<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 14, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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
PRINCIPAL EXECUTIVE OFFICES) NUMBER, INCLUDING 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........ -- -- $57,500,000 $17,425
</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.
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 OCTOBER 14, 1997
Shares
XPLOR ENERGY, INC.
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
Stockholders identified herein have agreed to sell up to 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 Company has applied for quotation of the Common Stock 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)
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<S> <C> <C> <C>
Per Share $ $ $
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Total(3) $ $ $
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</TABLE>
(1)The Company and the Selling Stockholders 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 $ .
(3)The Company and the Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to an additional 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 Stockholders 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
, 1997 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.
, 1997
<PAGE>
[ART]
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, any 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, any
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 Stockholders 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
<S> <C>
Prospectus Summary.................................................... 4
Risk Factors.......................................................... 11
Use of Proceeds....................................................... 18
Dividend Policy....................................................... 18
Dilution.............................................................. 19
Capitalization........................................................ 20
The Combination Transaction........................................... 21
Unaudited Pro Forma Consolidated Financial Information................ 22
Selected Historical Financial Data of Araxas.......................... 27
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 28
Business.............................................................. 37
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management............................................................ 54
Certain Transactions.................................................. 61
Principal Stockholders................................................ 65
Selling Stockholders.................................................. 66
Shares Eligible for Future Sale....................................... 67
Description of Capital Stock.......................................... 68
Underwriting.......................................................... 72
Legal Matters......................................................... 74
Experts............................................................... 74
Additional Information................................................ 74
Glossary of Certain Industry Terms.................................... 75
Index to Consolidated Financial Statements............................ F-1
Letter of Petroleum Engineers......................................... A-1
</TABLE>
UNTIL , 1997 (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 -for- split of the Common Stock
effected in 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 280 Mcfe per day for the year ended December 31, 1994
to approximately 9,500 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 $0.72 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. Within these project areas,
XPLOR currently has 98 exploration and development prospects
4
<PAGE>
scheduled to be drilled over the next two to three 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 available for its drilling program $ million in net proceeds
from the Offering and an additional $20.0 million available for borrowing under
the Company's revolving credit facility. XPLOR has budgeted total capital
expenditures of approximately $41.0 million 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 also
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 technologies.
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 a networked environment consisting of 10 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 access to
emerging technologies prior to their availability for general use.
Existing Prospect Inventory and Proved Reserves
XPLOR has an existing inventory of 98 exploration and development prospects
scheduled to be drilled within the next two to three 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 9,500 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. In addition to
its 98 exploration and development prospects scheduled to be drilled over the
next two to three 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.
The methodology comprises 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. 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.
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.
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
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 shares
COMPANY(1)........................
COMMON STOCK OUTSTANDING AFTER THE
OFFERING(1)(2)....................
shares
USE OF PROCEEDS.................... The Company intends to use approximately
$ 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 Company has applied for quotation of
the Common Stock on the Nasdaq National
Market.
PROPOSED NASDAQ NATIONAL MARKET XPLR
SYMBOL............................
- --------
(1) Assumes the Underwriters' over-allotment option for up to shares of
Common Stock granted by the Company and the Selling Stockholders is not
exercised. See "Underwriting."
(2) Excludes an aggregate of 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 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 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."
7
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth the summary unaudited pro forma consolidated
financial information of the Company for the year ended December 31, 1996 and
the six months ended June 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 Araxas, 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
financial condition or results of operations had such transactions occurred as
of the date or prior to the period presented or to project the Company's future
financial condition or results of operations.
<TABLE>
<S> <C> <C>
---------------------------
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
Dollars in thousands ------------ --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues
Oil and gas revenues.............................. $ 9,778 $ 4,855
Consulting revenues............................... 1,395 950
------- -------
Total revenues.................................. 11,173 5,805
------- -------
Costs and expenses
Lease operating expenses.......................... 3,874 1,148
Production taxes and gathering fees............... 988 454
Consulting and workstation fees................... 607 271
Depreciation, depletion and amortization.......... 3,340 1,914
General and administrative........................ 2,590 1,843
------- -------
Total costs and expenses........................ 11,399 5,630
------- -------
Income (loss) from operations................... (226) 175
Other (income) expenses
Interest expense.................................. 3,406 1,964
Interest income................................... (259) (56)
Other expenses.................................... 652 101
------- -------
Loss before income tax benefit.................. (4,025) (1,834)
Income tax benefit................................ 624 172
------- -------
Net loss........................................ $(3,401) $(1,662)
======= =======
GAS EQUIVALENT PRODUCTION (MMCFE)................... 3,239 1,817
OIL AND GAS OPERATING DATA (PER MCFE)
Revenues.......................................... $ 3.02 $ 2.67
Operating expenses and production taxes........... 1.50 0.88
Depletion......................................... 0.88 0.88
General and administrative expenses............... 0.80 1.01
Operating income (loss)........................... (0.07) 0.10
</TABLE>
<TABLE>
<CAPTION>
-------------------------
AT JUNE 30,
AT JUNE 30, 1997
1997 (AS ADJUSTED)
Dollars in thousands ----------- -------------
<S> <C> <C>
BALANCE SHEET DATA
Working capital deficit............................... $ (2,239) $
Net property and equipment............................ 41,661
Total assets.......................................... 50,657
Long-term debt, net of current maturities............. 24,966
Total stockholders' equity............................ 16,282
</TABLE>
8
<PAGE>
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 six months ended
June 30, 1996 and 1997. Such data represent combined operating data for each of
Araxas and the South Coast Companies for such periods.
<TABLE>
<S> <C> <C> <C> <C> <C>
------------------------------------
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS
31, ENDED JUNE 30,
1994 1995 1996(1) 1996(1) 1997(1)
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA
Oil and condensate (MBbls)........... 6 55 177 33 164
Gas (MMcf)........................... 69 486 1,304 588 834
Gas equivalent (MMcfe)............... 103 814 2,368 789 1,817
AVERAGE SALES PRICES PER UNIT
Oil and condensate (per Bbl)......... $14.40 $16.36 $20.80 $19.85 $17.85
Gas (per Mcf)........................ 1.57 1.53 2.33 2.41 2.31
NUMBER OF WELLS DRILLED
Gross................................ 6 16 23 10 2(2)
Net.................................. 0.9 3.1 3.0 1.0 0.3(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 six months ended June 30, 1996 and 1997, the
average sales prices for oil and condensate per Bbl would have been $22.91,
$19.85 and $21.35, respectively, and the average sales prices for gas per Mcf
would have been $2.50, $2.47 and $2.51, 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. Although
the Company believes that its use of 3-D seismic data and other advanced
technologies should increase the probability of success of its exploratory
wells and should reduce average finding and development costs through
elimination of marginal or uneconomic prospects that might have otherwise been
drilled solely on the basis of 2-D seismic data and other traditional methods,
exploratory drilling remains a speculative activity. Even when fully utilized
and properly interpreted, 3-D seismic data and other advanced technologies only
assist geoscientists in identifying subsurface structures and do not enable the
interpreter to determine whether hydrocarbons are in fact present in such
structures. 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."
11
<PAGE>
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 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.
The Company's former debt agreement required the Company to put into place
significant long-term hedging 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. The Company repaid and terminated its former debt
agreement in September 1997, and the Company's current credit facility does not
require the Company to maintain hedges. During September 1997, the Company
closed all its outstanding hedging arrangements, resulting in losses of $2.8
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. 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
six months of 1997, the Company received a fixed price and paid the NYMEX price
with respect to 338 MMBtus of gas and 177 MBbls of oil under commodity price
swap arrangements, realizing losses of $739,000. The Company did not engage in
hedging prior to 1996. 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, although the Company's revenues could increase if prevailing
prices for oil and gas increase significantly, the Company's finding and
development costs could also increase. Of the Company's 98 currently identified
drilling prospects, approximately 80% (representing approximately 55% of the
Company's estimated capital drilling expenditures for such projects) are
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. The
Company carries 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 through the
expansion of its 3-D seismic data acquisition and drilling program. The
Company's rapid growth 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. The Company believes that its ability to use advanced technologies
currently gives it an advantage over many of its competitors. This advantage,
however, is based in part upon technologies developed by others, and the
Company may not be able to maintain this advantage. 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. Although the Company believes that the net
proceeds from the Offering, cash flow from operations and its existing credit
arrangements should allow the Company to implement its current business
strategy, 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 that financing will
continue to be available 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. 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 and directors will
beneficially own approximately % ( % 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 % and %, respectively ( %, and %, 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."
GOVERNMENT 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, 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
15
<PAGE>
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 could adversely affect the market price of the Common
Stock. Upon the completion of the Offering, the Company will have a total of
shares of Common Stock outstanding. Of these shares, the shares of
Common Stock offered hereby ( shares if the Underwriters' over-allotment
option is exercised in full) 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 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,
shares of Common Stock may be issued pursuant to options issued under the
Company's Incentive Plan and options and warrants not included under the
Incentive Plan. The Company anticipates that the shares of Common Stock
issuable upon exercise of outstanding options will become available for future
sale in the public market pursuant to a subsequently filed registration
statement on Form S-8. See "Management--Executive Compensation."
Under Rule 144 (and subject to certain volume limitations, manner of sale and
other requirements related to the sale of securities), the restricted
shares will become eligible for sale in September 1998, or one year following
the consummation of the Combination Transaction. The Company also has entered
into registration rights agreements with certain of the Company's current
stockholders who own approximately shares of Common Stock and with certain
holders of options and warrants to purchase shares of Common Stock,
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
16
<PAGE>
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 six months ended June 30, 1997. Araxas incurred net
losses in each of the last two years. Although the South Coast Companies have
had net income on a combined basis in each of such years, there can be no
assurance that the Company will be profitable in the future. See "Unaudited Pro
Forma Consolidated Financial Information" and the related notes thereto,
"Selected Historical Financial Data of Araxas" and the financial statements of
Araxas and the South Coast Companies 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 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 Stockholders. The Company intends to use the net proceeds as follows:
<TABLE>
<S> <C>
--------
<CAPTION>
Dollars in millions
<S> <C>
Repayment of Bridge Loan(1)........................................... $
Repayment of notes payable(2).........................................
General corporate purposes(3).........................................
--------
$
========
</TABLE>
- --------
(1) The Company's bridge loan (the "Bridge Loan") with Credit Lyonnais, New
York Branch ("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."
(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;
(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 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. 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 its 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 $ million, or approximately $ 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....... $
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>
TOTAL
SHARES PURCHASED(1) AVERAGE PRICE CONSIDERATION
NUMBER PERCENT PER SHARE AMOUNT PERCENT
---------- ---------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. % $ $ (2) %
New investors..........
---------- -------- -------- -------- ----
Total................ 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 net assets and
liabilities received by the Company in the Combination Transaction.
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 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." This table should be read in
conjunction with the Company's Unaudited Pro Forma Consolidated Financial
Information and the notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements of
Araxas and of the South Coast Companies and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<S> <C> <C> <C>
---------------------------
<CAPTION>
AS OF SEPTEMBER 30, 1997
AS
HISTORICAL ADJUSTED
------------ ----------
Dollars in thousands
<S> <C> <C> <C>
Long-term debt
Bridge Loan...................................... $ $
Credit facility..................................
Notes payable(1).................................
---------- --------
Total long-term debt, including current
portion.......................................
Stockholders' equity(2)
Preferred Stock, $.001 par value; shares
authorized; none outstanding....................
Common Stock, $.001 par value; shares
authorized; shares issued and outstanding
(historical); shares issued and outstanding
(as adjusted)...................................
Additional paid-in capital.......................
Retained earnings................................
---------- --------
Total stockholders' equity.....................
---------- --------
Total capitalization........................... $ $
========== ========
</TABLE>
- --------
(1) Includes (i) $3.0 million issued in connection with the Combination
Transaction, (ii) $2.2 million issued in connection with the Company's
acquisition of FO&G, (iii) $5.0 million issued to Equitable to provide working
capital to the Company and (iv) $1.0 million issued to Mr. Rowsey.
(2) Excludes an aggregate of (i) shares of Common Stock reserved for
issuance upon exercise of outstanding stock options granted to employees and
nonemployee directors, (ii) shares of Common Stock reserved for issuance
upon exercise of outstanding options granted to Stratum Group Energy Partners,
L.P. ("Stratum"), which have an exercise price of $ per share and expire on
June 30, 1999, and (iii) shares of Common Stock reserved for issuance upon
exercise of outstanding warrants granted to Credit Lyonnais, which have an
exercise price of 125% of the initial public offering price per share set forth
on the cover page of this Prospectus and expire 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 consolidate and
continue activities previously conducted by Araxas and 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) issued to the owners of
the outstanding capital stock of Araxas shares of Common Stock and (iii)
issued to the owners of the outstanding capital stock and limited partnership
interests of the South Coast Companies 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.
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 , and shares of Common Stock,
respectively, Messrs. Krenzke, Davis and Duggan and Equitable beneficially own
, , and shares of Common Stock, respectively, and Stratum has an
option to purchase shares of Common Stock.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated financial information of XPLOR reflects
the Combination Transaction as a purchase of the South Coast Companies by
XPLOR, as successor to Araxas, the August 1996 acquisition of Main Pass 35 and
the April 1997 divestiture of Gulfland Industries. The unaudited pro forma
consolidated balance sheet gives effect to the Combination Transaction as
though it were consummated as of June 30, 1997 (the acquisition of Main Pass 35
and the divestiture of Gulfland Industries having been consummated prior to
such date). The unaudited pro forma consolidated statement of operations for
the year ended December 31, 1996 and the six months ended June 30, 1997 give
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 Securities Exchange Commission and is provided for comparison
purposes only. The unaudited pro forma information is based upon the historical
consolidated financial statements of Araxas 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. A charge of approximately $3.8 million to
reflect these items will be 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" and "--Hedging."
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.
