Stockholder shall have received the copies of the
supplemented or amended prospectus contemplated by Section 1.5(c) hereof.
1.6 Expenses of Registration. All expenses incurred in connection with a
registration, filing or qualification pursuant to Section 1.3 or 1.4 hereof
(other than fees and expenses of the Company's counsel), including, without
limitation, registration, filing and qualification fees, printers' and
accounting fees (other than the fees and disbursements of counsel for
Stockholder, which shall be paid by such Stockholder) and any underwriting
discounts and commissions, shall be borne and paid by Stockholder as the number
of Registrable Securities registered pursuant to such registration bears to the
total amount of securities registered pursuant thereto.
1.7 Underwritten Registrations.
(a) If any of the Registrable Securities covered by any registration
under Section 1.3 are to be sold in an underwritten offering, the
investment banker or investment bankers and manager or managers that will
administer the offering will be selected by the requesting Stockholder,
subject to the consent of Company, which consent will not be unreasonably
withheld.
(b) The Stockholder may not participate in any underwritten
registration under Section 1.4 hereunder unless it (i) agrees to sell its
securities on the basis provided in any underwriting arrangements approved
by the Persons entitled hereunder to approve such arrangements and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the
terms of such underwriting arrangements. In connection with any
underwritten offering that includes securities being issued or sold by the
Company, the Company shall be the Person entitled hereunder to approve the
terms of the underwriting arrangements.
1.8 Indemnification. In the event any Registrable Securities are included
in a registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless the Stockholder, the officers and directors of Stockholder,
each underwriter of Registrable Securities and each other Person, if any,
who controls Stockholder or such
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underwriter within the meaning of Section 1.5 of the Securities Act,
against any losses, claims, damages, liabilities or expenses, joint or
several, to which any such Person may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of a material fact
contained in any registration statement under which such Registrable
Securities were registered under the Securities Act pursuant hereto, or any
post-effective amendment thereof, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (ii) any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus, if used prior to the effective date of the registration
statement and not corrected in the final prospectus, or contained in the
final prospectus (as amended or supplemented, if the Company shall have
filed with the Commission any amendment thereof or supplement thereto), or
the omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading; and will reimburse any such Person for any legal or other
expenses reasonably incurred by such Person in connection with
investigating or defending any such loss, claim, damage, liability or
expense; provided, however, that the indemnify agreement contained in this
Section 1.8(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or expense if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld); and provided further that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage, liability or
expenses arises out of or is based upon any such untrue statement or
omission or alleged untrue statement or omission which has been made in
said registration statement, preliminary prospectus, prospectus or
amendment or supplement or omitted therefrom in reliance upon and in
conformity with information furnished in writing to the Company by
Stockholder or such underwriter specifically for use in the preparation
thereof.
(b) To the extent permitted by law, Stockholder whose Registrable
Securities shall have been registered pursuant to this Agreement will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each Person, if any,
who controls the Company within the meaning of Section 15 of the Securities
Act, each underwriter and each Person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against any losses,
claims, damages, liabilities or expenses, joint or several, to which the
Company or any such Person, may become subject under the Securities Act or
otherwise, and will reimburse the Company or any such Person for any legal
or other expenses reasonably incurred by the Company or such Person in
connection with investigating or defending any such loss, claim, damage,
liability or expense, but only insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) arise out of or are
based upon any untrue statement or omission or alleged untrue statement or
omission of a material fact referred to in clause (i) or (ii) of Section
1.8(a) hereof, in each case to the extent (and only to the extent) that
such untrue statement or omission or alleged untrue statement or omission
was made in reliance upon and in
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conformity with information furnished in writing by or on behalf of
Stockholder specifically for use in connection with such registration;
provided, however, that the indemnity agreement contained in this Section
1.8(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or expense if such settlement is effected without
the consent of Stockholder, which consent shall not be unreasonably
withheld; and, provided further, that the obligations Stockholder under
this Section 1.8(b) shall be limited to an amount equal to the amount of
proceeds from the sale by Stockholder of Registrable Securities included in
a registration statement under this Agreement to which such obligations
relate.
(c) Promptly after receipt by an indemnified party under this Section
1.8 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to
be made against an indemnifying party under this Section 1.8, notify the
indemnifying party in writing of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, to assume the defense thereof
with counsel mutually satisfactory to the parties; provided, however, that
an indemnified party shall have the right to retain its own counsel, with
the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure so to notify
an indemnifying party within a reasonable time of the commencement of any
such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party
under this Section 1.8, but the omission so to notify the indemnifying
party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.8.
(d) If the indemnification provided for in this Section 1.8 from the
indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to
herein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities
or expenses in such proportion as is appropriate to reflect the relative
fault of the indemnifying party and indemnified parties in connection with
the actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations; provided
that the obligations of Stockholder under this Section 1.8(d) shall be
limited to an amount equal to the amount of proceeds from the sale by
Stockholder of Registrable Securities included in a registration statement
under this Agreement to which such obligations relate. The relative fault
of such indemnifying party and indemnified parties shall be determined by
reference to, among other things, whether any action in question, including
any untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified parties,
and the parties' relative intent, knowledge,
11
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access to information and opportunity to correct or prevent such action.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 1.8(c) hereof, any
legal or other fees or expenses reasonably incurred by such party in
connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 1.8(d) were determined by pro rata
allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in the immediately
preceding paragraph. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities act) shall be
entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
1.9 Reports Under Exchange Act. With a view to making available to
Stockholder the benefits of Rule 144 under the Securities Act and any other rule
or regulation of the Commission that may at any time permit the Stockholder to
sell securities of the Company to the public without registration, the Company
agrees to:
(a) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange
Act, and the rules and regulations adopted by the Commission thereunder;
and
(b) furnish to Stockholder forthwith upon request (i) a written
statement by the Company as to whether it has complied with the reporting
requirements of Rule 144, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents filed by the Company
pursuant to the Exchange Act and (iii) such other information as may be
reasonably requested in availing Stockholder of any rule or regulation of the
Commission which permits the sale of any securities without registration.
1.10 Assignment of Registration Rights. The right to cause the Company to
register Registrable Securities pursuant to this Agreement may be assigned, in
whole or in part, to any assignee of the Registrable Securities (to the extent
of the shares of Common Stock assigned by Stockholder without the prior written
consent of the Company.
1.11 Hold-Back Agreements.
(a) The Company agrees (i) not to effect any public sale or
distribution of any securities similar to those being registered during the
14-day period prior to, and during the 60-day period beginning on, the date
the distribution under a registration statement filed pursuant to Section
1.3 or 1.4 hereof is completed (except as part of such registration or in
connection with (A) employee or non-employee director compensation or
benefit programs, (B) an exchange offer or an offering of securities solely
to the existing stockholders or
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employees of the Company, or (C) an acquisition, merger or other business
combination using a registration statement on Form S-4 or any successor or
other appropriate form.
(b) Each holder of Registrable Securities agrees not to effect any
public sale or distribution of Registrable Securities which are similar in
nature as the securities of the Company being registered, during the
fourteen days prior to and during the 60-day period beginning on, the
effective date of a registration statement filed by the Company (except as
part of such registration), but only if and to the extent requested in
writing (with reasonable prior notice) by the managing underwriter or
underwriters in the case of an underwritten public offering or, if such
offering is not underwritten, by the Company of securities similar to the
Registrable Securities.
ARTICLE II
MISCELLANEOUS
2.1 Successors and Assigns; No Third Party Benefit. This Agreement shall
be binding upon and inure to the benefit of the parties and their respective
permitted successors and assigns. Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto and their
respective permitted successors and assigns any rights or remedies under or by
reason of this Agreement, except as expressly provided in this Agreement.
2.2 Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the substantive laws of the State of Texas, without
giving effect to the principles or conflicts of law thereof.
2.3 Counterparts. This Agreement may be executed by the parties hereto in
separate counterpart, each of which when so executed and delivered shall be
deemed an original, but all such counterparts shall together constitute one and
the same instrument. Each counterpart may consist of a number of copies hereof
each signed by less than all, but together signed by all, the parties hereto.
2.4 Titles and Subtitles. The titles and subtitles used in this Agreement
are inserted for convenience only and are not to be considered in construing or
interpreting this Agreement.
2.5 Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing and shall be delivered by (a)
personal delivery, (b) expedited delivery service, (c) telefax with confirmed
delivery, or (d) certified or registered mail, postage prepaid. Any such notice
shall be deemed given upon its receipt at the following address or telefax
number, as applicable:
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(i) If to Credit Lyonnais:
Credit Lyonnais New York Branch
Telefax:
-------------------------
Attention:
------------------------
With a copy to:
Telefax:
-------------------------
and thereafter at such other address, notice of which is given to the Company
in accordance with this Section 2.5; and
(ii) If to Company:
10200 Grogans Mill Road, Suite 500
The Woodlands, Texas 77380
Telefax: (281) 364-3759
Attn: Steven W. Nance
With a copy to:
Reeder E. Ratliff
Crowe & Dunlevy
1800 Mid-America Tower
20 North Broadway
Oklahoma City, Oklahoma 73102
Telefax: (405) 272-5246
and thereafter at such other address, notice of which is given in accordance
with this Section 2.5.
2.6 Amendment and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof (which may be
generally or in a particular instance and either retroactively or prospectively)
may not be given, unless the Company has obtained the written consent of
Stockholder.
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2.7 Severability. If any provision or any portion of any provision of
this Agreement or the application of such provision or any portion there of to
any Person or circumstance shall be held invalid or unenforceable, the remaining
portion of such provision, as it applies to other Persons or circumstances and
the remaining provisions, shall not be affected or impaired thereby.
2.8 Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter herein contained. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein,
with respect to the registration rights granted by the Company to the
Stockholder. This Agreement supersedes all prior agreements and understanding
between the parties with respect to such subject matter.
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In Witness Whereof, the parties have caused this Agreement to be duly
executed as of the date first above written.
COMPANY:
XPLOR ENERGY, INC.
By: /s/ Steven W. Nance
-----------------------------------
Steven W. Nance, President and
Chief Executive Officer
STOCKHOLDER:
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Pascal Poupelle
---------------------------------------
Name: Pascal Poupelle
Title: Executive Vice President
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EXHIBIT 10.12
XPLOR ENERGY, INC.
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT is executed and delivered on this 24th
day of September, 1997 (this "Agreement"), by and between XPLOR ENERGY, INC., a
Delaware corporation (the "Company"), and ERI INVESTMENTS, INC., a Delaware
corporation ("Equitable"), and 420 ENERGY INVESTMENTS, INC., a Delaware
corporation ("Energy") (each of Equitable and Energy a "Stockholder"), and
collectively the "Stockholders");
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and the Stockholders are parties to that certain
Acquisition Agreement and Plan of Organization dated as of August 19, 1997 (the
"Acquisition Agreement") pursuant to which the Company will acquire all of the
outstanding South Coast Ownership Interests (as defined in the Acquisition
Agreement) from the Stockholders (the "Acquisition"); and
WHEREAS, pursuant to the Acquisition Agreement, the Stockholders will have
acquired, in exchange for the South Coast Ownership Interests, approximately
________ aggregate shares of common stock, par value $.001 per share, of the
Company ("Common Stock"), and
WHEREAS, it is a condition to the consummation of the transactions
contemplated by the Acquisition Agreement that the Company has agreed to provide
to the Stockholders the limited registration rights set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual terms,
covenants and conditions herein contained, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
ARTICLE I
REGISTRATION RIGHTS
The Company and each of the Stockholders covenant and agree as follows:
1.1 Definitions. For purposes of this Agreement:
(a) The terms "register," "registered" and "registration" refer to a
registration of securities effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act (as defined
below), and the declaration or ordering of effectiveness of such registration
statement or document.
<PAGE>
(b) The term "Registrable Securities" means (i) the Common Stock received
by the Stockholders pursuant to the Acquisition Agreement and (ii) a dividend or
other distribution with respect to, or in exchange for or in replacement of,
such Common Stock.
(c) The term "Restricted Securities" means the Registrable Securities upon
original issuance thereof, subject to the provisions of Section 1.2 hereof.
(d) The term "Person" means an individual, partnership, corporation,
limited liability company, trust or unincorporated organization, or government
or agency or political subdivision thereof.
(e) The term "Board" means the Board of Directors of the Company.
(f) The term "Commission" means the Securities and Exchange Commission.
(g) The term "Securities Act" means the Securities Act of 1933, as amended,
and the term "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(h) The term "Best Efforts" means a Person's good faith best efforts in
accordance with reasonable commercial practice.
1.2 Securities Subject to this Agreement. The securities entitled to the
benefits of this Agreement are the Registrable Securities but with respect to
any particular Registrable Security, only so long as such security continues to
be a Restricted Security. A Registrable Security ceases to be a Restricted
Security when (a) it has been effectively registered under the Securities Act
and disposed of in accordance with the registration statement covering it, (b)
it is sold pursuant to Rule 144 or Rule 145 (or any similar provision them in
force) under the Securities Act or (c) it is eligible for sale pursuant to Rule
144 or Rule 145 (or any similar provision then in force) under the Securities
Act without any volume limitations.
1.3 Registration on Request.
(a) If, at any time after the consummation of an initial public offering
("IPO") of Common Stock (the "IPO Date"), the Company shall receive a written
request from any Stockholder or Stockholders holding an aggregate of a majority
of Registrable Securities that the Company file a registration statement under
the Securities Act covering the registration of Registrable Securities, then the
Company shall (i) if such request is received from less than all of the
Stockholders, give prompt written notice of such requested registration to the
other Stockholders, so that such other Stockholders shall have the opportunity
to join in such request and (ii) subject to the limitations of Sections 1.5 and
1.7 hereof, effect the registration of all Registrable Securities that any such
Stockholder or Stockholders request to be registered as soon as is practicable
with the use of the Company's Best Efforts, but in no event later than 60 days
after the receipt by the Company of such written request, by means of a shelf
registration statement on any appropriate form under the
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Securities Act for an offering to be made on a continuous basis pursuant to Rule
415 under the Securities Act. The Company agrees to use its Best Efforts to
keep such shelf registration statement continuously effective for a period of
time following the date on which such shelf registration statement is declared
effective equal to (i) 120 days in the case of a registration statement on Form
S-3 or (ii) 60 days in the case of a registration statement on any other form,
plus, in either case, the number of days of any discontinuance as described
below.
(b) If the requesting Stockholder or Stockholders intend to distribute the
Registrable Securities covered by the request by means of an underwriting, they
shall so advise the Company as a part of its request made pursuant to this
Section 1.3.
(c) The Company is obligated to effect one registration pursuant to this
Section 1.3, in addition to any registrations in which the Stockholders may
participate pursuant to the other provisions of this Agreement. A registration
shall not be deemed to have been effected (i) unless it has become effective and
remained effective for the period specified in Section 1.3(a) or, if earlier,
until the Registrable Securities registered under such registration statement
have been sold, or (ii) if, after it has become effective, such registration is
terminated by a stop order, injunction or other order of the Commission or other
governmental agency or court.
(d) If none of the Registrable Securities registered pursuant to any shelf
registration pursuant to this Section 1.3 are to be sold in an underwritten
offering, shares of Common Stock other than the Registrable Securities may be
included among the securities covered by the registration statement effected
pursuant to this Section 1.3; provided, that such registration statement
includes a prospectus containing a plan of distribution satisfactory to the
Stockholders including Registrable Securities therein. If any of the
Registrable Securities registered pursuant to this Section 1.3 are to be sold in
an underwritten offering, shares of Common Stock other than the Registrable
Securities may be included among the securities covered by the registration
statement subject to the right to exclude such other securities under Section
1.3(e).
(e) If any of the Registrable Securities registered pursuant to any shelf
registration pursuant to this Section 1.3 are to be sold in an underwritten
offering, and the managing underwriter or underwriters deliver an opinion to the
Company and the requesting Stockholder or Stockholders that the total number of
shares of Common Stock which such Stockholder or Stockholders and any other
Persons intend to include in such offering exceeds the number of shares that can
be sold in such offering, then there shall be included in such underwritten
offering the number of shares of Common Stock which in the opinion of such
underwriters can be sold, and such shares shall be allocated pro rata among the
holders of shares of Common Stock to be sold on the basis of the number of
shares of Common Stock to be registered; provided, that if shares of Common
Stock are being offered for the account of other Persons (including the Company)
as well as such Stockholder or Stockholders, a reduction in number of shares
shall first be made from the shares intended to be offered by such Persons other
than the Stockholder or Stockholders. Anything in this Agreement to the
contrary notwithstanding, in the event that the Stockholder or Stockholders
request registration of their Registrable Securities pursuant to this Section
1.3 and shares representing 50% or more of
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<PAGE>
the Registrable Securities requested to be included by such Stockholder or
Stockholders are excluded from the offering by the managing underwriter or
underwriters thereof, then such registration shall not constitute, or be counted
as, the registration requested by the Stockholders pursuant to Section 1.3
hereof.
(f) Notwithstanding the foregoing, the Company shall not be required to
register any Registrable Securities pursuant to this Section 1.3: (i) during a
reasonable period of time, not to exceed six months, following the IPO Date, if
the Company has been advised by the managing underwriters for the IPO that a
registration of Registrable Securities pursuant to this Section 1.3 would
adversely affect the market for the Common Stock, (ii) during a reasonable
period of time (not to exceed 30 days) with respect to which the Board of
Directors of the Company has determined that a registration of Registrable
Securities pursuant to this Section 1.3 would adversely affect the Company
because of a material non-public acquisition or similar material transaction
that is pending or imminent, or (iii) for a period of three months following the
effective date of a Company registration statement as described in Section 1.4
hereof, provided that the Stockholder or Stockholders were offered the
opportunity to have the Registrable Securities included therein and declined to
request that a majority of such shares be so included.
1.4 Company Registration. At any time the Company proposes to register
(including for this purpose a registration effected by the Company for
stockholders other than the Stockholders) any shares of its Common Stock under
the Securities Act for sale (other than registration of the Common Stock for
issuance or sale (a) pursuant to Section 1.3 hereof or (b) in connection with
(i) employee or non-employee director compensation or benefit programs, (ii) an
exchange offer or an offering of securities solely to the existing stockholders
or employees of the Company or (iii) an acquisition, merger or other business
combination using a registration statement on Form S-4 or any successor or other
appropriate form), the Company will give prompt written notice (which, in any
event, shall be given no less than 15 days prior to the filing of a registration
statement with respect to such offering) to the Stockholders of its intention so
to do and, upon the written request of any Stockholder sent within 15 days after
the effective date of any such notice, the Company will, subject to the
provisions of Sections 1.5 and 1.7 hereof, use its Best Efforts to cause all
Registrable Securities as to which any such Stockholder or Stockholders shall
have so requested registration, to be registered under the Securities Act, all
to the extent necessary to permit the sale in such offering of the Registrable
Securities so registered on behalf of such Stockholder or Stockholders in the
same manner as the Company (or stockholder other than one of the Stockholders,
as the case may be) proposes to offer its shares of Common Stock. The Company
shall use its Best Efforts to cause the managing underwriter or underwriters of
a proposed underwritten offering to permit the Registrable Securities requested
by the Stockholder or Stockholders to be included in the registration for such
offering on the same terms and conditions as the shares of Common Stock of the
Company included therein. Notwithstanding the foregoing, if the managing
underwriter or underwriters of such offering deliver an opinion to the Company
and the requesting Stockholder or Stockholders that the total number of shares
of Common Stock which the requesting Stockholder or Stockholders or the Company,
and any other Persons, intend to include in such offering will in the good faith
opinion of such managing underwriter or underwriters materially and adversely
affect the success of such
-4-
<PAGE>
offering, then the number of shares of Common Stock to be offered for the
account of the Stockholder(s) shall be reduced pro rata based upon the number of
shares of Common Stock proposed to be sold by the Stockholder or Stockholders
and any other Persons (excluding the Company and the stockholder(s) for whom the
Company filed such Registration Statement) to the extent necessary to reduce the
total number of shares of Common Stock to be included in such offering to the
number of shares recommended by such managing underwriter.
1.5 Obligations of the Company. If and whenever the Company is required
by the provisions of this Agreement to use its Best Efforts to effect the
registration of any Registrable Securities, the Company shall as expeditiously
as reasonably practicable:
(a) Prepare and file with the Commission a registration statement on an
appropriate form under the Securities Act and use its Best Efforts to cause such
registration statement to become effective; provided, that before filing a
registration statement or prospectus or any amendments or supplements thereto,
including documents incorporated by reference after the initial filing of any
registration statement, as soon as practicable, the Company will furnish to the
requesting Stockholder or Stockholders and the underwriters, if any, copies of
all such documents proposed to be filed, which documents will be subject to the
review of the requesting Stockholder or Stockholders and the underwriters, and
the Company will not file any registration statement or amendment thereto, or
any prospectus or any supplement thereto (including such documents incorporated
by reference) to which the requesting Stockholder or Stockholders or the
underwriters, if any, shall reasonably object in the light of the requirements
of the Securities Act and any other applicable laws and regulations.
(b) Prepare and file with the Commission such amendments and post-effective
amendments to a registration statement as may be necessary to keep such
registration statement effective for the applicable period; cause the related
prospectus to be filed pursuant to Rule 424(b) under the Securities Act; cause
such prospectus to be supplemented by any required prospectus supplement and, as
so supplemented, to be filed pursuant to Rule 424(b) under the Securities Act;
and comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement during the
applicable period in accordance with the intended methods of disposition set
forth in such registration statement or supplement to such prospectus.
(c) Notify the requesting Stockholder or Stockholders and the managing
underwriters, if any, promptly, and (if requested by any such Person) confirm
such advice in writing, (i) when a prospectus or any prospectus supplement or
post-effective amendment has ben filed, and, with respect to a registration
statement or any post-effective amendment, when the same has become effective,
(ii) of any request by the Commission for amendments or supplements to a
registration statement or related prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of a registration statement or the initiation of any proceeding
for that purpose, (iv) if at any time the representations and warranties of the
Company contemplated by Section 1.5(1) cease to be true and correct, (v) of the
receipt by the Company of any notification with respect to the suspension or
qualification of any of the Registrable Securities
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<PAGE>
for sale in any jurisdiction or the initiation of any proceeding for such
purpose, (vi) of the happening of any event which requires the making of any
changes in a registration statement or related prospectus so that such documents
will not contain any untrue statement of a material factor or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading and (vii) of the Company's reasonable determination that
a post-effective amendment to a registration statement would be appropriate or
that there exist circumstances not yet disclosed to the public which make
further sales under such registration statement inadvisable pending such
disclosures and post-effective amendment.
(d) Make reasonable efforts to obtain the withdrawal of any order
suspending the effectiveness of a registration statement, or the lifting of any
suspension of the qualification of any of the Registrable Securities for sale in
any jurisdiction, at the earliest possible moment.
(e) If requested by the managing underwriters or any Stockholder or
Stockholders in connection with an underwritten offering, immediately
incorporate in a prospectus supplement or post effective amendment such
information as the managing underwriters and such Stockholder or Stockholders
agree should be included therein relating to such sale and distribution of
Registrable Securities, including, without limitation, information with respect
to the number of shares of Registrable Securities being sold to such
underwriters and the purchase price being paid therefor by such underwriters and
with respect to any other terms of the underwritten (or best efforts
underwritten) offering of the Registrable Securities to be sold in such
offering; make all required filings of such prospectus supplement or post-
effective amendment as soon as notified of the matters to be incorporated in
such prospectus supplement or post-effective amendment; and supplement or make
amendments to any registration statement if requested by such Stockholder or
Stockholders or any underwriter of such Registrable Securities.
(f) Furnish to each Stockholder requesting registration and each managing
underwriter, if any, without charge, at least one signed copy of the
registration statement, any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference).
(g) Deliver without charge to each Stockholder requesting registration and
the underwriters, if any, as many copies of the prospectus or prospectuses
(including each preliminary prospectus) and any amendment or supplement thereto
as such Persons may reasonably request; and the Company consents to the use of
such prospectus or any amendment or supplement thereto by each such Stockholder
and the underwriters, if any, in connection with the offer and sale of the
Registrable Securities covered by such prospectus or any amendment or supplement
thereto.
(h) Prior to any public offering of Registrable Securities, register or
qualify or cooperate with the Stockholder or Stockholders requesting
registration, the underwriters, if any, and respective counsel in connection
with the registration or qualification of such Registrable Securities for offer
and sale under the securities or Blue Sky laws of such jurisdictions as each
such Stockholder or an underwriter reasonably requests in writing; keep each
such registration or qualification effective
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<PAGE>
during the period such registration statement is required to be kept effective
and do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by the
applicable registration statement; provided, however, that the Company will not
be required in connection therewith or as a condition thereto to qualify
generally to do business or subject itself to general service of process in any
such jurisdiction where it is not then so subject.
(i) Cooperate with each requesting Stockholder and the managing
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold and not bearing any
restrictive legends; and enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriters may
request at least two business days prior to any sale of Registrable Securities
to the underwriters.
(j) Use its Best Efforts to cause the Registrable Securities covered by the
applicable registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary, if any, to
consummate the disposition of such Registrable Securities.
(k) Upon the occurrence of any event contemplated by Section 1.5(c)(ii) -
(vii) above, prepare a supplement or post-effective amendment to the applicable
registration statement or related prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchaser of the Registrable Securities being sold thereunder,
such prospectus will not contain an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading.
(l) Enter into such agreements (including an underwriting agreement) and
take all such other actions in connection therewith in order to expedite or
facilitate the disposition of such Registrable Securities and in such
connection, whether or not an underwriting agreement is entered into and whether
or not the Registrable Securities to be covered by such registration are to be
offered in an underwritten offering: (i) make such representations and
warranties to the requesting Stockholder or Stockholders with respect to the
registration statement, prospectus and documents incorporated by reference, if
any, in form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and updates thereof
with respect to the registration statement and the prospectus in the form, scope
and substance which are customarily delivered in underwritten offerings; (iii)
in the case of an underwritten offering, enter into an underwriting agreement in
form, scope and substance as is customary in underwritten offerings and obtain
opinions of counsel to the Company and updates thereof (which counsel and
opinions (in form, scope and substance) shall be reasonably satisfactory to the
managing underwriters and the requesting Stockholder or Stockholders) addressed
to such Stockholder or Stockholders and the underwriters, if any, covering the
matters customarily covered in opinions delivered in underwritten offerings and
such other matters as may be reasonably requested by such Stockholder or
Stockholders and such underwriters; (iv) obtain "cold comfort" letters and
updates thereof from the Company's independent certified public accountants
addressed to such Stockholder or Stockholders and the underwriters, if any, such
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<PAGE>
letters to be in customary form and covering maters of the type customarily
covered in "cold comfort" letters by accountants in connection with underwritten
offerings; (v) if any underwriting agreement is entered into, the same shall set
forth in full the indemnification provisions and procedures customarily included
in underwriting agreements in underwritten offerings; and (vi) the Company shall
deliver such documents and certificates as may be requested by such Stockholder
or Stockholders and the managing underwriters, if any, to evidence compliance
with clause (i) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company. The above
shall be done at each closing under such underwriting or similar agreement or as
and to the extent required thereunder.
(m) Make available for inspection by a representative of any Stockholder or
Stockholders requesting registration, any underwriter participating in any
disposition pursuant to such registration, and any attorney or accountant
retained by any such Stockholder or Stockholders or such underwriter, all
financial and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such representative, underwriter,
attorney or accountant in connection with such registration; provided that any
records, information or documents that are designated by the Company in writing
as confidential shall be kept confidential by such Persons unless disclosure of
such records, information or documents is required by court or administrative
order.
(n) Otherwise use its Best Efforts to comply with all applicable rules and
regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act, no later than 90 days after the end of any 12-month period (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm or best efforts underwritten offering and (ii)
beginning with the first day of the Company's first fiscal quarter next
succeeding each sale of Registrable Securities after the effective date of a
registration statement, which statements shall cover said 12-month periods.
In connection with any registration of Registrable Securities, the Company
may require any Stockholder whose Registrable Securities shall have been
registered hereunder to furnish to the Company such information regarding itself
and the distribution of such securities as the Company may from time to time
reasonably request in writing.
Each Stockholder agrees by acquisition of Registrable Securities that, upon
receipt of any notice from the Company of the happening of any event of the kind
described in Section 1.5(c)(ii)-(vii) hereof, such Stockholder will forthwith
discontinue disposition of Registrable Securities covered by such registration
statement or prospectus until such Stockholder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 1.5(c)(i) hereof, or
until it is advised in writing by the Company that the use of the applicable
prospectus may be resumed, and has received copies of any additional or
supplemental filings which are incorporated by reference in such prospectus, and
if so directed by the Company, the Stockholder will deliver to the Company (at
the Company's expense) all copies, other than permanent file copies then in the
Stockholder's possession, of the prospectus covering such Registrable Securities
current at the time
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of receipt of such notice. In the event the Company shall give any such notice,
the time period mentioned in Section 1.3(a) shall be extended by the number of
days during the time period from and including the date of the giving of such
notice pursuant to Section 1.5(c) hereof to and including the date when such
Stockholder shall have received the copies of the supplemented or amended
prospectus contemplated by Section 1.5(c) hereof.
1.6 Expenses of Registration. All expenses incurred in connection with a
registration, filing or qualification pursuant to Section 1.3 or 1.4 hereof
(other than fees and expenses of the Company's counsel), including, without
limitation, registration, filing and qualification fees, printers' and
accounting fees (other than the fees and disbursements of counsel for any
Stockholder or Stockholders requesting registration, which shall be paid by such
Stockholder or Stockholders) and any underwriting discounts and commissions,
shall be borne and paid by such Stockholder or Stockholders, pro rata in such
proportion as the number of Registrable Securities registered pursuant to such
registration bears to the total amount of securities registered pursuant
thereto.