The per share data and weighted average common shares and dilutive common
equivalent shares outstanding included in the pro forma information do not give
effect to the -for- split of the Common Stock to be effected prior
to the consummation of the Offering.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF XPLOR
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------
<CAPTION>
AT JUNE 30, 1997
SOUTH PRO
ARAXAS COAST ADJUSTMENTS FORMA
------- ------ ----------- -------
Dollars in thousands
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 579 $ 607 -- $ 1,186
Accounts receivable.................. 3,409 299 -- 3,708
Prepaid expenses and other........... 215 7 -- 222
------- ------ ------- -------
Total current assets............... 4,203 913 -- 5,116
------- ------ ------- -------
Property and equipment
Oil and gas properties............... 28,594 8,868 $ 5,579 (a) 43,041
Pipeline and equipment............... 1,530 -- -- 1,530
Office equipment and other........... 624 429 (148)(a) 905
------- ------ ------- -------
30,748 9,297 5,431 45,476
Less: accumulated depreciation,
depletion, and amortization......... (3,815) (690) 690 (a) (3,815)
------- ------ ------- -------
Net property and equipment......... 26,933 8,607 6,121 41,661
------- ------ ------- -------
Restricted cash-escrow agreements...... 1,165 -- -- 1,165
Debt financing costs, net.............. 735 -- -- 735
Goodwill............................... -- -- 1,385 (a) 1,385
Accounts receivable-stockholder........ 595 -- -- 595
Other assets........................... -- 27 (27)(a) --
------- ------ ------- -------
Total assets....................... $33,631 $9,547 $ 7,479 $50,657
======= ====== ======= =======
LIABILITIES
Current liabilities:
Current maturities of long-term debt. $ 612 -- -- $ 612
Accounts payable..................... 4,401 $ 422 -- 4,823
Prepayments received from joint
owners.............................. 727 -- -- 727
Other payables and accrued
liabilities......................... 1,193 -- -- 1,193
------- ------ ------- -------
Total current liabilities.......... 6,933 422 -- 7,355
------- ------ ------- -------
Long-term debt, net of current
maturities............................ 22,286 $ 2,680 (a) 24,966
Deferred federal income taxes.......... -- 142 1,912 (a) 2,054
Stockholders' equity
Partners' capital.................... -- 3,440 (3,440)(a) --
Common stock......................... 1 1 -- (a) 2
Additional paid in capital........... 9,466 4,711 7,158 (a) 21,335
Accumulated deficit.................. (5,055) 831 (831) (5,055)
------- ------ ------- -------
Total stockholders' equity......... 4,412 8,983 2,887 16,282
------- ------ ------- -------
Total liabilities and stockholders'
equity............................ $33,631 $9,547 $ 7,479 $50,657
======= ====== ======= =======
</TABLE>
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS OF XPLOR
<TABLE>
<S> <C> <C> <C> <C> <C>
-------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
SOUTH MAIN PRO
ARAXAS COAST PASS 35 ADJUSTMENTS FORMA
------- ------ ------- ----------- -------
Dollars in thousands, except per
share data
<S> <C> <C> <C> <C> <C>
Oil and gas revenues............ $ 6,043 $ 686 $3,548 $ (304)(b) $ 9,778
(195)(c)
Offshore services............... 1,744 -- -- (1,744)(d) --
Consulting revenues............. -- 1,395 -- -- 1,395
------- ------ ------ ------- -------
Total revenues................ 7,787 2,081 3,548 (2,243) 11,173
------- ------ ------ ------- -------
Lease operating expenses........ 1,614 69 2,292 (101)(b) 3,874
Production taxes and gathering
fees........................... 555 29 444 (40)(b) 988
Cost of offshore services....... 2,194 -- -- (2,194)(d) --
Consulting and workstation fees. -- 607 -- -- 607
Depletion, depreciation and
amortization................... 1,714 256 -- 1,370 (e)(f) 3,340
General and administrative...... 1,501 1,089 -- -- 2,590
------- ------ ------ ------- -------
Total costs and expenses...... 7,578 2,050 2,736 (965) 11,399
------- ------ ------ ------- -------
Income (loss) from operations. 209 31 812 (1,278) (226)
------- ------ ------ ------- -------
Interest expense................ 2,075 -- -- 1,331 (g) 3,406
Interest income................. (24) (235) -- -- (259)
Other expense (income).......... 658 (6) -- -- 652
------- ------ ------ ------- -------
2,709 (241) -- 1,331 3,799
------- ------ ------ ------- -------
Income (loss) before income
tax benefit (expense)........ (2,500) 272 812 (2,609) (4,025)
Income tax benefit (expense).. 36 (95) -- 683 (h) 624
------- ------ ------ ------- -------
Net income (loss)........... $(2,464) $ 177 $ 812 $(1,926) $(3,401)
======= ====== ====== ======= =======
Net income (loss) per common
share.......................... $(23.05) $(18.57)
======= =======
Weighted average common shares
and dilutive common equivalent
shares outstanding............. 109,828 76,958 (a) 186,786
</TABLE>
24
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS OF XPLOR
<TABLE>
<S> <C> <C> <C> <C>
-----------------------------------------
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
SOUTH PRO
ARAXAS COAST ADJUSTMENTS FORMA
------- ------ ----------- -------
Dollars in thousands, except per share
data
<S> <C> <C> <C> <C>
Oil and gas revenues.................... $ 4,450 $ 405 -- $ 4,855
Offshore services....................... 1,580 -- $(1,580)(d) --
Consulting revenues..................... -- 950 -- 950
------- ------ ------- -------
Total revenues...................... 6,030 1,355 (1,580) 5,805
------- ------ ------- -------
Lease operating expenses................ 1,130 18 -- 1,148
Production taxes and gathering fees..... 419 35 -- 454
Cost of offshore services............... 1,659 -- (1,659)(d) --
Consulting and workstation fees......... -- 271 -- 271
Depletion, depreciation and
amortization........................... 1,291 198 425 (e)(f) 1,914
General and administrative.............. 1,029 814 -- 1,843
------- ------ ------- -------
Total costs and expenses............ 5,528 1,336 (1,234) 5,630
------- ------ ------- -------
Income (loss) from operations......... 502 19 (346) 175
------- ------ ------- -------
Interest expense........................ 1,804 -- 160 (g) 1,964
Interest income......................... (22) (34) -- (56)
Other expense (income).................. 115 (14) -- 101
------- ------ ------- -------
1,897 (48) 160 2,009
------- ------ ------- -------
Income (loss) before income tax
benefit (expense).................... (1,395) 67 (506) (1,834)
Income tax benefit (expense).......... -- (20) 192 (h) 172
------- ------ ------- -------
Net income (loss)................... $(1,395) $ 47 $ (314) $(1,662)
======= ====== ======= =======
Net income (loss) per common share...... $(11.76) $ (8.50)
======= =======
Weighted average common shares and
dilutive common equivalent shares
outstanding............................ 118,629 76,958 (a) 195,587
</TABLE>
25
<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 record the combination of Araxas and the South Coast Companies to form
XPLOR as a purchase of the South Coast Companies by XPLOR, as successor to
Araxas, as follows:
<TABLE>
<CAPTION>
Dollars in thousands, except per share data -------
<S> <C>
Issuance of 76,958 shares of XPLOR common stock to South Coast
valued at an estimated fair value of $153 per share.............. $11,800
Issuance of Combination Notes to principals of South Coast, net of
discount of $320................................................. 2,680
Estimated transaction costs....................................... 70
-------
Total purchase price............................................ $14,550
=======
Purchase allocation:
Working capital................................................. 491
Oil and gas properties.......................................... 14,447
Office equipment and other...................................... 281
INEXS goodwill.................................................. 1,385
Deferred income taxes payable................................... (2,054)
-------
Total purchase allocation to net assets acquired................ $14,550
=======
</TABLE>
(b) 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.
(c) To adjust oil and gas revenues for the 5.5% overriding royalty interest
assigned to Stratum in connection with the Main Pass 35 acquisition.
(d) To eliminate the offshore services revenue and expense related to the
divestiture of Gulfland Industries.
(e) 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.
(f) To adjust for the amortization of goodwill of $1,385,000 attributable to
the acquisition of INEXS in the Combination Transaction, assuming a 10 year
life.
(g) 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.
(h) To adjust for taxes at an assumed federal and state effective income tax
rate of 38%.
26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF ARAXAS
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 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 Araxas not included in this
Prospectus. The selected financial data as of and for the six months ended June
30, 1996 and 1997 are derived from the unaudited financial statements of Araxas
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 Araxas as of such dates and
for such periods. The results for the six month period ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the entire
year. 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 Araxas and notes
thereto included elsewhere in the Prospectus.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------- ------- ------ -------
Dollars in thousands (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 $1,824 $ 4,449
Offshore services..... -- -- -- -- 1,745 -- 1,581
------ ------ ------ ------- ------- ------ -------
Total revenues...... 322 98 190 1,376 7,788 1,824 6,030
------ ------ ------ ------- ------- ------ -------
Costs and expenses
Lease operating
expenses............. 17 251 245 296 1,614 208 1,131
Production taxes and
gathering fees....... 23 5 12 99 555 123 419
Offshore services..... -- -- -- -- 2,194 -- 1,659
Depreciation,
depletion and
amortization......... 17 46 134 741 1,714 730 1,290
General and
administrative....... 821 527 920 2,180 1,501 818 1,029
------ ------ ------ ------- ------- ------ -------
Total costs and
expenses........... 878 829 1,311 3,316 7,578 1,879 5,528
------ ------ ------ ------- ------- ------ -------
Income (loss) from
operations......... (556) (731) (1,121) (1,940) 210 (55) 502
Other (income) expenses
Gain on sale of oil
and gas properties... (676) (1,190) (1,320) -- -- -- --
Interest expense...... 93 85 117 500 2,076 396 1,805
Interest income....... (2) -- (1) (17) (24) (12) (23)
Other expenses
(income)............. (10) (265) 17 96 658 35 115
------ ------ ------ ------- ------- ------ -------
Income (loss) before
income tax benefit. 39 639 66 (2,519) (2,500) (474) (1,395)
Income tax benefit
(expense).............. 27 (219) (26) 949 36 36 --
------ ------ ------ ------- ------- ------ -------
Net income (loss)... $ 66 $ 420 $ 40 $(1,570) $(2,464) $ (438) $(1,395)
====== ====== ====== ======= ======= ====== =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
--------------------------------------------------
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1992 1993 1994 1995 1996 1997
------ ------ ------- ------- ------- -----------
(UNAUDITED) (UNAUDITED)
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working Capital......... $ (808) $ (374) $(2,546) $(4,318) $ (606) $(2,730)
Net property and
equipment.............. 927 2,009 3,347 13,330 23,689 26,933
Total assets............ 1,272 2,287 3,732 14,291 32,832 33,631
Long-term debt, net of
current maturities..... 37 902 -- 2,944 20,846 22,286
Total stockholders'
equity................. 118 538 577 4,533 5,807 4,412
</TABLE>
27
<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 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. On a pro forma basis, as of June 30, 1997, the Company had a
working capital deficit of $2.2 million and indebtedness as a percentage of
total capitalization of 61%. The Company intends to use the net proceeds from
the Offering to repay indebtedness and for capital expenditures, including
funding its exploration and development activities.
Financing Transactions
The Company's borrowings were formerly made under a $42.5 million credit
facility with Stratum. 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, of which
28
<PAGE>
$30.8 million was outstanding at September 30, 1997. Borrowings under the
Bridge Loan bear 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
the closing of the Offering.
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. The initial
borrowing base will provide for availability of up to $20 million, none of
which is expected to be outstanding immediately following the Offering. 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 Company's option, at a fluctuating rate based on LIBOR plus 1%
to 1.5% per annum or based on the Credit Lyonnais base rate. 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, including those relating to
interest coverage, current ratio and tangible net worth. The Company believes
that it is currently in compliance with such covenants. The Credit Agreement
also places restrictions on, among other things, incurring additional
indebtedness and liens, changing the nature of the Company's business, selling
assets and paying dividends.
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 to a
former employee a $1.0 million 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 $1.0 million note. See "Use of Proceeds."
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 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 this loan 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 $750,000 in cash and a
$2.2 million promissory 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 this 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 $41.0 million. The capital expenditure budget
includes the planned drilling of 68 gross (17.0 net) planned 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. While the Company believes that the net
proceeds from the Offering, cash flow from operations and borrowings under the
Credit Facility 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 additional financing is not available, the Company may be required to
curtail these activities.
29
<PAGE>
RESULTS OF OPERATIONS OF XPLOR
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. 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 six months ended June 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>
<CAPTION>
----------------------------------
PRO FORMA
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 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 $ 4,596 $ 4,855
Consulting revenues................. 878 1,395 574 950
------- ------- ------- -------
Total revenues.................... 7,009 11,173 5,170 5,805
------- ------- ------- -------
Costs and expenses Lease operating
expenses........................... 3,303 3,874 1,960 1,148
Production taxes and gathering fees. 709 988 466 454
Consulting and workstation fees..... 332 607 233 271
Depreciation, depletion and
amortization....................... 2,381 3,340 1,472 1,914
General and administrative.......... 3,164 2,590 1,231 1,843
------- ------- ------- -------
Total costs and expenses.......... 9,889 11,399 5,362 5,630
------- ------- ------- -------
Income (loss) from operations..... (2,880) (226) (192) 175
Other (income) expenses
Interest expense.................... 2,553 3,406 1,423 1,964
Interest income..................... (531) (259) (87) (56)
Other expense....................... 102 652 19 101
------- ------- ------- -------
Loss before income tax benefit.... (5,004) (4,025) (1,547) (1,834)
Income tax benefit.................... 1,894 624 447 172
------- ------- ------- -------
Net loss.......................... $(3,110) $(3,401) $(1,100) $(1,662)
======= ======= ======= =======
</TABLE>
Pro Forma Six Months Ended June 30, 1997 Compared to Pro Forma Six Months Ended
June 30, 1996
Revenues. Oil and gas revenues increased $0.3 million, or 6%, from $4.6 million
in the first six months of 1996 to $4.9 million in the first six months of
1997. Total production volumes increased 20% from 1,509 MMcfe in the first six
months of 1996 to 1,817 MMcfe in the first six months of 1997. Production
volumes for oil and condensate increased from 145 MBbls in the first six months
of 1996 to 164 MBbls in the first six months of 1997. The majority of the
increase was attributable to the High Island 30L field, which was acquired in
the latter part of 1996. Production volumes for gas increased 30% from 641 MMcf
in the first six months of 1996 to 834 MMcf in the first six months of 1997.
This increase was primarily attributable to three new wells. The increase in
revenues from higher production was partially offset by declines of 13% and 9%
in the prices received for oil and gas, respectively.
30
<PAGE>
As a result of hedging activities, the Company realized an average oil price of
$17.85 per Bbl and an average gas price of $2.31 per Mcf for the six months
ended June 30, 1997, compared to average prices of $21.35 per Bbl and $2.51 per
Mcf, respectively, that otherwise would have been received. These hedging
activities decreased oil and gas revenues by approximately $0.7 million in the
six months ended June 30, 1997. The hedges, which were required by the terms of
the Stratum debt agreement, were entered into commencing in May 1996 and had no
significant effect on the six months ended June 30, 1996. During September
1997, the Company closed all of its outstanding hedging arrangements. See "--
Hedging."
Consulting revenues increased $0.4 million, or 66%, from $0.6 million in the
first six months of 1996 to $1.0 million in the first six 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 $2.0 million in the first six
months of 1996 to $1.1 million in the first six months of 1997, a decrease of
$0.9 million, or 41%, primarily as a result of unusual costs incurred in the
operation of Main Pass 35 prior to its acquisition. The decrease in production
taxes and gathering fees from the first six months of 1996 to the first six
months of 1997 was insignificant.
Consulting and workstation fees increased from $0.2 million in the first six
months of 1996 to $0.3 million in the first six months of 1997. The increase
was primarily due to a greater number of consultants being employed.
Depreciation, depletion and amortization ("DD&A") was $1.5 million in the first
six months of 1996, compared to $1.9 million in the first six months of 1997,
an increase of $0.4 million, or 30%, as a result of higher volumes. On a per
Mcfe basis, the depletion rate was constant at $0.88.
General and administrative expenses increased 50% from $1.2 million in the
first half of 1996 to $1.8 million in the first half of 1997. The increase was
primarily due to an increase in the number of employees and consultants, an
increase in the cost of independent engineering services and an increase in
office rent.
Interest expense increased from $1.4 million in the first six months of 1996 to
$2.0 million in the first six months of 1997. The increase was primarily
attributable to the higher debt outstanding during the first half of 1997
compared to the first half of 1996. The incremental debt was incurred to fund
capital expenditures.
Income tax benefit was $0.2 million for the six months ended June 30, 1997
compared to $0.4 million for the same period in 1996.
Net Loss. Net loss was $1.1 million in the first half of 1996 as compared to a
net loss of $1.7 million in the first half of 1997 as a result of the factors
described above.
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 61%, 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 46%. 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
31
<PAGE>
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 40%, 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 $2.4 million in 1995, compared to $3.3 million in 1996, an increase of
$0.9 million, or 40%, based on an assumed depletion rate of $0.88 per Mcfe.
General and administrative expenses decreased from $3.2 million in 1995 to $2.6
million in 1996, a decrease of $0.6 million, or 18%. The decrease was primarily
attributable to an item of compensation expense of approximately $1.3 million
recorded in 1995 relating to stock options granted that year. This decrease was
partially offset by the increase associated with a larger staff and more
activity as the Company underwent significant growth.
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 $1.9 million in 1995 to $0.6 million in 1996,
a decrease of $1.3 million, or 67%, primarily as a result of the complete use
of deferred tax liabilities as an offset to deferred tax assets.
Net Loss. Net loss was $3.1 million in 1995, compared to $3.4 million in 1996,
as a result of the factors described above.
RESULTS OF OPERATIONS OF ARAXAS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues. Oil and gas revenues increased $2.6 million from $1.8 million in the
first six months of 1996 to $4.4 million in the first six months of 1997. Total
production volumes increased 138% from 712 MMcfe in the first six months of
1996 to 1,695 MMcfe in the first six months of 1997. Production volumes for oil
and condensate increased from 23 MBbls in the first six months of 1996 to 151
MBbls in the first six months of 1997. This increase was attributable primarily
to production both from Main Pass 35 and High Island 30L, which were acquired
in the latter part of 1996 and accounted for 119 MBbls of the increase.
Production volumes for gas increased 38% from 571 MMcf in the first six months
of 1996 to 790 MMcf in the first six months of 1997. This increase was
primarily attributable to two new wells. The increase in volumes of oil and gas
accounted for an increase in revenues of approximately $3.0 million, offset by
declines of 11% and 5% in the prices received for oil and gas, respectively.
32
<PAGE>
As a result of hedging activities, Araxas realized an average oil price of
$17.67 per Bbl and an average gas price of $2.26 per Mcf for the six months
ended June 30, 1997, compared to average prices of $21.46 per Bbl and $2.47 per
Mcf that otherwise would have been received. These hedging activities decreased
oil and gas revenues by approximately $0.7 million in the six months ended June
30, 1997. The hedges, which were required by the terms of Araxas's debt
agreement with Stratum, were entered into commencing in May 1996.
Revenues from offshore services (conducted by Gulfland Industries) were $1.6
million in the six months ended June 30, 1997, while the cost of offshore
services was $1.7 million in the same period. Araxas did not acquire this
business until August 1996, and accordingly no amounts were recorded in the six
months ended June 30, 1996. Araxas disposed of this business in April 1997.
Expenses. Lease operating expenses increased from $0.2 million in the first six
months of 1996 to $1.1 million in the first six months of 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 $0.1 million in the first six months of
1996 to $0.4 million in the first six months of 1997 due to greater production
volumes and resulting revenue increases.
DD&A was $0.7 million in the first six months of 1996, compared to $1.3 million
in the first six months of 1997, an increase of $0.6 million, or 77%, as a
result of higher production volumes. On a per Mcfe basis, the depletion rate
decreased 17% from $0.78 used for the first half of 1996 to $0.65 in the first
half of 1997.
General and administrative expenses increased from $0.8 million in the first
half of 1996 to $1.0 million in the first half of 1997, an increase of $0.2
million, or 26%. The increase was primarily due to a larger number of employees
and consultants, as well as increased independent engineering services.
Interest expense increased $1.4 million, from $0.4 million in the first six
months of 1996 to $1.8 million in the first half of 1997. The increase was
primarily attributable to the higher debt outstanding during the first half of
1997 compared to the first half of 1996 and the higher rate associated with the
debt outstanding during the entire period in 1997. The debt outstanding during
the first half of 1997 was principally incurred in April 1996 to refinance debt
and to acquire assets requiring a cash outlay of approximately $10.3 million.
Income tax benefit was insignificant for both the six months ended June 30,
1996 and June 30, 1997, despite pre-tax losses of $0.5 million and $1.4
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 $1.4 million in the first half of 1997, compared to $0.4
million in the first half of 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, Araxas experienced a 29% increase in oil prices and a 55%
increase in gas prices received in 1996 as compared to 1995.
33
<PAGE>
As a result of hedging activities, Araxas 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
Araxas's debt agreement with Stratum.
Revenues from offshore services were $1.7 million in 1996. Araxas 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. Araxas 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 decreased from $2.2 million in 1995 to $1.5
million in 1996, a decrease of $0.7 million, or 31%. The decrease was primarily
attributable to an item of compensation expense of approximately $1.3 million
recorded in 1995 relating to stock options granted that year. This decrease was
partially offset by the increase associated with a larger staff and more
activity as Araxas experienced significant growth.
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 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.
34
<PAGE>
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 increased from $0.9 million in 1994 to $2.2
million in 1995. The increase was primarily attributable to an item of
compensation expense of approximately $1.3 million recorded in 1995 relating to
stock options granted that year.
Gains on sales of oil and gas properties were $1.3 million in 1994. During
1994, Araxas sold interests in a number of leases, each of which were
significant to Araxas, thus requiring the recognition of gain or loss on the
transactions, rather than crediting the full cost pool. In 1995, Araxas 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 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 drawdowns thereunder. 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 its outstanding hedging arrangements, resulting in
losses of $2.8 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. 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
six months of 1997, the Company received a fixed price and paid the NYMEX price
with respect to 338 MMBtus of gas and 177 MBbls of oil under commodity price
arrangements, realizing losses of $739,000. See "Business--Marketing."
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
for the quarter ended December 31, 1997.
35
<PAGE>
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.
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 280 Mcfe per day for the year ended December 31, 1994
to approximately 9,500 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 $0.72 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. Within these project areas,
XPLOR currently has 98 exploration and development prospects scheduled to be
drilled over the next two to three 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 available
for its drilling program $ million in net proceeds from the Offering and an
additional $20.0 million available for borrowing under the Credit Facility.
XPLOR has budgeted total capital expenditures of approximately $41.0 million
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 also
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 technologies.
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 a networked environment consisting of 10 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 access to
emerging technologies prior to their availability for general use.
Existing Prospect Inventory and Proved Reserves
XPLOR has an existing inventory of 98 exploration and development prospects
scheduled to be drilled within the next two to three 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 9,500 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."
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 to three years, the
38
<PAGE>
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.
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.
39
<PAGE>
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 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.
40
<PAGE>
SIGNIFICANT PROPERTIES AND PROJECT AREAS
XPLOR currently has 98 prospects in 17 project areas scheduled to be drilled
over the next two to three 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>
PRODUCING DAILY PROSPECT INVENTORY
WELLS(1) PRODUCTION(2) DEVELOPMENT EXPLORATION
--------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
LOUISIANA GULF COAST--TOTAL
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 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
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 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.
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.
41
<PAGE>
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 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 9,000 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%.
42
<PAGE>
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 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."
43
<PAGE>
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 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.
44
<PAGE>
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 information regarding the production
volumes of, average sales prices received for and average production costs
associated with the Company's sales of oil and gas for the periods indicated.
--------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS
31, ENDED JUNE 30,
1994 1995 1996(1) 1996(1) 1997(1)
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES
Oil and condensate (MBbls)............. 6 55 177 33 164
Gas (MMcf)............................. 69 486 1,304 588 834
Gas equivalent (MMcfe)................. 103 814 2,368 789 1,817
AVERAGE SALES PRICES
Oil and condensate (per Bbl)........... $14.40 $16.36 $20.80 $19.85 $17.85
Gas (per Mcf).......................... 1.57 1.53 2.33 2.41 2.31
AVERAGE OIL & GAS OPERATING EXPENSE (PER
MCFE)(2)................................ $ 2.50 $ 0.55 $ 0.96 $ 0.47 $ 0.88
</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 six months ended June 30, 1996 and 1997, the average sales prices
for oil and condensate per Bbl would have been $22.91, $19.85 and $21.35,
respectively, and the average sales prices for gas per Mcf would have been
$2.50, $2.47 and $2.51, respectively.
(2) Includes direct lifting costs (labor, repairs and maintenance, materials
and supplies), workover costs and the administrative costs of production
offices, 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 $45.6 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 $0.71 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 $2,554
Proved properties........................ -- 7,435 9,468 --
Exploration................................ 1,594 3,323 7,279 3,400
Development................................ -- 2,196 4,469 3,564
------ ------- ------- ------
Total costs incurred....................... $2,351 $14,959 $22,318 $9,518
====== ======= ======= ======
</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>
As of September 30, 1997, the Company was drilling or evaluating 7 gross
exploratory wells (0.9 net) and 2 gross development wells (0.3 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 hedging arrangements in an effort to
reduce price risk. The Company repaid and terminated the Stratum debt agreement
in September
47
<PAGE>
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, resulting in losses of $2.8 million. 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 six months of
1997, the Company received a fixed price and paid the NYMEX price with respect
to 338 MMBtus of gas and 177 MBbls of oil under commodity price arrangements,
realizing losses of $739,000. 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.
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
48
<PAGE>
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'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 Gas Act of 1938 (the "NGA"), the
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 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 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.
49
<PAGE>
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.
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
50
<PAGE>
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 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
51
<PAGE>
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'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 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
52
<PAGE>
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 September 30, 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
Director
Ron A. Krenzke.......... 44 Executive Vice President, Chief Operating
Officer and Director
Stephen M. Clark........ 46 Vice President and Chief Financial Officer
W.E. Rowsey, III........ 46 Chairman of the Board and Director
(1)............. Director
(1)............. Director
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 Operations Manager
</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 the 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,
54
<PAGE>
and 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 the 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.
KEY OFFICERS AND MANAGERS
CRAIG S. DAVIS is the 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 the 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 the 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.
55
<PAGE>
ALAN L. SMITH is the Operations Manager 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. In connection with the Offering, each
nonemployee director will receive options 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. Such options will have a term
of ten years and become exercisable in cumulative annual increments of one-
third beginning on the first anniversary of the closing date of the Offering.
In addition, nonemployee directors will receive annual grants of options to
purchase 2,500 shares of Common Stock at the market price on the date of grant.
Such options will have a term of ten years and will become exercisable one year
after the date of grant.
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 intends
to enter 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.
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<PAGE>
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.
(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."
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.
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<PAGE>
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>
<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 provides that the employee's annual base salary
shall be reviewed annually and may be increased as determined by the
Compensation Committee or the Board of Directors.
Each of the agreements has an initial three-year term, and beginning at the end
of the second year of such initial term, the term will be automatically
extended such that there shall always be at least one year remaining on the
term of the agreement. Each agreement will be subject to the right of the
Company and the employee to terminate the employee's employment at any time.
Each agreement provides that, upon termination of employment because of death,
the employee will generally be entitled to a lump sum payment equal to a pro
rata share of the employee's annual base salary or incentive compensation or
both based on the number of days in the year that elapsed prior to termination.
Upon termination of employment because of illness or other incapacity, the
employee will generally be entitled to (i) compensation for the remaining term
of the agreement, but in no event less than one year, if the Company has not
provided disability insurance, (ii) 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 (iii) 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 provides that, for six months following
termination of the employee's employment, the employee will not (i) own,
operate, be employed by or participate in a business conducted by a
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<PAGE>
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
shares of Common Stock and options to acquire an additional shares of
Common Stock. The restricted stock awards and the options become vested in
cumulative annual increments of one-third beginning on January 21, 1998, and
become fully exercisable upon a change of control. The options have an exercise
price of $ per share and expire in January 2007.
Pursuant to his employment agreement, Mr. Clark received options to acquire
shares of Common Stock in accordance with the Incentive Plan. The options
become vested 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 $ 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 its
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 (i) 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 (ii) no amendment or alteration shall be effective prior to approval by the
Company's stockholders to the extent such approval is then required pursuant to
Rule 16b-3 under the Exchange Act to preserve the applicability of any
exemption provided by such rule to any Award then outstanding (unless the
holder of such Award consents) or to the extent stockholder approval is
otherwise 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
59
<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 shares of Common Stock, subject to adjustment, for
use in connection with the Incentive Plan. Options under the Incentive Plan
have been granted to approximately 39 employees and contractors of the Company
to purchase a total of approximately shares of Common Stock at an exercise
price per share equal to $ . 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.
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 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.
60
<PAGE>
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") shares of common stock (the "Stratum Option Shares") at
an exercise price of $ 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
25,000 shares of Araxas common stock, redeemable preferred stock with an
aggregate redemption value of $1.5 million and a promissory note in the
principal amount of $3.7 million. In March 1996, Araxas issued to New West
5,263 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 7,434 additional shares of Araxas common stock. In the Combination
Transaction, New West received approximately shares of Common Stock in
exchange for its shares of Araxas common stock.
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<PAGE>
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 ( 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, (ii) any shares of Common Stock issued to GR, Inc.
in connection with the acquisition of Main Pass 35 and Gulfland Industries are
reacquired by the Company or (iii) 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.
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 a
promissory note in the principal amount of $2.2 million. 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 has
entered into a severance agreement with Mr. Faulkinberry pursuant to which the
Company paid him $50,000, less taxes.
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 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 a promissory note in the principal amount of $1.0 million, which bears
no interest and will mature upon the closing of the Offering.
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<PAGE>
REGISTRATION RIGHTS AGREEMENTS
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 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 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
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<PAGE>
Securities Act or (iii) it is eligible for sale pursuant to Rule 144 or Rule
145 without volume limitations. An aggregate of outstanding shares of Common
Stock are subject to the agreement.
Weisser
Prior to the Combination Transaction, South Coast entered into a registration
rights agreement with Equitable, Messrs. Krenzke, Davis and Duggan, and
Weisser, Johnson & Co. ("Weisser"). In the Combination Transaction, the
registration rights of Equitable and Messrs. Krenzke, Davis and Duggan granted
pursuant to this agreement were terminated. Weisser's registration rights
relate to approximately shares of Common Stock that may be acquired by
Weisser from Messrs. Krenzke, Davis and Duggan upon exercise of an option
granted to Weisser by such persons (when so acquired, the "Weisser Option
Shares"). The agreement provides that, upon the request of the holders of a
majority of the Weisser Option Shares (collectively, the "Weisser Holders"),
the Company will file a registration statement under the Securities Act to
register the Weisser Option Shares held by any Weisser Holder that desires to
sell Registrable Securities pursuant to such registration statement. The
Weisser Holders may make unlimited requests for registration provided that such
registration include at least 25% of the Weisser 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 shares of Common Stock. In addition,
subject to certain conditions and limitations, the agreement provides that a
Weisser Holder may participate in any registration by the Company of any of its
Common Stock. A Weisser 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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial ownership
of the Common Stock of the Company as of September 30, 1997 by (i) all persons
who will be the beneficial owner of 5% or more of the outstanding Common Stock,
(ii) each director, (iii) each executive officer and (iv) all officers and
directors of the Company as a group.
-----------------------------------
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PERCENTAGE PERCENTAGE
PRIOR TO AFTER
NAME SHARES(1) THE OFFERING THE OFFERING
- ---- --------- ------------ ------------
<S> <C> <C> <C>
Steven W. Nance(2).........................
Ron A. Krenzke(2)..........................
Stephen M. Clark(2)........................
W.E. Rowsey, III(2)........................
New West Resources, Inc.(3)................
Equitable Resources, Inc.(4)...............
Stratum Group Energy Partners, L.P.(5).....
All directors and executive officers as a
group ( persons)(2).....................
</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 is c/o XPLOR
Energy, Inc., 10200 Grogans Mill Road, Suite 500, The Woodlands, Texas 77380.
(3) The address of New West is 500 W. Wall, Suite 400, Midland, Texas 79701.
(4) Consists of shares of Common Stock held by ERI Investments, Inc. and
shares of Common Stock held by 420 Energy Investments, Inc. The address of
Equitable is 420 Boulevard of the Allies, Pittsburgh, Pennsylvania 15219.
(5) 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.
65
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the ownership of
Common Stock by the Selling Stockholders as of September 30, 1997 and after
giving effect to an exercise in full of the Underwriters' over-allotment
option.
<TABLE>
<CAPTION>
------------------------------------------
NUMBER OF SHARES TO BE
SHARES SHARES TO BE OWNED AFTER SALE
OWNED PRIOR SOLD IN IN THE OFFERING
SELLING STOCKHOLDER TO OFFERING THE OFFERING NUMBER PERCENT
- ------------------- ----------- ------------ --------- -------
<S> <C> <C> <C> <C>
Total............................ %
========= ========= ========= ===
</TABLE>
The Company, pursuant to registration rights agreements with certain of the
Selling Stockholders, is paying the expenses of the Offering, other than
underwriting discounts and commissions attributable to the shares that may be
sold by the Selling Stockholders. See "Certain Transactions--Registration
Rights Agreements."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, approximately shares of Common Stock
will be outstanding. The 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 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 and will constitute "restricted securities" within the meaning of
Rule 144. Such shares 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 Company
Affiliates who own approximately shares of Common Stock and options to
purchase shares of Common Stock, 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
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 currently has outstanding options ( of which are vested) and
warrants to purchase shares of Common Stock. Such shares for which the
vested portion of outstanding options may be exercised may generally be sold by
employees, officers, directors or consultants and independent contractors of
the Company in reliance on the resale provisions of Rule 701. In general, such
persons who purchased shares pursuant to a written compensatory plan or
contract entered into prior to the Offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144, and permit affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. The holders of vested outstanding options to purchase shares
could exercise these options and could then sell such shares in compliance with
Rule 701. Holders of all options and warrants granted prior to the Offering
have agreed not to sell the shares of Common Stock related to such options and
warrants for a period of 180 days following the date of this Prospectus.
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. Shares of Common Stock
issued pursuant to such plan generally will be available for sale in the open
market by holders who are not
67
<PAGE>
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 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 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 shares of Common Stock
and shares of preferred stock, $.001 par value per share ("Preferred
Stock"). Following consummation of the Offering, there will be approximately
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 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
68
<PAGE>
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 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 the affirmative vote of the holders of both (i) at least 80%
of the outstanding voting stock and (ii) at least 66% of the outstanding voting
stock not beneficially owned by the related person. 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."
69
<PAGE>
The Certificate of Incorporation provides that the number of directors will be
no greater than 12 nor less than 3. 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 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.
70
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
71
<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........................................................
========
</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 Stockholders 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 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 Stockholders 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 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 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 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.
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<PAGE>
The Company intends to pay Credit Lyonnais approximately $ 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 Company has applied for quotation of the Common Stock 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 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.
73
<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 Araxas 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.
74
<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.
"MMBbls"
One million barrels of crude oil or other liquid
hydrocarbons.
"MMBtus"
One million British Thermal Units.
75
<PAGE>
"MMcf" One million cubic feet.
"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
location" A site on which a development well can be drilled
consistent with spacing rules for purposes of
recovering proved undeveloped reserves.
"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
76
<PAGE>
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.
"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.