1.7 Underwritten Registrations.
(a) If any of the Registrable Securities covered by any registration under
Section 1.3 are to be sold in an underwritten offering, the investment banker or
investment bankers and manager or managers that will administer the offering
will be selected by the requesting Stockholder or Stockholders, subject to the
consent of the Company, which consent will not be unreasonably withheld.
(b) The requesting Stockholder or Stockholders may not participate in any
underwritten registration under Section 1.4 hereunder unless it (i) agrees to
sell its securities on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements. In connection with any underwritten offering
that includes securities being issued or sold by the Company, the Company shall
be the Person entitled to approve the terms of the underwriting arrangements.
1.8 Indemnification. In the event any Registrable Securities are included
in a registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless the requesting Stockholder or Stockholders, the officers and directors
of each such Stockholder, each underwriter of Registrable Securities and each
other Person, if any, who controls each such Stockholder or such underwriter
within the meaning of Section 15 of the Securities Act, against any losses,
claims, damages, liabilities or expenses, joint or several, to which any such
Person may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in any registration statement under
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which such Registrable Securities were registered under the Securities Act
pursuant hereto, or any post-effective amendment thereof, or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, if used prior to the effective date of the registration
statement and not corrected in the final prospectus, or contained in the final
prospectus (as amended or supplemented, if the Company shall have filed with the
Commission any amendment thereof or supplement thereto), or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading; and will reimburse any
such Person for any legal or other expenses reasonably incurred by such Person
in connection with investigating or defending any such loss, claim, damage,
liability or expense; provided, however, that the indemnity agreement contained
in this Section 1.8(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or expense if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld);
and provided further that the Company shall not be liable in any such case to
the extent that any such loss, claim, damage, liability or expense arises out of
or is based upon any such untrue statement or omission or alleged untrue
statement or omission which has been made in said registration statement,
preliminary prospectus, prospectus or amendment or supplement or omitted
therefrom in reliance upon and in conformity with information furnished in
writing to the Company by any such Stockholder or such underwriter specifically
for use in the preparation thereof.
(b) To the extent permitted by law, each Stockholder whose Registrable
Securities shall have been registered pursuant to this Agreement will indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each Person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act, each underwriter
and each Person who controls any underwriter within the meaning of Section 15 of
the Securities Act, against any losses, claims, damages, liabilities or
expenses, joint or several, to which the Company or any such Person, may become
subject under the Securities Act or otherwise, and will reimburse the Company or
any such Person for any legal or other expenses reasonably incurred by the
Company or such Person in connection with investigating or defending any such
loss, claim, damage, liability or expense, but only insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission of a material fact referred to in clause (i) or (ii) of
Section 1.8(a) hereof, in each case to the extent (and only to the extent) that
such untrue statement or omission or alleged untrue statement or omission was
made in reliance upon and in conformity with information furnished in writing by
or on behalf of such Stockholder specifically for use in connection with such
registration; provided, however, that the indemnity agreement contained in this
Section 1.8(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or expense if such settlement is effected without the
consent of such Stockholder, which consent shall not be unreasonably withheld;
and, provided further, that the obligations a Stockholder under this Section
1.8(b) shall be limited to an amount equal to the amount of proceeds from the
sale by such Stockholder of Registrable Securities included in a registration
statement under this Agreement to which such obligations relate.
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(c) Promptly after receipt by an indemnified party under this Section 1.8
of notice of the commencement of any action (including any governmental action),
such indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party under this Section 1.8, notify the indemnifying party in
writing of the commencement thereof and the indemnifying party shall have the
right to participate in, and, to the extent the indemnifying party so desires,
to assume the defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an indemnified party shall have the right to retain its
own counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure so to notify an indemnifying party
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, shall relieve such indemnifying party of
any liability to the indemnified party under this Section 1.8, but the omission
so to notify the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 1.8.
(d) If the indemnification provided for in this Section 1.8 from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to herein, then
the indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party and
indemnified parties in connection with the actions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations; provided that the obligations of a Stockholder under
this Section 1.8(d) shall be limited to an amount equal to the amount of
proceeds from the sale by such Stockholder of Registrable Securities included in
a registration statement under this Agreement to which such obligations relate.
The relative fault of such indemnifying party and indemnified parties shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, has been made by, or related to
information supplied by, such indemnifying party or indemnified parties, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Section 1.8(c) hereof, any legal or other fees or expenses reasonably incurred
by such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 1.8(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
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<PAGE>
1.9 Reports Under Exchange Act. With a view to making available to the
Stockholders the benefits of Rule 144 under the Securities Act and any other
rule or regulation of the Commission that may at any time permit the Stockholder
to sell securities of the Company to the public without registration, the
Company agrees to:
(a) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act,
and the rules and regulations adopted by the Commission thereunder; and
(b) furnish to any Stockholder forthwith upon request (i) a written
statement by the Company as to whether it has complied with the reporting
requirements of Rule 144, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents filed by the Company
pursuant to the Exchange Act and (iii) such other information as may be
reasonably requested in availing such Stockholder of any rule or regulation of
the Commission which permits the sale of any securities without registration.
1.10 Assignment of Registration Rights. The right to cause the Company to
register Registrable Securities pursuant to this Agreement may be assigned, in
whole or in part, to an assignee of the Registrable Securities (to the extent
the shares of Common Stock are assigned), by any Stockholder without the prior
written consent of the Company.
1.11 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of Stockholders holding more than 50% of the Registrable Securities, enter into
any agreement with any holder or prospective holder of any securities of the
Company which would conflict with any term of this Agreement, including (i) the
right to exclude other securities under Section 1.3(e) and (ii) the right of the
Stockholders to register and offer Registrable Securities under Section 1.4 on a
pro-rata basis if a reduction in the amount of Common Stock intended to be
offered is necessary in an underwritten offering with any other Persons
(excluding shares to be offered by the Company and the stockholder(s) for whom
the Company files such Registration Statement) intending to register and offer
their Common Stock. Except as set forth on Schedule A hereto, the Company is
not a party to any currently subsisting agreement with respect to its securities
granting any registration rights to any Person.
1.12 Company's Hold-Back Agreements.
(a) The Company agrees not to effect any public sale or distribution of any
securities similar to those being registered during the 14-day period prior to,
and during the 60-day period beginning on, the date the distribution under a
registration statement filed pursuant to Section 1.3 or 1.4 hereof is completed
(except as part of such registration or in connection with (A) employee or non-
employee director compensation or benefit programs, (B) an exchange offer or an
offering of securities solely to the existing stockholders or employees of the
Company, or (C) an acquisition,
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<PAGE>
merger or other business combination using a registration statement on Form S-4
or any successor or other appropriate form).
(b) Each holder of Registrable Securities agrees not to effect any public
sale or distribution of any Registrable Securities which (i) are similar in
nature as the securities of the Company being registered and (ii) the
Stockholder(s) declined to include in such Registration Statement after being
given the opportunity to do so by the Company, during the 14 days prior to and
during the 60-day period beginning on, the effective date of a Registration
Statement filed by the Company, but only if and to the extent requested in
writing (with reasonable prior notice) by the managing underwriting or
underwriters in the case of an underwritten public offering or, if such offering
is not underwritten, by the Company of securities similar to the Registrable
Securities.
ARTICLE II
MISCELLANEOUS
2.1 Successors and Assigns; No Third Party Benefit. This Agreement shall
be binding upon and inure to the benefit of the parties and their respective
permitted successors and assigns. Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto and their
respective permitted successors and assigns any rights or remedies under or by
reason of this Agreement, except as expressly provided in this Agreement.
2.2 Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the substantive laws of the State of Texas, without
giving effect to the principles of conflicts of law thereof.
2.3 Counterparts. This Agreement maybe executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts shall together constitute one and
the same instrument. Each counterpart may consist of a number of copies hereof
each signed by less than all, but together signed by all, the parties hereto.
2.4 Titles and Subtitles. The titles and subtitles used in this Agreement
are inserted for convenience only and are not to be considered in construing or
interpreting this Agreement.
2.5 Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing and shall be delivered by (a)
personal delivery, (b) expedited delivery service, (c) telefax with confirmed
delivery or (d) certified or registered mail, postage prepaid. Any such notice
shall be deemed given upon its receipt at the following address or telefax
number, as applicable:
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(i) If to Equitable or Energy:
ERI Investments, Inc.
420 Boulevard of the Allies
Pittsburgh, Pennsylvania 15219
Telefax: (412) 553-3863
Attention: Jeff Swoveland
With a copy to:
Michael L. Bengtson
Thompson & Knight, P.C.
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201
Telefax: (214) 969-1751
and thereafter at such other address, notice of which is given to the Company in
accordance with this Section 2.5; and
(ii) If to the Company:
10200 Grogans Mill Road, Suite 500
The Woodlands, Texas 77380
Telefax: (281) 364-3759
Attn: Steven W. Nance
With a copy to:
Reeder E. Ratliff, Esq.
Crowe & Dunlevy
1800 Mid-America Tower
20 North Broadway
Oklahoma City, Oklahoma 73102
Telefax: (405) 272-5246
and thereafter at such other address, notice of which is given in accordance
with this Section 2.5.
2.6 Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof (which may be
generally or in a particular instance and either retroactively or prospectively)
may not be given, unless the Company has obtained the written consent of
Stockholders holding more than 50% of the Registrable Securities.
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<PAGE>
2.7 Severability. If any provision or any portion of any provision of
this Agreement or the application of such provision or any portion thereof to
any Person or circumstance shall be held invalid or unenforceable, the remaining
portion of such provision, as it applies to other Persons or circumstances and
the remaining provisions, shall not be affected or impaired thereby.
2.8 Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter herein contained. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein,
with respect to the registration rights granted by the Company with respect to
the securities received by the Stockholder pursuant to the Acquisition. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to such subject matter.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
THE COMPANY:
XPLOR ENERGY, INC.
By: /s/ W. E. Rowsey
--------------------------
Name: W. E. Rowsey
-------------------------
Title: Chairman
------------------------
EQUITABLE:
ERI INVESTMENTS, INC.
By: /s/ Jeffrey C. Swoveland
---------------------------
Name: Jeffrey C. Swoveland
-------------------------
Title: President
------------------------
ENERGY:
420 ENERGY INVESTMENTS, INC.
By: /s/ Jeffrey C. Swoveland
-------------------------
Name: Jeffrey C. Swoveland
------------------------
Title: President
-----------------------
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SCHEDULE "A"
Registration Rights Agreement
As of September 24, 1997, XPLOR has registration rights agreements with
Stratum Group L.P. and Credit Lyonnais, New York Branch.
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<PAGE>
EXHIBIT 10.13
REGISTRATION AGREEMENT
THIS REGISTRATION AGREEMENT (this "Agreement") dated as of September
1, 1995 is made by and among South Coast Exploration Company, a Texas
corporation (the "Company"), Ron A. Krenzke, Craig S. Davis and Philip V.
Duggan, each an individual (the "Management Shareholders"), EQT Capital
Corporation, a Delaware corporation ("EQT"), and Weisser, Johnson & Co., a
Delaware corporation (the "Option Holder") (the Management Shareholders), EQT
and the Option Holder are collectively referred to herein as the "Shareholders"
and each is referred to herein as a "Shareholder").
The Company and EQT are parties to a Stock Purchase Agreement of even
date herewith (the "Purchase Agreement"). In order to induce EQT to enter into
the Purchase Agreement, the Company has agreed to provide the registration
rights set forth in this Agreement.
The Company, the Management Shareholders, EQT and the Option Holder
are parties to a Shareholders Agreement of even date herewith (the "Shareholders
Agreement"). In order to induce the Management Shareholders, EQT and the Option
Holder to enter into the Shareholders Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement.
Unless otherwise provided in this Agreement, capitalized terms used
herein shall have the meanings set forth in Section 9 hereof.
Intending to be legally bound hereby, the parties hereto mutually
agree as follows:
1. Piggyback Registrations.
(a) Right to Piggyback. Whenever the Company proposes to register any
of its securities under the Securities Act (other than pursuant to a Demand
Registration, as contemplated by Section 2, and other than a registration
statement on Form S-4 or S-8 (or any substitute form for comparable purposes
that may be adopted by the Securities and Exchange Commission) or a registration
statement filed solely in connection with a business combination, an exchange
offer or an offering of securities to the Company's existing security holders or
employees) (a "Piggyback Registration"), whether or not for sale for its own
account, the Company will give prompt written notice to all holders of
Registrable Securities of its intention to effect such a registration and will
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within twenty
days after the receipt of the Company's notice.
(b) Piggyback Expenses. The Registration Expenses of the holders of
Registrable Securities will be paid by the Company in all Piggyback
Registrations.
(c) Priority on Primary Registrations. If a Piggyback Registration is
an underwritten primary registration on behalf of the Company, and the managing
underwriters advise
<PAGE>
the Company in writing (with a copy to each party hereto requesting registration
of Registrable Securities) that in their opinion the number of securities
requested to be included in such registration exceeds the number which can be
sold in such offering (i) without adversely affecting the marketability of such
offering or (ii) within a price range acceptable to the Company, the Company
will include in such registration (x) first, the securities the Company proposes
to sell for its own account, (y) second, the Registrable Securities requested to
be included in such registration, pro rata among the holders of such Registrable
Securities on the basis of the number of shares of Registrable Securities
requested to be included in such registration by each such holder and (z) third,
other securities requested to be included in such registration.
(d) Priority on Secondary Registrations. If a Piggyback Registration
is a secondary registration on behalf of holders of the Company's securities,
and the managing underwriters advise the Company in writing (with a copy to each
party hereto requesting registration of Registrable Securities) that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering (i) without adversely
affecting the marketability of such offering or (ii) within a price range
acceptable to the holders initially requesting such registration, the Company
will use its best efforts to include in such registration the securities
requested to be included therein by the holders requesting such registration and
the Registrable Securities requested to be included in such registration, pro
rata among the holders of such securities on the basis of the number of such
securities requested to be included in such registration by each such holder.
(e) Other Registrations. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to this
Section 1 or pursuant to Section 2, and if such previous registration has not
been withdrawn or abandoned, the Company will not file or cause to be effected
any other registration of any of its equity securities or securities convertible
or exchangeable into or exercisable for its equity securities under the
Securities Act (except on Form S-4 or S-8 or any successor form thereto),
whether on its own behalf or at the request of any holder or holders of such
securities, until a period of at least six months has elapsed from the effective
date of such previous registration.
(f) Selection of Underwriters. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company, the Company will
have the right, subject to the applicable provisions of the Shareholders
Agreement, to select the investment banker(s) and manager(s) to administer the
offering.
2. Demand Registrations.
(a) Requests for Registration.
(i) As used herein, the term "Initial Demand Availability Date" shall
mean a date on which EQT (together with its Affiliates) owns at least one-third
of the number of shares of Common Stock it acquired under the Purchase Agreement
and which is the earlier to occur of (A)
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the six month anniversary of the date on which the Company has completed a
public offering of Common Stock pursuant to an effective registration statement
filed under the Securities Act and (B) the date on which the Company has issued
equity securities for an aggregate cumulative purchase price of $150,000,000.