77
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARAXAS ENERGY CORPORATION
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and as of
June 30, 1997 (unaudited)............................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996 and for the Six Months Ended June 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 Six Months Ended June 30,
1997 (unaudited)........................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and for the Six Months Ended June 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-23
Combined Balance Sheets as of December 31, 1995 and 1996 and as of June
30, 1997 (unaudited).................................................... F-24
Combined Statements of Earnings for the Years Ended December 31, 1995 and
1996 and for the Six Months Ended June 30, 1996 and 1997 (unaudited).... F-25
Combined Statements of Stockholders'/Partners' Equity for the Years Ended
December 31, 1995 and 1996 and for the Six Months Ended June 30, 1997
(unaudited)............................................................. F-26
Combined Statements of Cash Flows for the Years Ended December 31, 1995
and 1996 and for the Six Months Ended June 30, 1996 and 1997
(unaudited)............................................................. F-27
Notes to Combined Financial Statements................................... F-28
MAIN PASS 35
Independent Auditors' Report............................................. F-37
Statement of Revenues and Direct Operating Expenses for the Year Ended
December 31, 1995 and for the Eight Months Ended August 31, 1996........ F-38
Notes to Financial Statements............................................ F-39
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Araxas Energy Corporation:
We have audited the accompanying consolidated balance sheets of 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 Araxas
Energy Corporation 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
F-2
<PAGE>
ARAXAS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C> <C>
-------------------------------------
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
ASSETS ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 418,947 $ 917,619 $ 579,386
Investment in marketable securities--
pledged.............................. -- 2,624,119 --
Accounts receivable................... 461,625 3,213,284 3,408,526
Prepaid expenses and other............ 79,656 29,516 215,460
----------- ----------- -----------
Total current assets................ 960,228 6,784,538 4,203,372
Property and equipment, at cost:
Oil and gas properties, full cost
method............................... 13,876,290 24,188,415 28,593,753
Pipeline and equipment................ -- 1,529,943 1,529,943
Furniture and fixtures and other...... 328,264 495,659 624,210
----------- ----------- -----------
14,204,554 26,214,017 30,747,906
Less accumulated depreciation,
depletion and amortization........... (874,045) (2,524,542) (3,815,028)
----------- ----------- -----------
Net property and equipment.......... 13,330,509 23,689,475 26,932,878
Other assets:
Accounts receivable, stockholder...... -- 620,000 594,839
Restricted cash--escrow agreements.... -- 1,016,109 1,164,709
Debt financing costs, net............. -- 721,810 734,826
----------- ----------- -----------
-- 2,357,919 2,494,374
----------- ----------- -----------
$14,290,737 $32,831,932 $33,630,624
=========== =========== ===========
<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 $ 612,402
Accounts payable...................... 1,548,473 4,537,509 4,400,954
Prepayments received from joint
owners............................... 652,053 288,793 726,812
Other payables and accrued
liabilities.......................... 344,256 775,854 1,192,731
----------- ----------- -----------
Total current liabilities........... 5,278,115 6,178,605 6,932,899
Long-term debt, net of current maturi-
ties................................... 2,943,667 20,845,893 22,285,770
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 $.01 per share;
4,900,000 shares authorized; 100,000
shares issued and outstanding at
December 31, 1995; 118,628 issued and
outstanding at December 31, 1996 and
June 30, 1997........................ 1,000 1,186 1,186
Paid-in capital....................... 5,660,362 9,465,981 9,465,981
Accumulated deficit................... (1,128,364) (3,659,733) (5,055,212)
----------- ----------- -----------
Total stockholders' equity.......... 4,532,998 5,807,434 4,411,955
----------- ----------- -----------
$14,290,737 $32,831,932 $33,630,624
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ARAXAS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 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 $1,824,189 $ 4,449,618
Offshore services..... -- -- 1,744,664 -- 1,580,807
----------- ----------- ----------- ---------- -----------
Total revenues...... 190,178 1,376,281 7,787,923 1,824,189 6,030,425
----------- ----------- ----------- ---------- -----------
Costs and expenses:
Lease operating
expenses............. 244,863 295,818 1,613,863 208,122 1,130,656
Production taxes and
gathering fees....... 12,391 98,976 555,416 122,697 418,919
Cost of offshore
services............. -- -- 2,193,925 -- 1,658,759
Depreciation,
depletion and
amortization......... 134,137 740,957 1,714,201 730,418 1,290,486
General and
administrative....... 919,787 2,180,300 1,500,920 817,557 1,029,483
----------- ----------- ----------- ---------- -----------
Total costs and
expenses........... 1,311,178 3,316,051 7,578,325 1,878,794 5,528,303
----------- ----------- ----------- ---------- -----------
Income (loss) from
operations......... (1,121,000) (1,939,770) 209,598 (54,605) 502,122
Other (income) expenses:
Gain on sale of oil
and gas properties... (1,319,997) -- -- -- --
Interest expense...... 117,011 500,271 2,075,591 395,554 1,804,523
Interest income....... (1,109) (16,911) (24,309) (12,452) (22,375)
Other expense......... 17,272 95,788 658,135 35,825 115,453
----------- ----------- ----------- ---------- -----------
(1,186,823) 579,148 2,709,417 418,927 1,897,601
----------- ----------- ----------- ---------- -----------
Income (loss) before
income tax benefit
(expense).............. 65,823 (2,518,918) (2,499,819) (473,532) (1,395,479)
Income tax benefit (ex-
pense)................. (25,684) 949,231 35,957 35,957 --
----------- ----------- ----------- ---------- -----------
Net income (loss)....... 40,139 (1,569,687) (2,463,862) (437,575) (1,395,479)
Preferred stock divi-
dends.................. -- -- (67,507) (57,026) --
----------- ----------- ----------- ---------- -----------
Net income (loss)
applicable to common
stock.................. $ 40,139 $(1,569,687) $(2,531,369) $ (494,601) $(1,395,479)
=========== =========== =========== ========== ===========
Net income (loss) per
common share........... $ 0.54 $ (16.89) $ (23.05) $ (4.80) $ (11.76)
=========== =========== =========== ========== ===========
Weighted average common
and dilutive common
equivalent shares
outstanding............ 75,000 92,945 109,828 102,966 118,629
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ARAXAS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND
SIX MONTHS ENDED JUNE 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. 75,000 $ 500 $ 2,000 $ 535,739 $ 538,239
Other...................... -- -- -- (1,108) (1,108)
Net income................. -- -- -- 40,139 40,139
------- ------ ---------- ----------- -----------
Balance at December 31,
1994...................... 75,000 500 2,000 574,770 577,270
Dividend of property to
stockholder............... -- -- -- (133,447) (133,447)
Stock issued for
acquisition of properties. 25,000 500 4,345,362 -- 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...................... 100,000 1,000 5,660,362 (1,128,364) 4,532,998
Preferred stock dividend... -- -- -- (67,507) (67,507)
Stock issued for release of
collateral................ 5,263 53 220,730 -- 220,783
Stock option issued to
lender.................... -- -- 1,258,256 -- 1,258,256
Stock issued for redemption
of preferred stock,
accrued dividends and
interest.................. 7,434 74 1,826,692 -- 1,826,766
Stock issued for
acquisition of properties
and assets of Gulfland
Resources................. 5,931 59 499,941 -- 500,000
Net loss................... -- -- -- (2,463,862) (2,463,862)
------- ------ ---------- ----------- -----------
Balance at December 31,
1996...................... 118,628 1,186 9,465,981 (3,659,733) 5,807,434
Net loss................... -- -- -- (1,395,479) (1,395,479)
------- ------ ---------- ----------- -----------
Balance at June 30, 1997
(unaudited)............... 118,628 $1,186 $9,465,981 $(5,055,212) $ 4,411,955
======= ====== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ARAXAS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 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) $ (437,575) $(1,395,479)
Adjustments to
reconcile net income
(loss) to net cash
(used in) provided by
operating activities:
Depreciation,
depletion and
amortization.......... 134,137 740,957 1,714,201 730,418 1,290,486
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............... -- -- 376,750 220,783 --
Net unrealized gains
on securities......... -- -- -- -- (462,999)
Net realized loss on
securities............ -- -- -- -- 578,452
Amortization of debt
discount.............. -- -- -- -- 336,977
Loss on disposal of
leaseholds............ -- 52,098 9,064 -- --
Unrealized loss on
marketable
securities............ -- -- 462,999 -- --
Imputed interest....... -- -- 21,202 -- --
Amortization of debt
discount.............. -- -- 368,598 -- --
Changes in assets and
liabilities:
Accounts receivable.. (127,968) (370,969) (2,635,401) (841,400) (170,081)
Prepaid expenses and
other............... 69,794 (20,986) 50,140 (37,672) (185,944)
Prepayments from
joint interest
owners.............. -- 652,053 (363,260) (478,290) 438,019
Other payable and
accrued
liabilities......... 1,072,189 566,894 3,110,740 (406,388) 280,322
---------- ----------- ----------- ---------- -----------
Net cash provided
by (used in)
operating
activities........ (103,754) 414,129 615,214 (1,286,081) 709,753
---------- ----------- ----------- ---------- -----------
Cash flows from
investing activities:
Capital expenditures
and acquisition of
properties............ (2,382,160) (5,515,976) (19,075,204) (2,461,623) (4,747,498)
Payments on escrow
agreements............ -- -- (206,000) -- (148,600)
Proceeds from sales of
oil and gas
properties............ 2,230,534 2,166,025 1,136,363 372,996 213,609
Proceeds from sales of
securities............ -- -- -- -- 2,508,666
---------- ----------- ----------- ---------- -----------
Net cash used in
investing
activities........ (151,626) (3,349,951) (18,144,841) (2,088,627) (2,173,823)
---------- ----------- ----------- ---------- -----------
Cash flows from
financing activities:
Proceeds from
borrowings............ 1,337,615 5,000,000 25,463,023 5,232,592 4,860,372
Debt issuance costs.... -- -- (769,300) (1,904,022) (80,993)
Payments of long-term
debt.................. (1,031,868) (1,755,748) (6,665,424) (281,586) (3,653,542)
Other.................. (1,108) -- -- -- --
---------- ----------- ----------- ---------- -----------
Net cash provided
by financing
activities........ 304,639 3,244,252 18,028,299 3,046,984 1,125,837
---------- ----------- ----------- ---------- -----------
Net increase
(decrease) in cash
and cash
equivalents....... 49,259 308,430 498,672 (327,724) (338,233)
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 $ 91,223 $ 579,386
========== =========== =========== ========== ===========
Supplemental disclosures
of cash flow
information:
Cash paid during the
year for interest..... $ 113,574 $ 194,215 $ 1,659,503 $ 189,830 $ 1,472,195
Noncash investing and
financing activities:
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 -- --
Stock issued for
redemption of
preferred stock,
accrued dividends and
interest payable...... -- -- 1,826,766 -- --
Sale of properties in
exchange for
marketable
securities............ -- -- 3,087,118 -- --
Acquisition of
properties............ -- -- 119,232 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Organization
The consolidated financial statements include the accounts of Araxas Energy
Corporation (AEC) and its wholly-owned subsidiaries, Araxas Exploration, Inc.
(AEI), Araxas SPV-1 (SPV) and Gulfland Industries, Inc. (GII), collectively
referred to as the Company. 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
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
F-7
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
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
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
F-8
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
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 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.
F-9
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
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.
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.
Reclassifications
Certain reclassifications have been made to the financial statements to conform
to the 1996 presentation.
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 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
F-10
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
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) 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.
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.
F-11
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(3) 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 5,931 shares of the stock of the Company, then valued at $84.30
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 5,931 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 25,000 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 12) 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................................................................ (3,110) (4,022)
Net loss per share...................................................... $(18.30) $(21.53)
======= =======
</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>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(4) LONG-TERM DEBT
At December 31, the Company had long-term debt as follows:
<TABLE>
<S> <C> <C>
----------------------
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
$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 (a)............ -- (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
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 (b)....................................... $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
---------- -----------
5,677,000 21,422,342
Less current maturities............................... 2,733,333 576,449
---------- -----------
$2,943,667 $20,845,893
========== ===========
</TABLE>
- --------
(a)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 gave 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.
(b) 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, New York Branch
(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>
F-13
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(5) 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. 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 $225,000 on a note payable to the
preferred stockholder in exchange for the issuance of 7,434 common shares which
represents 4.7% of the total outstanding shares of the Company.
(6) INCOME TAXES
Income tax expense (benefit) represents deferred income taxes for each of the
[Bthree 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>
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
F-14
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
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.
(7) 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.
(8) 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 10,730 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 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.
(9) 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.
F-15
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(10) 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..................................................... (16.89)
Pro forma....................................................... (17.66)
</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>
A summary of the Company's 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......................... -- -- 10,730 $39.61
Granted....................... 10,730 $39.61 22,828 54.76
Exercised..................... -- -- -- --
Forfeited..................... -- -- -- --
Outstanding at end of year.... 10,730 39.61 33,558 49.91
Options exercisable at end of
year......................... 10,730 39.61 10,730 39.61
</TABLE>
The following table summarizes information about 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>
$35-44 10,730 1.4 years $39.61 10,730 $39.61
55 22,828 2.6 years 55 -- --
</TABLE>
F-16
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(11) 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.
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.
(12) 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.
On August 19, 1997, an agreement was entered into by XPLOR Energy, Inc., a
Delaware corporation formed July 2, 1997 (XPLOR), AEC, South Coast Exploration
Company (South Coast), Interactive Exploration Solutions, Inc. (INEXS), SOCO
Exploration, L.P. (SOCO) and certain owners of the stock of AEC, South Coast,
INEXS and SOCO (the Acquisition Agreement), which provided for the combination
of AEC and its subsidiaries with South Coast, 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, 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 will be
accounted for as a purchase, effective September 30, 1997, of South Coast,
INEXS and SOCO by XPLOR, as successor to AEC.
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
F-17
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
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.
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%,
payable quarterly, or, at the option of the Company, a fixed rate based on
short-term London Interbank Offered Rates (LIBOR) plus a margin of 4.3%,
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% at March 24, 1998 and by 2% 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. 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%, payable at the underlying LIBOR maturities. Rates
under the revolving loan are subject to an increase of 0.25% if funded debt
exceeds 40% of total capitalization and, under the LIBOR option, are subject to
an increase of 0.25% if borrowings exceed 50% of the borrowing base and 0.5% 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 terms of the Credit Agreement, among other things,
require the Company to maintain certain minimum financial ratios and tangible
net worth of $5,500,000 plus 75% of net income, and require the Company to
pursue the IPO. The Credit Agreement also prohibits mergers, dividends and
dispositions of assets and limits additional indebtedness 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.
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
F-18
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
agreements, 4,750 shares of the Company's stock were issued at par value to
former employees. In addition, the Company entered into an agreement to
purchase for $2,950,000 the stock of a company owned by an employee, the
principal assets of which are working interests in properties in which AEC
already owns interests. Of the $2,950,000, $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.
On July 7, 1997, in anticipation of the transactions covered 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.
The ERI Note, the INEXS Shareholder Notes and Employee Note are subordinated to
the Credit Agreement.
(13) 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 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,
F-19
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
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>
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>
F-20
<PAGE>
ARAXAS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
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......................... (212,900) 107,900
Discoveries and extensions.............................. 124,700 3,914,200
Production.............................................. (6,000) (69,000)
--------- ----------
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-21
<PAGE>
ARAXAS ENERGY CORPORATION
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........... 2,134,000 496,000 (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......... (759,000) 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-22
<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-23
<PAGE>
SOUTH COAST EXPLORATION COMPANY,
SOCO EXPLORATION, L.P. AND
INTERACTIVE EXPLORATION SOLUTIONS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<S> <C> <C> <C>
----------------------------------
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash..................................... $4,278,378 $2,245,368 $ 606,479
Accounts receivable...................... 314,281 650,058 299,615
Prepaid expenses......................... -- 6,722 6,722
---------- ---------- ----------
Total current assets................... 4,592,659 2,902,148 912,816
Property and equipment:
Oil and gas properties (full-cost
method)................................. 2,054,463 7,238,972 8,868,705
Office equipment and other............... 80,009 205,947 428,692
---------- ---------- ----------
2,134,472 7,444,919 9,297,397
Less: accumulated depreciation, depletion
and amortization........................ (236,815) (492,764) (690,412)
---------- ---------- ----------
Net property and equipment............. 1,897,657 6,952,155 8,606,985
Other assets............................... 13,615 19,567 26,872
---------- ---------- ----------
$6,503,931 $9,873,870 $9,546,673
========== ========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'/PARTNERS'
EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities. $ 840,946 $1,017,057 $ 421,960
Credit line payable...................... 26,000 -- --
---------- ---------- ----------
Total current liabilities.............. 866,946 1,017,057 421,960
Deferred income taxes...................... 40,554 135,629 142,237
---------- ---------- ----------
Total liabilities...................... 907,500 1,152,686 564,197
Commitments and contingencies
Shareholders'/partners' equity:
Partners' equity......................... 279,884 3,225,547 3,427,482
Common stock, $.01 par value; 1,000,000
and 100,000 shares of SCEC and INEXS au-
thorized, respectively; 100,000 and
10,000 shares of SCEC and INEXS, respec-
tively, issued and outstanding at Decem-
ber 31, 1996 and 1995, respectively..... 1,100 1,100 1,100
Additional paid-in capital............... 4,711,311 4,711,311 4,711,311
Retained earnings........................ 604,136 783,226 842,583
---------- ---------- ----------
Total shareholders'/partners' equity... 5,596,431 8,721,184 8,982,476
---------- ---------- ----------
$6,503,931 $9,873,870 $9,546,673
========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-24
<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 SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas revenues................ $ 263,590 $ 686,221 $ 257,137 $ 405,682
Consulting revenues................. 878,452 1,395,503 573,916 949,846
--------- --------- --------- ---------
Total operating revenues.......... 1,142,042 2,081,724 831,053 1,355,528
Operating expenses:
Lease operating expenses............ 34,149 68,558 32,088 18,031
Production taxes and gathering fees. 15,315 28,915 11,000 35,642
Consulting and workstation fees..... 332,493 606,961 233,323 270,576
Depreciation, depletion and
amortization....................... 176,329 256,238 113,504 197,648
General and administrative expenses. 983,525 1,089,754 413,595 814,207
--------- --------- --------- ---------
Total operating expenses.......... 1,541,811 2,050,426 803,510 1,336,104
--------- --------- --------- ---------
Operating income (loss)........... (399,769) 31,298 27,543 19,424
Other income (expenses):
Interest income..................... 513,836 234,766 74,278 34,454
Other income (expenses)............. (6,097) 5,954 17,095 13,542
--------- --------- --------- ---------
Total other income................ 507,739 240,720 91,373 47,996
--------- --------- --------- ---------
Earnings before income taxes...... 107,970 272,018 118,916 67,420
Income tax expense.................... 40,554 95,075 41,563 20,105
--------- --------- --------- ---------
Net earnings...................... $ 67,416 $ 176,943 $ 77,353 $ 47,315
========= ========= ========= =========
</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 SHAREHOLDERS'/PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND SIX MONTHS ENDED JUNE 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) -- -- -- 59,357 47,315
---------- ------- ------ ---------- -------- ----------
Balances at June 30,
1997 (unaudited)....... $3,427,482 110,000 $1,100 $4,711,311 $842,583 $8,982,476
========== ======= ====== ========== ======== ==========
</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 CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------------------
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings............ $ 67,416 $ 176,943 $ 77,353 $ 47,315
Adjustments to reconcile
net earnings to net
cash provided by
operating activities:
Depreciation, depletion
and amortization...... 176,329 256,238 113,504 197,648
Deferred income taxes.. 40,554 95,075 41,563 6,608
Changes in assets and
liabilities:
Increase in accounts
receivable........... (116,358) (390,576) 103,919 350,443
Decrease in prepaid
expenses and other
assets............... 439,148 42,125 -- (7,305)
Increase in accounts
payable and accrued
liabilities.......... 685,186 176,111 (484,684) (595,097)
----------- ----------- ----------- -----------
Net cash provided by
operating
activities......... 1,292,275 355,916 (148,345) (388)
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Capital expenditures.... (2,048,979) (5,801,371) (2,598,907) (1,852,478)
Proceeds from sale of
oil and gas properties. -- 490,635 -- --
----------- ----------- ----------- -----------
Net cash used in
investing
activities......... (2,048,979) (5,310,736) (2,598,907) (1,852,478)
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Partner contributions... 281,339 2,947,810 1,165,403 213,977
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 1,139,403 213,977
----------- ----------- ----------- -----------
Net increase
(decrease) in cash
and cash
equivalents........ 4,270,633 (2,033,010) (1,607,849) (1,638,889)
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 $ 2,670,529 $ 606,479
=========== =========== =========== ===========
Supplemental disclosures
of cash flow information:
Cash paid for interest.. $ 3,217 $ 101 $ 101 $ --
</TABLE>
See accompanying notes to combined financial statements.
F-27
<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 JUNE 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-28
<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-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)
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-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)
(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-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)
(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-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)
(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-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)
(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-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)
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............................................. (36,200) (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-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)
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-36
<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-37
<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-38
<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-39
<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-40
<PAGE>
EXHIBIT A
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 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.
A-1
<PAGE>
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,
/s/ Danny D. Simmons
A-3
<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............ $17,425
NASD Filing Fee................................................ 6,250
Nasdaq National Market Fees.................................... *
Printing Expenses.............................................. *
Legal Fees and Expenses........................................ *
Engineering Fees and Expenses.................................. *
Accountants' Fees and Expenses................................. *
Blue Sky Fees and Expenses..................................... *
Transfer Agent and Registrar Fees.............................. *
Miscellaneous Expenses......................................... *
-------
Total...................................................... *
=======
</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 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 shares of Common Stock and (iii)
issued to the owners of the outstanding capital stock and limited partnership
interests of the South Coast Companies 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 will reclassify each
outstanding share of Common Stock into shares 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.
*3.1 --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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*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 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.
*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 23, 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 --Form of Indemnification Agreement between the Company and each of
its officers and directors.
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).
24.1 --Powers of Attorney (included on signature page).
27.1 --Financial Data Schedule.
</TABLE>
* 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.
II-5
<PAGE>
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 REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON THE 14TH DAY OF OCTOBER, 1997.
XPLOR ENERGY, INC.
/s/ Steven W. Nance
By:__________________________________
Steven W. Nance
President and Chief Executive
Officer
Each person whose signature appears below hereby appoints Steven W. Nance, Ron
A. Krenzke and Stephen M. Clark and each of them, any of whom may act without
the joinder of the other, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
registration statement for the same offering filed pursuant to Rule 462 under
the Securities Act of 1933, and to file the same, with all exhibits thereto and
all other documents in connection therewith, with the Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing appropriate or necessary to be done, as fully and
for all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON OCTOBER 14, 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)
/s/ Ron A. Krenzke Executive Vice President, Chief Operating
____________________________________ Officer and Director
Ron A. Krenzke
/s/ W.E. Rowsey, III Director
____________________________________
W.E. Rowsey, III
</TABLE>
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 --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 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.
*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 23, 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 --Form of Indemnification Agreement between the Company
and each of its officers and directors.
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).
24.1 --Powers of Attorney (included on signature page).
27.1 --Financial Data Schedule.
</TABLE>
* To be filed by amendment.
<PAGE>
EXHIBIT 2.1
________________________________________________________________________________
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION
________________________________________________________________________________
ACQUISITION OF
ARAXAS ENERGY CORPORATION
AND
SOUTH COAST EXPLORATION COMPANY
INTERACTIVE EXPLORATION SOLUTIONS, INC.
AND
SOCO EXPLORATION, L.P.
BY
ARAXAS HOLDINGS, INC.
AUGUST 19, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I - DEFINITIONS.................................................. 1
1.01 Defined Terms................................................ 1
1.02 References and Titles........................................ 9
ARTICLE II - ACQUISITION OF SOUTH COAST OWNERSHIP INTERESTS............... 9
2.01 Contribution of South Coast Shares........................... 9
2.02 Contribution of INEXS Shares................................. 9
2.03 Contribution of SOCO Partnership Interest.................... 10
2.04 Issuance of Newco Common Stock and Newco Notes............... 10
2.05 Effects of Contribution of South Coast Shares and
INEXS Shares................................................ 10
2.06 Certificate of Incorporation................................. 10
2.07 Bylaws....................................................... 10
ARTICLE III - SHARE ACQUISITION OF ARAXAS.................................. 10
3.01 Share Acquisition; Effective Time............................ 10
3.02 Effects of Araxas Acquisition................................ 11
3.03 Certificates of Incorporation................................ 11
3.04 Bylaws....................................................... 11
3.05 Officers and Directors....................................... 11
3.06 Effect on Securities of Araxas............................... 11
(a) Cancellation of Araxas Common Stock in Treasury......... 11
(b) Conversion of Araxas Common Stock....................... 11
(c) Araxas Stock Options.................................... 11
(d) Dissenters' Rights...................................... 12
3.07 Exchange of Certificates..................................... 12
ARTICLE IV - REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE SOUTH
COAST ENTITIES.............................................. 12
4.01 Organization, Standing and Qualification..................... 12
4.02 Execution, Delivery and Performance of Agreement; Authority.. 13
4.03 Other Entities............................................... 13
4.04 Capitalization............................................... 13
(a) South Coast............................................. 13
(b) INEXS................................................... 14
(c) SOCO.................................................... 14
4.05 Financial Statements......................................... 14
4.06 Absence of Undisclosed Liabilities........................... 14
i
<PAGE>
4.07 Absence of Events............................................ 15
4.08 Taxes........................................................ 16
4.09 Litigation................................................... 16
4.10 Compliance with Laws, Material Agreements and Permits........ 16
4.11 Environmental Matters........................................ 17
4.12 Books and Records............................................ 18
4.13 Gas Imbalances............................................... 18
4.14 Calls on Production.......................................... 19
4.15 Title to Assets other than Oil and Gas....................... 19
4.16 Title to Oil and Gas Interests............................... 19
4.17 Oil and Gas Operations....................................... 20
4.18 Certain Business Relationships or Transactions With
Affiliates.................................................. 20
4.19 No Guaranties................................................ 20
4.20 Employee Benefit Plan........................................ 20
4.21 Broker/Finders............................................... 21
4.22 Royalties.................................................... 21
4.23 Plugging and Abandonment Liabilities......................... 21
4.24 Prepayments.................................................. 21
4.25 Hedging Activities........................................... 21
4.26 Disclosure................................................... 21
ARTICLE V - ADDITIONAL REPRESENTATIONS AND WARRANTIES OF SOUTH COAST
OWNERS........................................................ 21
5.01 Title to South Coast Ownership Interests...................... 22
5.02 Authority..................................................... 22
5.03 Securities Laws and Certain Stockholder Agreements............ 22
5.04 Tax Representations........................................... 23
ARTICLE VI - REPRESENTATIONS AND WARRANTIES OF ARAXAS...................... 24
6.01 Organization, Standing and Qualification...................... 24
6.02 Execution, Delivery and Performance of Agreement; Authority... 25
6.03 Other Entities................................................ 25
6.04 Capitalization................................................ 25
6.05 Financial Statements.......................................... 26
6.06 Absence of Undisclosed Liabilities............................ 26
6.07 Absence of Events............................................. 26
6.08 Compliance with Laws, Material Agreements and Permits......... 27
6.09 Environmental Matters......................................... 28
6.10 Title to Non Oil and Gas Properties........................... 29
6.11 Title to Oil and Gas Properties............................... 30
6.12 Broker/Finders................................................ 30
6.13 Royalties..................................................... 30
ii
<PAGE>
6.14 Litigation................................................... 31
6.15 Taxes........................................................ 31
6.16 Books and Records............................................ 31
6.17 Gas Imbalances............................................... 31
6.18 Hedging Activities........................................... 32
6.19 Certain Business Relationships or Transactions With
Affiliates.................................................. 32
6.20 No Guaranties................................................ 32
6.21 Employee Benefit Plans....................................... 32
6.22 Plugging and Abandonment Liabilities......................... 32
6.23 Prepayments.................................................. 32
6.24 Calls on Production.......................................... 32
6.25 Oil and Gas Operations....................................... 33
6.26 Disclosure................................................... 33
ARTICLE VII - REPRESENTATIONS AND WARRANTIES OF NEWCO...................... 33
7.01 Organization, Standing and Qualification..................... 33
7.02 Execution, Delivery and Performance of Agreement; Authority.. 33
7.03 Interim Operations of Newco.................................. 34
7.04 Other Entities............................................... 34
7.05 Capitalization............................................... 34
7.06 Litigation................................................... 34
7.07 No Guaranties................................................ 34
7.08 Broker/Finders............................................... 35
7.09 Newco Common Stock........................................... 35
7.10 Tax Representations.......................................... 35
ARTICLE VIII - REPRESENTATIONS AND WARRANTIES OF ROWSEY.................... 36
8.01 Title to Araxas Common Stock................................. 36
8.02 Authority.................................................... 36
8.03 Securities Laws and Certain Shareholder Covenants............ 36
8.04 Tax Representations.......................................... 37
ARTICLE IX - COVENANTS..................................................... 38
9.01 Access to Records and Properties............................. 38
9.02 Operation of the Business.................................... 39
(a) South Coast Entities.................................... 39
(b) Araxas Companies........................................ 39
9.03 Consents..................................................... 40
9.04 Announcements................................................ 40
9.05 Exclusivity.................................................. 40
9.06 Notification of Certain Matters.............................. 41
iii
<PAGE>
9.07 Shareholder Approval......................................... 41
9.08 Financing Covenants.......................................... 41
(a) New Debt and Bridge Financing........................... 41
(b) Newco Stock Adjustment.................................. 41
9.09 Public Equity Transaction.................................... 42
9.10 Management of Newco.......................................... 42
9.11 Newco Ownership.............................................. 42
(a) Clawback of Certain Araxas Owners....................... 42
(b) Newco Option Plan....................................... 43
ARTICLE X - CONDITIONS..................................................... 43
10.01 Conditions to Obligations of South Coast Owners.............. 43
(a) Representations and Warranties.......................... 43
(b) Covenants, Agreements and Obligations................... 43
(c) No Material Adverse Effect.............................. 44
(d) Delivery of Documents................................... 44
(e) Legal Opinion........................................... 44
(f) Dissenting Shareholders................................. 44
(g) Certificates of Existence and Good Standing............. 44
(h) Disclosure Schedule..................................... 44
10.02 Conditions to Obligations of Araxas.......................... 44
(a) Representations and Warranties.......................... 45
(b) Covenants, Agreements and Obligations................... 45
(c) No Material Adverse Effect.............................. 45
(d) Delivery of Documents................................... 45
(e) Legal Opinion........................................... 45
(f) Certificates of Existence and Good Standing............. 45
(g) Resignations............................................ 45
(h) Waiver of Community Property Rights..................... 46
(i) Certain Agreements of South Coast Entities.............. 46
(j) Disclosure Schedule..................................... 46
10.03 Conditions to Obligations of All Parties..................... 46
(a) Araxas Acquisition Approval............................. 46
(b) Other Consents and Approvals............................ 46
(c) Related Agreements...................................... 46
(d) Pending Actions......................................... 47
(e) Certain Employment Agreements........................... 47
(f) Agreement of Certain Araxas Owners...................... 47
(g) New Debt................................................ 48
(h) Additional Agreements................................... 48
(i) Newco Bridge Financing.................................. 48
(j) Officers of South Coast, INEXS and Araxas............... 48
iv
<PAGE>
ARTICLE XI - TERMINATION.................................................. 48
11.01 Termination of Agreement..................................... 48
11.02 Obligations Upon Termination................................. 49
ARTICLE XII - CLOSING...................................................... 49
12.01 Time and Place............................................... 49
12.02 Certificate of Acquisition................................... 49
12.03 Further Assurances........................................... 49
12.04 Concurrent Conditions........................................ 50
ARTICLE XIII - GENERAL PROVISIONS.......................................... 50
13.01 Nonsurvival of Representations, Warranties and Covenants..... 50
13.02 Entire Agreement; Amendment and Waiver....................... 50
13.03 Severability................................................. 50
13.04 Applicable Law............................................... 51
13.05 Assignment................................................... 51
13.06 Notices...................................................... 51
13.07 Incorporation of Exhibits and Schedules by Reference......... 54
13.08 Gender and Number............................................ 54
13.09 Multiple Counterparts........................................ 54
13.10 Expenses..................................................... 54
ATTACHMENTS
EXHIBITS:
Exhibit "A" Promissory Note
Exhibit "B" South Coast Owners Ownership Table
Exhibit "C" Form of Certificate of Acquisition
Exhibit "D" Newco Officers and Directors
Exhibit "E" Ownership of Araxas Common Stock and Araxas Stock Options
SCHEDULES:
Disclosure Schedule
Schedule 4.15 South Coast Entities' List of Computer Hardware and Software
Schedule 4.16 South Coast Entities' Property Schedule
Schedule 6.10 Araxas Companies' List of Computer Hardware and Software
Schedule 6.11 Araxas Companies' Property Schedule
v
<PAGE>
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION
This Acquisition Agreement and Plan of Organization ("Agreement") is
executed and delivered this 19th day of August, 1997, to be effective as of
such date, by and among Araxas Energy Corporation, an Oklahoma corporation
("Araxas"), Araxas Holdings, Inc., a Delaware corporation ("Newco"), South Coast
Exploration Company, a Texas corporation ("South Coast"), Interactive
Exploration Solutions, Inc., a Texas corporation ("INEXS"), SOCO Exploration,
L.P., a Texas limited partnership ("SOCO"), ERI Investments, Inc., a Delaware
corporation ("Equitable"), 420 Energy Investments, Inc., a Delaware corporation
("Energy"), and W.E. Rowsey, III ("Rowsey"), R.A. Krenzke ("Krenzke"), Craig
Davis ("Davis"), Phil Duggan ("Duggan"), individuals, and the trusts that are
identified on Exhibit B attached hereto as South Coast Owners and who have
executed a counterpart of this Agreement, with respect to the following
circumstances:
R E C I T A L S:
A. South Coast, INEXS, SOCO and Araxas have determined to engage in a
strategic business combination pursuant to which all the outstanding capital
stock of Araxas, South Coast, and INEXS, and all of the outstanding limited
partnership interests of SOCO, shall be transferred to Newco in exchange for
capital stock of Newco and the other considerations set forth herein, in
interdependent steps of a transaction intended to qualify under Section 351 of
the Code (as hereinafter defined); and
B. The parties desire to evidence the terms, provisions, representations,
warranties and conditions upon which such exchange will be consummated by this
binding Agreement.
NOW, THEREFORE, in consideration of the foregoing and the benefits to be
derived from the mutual observance of the terms and conditions set forth below,
the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01 Defined Terms. For purposes of this Agreement, in addition to the
terms defined elsewhere herein, the following terms shall have the meanings set
forth in this Article I or in the Section referred to below:
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 1 OF 56 PAGES
<PAGE>
"Agreement" means this Acquisition Agreement and Plan of Organization
and the Exhibits and Schedules attached hereto and by this reference made a
part hereof for all purposes.
"Araxas" has the meaning set forth in the preface above.
"Araxas Acquisition" has the meaning specified in Section 3.01 hereof.
"Araxas Common Stock" means the shares of common stock, par value
$0.01 per share, of Araxas.
"Araxas Companies" means Araxas and its wholly-owned subsidiaries,
Araxas Exploration, Inc., an Oklahoma corporation, and Araxas SPV-I, Inc.,
an Oklahoma corporation.
"Araxas Material Agreement(s)" means any written or oral agreement,
contract, commitment or understanding to which any of the Araxas Companies
is a party, by which any of the Araxas Companies is directly or indirectly
bound, or to which any asset of any of the Araxas Companies may be subject,
involving total value or consideration in excess of $250,000.
"Araxas Owners" means the persons named in Exhibit "E" attached
hereto, including the named holders of record of shares of Araxas Common
Stock and the named persons who are holders of Araxas Stock Options (or
will be at Closing the holder of an Araxas Pool Option).
"Araxas Pool Options" means the Araxas Stock Options that are
exercisable for the aggregate number of shares of Araxas Common Stock as
set forth under the caption "Araxas Pool Options" set forth on Exhibit "E".
The holders of the Araxas Pool Options will be identified in the
Disclosure Schedule on or before Closing.
"Araxas Stock Option(s)" means, individually or collectively as the
context dictates, the options granted pursuant to individually negotiated
agreements identified in Exhibit "E" attached hereto and the Araxas Pool
Options, and that relate to the number of shares of Araxas Common Stock set
forth in Exhibit "E".