As used herein, the term "Initial Demand Availability Period" means the period
commencing on the Initial Demand Availability Date and ending on the earliest to
occur of (C) the second anniversary of the Initial Demand Availability Date, (D)
the date specified by EQT in written notice to the Company as the termination
date of the Initial Demand Availability Period, (E) the date on which EQT
(together with its Affiliates) ceases to own at least one-third of the number of
shares of Common Stock it acquired under the Purchase Agreement and (F) the date
which is six months after the completion of the offering pursuant to the second
registration demanded during the Initial Demand Availability Period.
(ii) At any time during the Initial Demand Availability Period, the
holders of a majority of the EQT Registrable Securities may request registration
under the Securities Act of all or part of their EQT Registrable Securities;
provided, that the holders of EQT Registrable Securities may not, unless the
Company has completed a public offering of Common Stock pursuant to an effective
registration statement filed under the Securities Act, request any such
registration if, after completion of the offering of the EQT Registrable
Securities so registered, EQT or it Affiliates would own less than 20% of the
outstanding Common Stock.
(iii) At any time after the completion of the Initial Demand
Availability Period, the holders of a majority of the EQT Registrable
Securities, the holders of a majority of the Option Holder Registrable
Securities and the holders of a majority of the Management Registrable
Securities each may request registration under the Securities Act of all or part
of their Registrable Securities.
(iv) All registrations requested pursuant to this Section 2 (a) are
referred to herein as "Demand Registrations". Each request for a Demand
Registration shall specify the approximate number of Registrable Securities
requested to be registered and the anticipated per share price range for such
offering. Within ten days after receipt of any such request pursuant to clause
(ii) of this Section 2 (a), the Company will give written notice of such
requested registration to all other holders of EQT Registrable Securities and,
subject to Section 2(d) below, will include in such registration all EQT
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 15 days after the receipt of the Company's
notice. Within ten days after receipt of any such request pursuant to clause
(iii) of this Section 2(a), the Company will give written notice of such
requested registration to all other holders of Registrable Securities and,
subject to Section 2(d) below, will include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within 15 days after the receipt of the Company's notice.
(b) Number of Demand Registrations. The holders of a majority of the
EQT Registrable Securities will be entitled to request two Demand Registrations
during the Initial Demand Availability Period. The holders of a majority of the
EQT Registrable Securities, the holders of a majority of the Option Holder
Registrable Securities and the holders of a majority of
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<PAGE>
the Management Registrable Securities will each be entitled to request unlimited
Demand Registrations after the Initial Demand Availability Period, provided that
all such requests must request that such registration include at least 25% of
the Registrable Securities owned by such demanding holders immediately after the
purchase contemplated by the Purchase Agreement. The Company will pay all
Registration Expenses (as defined in Section 5) relating to one Demand
Registration for the holders of the EQT Registrable Securities, one Demand
Registration for the holders of the Option Holder Registrable Securities and one
Demand Registration for the holders of the Management Registrable Securities. A
registration will not count as a Demand Registration until it has remained
effective for 120 days or such shorter period as shall be required to sell all
of the Registrable Securities registered pursuant thereto (but not before the
expiration of the applicable prospectus delivery period) ; provided that, in the
event a registration does not count as a Demand Registration pursuant to the
foregoing clause, the Company will pay the Registration Expenses of such
registration if, but only if, it would have been obligated to pay such expenses
had the registration counted as a Demand Registration.
(c) Priority on Demand Registrations.
(i) The Company will not include in any Demand Registration requested
pursuant to clause (ii) of Section 2(a) any securities (other than securities to
be sold on behalf of the Company) which are not EQT Registrable Securities
without the prior written consent of all of the holders of EQT Registrable
Securities making the demand. The Company will not include in any Demand
Registration requested pursuant to clause (iii) of Section 2(a) any securities
(other than securities to be sold on behalf of the Company) which are not
Registrable Securities without the prior written consent of the holders of a
majority of the Registrable Securities making the demand.
(ii) If in a Demand Registration requested pursuant to clause (iii) of
Section 2(a) the managing underwriters advise the Company in writing that in
their opinion the number of Registrable Securities requested to be included in
the offering and, if permitted hereunder, other securities desired to be
included in the offering exceeds the number of securities which can be sold
therein (i) without adversely affecting the marketability of the offering or
(ii) within a price range acceptable to the holders of a majority of the
Registrable Securities initially requesting registration, there shall be
included in the offering: first, the Registrable Securities requested to be
included in such registration by the holders initially requesting registration
pursuant to the first sentence of clause (iii) of Section 2(a); second, the
Registrable Securities requested to be included in such registration pursuant to
the last sentence of clause (iv) of Section 2(a); third, securities of other
holders proposed to be included; and fourth, the securities the Company proposes
to include.
(d) Restrictions on Demand Registrations. The Company will not be
obligated to effect any Demand Registration within six months after the
effective date of a previous offering made pursuant to a request for a Demand
Registration. Twice during any twelve-month period, the Company may postpone
for up to 30 days the filing or the effectiveness of a registration statement
for a Demand Registration if the Company, in the good faith judgment of its
Board of Directors, determines that such Demand Registration could reasonably be
expected to have an adverse effect
4
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on any proposal or plan by the Company to engage in any acquisition (other than
in the ordinary course of business) or any merger, recapitalization,
consolidation, reorganization, tender offer or similar transaction or
negotiations, discussions or pending proposals with respect thereto or would
require the Company to make premature public disclosure of information, the
premature disclosure of which could have a material adverse effect on the
business or prospects of the Company, or would otherwise be seriously
detrimental to the Company or its shareholders; provided that in such event, the
holders of Registrable Securities initially requesting such Demand Registration
will be entitled to withdraw such request and, if such request is withdrawn,
such Demand Registration will not count as one of the holder's permitted Demand
Registrations hereunder, and the Company will pay all Registration Expenses in
connection with such withdrawn registrations.
(e) Selection of Underwriters. The holders of a majority of the
Registrable Securities included in any Demand Registration shall have the right
to select the investment banker(s) and manager(s) to administer any public
offering of equity securities of the Company pursuant to a Demand Registration
for which such holders are paying the Registration Expenses (or, if only certain
holders are paying the Registration Expenses, such selection shall be made by
the holders paying such expenses), subject to the Company's approval, which
approval shall not be unreasonably withheld. The Company will select the
investment banker(s) and manager(s) to administer any public offering of equity
securities of the Company pursuant to a Demand Registration for which the
Company pays the Registration Expenses, subject to the approval of the holders
of a majority of the Registrable Securities participating in such registration,
which approval shall not be unreasonably withheld.
(f) Other Registration Rights. Except as provided in or contemplated
by this Agreement, the Company will not grant to any Person the right to request
the Company to register any equity securities of the Company, or any securities
convertible or exchangeable into or exercisable for such securities, without the
prior written consent of the holders of a majority of the EQT Registrable
Securities, of the holders of a majority of the Management Registrable
Securities and of the holders of a majority of the Option Holder Registrable
Securities.
3. Holdback Agreements.
(a) To the extent not inconsistent with applicable law, each holder of
Registrable Securities agrees not to effect any public sale or distribution
(including sales pursuant to Rule 144) of equity securities of the Company, or
any securities, options or rights convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and the 90-day
period beginning on the effective date of any Demand Registration or any
underwritten Piggyback Registration (except as part of such underwritten
registration), unless the underwriters managing the registered public offering
otherwise agree.
(b) The Company agrees (i) not to effect any public sale or
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and during the 90-day period beginning on the effective date of any
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Demand Registration or any underwritten Piggyback Registration (except as part
of such underwritten registration or pursuant to registrations on Form S-4 or S-
8 or any successor form thereto), unless the underwriters managing the
registered public offering otherwise agree, and (ii) to cause each holder of its
Common Stock, or any securities convertible into or exchangeable or exercisable
for Common Stock, purchased from the Company at any time after the date of this
Agreement (other than in a registered public offering) to agree not to effect
any public sale or distribution (including sales pursuant to Rule 144) of any
such securities during such period (except as part of such underwritten
registration, if otherwise permitted), unless the underwriters managing the
registered public offering otherwise agree.
4. Registration Procedures. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its reasonable best efforts to effect
the registration and the sale of such Registrable Securities in accordance with
the intended method of disposition thereof, and pursuant thereto the Company
will as expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement on the appropriate form with respect to such Registrable
Securities and thereafter use its reasonable efforts to cause such registration
statement to become effective (provided that before filing a registration
statement or prospectus or any amendments or supplements thereto, the Company
will furnish to counsel selected by each holder of Registrable Securities
covered by such registration statement copies of all such documents proposed to
be filed, which documents will be subject to review of such counsel);
(b) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of either (i) not less than six months (subject
to extension pursuant to Section 7(b)) or, if such registration statement
relates to an underwritten offering, such longer period as in the opinion of
counsel for the underwriters a prospectus is required by law to be delivered in
connection with sales of Registrable Securities by an underwriter or dealer or
(ii) such shorter period as will terminate when all of the securities covered by
such registration statement have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof set forth in
such registration statement (but in any event not before the expiration of any
longer period required under the Securities Act), and to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement until such time as all of such
securities have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such registration
statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such
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<PAGE>
seller may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such seller;
(d) use its reasonable best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other acts
and things which may be reasonably necessary or advisable to enable such seller
to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller (provided that the Company will not be required
to (i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subsection, (ii) subject itself to
taxation in any such jurisdiction or (iii) consent to general service of process
in any such jurisdiction);
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the discovery of the happening of
any event as a result of which, the prospectus included in such registration
statement contains an untrue statement of a material fact or omits to state any
material fact necessary to make the statements therein not misleading in the
light of the circumstances under which they were made, and, at the request of
any such seller, the Company will prepare and furnish to such seller a
reasonable number of copies of a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus will not contain an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading in the light of the circumstances under which they were made;
(f) use its best efforts to cause all such Registrable Securities to
be listed on each securities exchange on which similar securities issued by the
Company are then listed and, if not so listed, to be listed on the Nasdaq Stock
Market;
(g) provide a transfer agent and registrar (which may be the Company)
for all such Registrable Securities not later than the effective date of such
registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including, without limitation, effecting a stock split
or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company as shall be reasonably
necessary to enable them to exercise their due diligence responsibility, and
cause the Company's officers, directors, employees and independent accountants
to supply all information reasonably requested
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<PAGE>
by any such seller, underwriter, attorney, accountant or agent in connection
with such registration statement; provided, however, each seller of Registrable
Securities agrees that information obtained by it as a result of such
inspections which is deemed confidential by the Company shall not be disclosed
to any third party and shall not be used by it as the basis for any market
transaction in securities of the Company unless and until such information is
made generally available to the public and each seller shall cause any attorney,
accountant or agent retained by such seller to adhere to these confidentiality
provisions;
(j) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Securities and Exchange Commission, and
make available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months beginning with
the first day of the Company's first full calendar quarter after the effective
date of the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any securities included in such registration statement for sale in any
jurisdiction, use its reasonable best efforts promptly to obtain the withdrawal
of such order;
(l) obtain a comfort letter, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, dated the date of the closing under the underwriting
agreement), signed by the Company's independent public accountants in customary
form and covering such matters of the type customarily covered by comfort
letters as the holders of a majority of the Registrable Securities being sold
reasonably request; and
(m) provide a legal opinion of the Company's outside counsel, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of the closing under
the underwriting agreement), with respect to the registration statement, each
amendment and supplement thereto, the prospectus included therein (including the
preliminary prospectus) and such other documents relating thereto in customary
form and covering such matters of the type customarily covered by legal opinions
of such nature.
The Company may require each seller of Registrable Securities as to which any
registration is being effected to furnish the Company such information regarding
such seller and the distribution of such securities as the Company may from time
to time reasonably request in writing.
5. Registration Expenses.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including, without limitation, all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, listing fees and fees
and disbursements of counsel for the Company and its independent certified
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public accountants and other Persons retained by the Company (all such expenses
being herein called "Registration Expenses"), will be borne as provided in this
Agreement, and the Company will, in any event, pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit or quarterly review, the expense of any liability insurance and the
expenses and fees for listing the securities to be registered on each securities
exchange on which similar securities issued by the Company are then listed or on
the Nasdaq Stock Market.
(b) To the extent Registration Expenses are not required to be paid by
the Company, each holder of securities included in any registration hereunder
will pay those Registration Expenses allocable to the registration of such
holder's securities so included, and any Registration Expenses not so allocable
will be borne by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
Each holder of Registrable Securities will pay any underwriting discounts and
commissions attributable to the sale of his or its Registrable Securities and
any expenses of counsel retained by such holder, whether or not the Company is
obligated to pay Registration Expenses.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless, to the extent
permitted by law, each holder of Registrable Securities, its officers and
directors and each Person who controls such holder (within the meaning of the
Securities Act) against any losses, claims, damages, liabilities, joint or
several, to which such holder or any such director or officer or controlling
person may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon (i)
any untrue or alleged untrue statement of material fact contained (A) in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or (B) in any application or other document or
communication (in this Section 6, collectively called an "application") executed
by or on behalf of the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to qualify any
securities covered by such registration statement under the "blue sky" or
securities laws thereof, or (ii) any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and the Company will reimburse such holder and each such
director, officer and controlling person for any legal or any other expenses
incurred by them in connection with investigating or defending any such loss,
claim, liability, action or proceeding; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of or is based upon an untrue statement or alleged untrue statement, or
omission or alleged omission, made in such registration statement, any such
prospectus or preliminary prospectus or any amendment or supplement thereto, or
in any application, in reliance upon, and in conformity with, written
information furnished to the Company by such holder expressly for use therein or
by such holder's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such holder with a sufficient number of copies
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<PAGE>
of the same. In connection with an underwritten offering, the Company will
indemnify such underwriters, their officers and directors and each Person who
controls such underwriters (within the meaning of the Securities Act) to the
same extent as provided above with respect to the indemnification of the holders
of Registrable Securities.
(b) In connection with any registration statement in which a holder of
Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, will indemnify and hold harmless
the Company, its directors and officers and each other Person who controls the
Company (within the meaning of the Securities Act) against any losses, claims,
damages, liabilities, joint or several, to which the Company or any such
director or officer or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon (i) any untrue or alleged untrue
statement of material fact contained in the registration statement, prospectus
or preliminary prospectus or any amendment thereof or supplement thereto or in
any application or (ii) any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or omission is
made in such registration statement, any such prospectus or preliminary
prospectus or any amendment or supplement thereto, or in any application, in
reliance upon and in conformity with written information furnished to the
Company by such holder expressly for use therein, and such holder will reimburse
the Company and each such director, officer and controlling Person for any legal
or any other expenses incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided,
however, that the obligation to indemnify will be individual to each holder and
will be limited to the net amount of proceeds received by such holder from the
sale of Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless such indemnified party has been
advised by legal counsel that there may be one or more legal defenses available
to such indemnified party which are different from or additional to those
available to the Company, permit such indemnifying party to assume the defense
of such claim with counsel reasonably satisfactory to the indemnified party. If
such defense is assumed, the indemnifying party shall not agree to any
settlement that does not provide for the complete release from liability of the
indemnified party without the indemnified party's prior written consent, which
consent will not be unreasonably withheld, and the indemnified party will not be
subject to any liability for any settlement made by the indemnifying party
without the indemnified party's consent. An indemnifying party who is not
entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless the
indemnified party has been advised by legal counsel that there may be one or
more legal defenses available to such indemnified party which are different from
or additional to those available to the Company.