"Bridge Financing" has the meaning specified in Section 9.08(a)
hereof.
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or any successor statutes and any
regulations promulgated thereunder.
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 2 OF 56 PAGES
<PAGE>
"CERCLIS" means the Comprehensive Environmental Response, Compensation
and Liability Information System List.
"Closing" means the taking of the actions contemplated by Article XII
of this Agreement in order to consummate the transactions contemplated
thereby.
"Closing Date" means the date on which the Closing occurs as set forth
in Section 12.01 hereof.
"Code" means the Internal Revenue Code as in effect on the date
hereof.
"Conversion Number" means 1.00.
"Davis" has the meaning set forth in the preface above.
"Defensible Title" means such right, title and interest that is
evidenced by an instrument or instruments whether or not filed of record in
accordance with the conveyance and recording laws of the applicable
jurisdiction to the extent necessary to prevail against competing claims of
bona fide purchasers for value without notice such that: (a) the titled
party shall be entitled to receive from its ownership interest in each of
the titled party's Oil and Gas Interests not less than the interest shown
as the Net Revenue Interest for such Oil and Gas Interest listed in such
titled party's Property Schedule attached hereto in all hydrocarbons
produced, saved and marketed from each of such Oil and Gas Interests
without reduction, suspension or termination throughout the life of each of
such Oil and Gas Interests; (b) the titled party is obligated to bear a
percentage of the costs and expenses relating to operations on and the
maintenance or development of each of the titled party's Oil and Gas
Interests listed in the Property Schedule of such party not greater than
the interest shown as the Working Interest for each of such Oil and Gas
Interests in the titled party's Property Schedule without increase
throughout the life of each of such Oil and Gas Interests; and (c) the
interest of the titled party in each of the titled party's Oil and Gas
Interests is free and clear of all Liens, claims, infringements, burdens or
other defects of any kind whatsoever, except for Permitted Encumbrances.
"Disclosure Schedule" means the Disclosure Schedule attached hereto
and any documents listed on such Disclosure Schedule and expressly
incorporated therein by reference, including any supplement thereof
delivered at or before the Closing.
"Dissenting Shares" has the meaning set forth in Section 3.06(b)
hereof.
"Duggan" has the meaning set forth in the preface above.
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 3 OF 56 PAGES
<PAGE>
"Energy" has the meaning set forth in the preface above.
"Environmental Law" means any federal, state, local or foreign
statute, code, ordinance, rule, regulation, policy, guideline, permit,
consent, approval, license, judgment, order, writ, decree, common law,
injunction or other authorization in effect on the date hereof or at a
previous time applicable to the operations of either, (i) any of the South
Coast Entities or (ii) any of the Araxas Companies, as the context
requires, relating to (a) emissions, discharges, releases or threatened
releases of Hazardous Materials into the natural environment, including
into ambient air, soil, sediments, land surface or subsurface, buildings or
facilities, surface water, groundwater, publicly-owned treatment works,
septic systems or land; (b) the generation, treatment, storage, disposal,
use, handling, manufacturing, transportation or shipment of Hazardous
Materials; (c) occupational health and safety; or (d) otherwise relating to
the pollution of the environment, solid waste handling treatment or
disposal, or operation or reclamation of oil and gas operations or mines.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Equitable" has the meaning set forth in the preface above.
"GAAP" means generally accepted accounting principles as recognized by
the U.S. Financial Accounting Standards Board.
"Governmental Action" means any authorization, application, approval,
consent, exemption, filing, license, notice, registration, permit or other
requirement of, to or with any Governmental Authority.
"Governmental Authority" means any national, state, county or
municipal government, domestic or foreign, any agency, board, bureau,
commission, court, department or other instrumentality of any such
government, or any arbitrator in any case that has jurisdiction over any of
the South Coast Entities, the Oil and Gas Interests of the South Coast
Entities or the Araxas Companies or any of Araxas Companies' Oil and Gas
Interests.
"Hazardous Material" means (a) any "hazardous substance," as defined
by CERCLA; (b) any "hazardous waste" or "solid waste," in either case as
defined by the Resource Conservation and Recovery Act, as amended; (c) any
solid, hazardous, dangerous or toxic chemical, material, waste or
substance, within the meaning of and regulated by any Environmental Law;
(d) any radioactive material, including any naturally occurring radioactive
material, and any source, special or byproduct material as defined in 42
U.S.C. 2011 et seq. and any amendments or authorizations thereof; (e) any
asbestos-containing materials in any form or condition; (f) any
polychlorinated biphenyl in any form or condition; or (g) petroleum,
petroleum hydrocarbons, or any fraction or byproducts thereof.
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 4 OF 56 PAGES
<PAGE>
"Hydrocarbons" means crude oil, natural gas, casinghead gas, and other
liquid or gaseous hydrocarbons.
"INEXS" has the meaning set forth in the preface above.
"INEXS Shareholders" means Krenzke, Davis and Duggan, the owners of
all of the outstanding INEXS Shares.
"INEXS Shares" means all of the issued and outstanding common stock,
par value $0.01 per share, of INEXS.
"Krenzke" has the meaning set forth in the preface above.
"Letter of Intent" means the letter agreement dated June 9, 1997,
among Krenzke, Davis, Duggan, Equitable Resources, Inc., the common parent
corporation of Equitable and Energy, and Araxas.
"Lien" means any lien, mortgage, security interest, pledge, deposit,
production payment, restriction, burden, encumbrance, rights of a vendor
under any title retention or conditional sale agreement, or lease or other
arrangement substantially equivalent thereto.
"Material Adverse Effect" means (i) when used with respect to the
South Coast Entities, a result or consequence that would materially
adversely affect the condition (financial or otherwise), results of
operations or business of the South Coast Entities (taken as a whole) or
the aggregate value of their assets, or would materially impair the ability
of the South Coast Entities (taken as a whole) to own, hold, develop and
operate a material portion of their assets, or would impair any of the
South Coast Entities' ability to perform its obligations hereunder or
consummate the transactions contemplated hereby; and (ii) when used with
respect to the Araxas Companies, a result or consequence that would
materially adversely affect the condition (financial or otherwise), results
of operations or business of the Araxas Companies (taken as a whole) or the
aggregate value of their assets, would materially impair the ability of the
Araxas Companies (taken as a whole) to own, hold, develop and operate a
material portion of their assets, or would impair Araxas' ability to
perform its obligations hereunder or consummate the transactions
contemplated hereby.
"Net Revenue Interest" means the interest in all Hydrocarbons produced
from a well, lease or any unit of which a lease is a part which is
attributable to: (i) the Working Interests therein after payment of
applicable lessor royalties, overriding royalties, production payments and
other payments out of or measured by the production of Hydrocarbons from
the well or
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 5 OF 56 PAGES
<PAGE>
property covered by the leases or any unit of which a lease is a part, (ii)
any overriding royalty interest therein, or (iii) any royalty interest
therein.
"Newco" has the meaning set forth in the preface above.
"Newco Common Stock" means the common stock, par value $0.001 per
share, of Newco to be issued pursuant to this Agreement.
"Newco Notes" means the secured promissory notes of Newco to be issued
pursuant to this Agreement on the terms set forth on Exhibit "A" attached
hereto.
"OGCA" means the Oklahoma General Corporation Act.
"Oil and Gas Interest(s)" means (i) all interests in and rights with
respect to oil, gas, mineral and related properties and assets of any kind
and nature, direct or indirect, including working, royalty and overriding
royalty interests, production payments, operating rights, net profits
interests, fee minerals, fee royalties, other non-working interests and
non-operating interests; (ii) interests in and rights with respect to
Hydrocarbons and other minerals or revenues therefrom and contracts in
connection therewith and claims and rights thereto (including oil and gas
leases, operating agreements, unitization and pooling agreements and
orders, division orders, transfer orders, mineral deeds, royalty deeds, oil
and gas sales, exchange and processing contracts and agreements and, in
each case, interests thereunder), surface interests, fee interests,
reversionary interests, reservations and concessions; (iii) easements,
rights of way, licenses, permits, leases, and other interests associated
with, appurtenant to, or necessary for the operation of any of the
foregoing; and (iv) interests in equipment and machinery (including well
equipment and machinery), oil and gas production, gathering, transmission,
compression, treating, processing and storage facilities (including tanks,
tank batteries, pipelines and gathering systems), pumps, water plants,
electric plants, gasoline and gas processing plants, refineries and other
tangible personal property and fixtures associated with, appurtenant to, or
necessary for the operation of any of the foregoing.
"Permitted Encumbrances" means (i) Liens securing indebtedness that is
described in the Disclosure Schedule of such party; (ii) Liens for Taxes
which are not yet delinquent or which are being contested in good faith and
for which adequate reserves have been established as may be required by
GAAP; (iii) Liens under operating agreements, unitization agreements,
pooling orders and mechanic's and materialman's liens relating to the
party's Oil and Gas Interests, which obligations are not yet due and
pursuant to which the party is not in default, except as disclosed in the
Disclosure Schedule of such party; (iv) Liens in the ordinary course of
business consisting of minor defects and irregularities in title or other
restrictions (whether created by or arising out of joint operating
agreements, farm-out
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agreements, leases and assignments, contracts for purchases of Hydrocarbons
or similar agreements, or otherwise in the ordinary course of business)
that are of the nature customarily accepted by prudent purchasers of oil
and gas properties and do not materially affect the value of any property
encumbered thereby or materially impair the ability of the obligor to use
any such property in its operations; provided, the effect thereof on such
Oil and Gas Interest of such party has been properly reflected on the
Property Schedule in the Net Revenue Interest and Working Interest
attributable to such Oil and Gas Interest; (v) all rights to consent by,
required notices to, filings with, or other actions of Governmental
Authorities to the extent customarily obtained subsequent to closing; (vi)
other Liens described in the Disclosure Schedule; and (vii) preferential
rights to purchase and consent to transfer requirements of any person other
than a party hereto or any Governmental Authority.
"Property Schedule" means the Schedule referred to in Section 4.16
hereof in the case of the South Coast Entities, and in Section 6.11 hereof
in the case of the Araxas Companies.
"Reserve Data" means, with respect to the South Coast Entities, the
report of Netherland Sewell & Associates dated August 11, 1997, effective
as of January 1, 1997, previously delivered to Araxas, and, with respect to
the Araxas Companies, the report of Netherland Sewell & Associates, Inc.
dated January 1, 1997, previously delivered to the South Coast Principals.
"Responsible Officers" means the chief executive officer, president
and any vice president of such corporation and, with respect to any
partnership, the general partner of such partnership.
"Rowsey" has the meaning set forth in the preface above.
"Securities Act" means the Securities Act of 1933 as in effect on the
date hereof or as the same may be amended from time to time.
"SOCO" has the meaning set forth in the preface above.
"SOCO Partnership Interest" means all of the issued and outstanding
limited partnership interests in SOCO pursuant to that Agreement of Limited
Partnership of SOCO dated September 11, 1995, between South Coast and
Energy.
"South Coast" has the meaning set forth in the preface above.
"South Coast Entities" means South Coast, INEXS and SOCO.
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"South Coast Material Agreement(s)" means any written or oral
agreement, contract, commitment or understanding to which any of the South
Coast Entities is a party, by which any of the South Coast Entities is
directly or indirectly bound, or to which any asset of any of the South
Coast Entities may be subject, involving total value or consideration in
excess of $125,000.
"South Coast Owners" means Equitable, Energy, Krenzke, Davis, Duggan
and the South Coast Trusts with respect to their respective ownership of
the South Coast Entities.
"South Coast Ownership Interests" mean the South Coast Shares, INEXS
Shares and SOCO Partnership Interest, collectively.
"South Coast Principals" means Krenzke, Davis and Duggan.
"South Coast Shareholders" means Equitable, Krenzke, Davis, Duggan and
the South Coast Trusts, the owners of all the outstanding shares of capital
stock of South Coast.
"South Coast Shares" means all of the issued and outstanding common
stock, par value $0.01 per share, of South Coast.
"South Coast Trusts" means the trusts listed on Exhibit "B" attached
hereto and which execute a counterpart to this Agreement.
"Subsidiary" of a corporation or other entity means a corporation or
other business entity the voting securities of which are owned or otherwise
controlled directly or indirectly by a parent corporation or other person
in an amount sufficient to elect at least a majority of the board of
directors or other managers of such corporation or other entity.
"Tax" means any federal, state, or local gross receipts, license,
payroll, employment, excise, severance, income, franchise, property, ad
valorem, sales and use or other tax of any kind, including any interest,
penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any
schedule or attachment thereto.
"Total Araxas Ownership Percentages" has the meaning set forth in
Exhibit "E" to this Agreement.
"Working Interest" means an interest in a well, lease or unit which
entitles the owner thereof, at its own expense, to explore for, produce and
sell oil, gas and other minerals from the lands covered thereby subject to
payment of the landowner's royalty and any overriding
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royalty, production payment or other similar burden to which the well,
lease or unit has been made subject.
1.02 References and Titles. All references in this Agreement to Exhibits,
Schedules, Articles, Sections, subsections and other subdivisions refer to the
corresponding Exhibits, Schedules, Articles, Sections, subsections and other
subdivisions of or to this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any Articles, Sections, subsections or other
subdivisions of this Agreement are for convenience only, do not constitute any
part of this Agreement, and shall be disregarded in construing the language
hereof. The words "this agreement," "herein," "hereby," "hereunder" and
"hereof," and words of similar import, refer to this Agreement as a whole and
not to any particular subdivision unless expressly so limited. The words "this
article," "this section" and "this subsection," and words of similar import,
refer only to the Article, Section or Subsection hereof in which such words
occur. The word "or" is not exclusive, and the word "including" (in its various
forms) means "including without limitation." Pronouns in masculine, feminine or
neuter genders shall be construed to state and include any other gender, and
words, terms and titles (including terms defined herein) in the singular form
shall be construed to include the plural and vice versa, unless the context
otherwise requires.
As used in the representations and warranties contained in this Agreement,
the phrase "to the knowledge" of the representing party shall mean that such
individual party(ies) or the Responsible Officers of such representing corporate
party, individually or collectively, either (i) know that the matter being
represented and warranted is true and accurate or (ii) have no reason, after
reasonable inquiry, to believe that the matter being represented and warranted
is not true and accurate.
ARTICLE II
ACQUISITION OF SOUTH COAST OWNERSHIP INTERESTS
2.01 Contribution of South Coast Shares. Subject to the terms and
conditions of this Agreement, each of the South Coast Shareholders shall sell,
assign, transfer, convey, contribute to the capital of, and deliver to Newco,
and Newco shall acquire, purchase and receive from the South Coast Shareholders,
at the Closing hereunder, all right, title and interest in and to all of the
South Coast Shares owned by the South Coast Shareholders, free and clear of all
liabilities, obligations, liens and encumbrances whatsoever.
2.02 Contribution of INEXS Shares. Subject to the terms and conditions of
this Agreement, each of the INEXS Shareholders shall sell, assign, transfer,
convey, contribute to the capital of, and deliver to Newco, and Newco shall
acquire, purchase and receive from the INEXS Shareholders, at the Closing
hereunder, all right, title and interest in and to all of the INEXS Shares
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 9 OF 56 PAGES
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owned by the INEXS Shareholders, free and clear of all liabilities, obligations,
liens and encumbrances whatsoever.
2.03 Contribution of SOCO Partnership Interest. Subject to the terms and
conditions of this Agreement, Energy shall sell, assign, transfer, convey,
contribute to the capital of, and deliver to Newco, and Newco shall acquire,
purchase and receive from Energy, at the Closing hereunder, all right, title and
interest in and to all of the SOCO Partnership Interest, free and clear of all
liabilities, obligations, liens and encumbrances whatsoever.
2.04 Issuance of Newco Common Stock and Newco Notes. In consideration of
the transfer by the South Coast Owners of the South Coast Ownership Interests,
Newco shall issue and deliver to Equitable, Krenzke, Davis, Duggan and the South
Coast Trusts at the Closing hereunder, certificates representing the number of
Newco Common Stock and principal amount of Newco Notes set forth next to each
such party's name on Exhibit "B" hereto (subject to reduction pursuant to
Section 9.08 hereof) against delivery by the South Coast Owners of certificates
or other instruments acceptable to Newco duly endorsed and ready for transfer in
accordance with the provisions of this Article II. The Newco Common Stock shall
be issued as fully paid and nonassessable.
2.05 Effects of Contribution of South Coast Shares and INEXS Shares. After
giving effect to the Closing Date, South Coast and INEXS shall be direct wholly-
owned subsidiaries of Newco.
2.06 Certificate of Incorporation. The respective Articles of
Incorporation of South Coast and INEXS in effect immediately prior to the
Closing shall remain in effect thereafter, unless and until amended as provided
by law and such Articles of Incorporation.
2.07 Bylaws. The respective bylaws of South Coast and INEXS in effect
immediately prior to the Closing shall remain in effect thereafter, unless and
until amended or repealed as provided by applicable law.