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(d) The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and will survive the transfer of securities. The Company also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason.
7. Participation in Underwritten Registrations.
(a) Notwithstanding anything to the contrary contained herein, no
Person may participate in any registration hereunder which is underwritten
unless such Person (i) agrees to sell such Person's securities on the basis
provided in any underwriting arrangements approved by the Person or Persons
entitled hereunder to approve such arrangements (including, without limitation,
pursuant to the terms of any over-allotment or "green shoe" option requested by
the managing underwriter(s), provided that no holder of Registrable Securities
will be required to sell more than the number of Registrable Securities that
such holder has requested the Company to include in any registration) and (ii)
completes and executes all customary questionnaires, powers of attorney, custody
agreements, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
(b) Each person that is participating in any registration hereunder
agrees that, upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 4(e) above, such Person will forthwith
discontinue the disposition of its Registrable Securities pursuant to the
registration statement until such Person's receipt of the copies of a
supplemented or amended prospectus as contemplated by such Section 4(e). In the
event the Company shall give any such notice, the applicable time period
mentioned in Section 4(b) during which a Registration Statement is to remain
effective shall be extended by the number of days during the period from and
including the date of the giving of such notice pursuant to this section to and
including the date when each seller of a Registrable Security covered by such
registration statement shall have received the copies of the supplemented or
amended prospectus contemplated by Section 4(e).
(c) Each selling holder of Registrable Securities also agrees to
notify the Company if any event relating to such holder occurs which would
require the preparation of a supplement or amendment to the prospectus so that
such prospectus will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
8. Current Public Information. At all times after the Company has
filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company will file all reports required to be filed by it under
the Securities Act and the Securities Exchange Act and the rules and regulations
adopted by the Securities and Exchange Commission thereunder, and will take such
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further action as any holder or holders of Registrable Securities may reasonably
request, all to the extent required to enable such holders to sell Registrable
Securities pursuant to Rule 144 adopted by the Securities and Exchange
Commission under the Securities Act such rule may be amended from time to time)
or any similar rule or regulation hereafter adopted by the Securities and
Exchange Commission.
9. Definitions.
"EQT Registrable Securities" means (i) any shares of Common Stock
acquired by EQT from the Company or from any other Person, whether pursuant to
the Purchase Agreement or otherwise, and (ii) any shares of Common Stock issued
or issuable directly or indirectly with respect to the securities referred to in
clause (i) above by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization, including a recapitalization or exchange. As to any particular
shares constituting EQT Registrable Securities, such shares will cease to be EQT
Registrable Securities when they have been (x) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, or (y) sold to the public through a broker, dealer or market
maker pursuant to Rule 144 (or by similar provision then in force) under the
Securities Act.
"Common Stock" means the common stock, no par value, of the Company.
"Management Registrable Securities" means (i) any shares of Common
Stock owned by any of the Management Shareholders on the date hereof or acquired
by any of the Management Shareholders from the Company or from any other Person
after the date hereof and (ii) any shares of Common Stock issued or issuable
directly or indirectly with respect to the securities referred to in clause (i)
above by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization, including a recapitalization or exchange. As to any particular
shares constituting Management Registrable Securities, such shares will cease to
be Management Registrable Securities when they have been (x) effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them, or (y) sold to the public through a
broker, dealer or market maker pursuant to Rule 144 (or by similar provision
then in force) under the Securities Act.
"Option Agreement" means the Option Agreement, dated as of the date
hereof among the Option Holder and each of the Management Shareholders.
"Option Holder Registrable Securities" means (i) any shares of Common
Stock acquired by the Option Holder upon the exercise of Options to purchase
Common Stack issued to the Option Holder pursuant to the Option Agreement and
(ii) any shares of Common Stock issued or issuable directly or indirectly with
respect to the securities referred to in clause (i) above by way of stock
dividend or stock split or conversion or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization,
including a recapitalization or exchange. As to any particular shares
constituting Option Holder Registrable Securities, such shares
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will cease to be Option Holder Registrable Securities when they have been (x)
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, or (y) sold to the public through
a broker, dealer or market maker pursuant to Rule 144 (or by similar provision
then in force) under the Securities Act.
"Options" means the Options to purchase Common Stock issued pursuant
to the Option Agreement.
"Person" means an individual, a partnership, a joint venture, a
corporation, a limited liability company, a trust, an unincorporated
organization and a government or any department or agency thereof.
"Registrable Securities" means collectively EQT Registrable
Securities, Management Registrable Securities and Option Holder Registrable
Securities.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Securities and Exchange Commission" includes the United States
government agency of that name and any governmental body or agency succeeding to
the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any similar federal law then in force.
"Shareholders Agreement" means the Shareholders Agreement of even date
herewith by and among the Company and the parties hereto.
Unless otherwise stated, other capitalized terms contained herein have
the meanings set forth in the Purchase Agreement.
10. Miscellaneous.
(a) Duration of Rights. Notwithstanding any other provision of this
Agreement to the contrary, the rights of all holders of Registrable Securities
shall terminate on the tenth anniversary of the date of the consummation of the
sale of the Company's Common Stock pursuant to an effective registration
statement under the Securities Act (the "Termination Date"). Notwithstanding the
foregoing, in the event a holder of Registrable Securities is not an affiliate
of the Company, in the opinion of counsel to the Company, addressed to the
holder and reasonably satisfactory to the holder and its counsel, then the
Termination Date with respect to such holder shall be the earlier to occur of
the Termination Date as provided above and the date on which such holder would
be free, in the such opinion of counsel, to sell all of his Registrable
Securities under Rule 144 (without any volume or manner of sale limitations).
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(b) No Violative Agreements. The Company will not hereafter enter
into any agreement with respect to its securities which violates the rights
granted to the holders of Registrable Securities in this Agreement.
(c) Adjustments Affecting Registrable Securities. During the period,
if any, commencing upon a Public Float (as defined in the Shareholders
Agreement) and ending on the last day of the Initial Demand Availability Period,
the Company will not, without the prior written consent of the holders of a
majority of the EQT Registrable Securities, (i) merge or consolidate with any
Person, (ii) liquidate, dissolve or effect a recapitalization or reorganization
in any form of transaction or (iii) make any amendment to its Articles of
Incorporation or bylaws.
(d) Remedies. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that any party hereto shall have the right to injunctive relief,
in addition to all of its other rights and remedies at law or in equity, to
enforce the provisions of this Agreement.
(e) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company, holders of a majority of the EQT Registrable
Securities, holders of a majority of the Management Registrable Securities and
holders of a majority of the Option Holder Registrable Securities; provided,
however, that in the event that such amendment or waiver would treat a holder
or group of holders of Registrable Securities in a manner different from any
other holders of Registrable Securities, then such amendment or waiver will
require the consent of such holder or the holders of a majority of the
Registrable Securities of such group adversely treated.
(f) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors and assigns. In addition, and whether or not any express
assignment shall have been made, the provisions of this Agreement which are for
the benefit of the holders of Registrable Securities (or any portion thereof) as
such shall be for the benefit of and enforceable by any subsequent holder of any
Registrable Securities (or of such portion thereof), subject to the provisions
respecting the minimum numbers or percentages of shares of Registrable
Securities (or of such portion thereof) required in order to be entitled to
certain rights, or take certain actions, contained herein.
(g) Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or the effectiveness or validity of any provision in any
other jurisdiction, and this Agreement shall be reformed, construed and enforced
in such jurisdiction as if such invalid, illegal or unenforceable provision had
never been contained herein.
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(h) Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
(i) Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
(j) Governing Law. All issues concerning this Agreement shall be
governed by and construed in accordance with the laws of the State of Texas,
without regard to choice of Law provisions thereof.
(k) Notices. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when personally delivered or
received by certified mail, postage prepaid and return receipt requested, or
sent by guaranteed overnight courier service, charges prepaid. Such notices,
demands and other communications will be sent to the respective addresses
indicated in the Shareholders Agreement or to such other address or to the
attention of such other person as the recipient party has specified by prior
written notice to the sending party.
(l) Entire Agreement. Except as otherwise expressly set forth herein,
this Agreement and any other agreements and instruments executed in connection
herewith or expressly referred to herein embodies the complete agreement and
understanding among the parties hereto with respect to the subject matter hereof
and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
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IN WITNESS WHEREOF, the parties have executed this Registration
Agreement on the day and year first above written.
SOUTH COAST EXPLORATION COMPANY
By: /s/ Ron A. Krenzke
----------------------------
Title:
EQT CAPITAL CORPORATION
By: /s/ Robert E. Daley
----------------------------
Title: President
WEISSER, JOHNSON & CO.
By: /s/ Scott W. Johnson
----------------------------
Title: Managing Director
Witness:
/s/ Scott W. Johnson /s/ Ron A. Krenzke
- -------------------- ---------------------------
Ron A. Krenzke
/s/ Ron A. Krenzke /s/ Craig S. Davis
- -------------------- ---------------------------
Craig S. Davis
/s/ Ron A. Krenzke /s/ Philip V. Duggan
- -------------------- ---------------------------
Philip V. Duggan
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EXHIBIT 10.14
PROMISSORY NOTE
$5,000,000 The Woodlands, Texas
July 7, 1997
For value received, the undersigned, Araxas Holdings, Inc., a Delaware
corporation, and Araxas Energy Corporation, an Oklahoma corporation ("Energy")
(collectively, the "Maker"), promises to pay ERI Investments, Inc. ("Payee") at
the office of Payee at 911 Washington Street, Wilmington, Delaware 19801, the
principal sum of Five Million and No/100 Dollars ($5,000,000), payable in lawful
money of the United States of America in the manner set forth below; provided,
however, the principal amount evidenced by this Promissory Note, shall become
satisfied in full and Maker shall not be obligated hereunder for any principal
if: (i) on or before July 31, 1998, Maker, Payee and/or Payee's designees
consummate a private placement of preferred stock, par value $0.001 per share
("Preferred Stock") of Maker, on mutually agreeable terms and conditions,
whereby Payee and/or Payee's designees acquire shares of Preferred Stock for
total proceeds to Maker of a minimum of $5,000,000; and (ii) at the request of
Payee, the entire principal balance of this Promissory Note shall be applied
against the purchase price of shares of Preferred Stock acquired by Payee or
Payee's designee in such offering on a dollar-for-dollar basis.
If the private equity placement, as described above, is not closed on
or before July 31, 1998, Maker shall pay the entire principal amount outstanding
plus accrued unpaid interest under this Promissory Note on or before July 31,
1998.
Maker promises to pay simple interest on the unpaid principal balance
outstanding hereunder from the date of this Promissory Note through the date of
payment (or the date the principal amount is satisfied pursuant to the private
equity placement) at a rate per annum equal to nine percent (9%). Interest
shall be computed for the actual number of days elapsed on the basis of a year
consisting of 365 days. Accrued interest shall be due and payable in two (2)
installments in lawful money of the United States of America at the principal
office of Payee referenced above on January 31, 1998, and all remaining accrued
interest shall be due and payable at the maturity of this Promissory Note on
July 31, 1998.
Maker covenants that the proceeds of the loan evidenced by this
Promissory Note shall be used solely to provide working capital financing,
directly or indirectly, to or for the benefit of Energy.
Upon any distribution of assets of Maker upon the dissolution, winding
up, liquidation or reorganization of Maker, the payment of the principal of and
interest on this Promissory Note shall be subordinated in right of payment to
the prior payment in full of all other indebtedness of Maker. By acceptance
hereof, Payee acknowledges that Stratum Group Energy Partners, L.P. holds a
prior perfected security interest in the assets of Araxas SPV-I, Inc., a wholly-
owned subsidiary of Energy, and agrees not to assert any claim or right arising
as a result of the obligations hereunder against the assets of Araxas SPV-I,
Inc. or the assets of Araxas Exploration,
<PAGE>
Inc., a wholly-owned subsidiary of Energy, unless the indebtedness secured by
such security interest has been satisfied.
Upon the occurrence of any Event of Default (as defined hereinafter),
the entire unpaid principal amount and all accrued and unpaid interest on this
Promissory Note shall immediately thereupon be due and payable.
Each of the following occurrences shall constitute an Event of Default
under this Promissory Note: (i) any bankruptcy, dissolution, liquidation or
other similar proceeding shall be filed by, against or on behalf of Maker and
any such proceeding shall not be dismissed within thirty (30) days; (ii) Maker
shall cease to do business in the ordinary course; (iii) any order shall be made
for appointment of Maker or Maker shall make an assignment for the benefit of
creditors; (iv) failure to pay principal or interest hereunder when due or
breach of any other covenant of Maker hereunder; and (v) Maker fails to pay any
amount due under indebtedness for borrowed money resulting in the acceleration
of maturity of such indebtedness.
During the existence of any Event of Default, the Payee or other
holder of this Promissory Note may apply payments received on any amount due
hereunder or under the terms of any instrument now or hereafter evidencing or
securing any said indebtedness as said holder may determine.
If any amount of any installment payable hereunder is not paid when
due, such amount shall bear interest at the rate of fifteen percent (15%) per
annum, accrued from the due date to the day on which such default is cured to
the satisfaction of the Payee or the holder hereof. All such past due sums
shall be paid at the time of, and as a condition precedent to the curing of, any
default hereunder.
Maker and all endorsers, sureties, guarantors, and all other persons
who may become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of non-payment. Said parties
consent to any extension of time (whether one or more) of payment hereof, and
renewal (whether one or more) hereof, and any release of any party liable for
payment of this obligation. Any such extension, renewal or release may be made
without notice to any such party and without discharging such party's liability
hereunder. Maker and the Payee stipulate and agree that none of the terms and
provisions hereof shall ever be construed as a contract for the use, forbearance
or detention of money, providing for interest at a rate in excess of the maximum
interest rate permitted to be charged by applicable law.
THIS NOTE CONTAINS NO PREPAYMENT PENALTY AND SHALL BE INTERPRETED ACCORDING TO
THE LAWS OF THE STATE OF TEXAS.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused their authorized
representatives to execute and deliver this instrument on this 7th day of July,
1997.
ARAXAS HOLDINGS, INC.
By: /s/ W. E. Rowsey, III
----------------------------------------
W. E. Rowsey, III, Chairman of the Board
ARAXAS ENERGY CORPORATION
By: /s/ Steven W. Nance
----------------------------------------
Steven W. Nance, President
3
<PAGE>
EXHIBIT 10.15
PROMISSORY NOTE
Due September 30, 1998
$1,000,000 The Woodlands, Texas
September 24, 1997
THIS INSTRUMENT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR COMPLIANCE WITH AN EXEMPTION FROM SUCH
REGISTRATION. THE HOLDER, BY ACCEPTANCE HEREOF, AGREES TO PROVIDE MAKER WITH
SUCH DOCUMENTS AND ASSURANCES AS MAKER MAY REQUEST WITH RESPECT TO COMPLIANCE
WITH THE FOREGOING RESTRICTIONS PRIOR TO REGISTRATION OF ANY PURPORTED TRANSFER
OR ASSIGNMENT OF THIS INSTRUMENT.
For value received, the undersigned, XPLOR Energy, Inc., a Delaware
corporation (the "Maker"), promises to pay Ron A. Krenzke ("Payee"), the
principal sum of One Million and No/100 Dollars ($1,000,000.00), without
interest, on September 30, 1998, payable in lawful money of the United States of
America; provided, however, the entire principal sum evidenced by this
Promissory Note shall become immediately due and payable upon the closing of the
sale for cash of equity securities of Maker in a firm commitment underwritten
public offering by Maker registered under the Securities Act of 1933, as
amended.
Maker may prepay all or any portion of this Promissory Note at any time and
from time to time without premium or penalty.
If any amount of the principal payable hereunder is not paid when due, at
maturity or upon acceleration, such amount shall bear interest at the rate of
twelve percent (12%) per annum, accrued from the due date to the day on which
such default is cured to the satisfaction of the holder hereof. All such past
due sums shall be paid at the time of, and as a condition precedent to the
curing of, any default hereunder.
Upon any distribution of assets of Maker upon the dissolution, winding up,
liquidation or reorganization of Maker, or in the event of the default of Maker
under any indebtedness for borrowed money, the payment of the principal and any
interest on this Promissory Note shall be subordinated in right of payment to
the prior payment in full of all other indebtedness of Maker.
This Promissory Note is one of a series of promissory notes of Maker in the
aggregate principal amount of $3.0 million ("Acquisition Notes") which are
issued pursuant to that certain
<PAGE>
Acquisition Agreement and Plan of Organization ("Agreement") dated August 19,
1997, and shall be subject to the terms of the Agreement.
To secure payment and performance of this Promissory Note and the other
Acquisition Notes, Maker hereby grants to and in favor of R. A. Krenzke, as
agent ("Agent") for and on behalf of the holders of the Acquisition Notes, a
security interest covering all of Maker's right, title and interest in the INEXS
Shares (as defined in the Agreement), and any and all products or proceeds
thereof ("Collateral"). The security interest granted by the preceding sentence
shall be subordinate to the rights of Credit Lyonnais New York Branch and its
successors and assigns ("Lender"), who shall be granted a security interest in
the Collateral, as security for certain debt of affiliates of Maker owing to
Lender ("Debt"), that will be first and superior in all respect to the rights of
the holders of this Promissory Note (and the other Acquisition Notes) in
accordance with the terms and provisions of that certain Subordination Agreement
of even date herewith by and among Lender, Payee, Agent, Maker and the holders
of the other Acquisition Notes.
To induce holder to accept this Note, Maker hereby agrees as follows: (i)
unless the advance approval of Agent is obtained approving a proposed deviation,
INEXS (as defined in the Agreement) shall be operated in the ordinary course and
substantially as INEXS' business activities are conducted as of the date hereof;
(ii) without the advance approval of Agent, Maker shall not sell, assign,
exchange, or transfer the Collateral, or cause to be sold all or substantially
all of the assets of INEXS, except as security for the Debt; and (iii) no
bankruptcy, dissolution, liquidation or other similar proceeding shall be filed
by, against or on behalf of Maker that is not dismissed within thirty (30) days.
Maker and all endorsers, sureties, guarantors, and all other persons who
may become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of non-payment. Said parties
consent to any extension of time (whether one or more) of payment hereof, and
renewal (whether one or more) hereof, and any release of any party liable for
payment of this obligation. Any such extension, renewal or release may be made
without notice to any such party and without discharging such party's liability
hereunder. Maker and the Payee stipulate and agree that none of the terms and
provisions hereof shall ever be construed as a contract to pay for the use,
forbearance or detention of money, providing for interest at a rate in excess of
the maximum interest rate permitted to be charged by applicable law.
Notwithstanding anything to the contrary contained in this Promissory Note,
the holder hereof shall not be entitled to obtain a deficiency judgment against
the Maker for the payment of principal and any interest on this Promissory Note.
THIS PROMISSORY NOTE AND THE INDEBTEDNESS EVIDENCED HEREBY SHALL BE
INTERPRETED ACCORDING TO THE INTERNAL LAWS OF THE STATE OF TEXAS.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Promissory Note to be
executed and delivered on its behalf by its duly authorized representative on
this 24th day of September, 1997.
XPLOR ENERGY, INC.
By: /s/ Steven W. Nance
-------------------------
Steven W. Nance,
President and Chief Executive Officer
-3-
<PAGE>
EXHIBIT 10.16
PROMISSORY NOTE
Due September 30, 1998
$1,000,000 The Woodlands, Texas
September 24, 1997
THIS INSTRUMENT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR COMPLIANCE WITH AN EXEMPTION FROM SUCH
REGISTRATION. THE HOLDER, BY ACCEPTANCE HEREOF, AGREES TO PROVIDE MAKER WITH
SUCH DOCUMENTS AND ASSURANCES AS MAKER MAY REQUEST WITH RESPECT TO COMPLIANCE
WITH THE FOREGOING RESTRICTIONS PRIOR TO REGISTRATION OF ANY PURPORTED TRANSFER
OR ASSIGNMENT OF THIS INSTRUMENT.
For value received, the undersigned, XPLOR Energy, Inc., a Delaware
corporation (the "Maker"), promises to pay Philip V. Duggan ("Payee"), the
principal sum of One Million and No/100 Dollars ($1,000,000.00), without
interest, on September 30, 1998, payable in lawful money of the United States of
America; provided, however, the entire principal sum evidenced by this
Promissory Note shall become immediately due and payable upon the closing of the
sale for cash of equity securities of Maker in a firm commitment underwritten
public offering by Maker registered under the Securities Act of 1933, as
amended.
Maker may prepay all or any portion of this Promissory Note at any time and
from time to time without premium or penalty.
If any amount of the principal payable hereunder is not paid when due, at
maturity or upon acceleration, such amount shall bear interest at the rate of
twelve percent (12%) per annum, accrued from the due date to the day on which
such default is cured to the satisfaction of the holder hereof. All such past
due sums shall be paid at the time of, and as a condition precedent to the
curing of, any default hereunder.
Upon any distribution of assets of Maker upon the dissolution, winding up,
liquidation or reorganization of Maker, or in the event of the default of Maker
under any indebtedness for borrowed money, the payment of the principal and any
interest on this Promissory Note shall be subordinated in right of payment to
the prior payment in full of all other indebtedness of Maker.
This Promissory Note is one of a series of promissory notes of Maker in the
aggregate principal amount of $3.0 million ("Acquisition Notes") which are
issued pursuant to that certain
<PAGE>
Acquisition Agreement and Plan of Organization ("Agreement") dated August 19,
1997, and shall be subject to the terms of the Agreement.
To secure payment and performance of this Promissory Note and the other
Acquisition Notes, Maker hereby grants to and in favor of R. A. Krenzke, as
agent ("Agent") for and on behalf of the holders of the Acquisition Notes, a
security interest covering all of Maker's right, title and interest in the INEXS
Shares (as defined in the Agreement), and any and all products or proceeds
thereof ("Collateral"). The security interest granted by the preceding sentence
shall be subordinate to the rights of Credit Lyonnais New York Branch and its
successors and assigns ("Lender"), who shall be granted a security interest in
the Collateral, as security for certain debt of affiliates of Maker owing to
Lender ("Debt"), that will be first and superior in all respect to the rights of
the holders of this Promissory Note (and the other Acquisition Notes) in
accordance with the terms and provisions of that certain Subordination Agreement
of even date herewith by and among Lender, Payee, Agent, Maker and the holders
of the other Acquisition Notes.
To induce holder to accept this Note, Maker hereby agrees as follows: (i)
unless the advance approval of Agent is obtained approving a proposed deviation,
INEXS (as defined in the Agreement) shall be operated in the ordinary course and
substantially as INEXS' business activities are conducted as of the date hereof;
(ii) without the advance approval of Agent, Maker shall not sell, assign,
exchange, or transfer the Collateral, or cause to be sold all or substantially
all of the assets of INEXS, except as security for the Debt; and (iii) no
bankruptcy, dissolution, liquidation or other similar proceeding shall be filed
by, against or on behalf of Maker that is not dismissed within thirty (30) days.
Maker and all endorsers, sureties, guarantors, and all other persons who
may become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of non-payment. Said parties
consent to any extension of time (whether one or more) of payment hereof, and
renewal (whether one or more) hereof, and any release of any party liable for
payment of this obligation. Any such extension, renewal or release may be made
without notice to any such party and without discharging such party's liability
hereunder. Maker and the Payee stipulate and agree that none of the terms and
provisions hereof shall ever be construed as a contract to pay for the use,
forbearance or detention of money, providing for interest at a rate in excess of
the maximum interest rate permitted to be charged by applicable law.
Notwithstanding anything to the contrary contained in this Promissory Note,
the holder hereof shall not be entitled to obtain a deficiency judgment against
the Maker for the payment of principal and any interest on this Promissory Note.
THIS PROMISSORY NOTE AND THE INDEBTEDNESS EVIDENCED HEREBY SHALL BE
INTERPRETED ACCORDING TO THE INTERNAL LAWS OF THE STATE OF TEXAS.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Promissory Note to be
executed and delivered on its behalf by its duly authorized representative on
this 24th day of September, 1997.
XPLOR ENERGY, INC.
By: /s/ Steven W. Nance
-----------------------------------
Steven W. Nance,
President and Chief Executive Officer
-3-
<PAGE>
EXHIBIT 10.17
PROMISSORY NOTE
Due September 30, 1998
$1,000,000 The Woodlands, Texas
September 24, 1997
THIS INSTRUMENT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR COMPLIANCE WITH AN EXEMPTION FROM SUCH
REGISTRATION. THE HOLDER, BY ACCEPTANCE HEREOF, AGREES TO PROVIDE MAKER WITH
SUCH DOCUMENTS AND ASSURANCES AS MAKER MAY REQUEST WITH RESPECT TO COMPLIANCE
WITH THE FOREGOING RESTRICTIONS PRIOR TO REGISTRATION OF ANY PURPORTED TRANSFER
OR ASSIGNMENT OF THIS INSTRUMENT.
For value received, the undersigned, XPLOR Energy, Inc., a Delaware
corporation (the "Maker"), promises to pay Craig S. Davis ("Payee"), the
principal sum of One Million and No/100 Dollars ($1,000,000.00), without
interest, on September 30, 1998, payable in lawful money of the United States of
America; provided, however, the entire principal sum evidenced by this
Promissory Note shall become immediately due and payable upon the closing of the
sale for cash of equity securities of Maker in a firm commitment underwritten
public offering by Maker registered under the Securities Act of 1933, as
amended.
Maker may prepay all or any portion of this Promissory Note at any time and
from time to time without premium or penalty.
If any amount of the principal payable hereunder is not paid when due, at
maturity or upon acceleration, such amount shall bear interest at the rate of
twelve percent (12%) per annum, accrued from the due date to the day on which
such default is cured to the satisfaction of the holder hereof. All such past
due sums shall be paid at the time of, and as a condition precedent to the
curing of, any default hereunder.
Upon any distribution of assets of Maker upon the dissolution, winding up,
liquidation or reorganization of Maker, or in the event of the default of Maker
under any indebtedness for borrowed money, the payment of the principal and any
interest on this Promissory Note shall be subordinated in right of payment to
the prior payment in full of all other indebtedness of Maker.
This Promissory Note is one of a series of promissory notes of Maker in the
aggregate principal amount of $3.0 million ("Acquisition Notes") which are
issued pursuant to that certain
<PAGE>
Acquisition Agreement and Plan of Organization ("Agreement") dated August 19,
1997, and shall be subject to the terms of the Agreement.
To secure payment and performance of this Promissory Note and the other
Acquisition Notes, Maker hereby grants to and in favor of R. A. Krenzke, as
agent ("Agent") for and on behalf of the holders of the Acquisition Notes, a
security interest covering all of Maker's right, title and interest in the INEXS
Shares (as defined in the Agreement), and any and all products or proceeds
thereof ("Collateral"). The security interest granted by the preceding sentence
shall be subordinate to the rights of Credit Lyonnais New York Branch and its
successors and assigns ("Lender"), who shall be granted a security interest in
the Collateral, as security for certain debt of affiliates of Maker owing to
Lender ("Debt"), that will be first and superior in all respect to the rights of
the holders of this Promissory Note (and the other Acquisition Notes) in
accordance with the terms and provisions of that certain Subordination Agreement
of even date herewith by and among Lender, Payee, Agent, Maker and the holders
of the other Acquisition Notes.
To induce holder to accept this Note, Maker hereby agrees as follows: (i)
unless the advance approval of Agent is obtained approving a proposed deviation,
INEXS (as defined in the Agreement) shall be operated in the ordinary course and
substantially as INEXS' business activities are conducted as of the date hereof;
(ii) without the advance approval of Agent, Maker shall not sell, assign,
exchange, or transfer the Collateral, or cause to be sold all or substantially
all of the assets of INEXS, except as security for the Debt; and (iii) no
bankruptcy, dissolution, liquidation or other similar proceeding shall be filed
by, against or on behalf of Maker that is not dismissed within thirty (30) days.
Maker and all endorsers, sureties, guarantors, and all other persons who
may become liable for all or any part of this obligation severally waive
presentment for payment, protest and notice of non-payment. Said parties
consent to any extension of time (whether one or more) of payment hereof, and
renewal (whether one or more) hereof, and any release of any party liable for
payment of this obligation. Any such extension, renewal or release may be made
without notice to any such party and without discharging such party's liability
hereunder. Maker and the Payee stipulate and agree that none of the terms and
provisions hereof shall ever be construed as a contract to pay for the use,
forbearance or detention of money, providing for interest at a rate in excess of
the maximum interest rate permitted to be charged by applicable law.
Notwithstanding anything to the contrary contained in this Promissory Note,
the holder hereof shall not be entitled to obtain a deficiency judgment against
the Maker for the payment of principal and any interest on this Promissory Note.
THIS PROMISSORY NOTE AND THE INDEBTEDNESS EVIDENCED HEREBY SHALL BE
INTERPRETED ACCORDING TO THE INTERNAL LAWS OF THE STATE OF TEXAS.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Promissory Note to be
executed and delivered on its behalf by its duly authorized representative on
this 24th day of September, 1997.
XPLOR ENERGY, INC.
By: /s/ Steven W. Nance
-------------------
Steven W. Nance,
President and Chief Executive Officer
-3-
<PAGE>
EXHIBIT 10.23
ARAXAS ENERGY CORPORATION
ARAXAS EXPLORATION, INC.