ARTICLE III
SHARE ACQUISITION OF ARAXAS
3.01 Share Acquisition; Effective Time. Subject to the terms and
conditions of this Agreement, Newco will acquire all of the outstanding shares
of capital stock of Araxas (the "Araxas Acquisition") in accordance with the
provisions of Section 1090.1 of the OGCA. The Araxas Acquisition shall become
effective at such time (the "Effective Time") as a certificate of acquisition in
substantially the form attached hereto as Exhibit "C" is filed with the
Secretary of State of the State of Oklahoma pursuant to Section 1090.1 of the
OGCA.
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3.02 Effects of Araxas Acquisition. At the Effective Time, Newco
shall become the owner of all of the outstanding Araxas Common Stock, and Araxas
shall become a direct wholly-owned subsidiary of Newco, all without any further
action on the part of Araxas or Newco or any of their respective shareholders.
The shareholders of Araxas shall have no further rights in such shares which
shall be automatically converted into the right to receive the consideration set
forth herein. The Araxas Acquisition shall have the additional effects provided
herein and by the OGCA.
3.03 Certificates of Incorporation. The respective Certificates of
Incorporation of Newco and Araxas in effect immediately prior to the Effective
Time shall remain in effect thereafter, unless and until amended as provided by
law and such Certificates of Incorporation.
3.04 Bylaws. The respective bylaws of Araxas and Newco in effect
immediately prior to the Effective Time shall remain in effect thereafter,
unless and until amended or repealed as provided by applicable law.
3.05 Officers and Directors. The directors and officers of Newco from and
after the Effective Time shall be as set forth on Exhibit "D" attached hereto,
and shall remain in their respective offices unless and until removal or
resignation in accordance with the bylaws of Newco and applicable laws, subject
to Section 9.10 hereof.
3.06 Effect on Securities of Araxas. At the Effective Time, by virtue of
the Araxas Acquisition and without any action on the part of the holder of any
shares of Araxas Common Stock:
(a) Cancellation of Araxas Common Stock in Treasury. All shares of
Araxas Common Stock and any of the shares of preferred stock of Araxas that
are held in the treasury of Araxas or are owned directly or indirectly by
any Subsidiary of Araxas, shall be canceled and no consideration shall be
delivered in exchange therefor.
(b) Conversion of Araxas Common Stock. Each of the shares of Araxas
Common Stock (or fraction thereof) issued and outstanding immediately prior
to the Effective Time (other than shares to be canceled pursuant to Section
3.06(a) hereof and shares, if any, held by persons exercising appraisal
rights in accordance with Section 1091 of the OGCA ("Dissenting Shares"))
shall be converted, without any action on the part of the holders thereof,
into shares of Newco Common Stock with each such share of Araxas Common
Stock being converted into the number of a share(s) of Newco Common Stock
(or fraction thereof) equal to the Conversion Number.
(c) Araxas Stock Options. At the Effective Time, each of the Araxas
Stock Options shall be exchanged by Newco for an option to purchase shares
of Newco Common Stock, with each such Newco stock option to be exercisable
on the same terms and
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 11 OF 56 PAGES
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conditions as then are applicable to such Araxas Stock Option (subject to
any agreed amendments contemplated in Section 10.03(e) hereof).
(d) Dissenters' Rights. Any Dissenting Shares shall not be converted
into the right to receive the Newco Common Stock but shall be converted
into the right to receive such consideration as may be determined to be due
with respect to such Dissenting Shares pursuant to the OGCA. Each holder
of Dissenting Shares who, pursuant to the provisions of the OGCA, becomes
entitled to payment of the fair value of shares of Company Common Stock
shall receive payment therefor (but only after the value therefor shall
have been agreed upon or finally determined pursuant to such provisions).
3.07 Exchange of Certificates. On and after the Effective Time, Newco
shall deliver certificates representing the shares of Newco Common Stock to be
issued in the Araxas Acquisition against surrender by the holders of Araxas
Common Stock of certificates representing the shares of such Araxas Common Stock
(the "Certificates"). Until surrendered and exchanged as contemplated by this
Section 3.07, each Certificate shall be deemed at any time after the Effective
Time to represent solely the right to receive upon such surrender shares of
Newco Common Stock, as provided by this Article III.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO THE SOUTH COAST ENTITIES
As a material part of the consideration for this Agreement, except as
disclosed in the Disclosure Schedule specifically referring to this Article IV,
each of the South Coast Entities jointly and severally represents and warrants
to Araxas and Newco as of the date of this Agreement and as of the Closing Date
as follows:
4.01 Organization, Standing and Qualification. Each of South Coast and
INEXS is a corporation duly organized, validly existing and in good standing
under the laws of the State of Texas. Each of South Coast and INEXS has all
requisite corporate power and authority to carry on its business as now being
conducted and to own, lease or operate its properties as and in the places where
such business is now conducted and such properties are now owned, leased or
operated. Each of South Coast and INEXS is qualified and in good standing to
do business in all states in which the nature of its business requires it to be
qualified.
SOCO is a limited partnership duly organized and validly existing under the
laws of the State of Texas. SOCO has all requisite power and authority to carry
on its business as now being conducted and to own, lease or operate its
properties as and in the places where such business is now
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 12 OF 56 PAGES
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conducted and such properties are now owned, leased or operated. SOCO is
qualified and in good standing to do business in all states in which the nature
of its business requires it to be qualified.
4.02 Execution, Delivery and Performance of Agreement; Authority. The
South Coast Entities have full corporate power and authority to enter into this
Agreement, perform their obligations hereunder and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the South Coast Entities will not, with or without the giving
of notice or the passage of time, or both, conflict with, result in a default,
right to accelerate or loss of rights under, or result in the creation of any
lien, charge or encumbrance pursuant to, any provision of the South Coast
Entities' organizational documents or bylaws or any franchise, mortgage, deed of
trust, lease, license, agreement, understanding, or to the knowledge of the
South Coast Entities, any law, ordinance, rule or regulation or any order,
judgment or decree to which any of the South Coast Entities is a party or by
which any of the South Coast Entities may be bound or affected. The execution
and delivery by the South Coast Entities of this Agreement and the documents to
be delivered by the South Coast Entities on or before Closing pursuant to this
Agreement ("South Coast Entities Closing Documents") have been, or will at
Closing be, duly and validly authorized by all necessary corporate action of the
South Coast Entities. Assuming the due authorization, execution and delivery by
each of Araxas, Rowsey and Newco, and the binding effect thereon, this Agreement
constitutes, and the South Coast Entities Closing Documents when executed and
delivered by the South Coast Entities will constitute, legal, valid and binding
obligations of the South Coast Entities enforceable against them in accordance
with their respective terms.
4.03 Other Entities. None of the South Coast Entities owns directly or
indirectly any equity interest in, and none of the South Coast Entities has a
commitment to purchase any such interest in, any other corporation or in any
partnership or other business enterprise or entity, other than the partnership
interest in SOCO owned by South Coast.
4.04 Capitalization.
(a) South Coast. The authorized capital stock of South Coast consists
of 1,000,000 shares of common stock, par value $0.01 per share, of which
100,000 shares are issued and outstanding as of the date hereof, and owned
of record and beneficially by the respective South Coast Shareholders in
the amounts set forth in Exhibit "B" hereto. Other than the Option
Agreement dated as of September 1, 1995, between South Coast, Krenzke,
Davis, Duggan and Weisser, Johnson & Co. as identified on Exhibit "B"
hereto, there are no outstanding subscriptions, options, warrants, calls,
contracts, demands, commitments, convertible securities or other agreements
or arrangements of any character or nature whatsoever under which South
Coast may become obligated to issue, assign, transfer or repurchase any
shares of the capital stock or other equity interest in South Coast. All
of the
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 13 OF 56 PAGES
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South Coast Shares outstanding have been validly issued and are fully paid
and nonassessable.
(b) INEXS. The authorized capital stock of INEXS consists of 100,000
shares of common stock, par value $0.01 per share, of which 10,000 shares
are issued and outstanding as of the date hereof, and owned of record and
beneficially by the respective INEXS Shareholders in the amounts set forth
in Exhibit "B" hereto. There are no outstanding subscriptions, options,
warrants, calls, contracts, demands, commitments, convertible securities or
other agreements or arrangements of any character or nature whatsoever
under which INEXS may become obligated to issue, assign, transfer or
repurchase any shares of the capital stock or other equity interest in
INEXS. All of the INEXS Shares outstanding have been validly issued and
are fully paid and nonassessable.
(c) SOCO. All of the partnership interests in SOCO are owned of
record and beneficially by South Coast and Energy in the respective
percentages set forth in Exhibit "B" hereto. South Coast is the sole
general partner and Energy is the sole limited partner of SOCO. There are
no outstanding subscriptions, options, warrants, calls, contracts, demands,
commitments, convertible securities or other agreements or arrangements of
any character or nature whatsoever under which SOCO may become obligated to
issue, assign, transfer or repurchase any partnership interest or other
equity interest in SOCO.
4.05 Financial Statements. The South Coast Entities have provided Araxas
the following financial information (collectively, the "South Coast Financial
Statements"): (i) unaudited balance sheets of South Coast, SOCO and INEXS as of
March 31, 1997, and unaudited statements of income for the fiscal year ended
March 31, 1997, in the case of South Coast, for the nine (9) months then ended
in the case of INEXS, and for the three (3) months then ended in the case of
SOCO. The South Coast Financial Statements which are incorporated into this
Agreement for all purposes are complete and correct in all material respects,
have been prepared in accordance with GAAP (without required footnote
disclosure) consistently applied and present fairly the financial condition of
each of the South Coast Entities as of the dates thereof and the results of the
operations for the periods covered thereby; provided, however, that the interim
financial statements are subject to normal year-end adjustments (which will not
be material individually or in the aggregate).
4.06 Absence of Undisclosed Liabilities. There are no liabilities of the
South Coast Entities of any kind whatsoever, whether asserted or unasserted,
absolute or contingent, accrued or unaccrued, liquidated or unliquidated, and
whether due or to become due, including liability for Taxes that are reasonably
likely to have a Material Adverse Effect on the South Coast Entities, except for
(i) liabilities set forth on the face of the South Coast Financial Statements,
(ii) liabilities which have arisen after March 31, 1997, in the ordinary course
of business and consistent with past experience and practice, and (iii)
liabilities under this Agreement.
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4.07 Absence of Events. Since March 31, 1997, none of the South Coast
Entities has done any of the following:
(a) mortgaged, pledged or subjected to lien, charge, security interest
or any other encumbrance or restriction any of its properties or assets,
other than Permitted Encumbrances;
(b) sold, leased, transferred or otherwise disposed of (i) any South
Coast Entities' Oil and Gas Interests that, individually or in the
aggregate, were assigned a value in the Reserve Data of $125,000 or more;
or (ii) any other assets other than in the ordinary course of business and
consistent with prior practice;
(c) except as set forth on the Disclosure Schedule and other than in
the ordinary course of business and consistent with prior practice, made
any change in the rate of compensation, commission, bonus or other direct
or indirect remuneration payable, or paid or agreed or orally promised to
pay, conditionally or otherwise, any bonus, extra compensation,
reimbursement, pension or severance or vacation pay, to any shareholder,
partner, director, officer, employee or agent;
(d) issued or sold any shares of capital stock or partnership interest
or other securities, or issued, granted or sold any options, rights or
warrants with respect thereto;
(e) paid or declared any dividends or distributions, purchased,
redeemed, acquired or retired any indebtedness, equity interest or other
securities from its equity owners or other security holders, made any loans
or advances or guaranteed any loans or advances to any person, or otherwise
incurred or suffered to exist any liabilities (other than current
liabilities incurred in the ordinary course of business and consistent with
past practices);
(f) canceled, waived or released any rights or claims against, or
indebtedness owed by, third parties;
(g) amended its certificate or articles of incorporation, certificate
of limited partnership, by-laws, or similar documents;
(h) except as set forth in the Disclosure Schedule, entered into any
transaction, contract or commitment other than in the ordinary course of
business and consistent with prior practice;
(i) received any notice of default or termination of any contract,
lease or other agreement or suffered any damage, destruction, loss (whether
or not covered by insurance)
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 15 OF 56 PAGES
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or any other changes, event or condition which in any case or in the
aggregate, has had or may have a Material Adverse Effect on any of the
South Coast Entities;
(j) instituted, settled or agreed to settle any litigation, action or
proceeding before any court or governmental body;
(k) except as set forth in the Disclosure Schedule, entered into any
swap, hedging or similar arrangements, forward sale of production or
production sales contract that is either (A) not cancelable on thirty (30)
days notice or (B) not tied to an index price, and which remains open on
the date hereof; or
(l) entered into any agreement or made any commitment to take any of
the types of actions described in paragraphs (a) through (k) above.
4.08 Taxes. Each of the South Coast Entities has filed all Tax Returns
required to be filed. All such filed Tax Returns were correct and complete in
all respects. All Taxes owed by any of the South Coast Entities (whether or not
shown on any Tax Return) have been paid. None of the South Coast Entities is
currently the beneficiary of any extension of time within which to file any Tax
Return. No claim has ever been made by an authority with respect to any of the
South Coast Entities in a jurisdiction where no Tax Return is filed that any of
the South Coast Entities is or may be subject to taxation by that jurisdiction.
Each of the South Coast Entities has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, shareholder, or other third party.
To the best knowledge of the South Coast Entities, there is no dispute or claim
concerning any liability for Taxes of any of the South Coast Entities claimed or
raised by any taxing authority which is not resolved. None of the South Coast
Entities is a party to any income tax allocation or sharing agreement, or has at
any time been a member of an affiliated group filing a consolidated Federal
income tax return.
4.09 Litigation. There is no legal, administrative, arbitration or other
proceeding (other than routine oil and gas field regulatory orders), or
governmental investigation, nor any order, decree or judgment in progress, in
effect, pending or, to the best knowledge of the South Coast Entities,
threatened against any of the South Coast Entities except where such legal,
administrative, arbitration or other legal proceeding or governmental
investigation which, individually or in the aggregate would not have a Material
Adverse Effect.
4.10 Compliance with Laws, Material Agreements and Permits. None of the
South Coast Entities is in violation of, or in default in any material respect
under, and no event has occurred that (with notice or the lapse of time or both)
would constitute a violation of or default under, (i) its articles of
incorporation, certificate of limited partnership, by-laws or partnership
agreement, (ii) any applicable law, rule, regulation, order, writ, decree or
judgment of any Governmental Authority, or (iii) any agreement to which any of
the South Coast Entities is a party or to which any of their
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respective assets is subject or bound, except (in the case of clause (ii) or
(iii) above) for any violation or default that would not, individually or in the
aggregate, have a Material Adverse Effect on the South Coast Entities. Each of
the South Coast Entities has obtained and holds all permits, licenses,
variances, exemptions, orders, franchises, approvals and authorizations of all
Governmental Authorities necessary for the lawful conduct of its business or the
lawful ownership, use and operation of its assets ("South Coast Permits"),
except for South Coast Permits which the failure to obtain or hold would not,
individually or in the aggregate, have a Material Adverse Effect on South Coast
Entities. Each of the South Coast Entities is in compliance with the terms of
its South Coast Permits, except where the failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect on South Coast
Entities. No investigation or review by any Governmental Authority with respect
to any of the South Coast Entities is pending or, to the knowledge of South
Coast Entities, threatened, other than those the outcome of which would not,
individually or in the aggregate, have a Material Adverse Effect on South Coast
Entities. To the knowledge of South Coast Entities, no party to any South Coast
Material Agreement is in material breach of the terms, provisions and conditions
of such South Coast Material Agreement.
4.11 Environmental Matters. To the knowledge of the South Coast Entities:
(a) Each of the South Coast Entities has conducted its business and
operated its assets, and is conducting its business and operating its
assets, in material compliance with all Environmental Laws;
(b) None of the South Coast Entities has been notified by any
Governmental Authority or other third party that any of the operations or
assets of any of the South Coast Entities is the subject of any
investigation or inquiry by any Governmental Authority or other third party
evaluating whether any remedial action is needed to respond to a release or
threatened release of any Hazardous Material or to the improper storage or
disposal (including storage or disposal at offsite locations) of any
Hazardous Material;
(c) None of the South Coast Entities and no other person has filed
any notice under any federal, state or local law indicating that (i) any of
the South Coast Entities is responsible for the improper release into the
environment, or the improper storage or disposal, of any Hazardous
Material, or (ii) any Hazardous Material is improperly stored or disposed
of upon any property of any of the South Coast Entities;
(d) None of the South Coast Entities has any contingent liability in
connection with (i) the release or threatened release into the environment
at, beneath or on any property now or previously owned or leased by any of
the South Coast Entities, (ii) the storage or disposal of any Hazardous
Material, or (iii) any other claims (including common law claims) with
respect to damage to health, safety or the environment;
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(e) None of the South Coast Entities has received any claim,
complaint, notice, inquiry or request for information involving any matter
which remains unresolved as of the date hereof with respect to any alleged
violation of any Environmental Law or regarding potential liability under
any Environmental Law or relating to any other claims (including common law
claims) with respect to damage to health, safety or the environment
relating to operations or conditions of any facilities or property
(including off-site storage or disposal of any Hazardous Material from such
facilities or property) currently or formerly owned, leased or operated by
any of the South Coast Entities;
(f) No property now or previously owned, leased or operated by any of
the South Coast Entities is listed on the National Priorities List pursuant
to CERCLA or on the CERCLIS or on any other federal or state list as sites
requiring investigation or cleanup;
(g) None of the South Coast Entities is directly transporting, has
directly transported, is directly arranging for the transportation of, or
has directly transported, any Hazardous Material to any location which is
listed on the National Priorities List pursuant to CERCLA, on the CERCLIS,
or on any similar federal or state list or which is the subject of federal,
state or local enforcement actions or other investigations that may lead to
material claims against such company for remedial work, damage to natural
resources or personal injury, including claims under CERCLA;
(h) There are no sites, locations or operations at which any of the
South Coast Entities is currently undertaking, or has completed, any
remedial or response action relating to any such disposal or release, as
required by Environmental Laws or in response to a common law claim or a
potential common law claim under Environmental Law; and
(i) All underground storage tanks and solid waste disposal facilities
owned or operated by the South Coast Entities are used and operated in
material compliance with Environmental Laws.