September 24, 1997
John L. Faulkinberry
42 West Rock Wing Place
The Woodlands, Texas 77381
Re: Severance Agreement
Dear John:
This letter will confirm the terms of your severance agreement with Araxas
Exploration, Inc. ("Exploration"), Araxas Energy Corporation ("Araxas"), and
XPLOR Energy, Inc. ("XPLOR") and the other subsidiaries and affiliates of
Exploration, Araxas and XPLOR (collectively referred to as the "Company"), which
are set forth below:
1. Your resignation as an employee and officer of the Company will be
effective on the date you execute and deliver to the Company this letter
agreement ("Effective Date").
2. On the Effective Date, Company agrees to pay you $50,000 subject to
tax withholding obligations of any applicable law. The Company shall also
reimburse you in accordance with the Company's policies for unpaid out-of-pocket
expenses incurred in the furtherance of your duties for the Company through the
Effective Date which are submitted to the Company in a written expense report no
later than 15 days after the date hereof. By execution hereof, you hereby
acknowledge and agree that the provisions of this Severance Agreement provide
consideration to you that exceeds Company's obligations under the Employment
Agreement.
You shall have the right to choose to continue coverage under the Company's
(or its successor's) group health plan pursuant to your rights under the
Consolidated Omnibus Budget Reconciliation Act of 1985.
3. All Company-owned manuals, letters, documents, memoranda, notes,
notebooks, reports, logs, well files, division orders, contracts, land title
files, maps, plats, charts, seismic information and all other material records
of any kind and all copies thereof that may be in your possession or under your
control which in any way pertain to the business of Company will be delivered to
Company on the Effective Date.
4. This Severance Agreement shall be in lieu of any other severance
payment, property interest or other right or benefit under that certain
Employment Agreement dated as of September 4,
<PAGE>
September 24, 1997
Page 2
1996 (the "Employment Agreement") (including, but not limited to, the stock
option thereunder), any overriding royalty plan, working interest participation
plan, or other plan or program, whether oral or written, providing compensation
or other benefits to employees, or any severance plan arrangement (collectively,
the "Company Agreements"). The terms and provisions of the Employment
Agreement, the Company Agreements, and all of the parties' respective rights,
duties, claims and obligations, now existing or hereafter arising, are hereby
canceled, terminated, released and discharged in full; provided, however, that
nothing herein shall terminate that certain Letter Agreement of even date
herewith (the "Letter Agreement") among Faulkinberry Oil and Gas Company, Inc.
("FOG"), you and your wife, and XPLOR relating to the purchase by XPLOR of the
stock of FOG, and (ii) the terms and conditions of Section 5 of your Employment
Agreement will apply with respect to the AMIs (as defined pursuant to that
certain letter agreement between XPLOR and Michael W. Englert date September 23,
1997). You agree that you have no claim, interest or right to the oil and gas
properties and rights now owned or hereafter acquired by Company or any
affiliate of Company, except as set forth in the Letter Agreement.
5. Exploration, Araxas and XPLOR, individually and on behalf of each of
their respective subsidiaries, affiliates and representatives (collectively,
with Exploration, Araxas and XPLOR, the Araxas Affiliates"), hereby release and
discharge you from any and all liability, actions, claims and demands of any
kind whatsoever which the Araxas Affiliates may have now or in the future
arising from any action or omission by you occurring with respect to your
employment pursuant to the Employment Agreement, except to the extent of any
backup or other similar withholding obligation, if any, applicable to amounts
paid under the Letter Agreement for which you agree to indemnify and hold the
Araxas Affiliates harmless. You hereby release and discharge the Araxas
Affiliates and their respective officers, directors, agents and employees from
any and all liability, actions, claims and demands of any kind whatsoever which
you may have arising now or in the future from any action or omission by any of
them with respect to your employment pursuant to the Employment Agreement;
provided, however, that this release shall not apply to any duties and
responsibilities of the Araxas Affiliates with respect to the Letter Agreement.
Except as specifically set forth above, the foregoing releases are intended to
be full and complete releases of all current and future claims of any kind
whatsoever, whether known or unknown, or whether arising in tort, contract, or
otherwise.
6. This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas.
7. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, and your personal
representative.
<PAGE>
September 24, 1997
Page 3
If the foregoing accurately sets forth our agreement with respect to your
severance agreement, please evidence your agreement by executing this letter in
the space provided below and return it to me.
Very truly yours,
ARAXAS ENERGY CORPORATION
XPLOR ENERGY, INC.
By: /s/ Steven W. Nance
------------------------------------------
Steven W. Nance,
President and Chief Executive Officer
ARAXAS EXPLORATION, INC.
By: /s/ W. E. Rowsey, III
------------------------------------------
W. E. Rowsey, III, President
Agreed and accepted on this 24 day of September, 1997.
/s/ John L. Faulkinberry
-----------------------------------------------
JOHN L. FAULKINBERRY
Address: 42 West Rock Wing Place
The Woodlands, Texas 77381
<PAGE>
EXHIBIT 10.24
XPLOR Energy, Inc.
Araxas Energy Corporation
10200 Grogans Mill Road, Suite 500
The Woodlands, Texas 77380
September 24, 1997
John L. Faulkinberry
Faulkinberry Oil & Gas Company, Inc.
42 West Rock Wing Place
The Woodlands, TX 77381
RE: STOCK ACQUISITION OF FAULKINBERRY OIL AND GAS COMPANY, INC.
("COMPANY")
Dear John:
The purpose of this letter is to set forth our agreement concerning the
acquisition of all of the outstanding capital stock of Company and of two oil
and gas properties by XPLOR Energy, Inc. ("XPLOR"), upon the terms and
conditions set forth below. If this letter is acceptable to you, it will, upon
your execution and delivery to the undersigned, constitute a binding agreement.
By execution below, John L. Faulkinberry ("John") hereby represents and
warrants as follows:
A. Company is duly organized, validly existing and in good standing under
the laws of the State of Texas. Company was organized under Texas corporate law
on July 6, 1995. Company is not qualified to do business now or at any prior
time in any other jurisdiction. Since incorporation, Company's exclusive
business has been to acquire, own and manage non-operated interests in oil and
gas properties. Company has been a validly electing S corporation within the
meaning of Sections 1361 and 1362 of the Internal Revenue Code of 1986, as
amended ("Code") at all times during its existence, and will be an S corporation
up to and including the Closing Date.
B. The authorized capital stock of Company consists of 100,000,000 shares
of common stock, par value $1.00 per share ("Common Stock"), of which 2,000
shares of Common Stock are issued and outstanding as of the date hereof, and are
held of record and beneficially as set forth below:
Stockholder No. of Shares
----------- -------------
John L. Faulkinberry 1,000
Greta G. Faulkinberry ("Greta") 1,000
<PAGE>
John L. Faulkinberry
September 24, 1997
Page 2
As of the date hereof, there are no outstanding subscriptions, rights, options,
warrants, convertible securities or other agreements or commitments obligating
Company to sell, convey, issue or transfer from treasury or otherwise issue any
additional shares of its Common Stock or any other securities convertible into
Common Stock.
C. As of the date hereof, there are no rights, agreements, understandings
or arrangements of any kind enforceable against John or Greta (collectively, the
"Sellers") or permitting or requiring either of the Sellers to sell shares of
Common Stock or granting any party(ies) any rights in connection with the sale
by either of the Sellers of shares of Common Stock. Each of the Sellers owns
all right, title and interest in such shareholder's Common Stock, free and clear
of all liens, claims, encumbrances of any kind whatsoever. The certificates to
be delivered to XPLOR at Closing representing the Common Stock, and the
endorsements thereon or stock powers delivered therewith, will be valid and
genuine.
D. The Company presently owns, and shall own as of the Closing Date
(defined below), (i) the oil and gas properties listed on Exhibit "A-1" attached
hereto, each of which working interests and overriding royalty interests was
acquired through Araxas Energy Corporation, an Oklahoma Corporation ("Araxas")
or its subsidiaries (the "Araxas Assets"), other than two properties separately
owned by John as identified thereon (the "Individually Owned Assets"), and (ii)
the oil and gas properties listed on Exhibit "A-2" attached hereto (the "Non-
Araxas Assets"). John presently owns, and shall own as of the Closing Date, the
Individually Owned Assets. The Company with respect to the Araxas Assets, and
John with respect to the Individually Owned Assets, have the same title and
interest in such properties as has been delivered to them by Araxas, and such
properties are not subject to any mortgage, pledge, lien, security interest,
encumbrance, lease or adverse claim created by, through or under the Company or
John, as the case may be. The Company has good and indefeasible title to the
Non-Araxas Assets, which are not subject to any mortgage, pledge, lien, security
interest, encumbrance, lease or adverse claim.
E. With respect to the Araxas Assets and the Individually Owned Assets,
(i) neither the Company nor John has any liabilities, duties and/or obligations
of any nature applicable thereto, other than those existing when such properties
were originally transferred by Araxas or subsequently incurred pursuant to Joint
Operating Agreements and/or similar agreements normally applicable to the
operation of oil and gas properties in the ordinary course of business
(collectively, the "Oil and Gas Agreements"), and (ii) the only joint interest
billings applicable to such properties which have been received prior to the
date hereof and are unpaid are set forth on Exhibit "B" attached hereto. With
respect to the Non-Araxas Assets, there are no liabilities, duties and/or
obligations of any
<PAGE>
John L. Faulkinberry
September 24, 1997
Page 3
nature, other than pursuant to Oil and Gas Agreements. Except as set forth
above, the Company does not have, and John does not have with respect to the
Individually Owned Assets, any liabilities, duties and/or obligations (whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated and whether due or to become due),
as of the date hereof, including, but not limited to, amounts due or to become
due, under any contract or arrangement for labor, services or materials rendered
or acquired, or to be rendered or acquired, by or on behalf of Company, or for
taxes or other similar assessments or fees or other costs with respect to the
activities or assets of the Company. There are no pending or threatened legal
claims or proceedings against or involving the Company and/or its assets.
The acquisition and sale of all outstanding shares of Common Stock
(collectively, "Company Shares") shall be consummated in accordance with the
following terms and conditions:
1. Sale and Purchase. Subject to the terms hereof (i) XPLOR shall
purchase from each of the Sellers, and each of the Sellers shall sell, assign
and convey, at the Closing (as defined below) on the Closing Date, all right,
title and interest in the Company Shares, free and clear of all liens, claims
and encumbrances; and (ii) XPLOR shall purchase, and John shall sell, assign and
convey, at the Closing on the Closing Date, all right, title and interest in the
Individually Owned Assets, free and clear of all liens, claims and encumbrances
created by, through or under John.
2. Purchase Price. The total consideration XPLOR shall be obligated to
pay Sellers for the Company Shares and Individually Owned Assets ("Purchase
Price") shall be Two Million Nine Hundred Fifty Thousand and no/100 Dollars
($2,950,000.00) U.S., payable as follows: (i) Seven Hundred Fifty Thousand
Dollars ($750,000.00) shall be payable in immediately available funds on the
Closing Date; and (ii) XPLOR will deliver at the Closing a promissory note(s) in
the aggregate principal amount of $2,200,000, in the form attached hereto as
Exhibit "C" ("Promissory Note"), subject to adjustment as provided therein.
Such Purchase Price shall be allocated between the Individually Owned Assets and
the Company Shares as John and XPLOR shall agree at the Closing, and to the
extent allocated to the Company Shares such portion of the Purchase Price shall
be allocated pro rata between the Sellers based on the number of Company Shares
sold hereunder.
The parties agree that the purchase and sale of the Company Shares and the
Individually Owned Assets shall be effective as of the opening of business on
September 1, 1997 ("Effective Time"), for purposes of division of revenues and
expenses (other than expenses applicable to the Araxas Assets and the
Individually Owned Assets listed on Exhibit "B" attached hereto which shall be
paid by XPLOR). Accordingly, on or before December 31, 1997, XPLOR and Sellers
shall prepare a final accounting with respect to the proceeds of Pre-Effective
Time production received
<PAGE>
John L. Faulkinberry
September 24, 1997
Page 4
after the Closing Date and Pre-Effective Time expenses (except those expenses
set forth on Exhibit "B") paid after the Closing Date, and the net proceeds (if
any) shall be paid to the Sellers. Any net expenses shall be offset against the
Promissory Note.
Before or after Closing, Company and John agree to promptly send to XPLOR
any checks received by either of them which relate to post Effective Time
production, and any invoices relating to post Effective Time expenses for the
properties being sold to XPLOR.
3. Earnest Money Deposit. Contemporaneously with the execution and
delivery of this letter agreement by the Sellers, XPLOR shall have deposited the
sum of Fifty Thousand and no/100 Dollars ($50,000.00) with John as a deposit
("Earnest Deposit") to be applied against the payment of the Purchase Price at
the Closing or otherwise disposed of pursuant to this letter agreement. By
execution hereof, John acknowledges receipt of the Earnest Deposit.
4. Covenants Pending Closing. After the execution hereof and prior to
the Closing, Company and John agree that Company's business and affairs will be
conducted only in the ordinary course and consistent with the Company's prior
practice, and Company shall maintain, keep and preserve its business properties
in good condition and repair in order to preserve the business and goodwill of
Company intact, and will not enter into any commitment or contract without
XPLOR's prior written consent. Neither John nor Company shall engage in any
transaction which may materially affect the Individually Owned Assets, or the
operations, capital, assets or liabilities of Company. Notwithstanding anything
to the contrary in this Section 4, Company and John shall be permitted to (i)
cash any checks received by either of them relating to pre-Effective Time
production and (ii) transfer to John all cash in Company's account no. 58907K88
at Merrill Lynch immediately prior to Closing.
5. Closing. The closing ("Closing") of this letter agreement shall occur
at a mutually satisfactory place and time ("Closing Date") no later than October
3, 1997, unless extended in writing by the mutual agreement of the parties, or
by XPLOR as a result of an unsatisfied condition to closing set forth in
paragraphs (a) through (c) below (but in no event past October 15, 1997).
The obligations of XPLOR to consummate the transactions described herein
are subject to the satisfaction at or prior to the Closing of the following
conditions, unless waived in writing by XPLOR:
(a) obtaining financing for the cash payment provided in Section 2
hereof from Credit Lyonnais New York Branch ("Credit Lyonnais"), pursuant
to the terms of the Credit
<PAGE>
John L. Faulkinberry
September 24, 1997
Page 5
Agreement between Credit Lyonnais and an affiliate of XPLOR (which XPLOR
agrees to use its best efforts in accordance with reasonable commercial
practice to obtain), including, but not limited to, the requirement that
Sellers enter into a subordination agreement with Credit Lyonnais with
respect to the Promissory Note on terms and conditions requested by Credit
Lyonnais;
(b) all the representations of John and/or the Company made herein or
in any document delivered pursuant hereto shall be true and correct in all
material respects at and as of Closing Date as though each such
representation and warranty were made at and as of such time; and
(c) stock certificate(s), with respect to the Company Shares, duly
endorsed and ready for transfer, with respect to the Company Shares, and
duly executed and acknowledged assignment with respect to the Individually
Owned Assets acceptable to XPLOR.
The obligation of the Sellers to consummate the transactions described
herein will be subject to the condition that XPLOR deliver the Purchase Price in
the manner required by Section 2 hereof.
In the event this letter agreement does not close because the terms and
conditions hereof to be satisfied at or prior to the Closing have not been
satisfied (and the necessity for satisfying same has not expired or has not been
waived by the party entitled to do so), the Sellers shall be entitled to retain
the Earnest Deposit, XPLOR shall issue and deliver to the Sellers six thousand
(6,000) shares of Common Stock, par value $0.001 per share, of XPLOR,
proportionately adjusted for any stock split or stock dividend after the date
hereof and before such shares are issued, ("XPLOR Shares"), Company shall pay
Sellers One Hundred Thousand and no/100 Dollars ($100,000) in immediately
available funds, which shall be treated as liquidated damages and not as a
penalty as the Sellers' sole remedy by reason of such failure of Closing,
(except as described in the next sentence below) and John shall be entitled to
all of the rights and subject to the provisions set forth in Paragraphs
3,4,5,6,9, 10 and 11 of that certain Severance Agreement dated September 23,
1997, between Michael W. Englert and XPLOR and its affiliates, a copy of which
is attached hereto as Exhibit "D" (other than Exhibit "A" to such Severance
Agreement), and XPLOR shall enter with a written agreement with John on
substantially identical terms to evidence such rights. If the failure to close
is attributable to the breach of this letter agreement by Sellers or John,
Sellers shall not be entitled to the additional $100,000 payment set forth
above, (which shall be treated as liquidated damages and not as a penalty as
XPLOR's sole remedy by reason of such failure of Closing) but if the failure to
close is attributable to the breach of this letter agreement by XPLOR, then
XPLOR
<PAGE>
John L. Faulkinberry
September 24, 1997
Page 6
shall pay Sellers an additional $100,000 in immediately available funds as
additional liquidated damages.
6. Certain Tax Covenants.
(a) Section 338(h)(10) Election. Company and each of the Sellers will
join with XPLOR in making an election under Section 338(h)(10) of the Code
with respect to the purchase and sale of the Company Stock hereunder (the
"Election"). Sellers will include any income, gain, loss, deduction or
other tax item resulting from the Election on their individual income tax
returns.
(b) Tax Periods Ending on or Before the Closing Date. Sellers shall
prepare and file or cause to be prepared and filed, all income tax returns
for the Company for all periods ending on or prior to the Closing Date,
which are filed after the Closing Date. Sellers agree to provide XPLOR a
copy of the tax return proposed to be filed pursuant to the preceding
sentence, a reasonable time in advance of such filing date, and shall make
such revisions to such tax returns as are reasonably requested by XPLOR.
Sellers shall not file such tax returns without the consent of XPLOR which
consents will not be unreasonably withheld. Sellers shall include any
income, gain, loss, deduction or other tax item for such periods on their
individual income tax returns in a manner consistent with the Schedule K-
1's furnished by Company to the Sellers for such periods.
7. Securities Laws. Each of the Sellers (i) understands that the
Promissory Notes have not been, and will not be, registered under the federal or
state securities laws, and are being offered and sold in reliance upon federal
and state exemptions for transactions not involving a public offering, (ii) is
acquiring the Promissory Notes solely for his or her own account for investment
purposes, and not with a view to the distribution thereof, (iii) is a
sophisticated investor with knowledge and experience in financial matters, (iv)
has received certain information concerning XPLOR and has had the opportunity to
obtain additional information as desired in order to evaluate the merits and the
risks inherent in holding the Promissory Notes, and (v) is able to bear the
economic risk and lack of liquidity inherent in holding the Promissory Notes.
8. Indemnification. Sellers hereby indemnify and agree to hold XPLOR
harmless from, against and in respect of (and shall on demand reimburse XPLOR
for): (i) any and all loss, liability, damage or claim (including legal fees)
suffered or incurred by XPLOR or Company by reason of any untrue representation,
breach of warranty or nonfulfillment of any covenant of Sellers or John
contained herein; and (ii) any liability, debt, and/or obligation of the Company
or with respect its
<PAGE>
John L. Faulkinberry
September 24, 1997
Page 7
assets, or with respect to the Individually Owned Assets, that arose or was
incurred prior to the Effective Time, except liabilities, debts, and obligations
that are listed on Exhibit "B" or that arise from the Oil and Gas Agreements.
Any such indemnification shall be limited to the Purchase Price hereunder, and
may, at the election of XPLOR be effected by set-off against amounts otherwise
due under the Promissory Notes. All indemnification obligations hereunder shall
expire on the second anniversary of the Closing Date, except indemnification for
environmental and tax liabilities, which shall survive until the underlying
statute of limitation for asserting claims against Company or its affiliates
under applicable state or federal law has expired. Notwithstanding the
foregoing, Sellers shall not be liable under this Section 8 for XPLOR's
attorney's fees attributable to environmental claims with respect to the Araxas
Assets and the Individually Owned Assets.
9. Expenses. XPLOR and Sellers shall each be responsible for its or
their own expenses incurred in connection with the transactions contemplated
hereby.
10. Binding Effect. This letter agreement is intended to be a binding
agreement between the parties hereto and will bind and inure to the benefit of
the successors and assigns of such party. This letter agreement sets forth the
entire understanding and agreement of the parties hereto with regard to the
subject matter hereof and supersedes all prior and contemporaneous agreements,
arrangements and understandings related thereto. This letter agreement may be
amended, modified, superseded or canceled only by written instrument which
specifically states that it amends this letter agreement, and is executed and
delivered by each person and by an authorized officer of each entity to be bound
by such amendment.
11. Governing Law. This Letter Agreement and all amendments thereof shall
be governed by and construed in accordance with the laws of the State of Texas,
without reference to its conflict of law provisions.
12. Signatures. Acceptance of the terms of this Letter Agreement by John
and Company may be evidenced by execution in multiple counterparts, each of
which, as so executed, shall be deemed to be an original, and all such
counterparts, taken together, shall constitute one and the same instrument.
<PAGE>
John L. Faulkinberry
September 24, 1997
Page 8
If you are in agreement with the terms of this letter and desire to proceed
with the transaction described herein, please sign the enclosed duplicate of
this letter in the space provided below and return it to the undersigned no
later than 6:00 p.m., Houston time, September __, 1997.
Very truly yours,
XPLOR ENERGY, INC.
By: /s/ Steven W. Nance
--------------------------------------
Steven W. Nance,
President and Chief Executive Officer
Accepted and agreed as of the date specified below:
/s/ John L. Faulkinberry
- -----------------------------
John L. Faulkinberry
/s/ Greta G. Faulkinberry
- -----------------------------
Greta G. Faulkinberry
Date: September 24, 1997
------------------------
<PAGE>
EXHIBIT 10.25
PROMISSORY NOTE
The Woodlands, Texas September 24, 1997
For value received, the undersigned, XPLOR Energy, Inc., a Delaware
corporation ("Maker"), promises to pay John L. Faulkinberry and Greta G.
Faulkinberry ("Payee"), at 42 West Rock Wing Place, The Woodlands, Texas 77381,
the principal sum due hereunder on December 31, 1998 ("Maturity Date"), together
with interest accrued thereon at the rate set forth below. If on or before
December 31, 1998, (i) Maker closes the sale for cash of equity securities of
Maker in a firm commitment underwritten public offering by Maker registered
under the Securities Act of 1933, as amended ("IPO"), or (ii) Maker is merged or
consolidated with, or all or substantially all of its assets are sold to,
another entity, and immediately after such transaction the voting power of such
other entity is not controlled directly or indirectly by the former shareholders
of Maker, or more than 50% of the outstanding capital stock of Maker is sold
("Other Sale"), then the principal amount due under this Promissory Note shall
be Two Million Two Hundred Thousand and No/100 Dollars ($2,200,000.00) ("Maximum
Principal Amount"), which shall be immediately due and payable at the closing of
the IPO or Other Sale (the "Accelerated Maturity Date"). If no IPO or Other
Sale has been closed by the Maturity Date, then the principal amount due under
this Promissory Note shall be One Million Three Hundred Fifty Thousand and
No/l00 Dollars ($1,350,000.00) ("Minimum Principal Amount"), which shall be
immediately due and payable at the Maturity Date.
Maker promises to pay interest on the unpaid principal balance outstanding
hereunder from the date of this Promissory Note through the date of payment at a
rate per annum equal to 5.81%. Interest shall be computed for the actual number
of days elapsed on the basis of a year consisting of 365 days. Accrued interest
shall be due and payable at the Maturity Date or the Accelerated Maturity Date,
as the case may be.
If any amount of any installment payable hereunder is not paid when due,
such amount shall bear interest at the rate of fifteen percent (15%) per annum,
or, if less, the maximum rate allowed by law, accrued from the due date to the
day on which such default is cured to the satisfaction of the Payee, or the
holder hereof. All such past due sums shall be paid at the time of, and as a
condition precedent to the curing of, any default hereunder.
This Promissory Note shall be subject to the right of Maker (and/or Maker's
affiliates or assigns) to set-off certain liabilities, costs and expenses
against any unpaid amounts payable under this Promissory Note, pursuant to that
certain letter agreement of even date herewith among Maker and Payee, with
respect to the acquisition of Faulkinberry Oil and Gas Company, Inc.
This Promissory Note may be prepaid prior to maturity, at the option of the
Maker, in whole equal to the Maximum Principal Amount (before giving effect to
any partial prepayments previously made) at any time or in part from time to
time, without premium or penalty. All partial prepayments shall be applied to
accrued interest and then principal.
<PAGE>
The occurrence or existence of any one of the following events or
conditions shall constitute and "Event of Default":
(a) any installment of the principal of or interest on this Promissory
Note shall not have been paid when the same shall become due and payable;
or
(b) the Maker makes an assignment for the benefit of creditors, or
applies to any tribunal for the appointment of a trustee or receiver of a
substantial part of the assets of the Maker, or commences any proceedings
relating to the Maker under any bankruptcy, reorganization, arrangement,
readjustment of debts or other insolvency law of any jurisdiction; or any
such application is filed, or any such proceedings are commenced against
the Maker and the Maker indicates its consent to such proceedings, or an
order is entered appointing such trustee or receiver, or adjudicating the
maker bankrupt or insolvent, or approving the petition in any such
proceedings, and such order remains in effect for 60 days.
If an Event of Default shall occur, the Payee or other holder of this
Promissory Note may declare the entire unpaid principal of this Promissory Note,
and all accrued unpaid interest thereon to be due and payable immediately, and
upon any such declaration, the principal of this Note as determined in the first
paragraph hereof and such accrued unpaid interest thereon shall become and be
immediately due and payable; provided, however, that for an Event of Default
resulting from (b) above, the principal amount due shall be the Minimum
Principal Amount (less any partial prepayments previously made).
If an Event of Default shall occur and this Promissory Note is placed in
the hands of an attorney for collection, or suit is filed hereon, or proceeds
are had in bankruptcy, probate, receivership, reorganization or other judicial
proceedings for the establishment or collection of any amount called for
hereunder or any amount payable hereunder is collected through any such
proceedings, the Maker agrees to pay the holder hereof a reasonable amount as
costs, attorney's or collection fees.
Maker and all endorsers, sureties, guarantors, and all other persons who
may become liable for all or any part of this obligation severally waive demand
and presentment for payment, notice of nonpayment, protest, notice of protest
and/or dishonor, bringing of suit and diligence in taking any action to collect
amounts called for hereunder, and shall be directly and primarily liable for the
payment of all sums owing and to be owing hereon, regardless of and without any
notice, diligence, act or omission as or with respect to the collection of any
amount called hereunder. Said parties consent to any extension of time (whether
one or more) of payment hereof, and renewal (whether one or more) hereof, and
any release of any party liable for payment of this obligation. Any such
extension, renewal or release may be made without notice to any such party and
without discharging such party's liability hereunder. Maker and the Payee
stipulate and agree that none of the terms and provisions hereof shall ever be
construed as a contract for the use, forbearance or detention of money,
providing for interest at a rate in excess of the maximum interest rate
permitted to be charged by applicable law.
<PAGE>
THIS NOTE CONTAINS NO PREPAYMENT PENALTY AND SHALL BE INTERPRETED ACCORDING
TO THE LAWS OF THE STATE OF TEXAS.
IN WITNESS WHEREOF, the undersigned have caused their authorized
representatives to execute and deliver this instrument on this 24th day of
September, 1997.
XPLOR ENERGY, INC.
By: /s/ Steven W. Nance
--------------------------------------
Steven W. Nance, President and
Chief Executive Officer
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
XPLOR Energy, Inc.
(formerly Araxas Energy Corporation)
We consent to the use of our reports on the consolidated financial statements
of XPLOR Energy, Inc. as of December 31, 1996 and 1995, and for each of the
years in the three-year period ended December 31, 1996 and on the combined
financial statements of the South Coast Companies as of December 31, 1996 and
1995, and for the years then ended, included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
KPMG PEAT MARWICK LLP
Houston, Texas
December 1, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 438 under the Securities Act of 1933, as amended (the "Act"),
I hereby consent to the use of my name and any references to me as a person
nominated to become a director of XPLOR Energy, Inc. ("XPLOR") in the
Prospectus constituting a part of XPLOR's Registration Statement on Form S-1
(Registration No. 333-37835), as amended, filed with the Securities and
Exchange Commission pursuant to the Act.
FRANK M. WEISSER
Dated: November 30, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 438 under the Securities Act of 1933, as amended (the "Act"),
I hereby consent to the use of my name and any references to me as a person
nominated to become a director of XPLOR Energy, Inc. ("XPLOR") in the
Prospectus constituting a part of XPLOR's Registration Statement on Form S-1
(Registration No. 333-37835), as amended, filed with the Securities and
Exchange Commission pursuant to the Act.
JACK L. GREGORY
Dated: November 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ARAXAS ENERGY CORPORATION AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 917,619 667,009
<SECURITIES> 2,624,119 0
<RECEIVABLES> 3,213,284 4,282,718
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,784,538 5,507,647
<PP&E> 26,214,017 46,197,777
<DEPRECIATION> 2,524,542 4,764,043
<TOTAL-ASSETS> 32,831,932 54,496,140
<CURRENT-LIABILITIES> 6,178,605 44,585,859
<BONDS> 20,845,893 1,556,667
0 0
0 0
<COMMON> 2,752 4,709
<OTHER-SE> 5,804,682 8,348,905
<TOTAL-LIABILITY-AND-EQUITY> 32,831,932 54,496,140
<SALES> 6,043,259 6,536,341
<TOTAL-REVENUES> 7,787,923 8,117,148
<CGS> 2,169,279 2,201,608
<TOTAL-COSTS> 7,578,325 8,973,354
<OTHER-EXPENSES> 2,709,417 3,141,496
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,075,591 2,823,108
<INCOME-PRETAX> (2,499,819) (3,997,702)
<INCOME-TAX> (35,957) 0
<INCOME-CONTINUING> (2,463,862) (3,997,702)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (3,908,965)
<CHANGES> 0 0
<NET-INCOME> (2,463,862) (7,906,667)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (0.55) (2.60)
</TABLE>