4.12 Books and Records. All books, records and files of the South Coast
Entities (including those pertaining to South Coast Entities' Oil and Gas
Interests, wells and other assets, those pertaining to the production,
gathering, transportation and sale of Hydrocarbons, and corporate, accounting,
financial and employee records) (i) have been prepared, assembled and maintained
in accordance with usual and customary policies and procedures and (ii) fairly
and accurately reflect the ownership, use, enjoyment and operation by the South
Coast Entities of their respective assets. True and correct copies of all such
books, records and files have been made available to Araxas and Equitable.
4.13 Gas Imbalances. To the knowledge of South Coast Entities, none of the
South Coast Entities has received any deficiency payments under gas contracts
for which any party has a right to
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take deficiency gas from any of the South Coast Entities, nor has any of the
South Coast Entities received any payments for production which are subject to
refund or recoupment out of future production. There is no Oil and Gas Interest
with respect to which a South Coast Entity and its predecessors in title to the
Oil and Gas Interest have collectively taken more (referred to herein as "over-
produced") or less (referred to herein as "under-produced") production from such
well than the ownership of such South Coast Entity and such predecessors would
entitle such South Coast Entity and such predecessors (absent any gas balancing
agreement or arrangement) to receive. There exist no gas balancing arrangements
or agreements whereby over-production from wells other than Oil and Gas
Interests can be balanced with production from the Oil and Gas Interests. None
of the Oil and Gas Interests is subject to having allowable production after the
date hereof reduced below the full and regular allowable (including the maximum
permissible tolerance) because of any over-production (whether or not the same
was permissible at the time) prior to the date hereof.
4.14 Calls on Production. No party has a call or preferential right to
purchase production from any of South Coast Entities' Oil and Gas Interests.
4.15 Title to Assets other than Oil and Gas. Except for Oil and Gas
Interests which are covered in Section 4.16 hereof, each of the South Coast
Entities has good and marketable title to, or valid leasehold interests in, all
of the properties and assets used in its business, including, but not limited
to, the computer hardware and software listed on Schedule 4.15 attached hereto,
and the exclusive right to use in its trade areas its name and any other
trademark or servicemark currently utilized by such entity. Except for any
Permitted Encumbrance, none of such properties and assets are subject to any
mortgage, pledge, lien, charge, security interest, encumbrance, restriction,
lease, license, easement, liability or adverse claim of any nature whatsoever,
direct or indirect, whether accrued, absolute, contingent or otherwise,
including, but not limited to, any seismic license arrangement that will cause a
payment to be made by Newco or any of the South Coast Entities to the licensor
as a result of the transactions contemplated hereby. All of such properties and
assets owned or leased are in good operating condition and repair (normal wear
and tear excepted).
4.16 Title to Oil and Gas Interests. The Property Schedule of the South
Coast Entities attached hereto as Schedule 4.16 contains a complete and accurate
list of each South Coast Entities' Oil and Gas Interests and sets forth the
respective Working Interests and Net Revenue Interests of each of the South
Coast Entities therein (individually or collectively).
With respect to the South Coast Entities' Oil and Gas Interests:
(a) the South Coast Entities (individually or collectively) have
Defensible Title to the South Coast Entities' Oil and Gas Interests;
(b) the Leases and related agreements forming any part of the South
Coast Entities' Oil and Gas Interests are in full force and effect and are
valid and legally binding
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 19 OF 56 PAGES
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agreements among the parties thereto, their successors and assigns,
enforceable in accordance with their terms in all material respects except
for applicable bankruptcy and insolvency laws. All rentals, royalties and
other payments due and payable under any such Leases and other contracts
and agreements forming a part of the South Coast Entities' Oil and Gas
Interests have been properly and timely paid and all other obligations
under such Leases and related agreements attendant to the ownership of the
South Coast Entities' Oil and Gas Interests have been met; and
(c) except as set forth in the Disclosure Schedule, there are no back-
in, reversionary or similar interests (the vesting of which is subject to
future production) held by third parties which would reduce the interests
of South Coast Entities in the South Coast Entities' Oil and Gas Interests
from that shown on the Property Schedule.
4.17 Oil and Gas Operations. All wells included in the Oil and Gas
Interests of the South Coast Entities have been drilled and (if completed)
completed, operated and produced in accordance with generally accepted oil and
gas field practices and in compliance in all material respects with applicable
Leases and applicable laws, rules and regulations, except where any failure or
violation could not reasonably be expected to have a Material Adverse Effect on
the South Coast Entities. Proceeds from the sale of Hydrocarbons produced from
South Coast Entities' Oil and Gas Interests are being received by the South
Coast Entities in a timely manner and are not being held in suspense for any
reason (except for amounts, individually or in the aggregate, not in excess of
$125,000 and held in suspense in the ordinary course of business). None of the
South Coast Oil and Gas Interests are subject to production curtailments, and,
to the knowledge of the South Coast Entities, no such production curtailment is
pending or threatened.
4.18 Certain Business Relationships or Transactions With Affiliates. The
Disclosure Schedule sets forth a complete and accurate list of any agreement,
contract, arrangement or understanding to which any of the South Coast Entities
is a party for the direct or indirect benefit of any of the South Coast Owners
(or, as the case may be, their family members, directors, officers or employees,
or other affiliates). None of the South Coast Owners (or, as the case may be,
their family members, directors, officers or employees, or other affiliates) (i)
has been involved in any material transaction or business arrangement or
relationship with any of the South Coast Entities in the past twelve (12) months
or (ii) owns any material asset, tangible or intangible, which is used in the
business of the South Coast Entities.
4.19 No Guaranties. None of the South Coast Entities has directly or
indirectly guaranteed the obligations or liabilities of any other person, firm
or corporation.
4.20 Employee Benefit Plan. The Disclosure Schedule contains a complete
list of all plans for the benefit of the employees of any of the South Coast
Entities. No such employee benefit plan is a "Defined Benefit Plan" as defined
in Section 3(35) of ERISA. To the knowledge of the South
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Coast Entities, each such employment benefit plan which is an "Employee Welfare
Benefit Plan" or an "Employee Pension Benefit Plan" as defined in Section 3(1)
or Section 3(2), respectively, of ERISA is and has been administered in material
compliance with all applicable requirements of ERISA and all regulations
promulgated thereunder by the Internal Revenue Service, the Department of Labor
and the Pension Benefit Guaranty Corporation.
4.21 Broker/Finders. Except as set forth on the Disclosure Schedule, no
broker, finder, investment banker or other person is or will be, in connection
with the transactions contemplated by this Agreement, entitled to any brokerage
or investment bankers fees, commissions or finders fees based on any arrangement
made by or on behalf of any of the South Coast Entities or any of the South
Coast Principals and for which any party hereto will have any liability or
obligation.
4.22 Royalties. To the knowledge of the South Coast Entities, all
royalties, overriding royalties, compensatory royalties and other payments due
from or in respect of production with respect to the South Coast Oil and Gas
Interests, have been or will be, prior to the Closing Date, properly and
correctly paid or provided for in all material respects, except for those for
which any of the South Coast Entities has a valid right to suspend.
4.23 Plugging and Abandonment Liabilities. None of the South Coast
Entities, has any obligation under contract, applicable statutes or regulations
to plug and/or dismantle any well.
4.24 Prepayments. No prepayment for Hydrocarbon sales has been received by
any of the South Coast Entities for Hydrocarbons which have not been delivered
as of the date hereof.
4.25 Hedging Activities. Except as set forth in the Disclosure Schedule,
the South Coast Entities do not participate in any hedging activities.
4.26 Disclosure. No representation or warranty of the South Coast Entities
set forth in this Agreement contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein not misleading.
ARTICLE V
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF
SOUTH COAST OWNERS
As a material part of the consideration for this Agreement, except as
disclosed in the Disclosure Schedule specifically referring to this Article V,
each of the South Coast Owners, severally and not jointly, represents and
warrants to Araxas and Newco as of the date of this Agreement and as of the
Closing Date as follows:
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5.01 Title to South Coast Ownership Interests. Such party owns
beneficially and of record all right, title and interest in and to the South
Coast Shares, INEXS Shares and the SOCO Partnership Interest indicated as owned
by such person on Exhibit "B" hereto, and shall assign, transfer and deliver
good, valid and legal title to such South Coast Shares, INEXS Shares and SOCO
Partnership Interest, to Newco pursuant to this Agreement, free and clear of
all liens, claims, encumbrances and restrictions whatsoever. Without in any way
limiting the generality of the foregoing, each of the South Coast Owners hereby
waives, releases and extinguishes any and all rights and options which each such
South Coast Owner has or may have to purchase any of the South Coast Ownership
Interests held by any other South Coast Owner, or to require any other South
Coast Owner to first offer to sell such South Coast Ownership Interest to any of
the South Coast Entities or South Coast Owners.
5.02 Authority. Such party has full right, power, capacity and authority
to enter into this Agreement and to perform the obligations of such party under
this Agreement, and has duly executed and delivered this Agreement. Assuming
the due authorization, execution and delivery by Araxas and Rowsey, and the
binding effect thereon, this Agreement constitutes, and the documents and
assignments to be delivered at Closing by each of the South Coast Owners ("South
Coast Owner Documents"), when so executed and delivered by such party will
constitute, legal, valid and binding obligations of such party enforceable
against such party in accordance with their respective terms. Neither the
execution and delivery of this Agreement and the South Coast Owner Documents nor
the consummation by each such party of the transactions contemplated herein or
therein violates or will violate, or conflicts with or will conflict with, or
constitutes a default under, any contract, commitment, lease, agreement,
understanding, arrangement or restriction of any kind to which such party is a
party or by which such party or its properties may be bound.
5.03 Securities Laws and Certain Stockholder Agreements. Such party
understands and agrees, and represents and warrants as follows:
(i) the Newco Common Stock and Newco Notes to be issued to such
party at the Closing have not been registered under the Securities Act or
any applicable state securities laws;
(ii) each is or will be at the Closing an "accredited investor" as
defined in Regulation D under the Securities Act with respect to the Newco
Common Stock and Newco Notes;
(iii) each understands that the shares of Newco Common Stock and the
Newco Notes being issued at the Closing will be characterized as
"restricted securities" under the Securities Act and may not be offered,
sold, pledged or otherwise transferred except in compliance with the
registration requirements of the Securities Act and any applicable state
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 22 OF 56 PAGES
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securities laws or pursuant to exemptions therefrom (which exemption will
be confirmed by an opinion of counsel acceptable to Newco);
(iv) an appropriate legend reflecting the restrictions on transfer
will be placed on the certificates representing the Newco Common Stock and
Newco Notes to be issued pursuant to this Agreement;
(v) such party shall, after the Closing, cause the designated
representatives of the South Coast Owners and Araxas Owners to be nominated
as directors of Newco, and further agrees to vote the shares of Newco
Common Stock acquired by such party hereunder for all such nominees, in
accordance with Section 9.10 hereof; and
(vi) such party is acquiring the Newco Common Stock and Newco Notes
for investment for such party's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof.
5.04 Tax Representations. To the knowledge of each South Coast Owner, each
of the following representations are true, correct and complete and will
continue to be true, correct and complete as of the Closing Date:
(i) the Newco Common Stock to be issued to such party at the Closing
will not be issued in satisfaction of indebtedness of Newco or interest on
indebtedness of Newco;
(ii) the transfers of the South Coast Ownership Interests to Newco
are not the result of the solicitation of a promoter, broker, or investment
house;
(iii) Newco will not assume any liabilities of such party in
connection with the transactions contemplated by this Agreement, or receive
the South Coast Ownership Interests of such party subject to any
liabilities;
(iv) there is no indebtedness between Newco and such South Coast
Owner and there will be no indebtedness created in favor of such South
Coast Owner as a result of this transaction, except with respect to the
Newco Notes and any indebtedness of Newco pursuant to the Bridge Financing;
(v) taking into account the issuance of Newco Common Stock pursuant
to this Agreement and the transactions contemplated at or in connection
with the Closing, the Araxas Owners and South Coast Owners, collectively,
will be in "control" of Newco within the meaning of Section 368(c) of the
Code on the Closing Date. For this purpose, "control" means the ownership
of stock in Newco possessing at least 80% of the total combined voting
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 23 OF 56 PAGES
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power of all classes of stock entitled to vote and at least 80% of the
total number of shares of all other classes of stock of Newco;
(vi) such South Coast Owner will receive Newco Common Stock (and,
as provided in Exhibit "B", Newco Notes) at the Closing approximately equal
to the fair market value of the South Coast Ownership Interests transferred
by such party to Newco;
(vii) such South Coast Owner will pay its or his own expenses, if
any, incurred in connection with the transactions contemplated pursuant to
this Agreement;
(viii) such South Coast Owner is not under the jurisdiction of a
court in a title 11 or similar case (within the meaning of Section
368(a)(3)(A) of the Code) and the Newco Common Stock to be received in the
transaction will not be used to satisfy any indebtedness of such party;
(ix) no Newco Common Stock issued to such South Coast Owner
pursuant to this Agreement will be issued for services rendered, or to be
rendered, to or for the benefit of Newco; and
(x) such South Coast Owner has no plan or intention to sell,
exchange, or otherwise dispose of any of the Newco Common Stock to be
received by such party pursuant hereto.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ARAXAS
As a material part of the consideration for this Agreement, except as
disclosed in the Disclosure Schedule specifically referring to this Article VI,
Araxas represents and warrants to Newco and the South Coast Owners as of the
date of this Agreement and as of the Closing Date as follows:
6.01 Organization, Standing and Qualification. Each of the Araxas
Companies is a corporation duly organized, validly existing and in good standing
under the laws of the State of Oklahoma. Each of the Araxas Companies has all
requisite corporate power and authority to carry on its business as now being
conducted and to own, lease or operate its properties as and in the places where
such business is now conducted and such properties are now owned, leased or
operated. Each of the Araxas Companies is qualified and in good standing to do
business in all states in which the nature of its business requires it to be
qualified.
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6.02 Execution, Delivery and Performance of Agreement; Authority.
Araxas has full corporate power and authority to enter into this Agreement,
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by Araxas will not, with or without the giving of notice or the passage of time,
or both, conflict with, result in a default, right to accelerate or loss of
rights under, or result in the creation of any lien, charge or encumbrance
pursuant to, any provision of Araxas' certificate of incorporation or bylaws or
any franchise, mortgage, deed of trust, lease, license, agreement,
understanding, or to the knowledge of Araxas, any law, ordinance, rule or
regulation or any order, judgment or decree to which any of the Araxas Companies
is a party or by which it may be bound or affected. The execution and delivery
by Araxas of this Agreement and the documents to be delivered by Araxas on or
before Closing pursuant to this Agreement ("Araxas Closing Documents") have
been, or will at Closing be, duly and validly authorized by all necessary
corporate actions of Araxas. Assuming the due authorization, execution and
delivery by each of the South Coast Owners and South Coast Entities, and the
binding effect thereon, this Agreement constitutes, and the Araxas Closing
Documents when executed and delivered by Araxas will constitute, legal, valid
and binding obligations of Araxas enforceable against it in accordance with
their respective terms.
6.03 Other Entities. Except for the Araxas Companies that are
Subsidiaries, Araxas has no interest, direct or indirect, and has no commitment
to purchase any interest, direct or indirect, in any other corporation or in any
partnership or other business enterprise or entity.
6.04 Capitalization. The authorized capital stock of Araxas consists of
(i) 4,900,000 shares of common stock, par value $0.01 per share, of which
120,084.65 shares are issued and outstanding as of the date hereof, and (ii)
100,000 shares of preferred stock, par value $0.01 per share, none of which are
outstanding. The shares of Araxas Common Stock are owned of record and
beneficially by the persons and in the amounts set forth in Exhibit "E" hereto.
Except as set forth in Exhibit "E" or in the Disclosure Schedule, there are no
outstanding subscriptions, options, warrants, calls, contracts, demands,
commitments, convertible securities or other agreements or arrangements of any
character or nature whatsoever under which Araxas may become obligated to issue,
assign, transfer or repurchase any shares of the capital stock or other equity
interest of Araxas. All of the Araxas Common Stock outstanding has been
validly issued and is fully paid and nonassessable. Araxas owns record and
beneficial title to all of the outstanding capital stock of each of Araxas
Exploration, Inc. and Araxas SPV-I, Inc. (the "Araxas Subs"), free and clear of
all liens, claims and encumbrances, except liens securing funded debt of the
Araxas Companies disclosed pursuant hereto. There are no outstanding
subscriptions, options, warrants, calls, contracts, demands, commitments,
convertible securities or other agreements or arrangements of any character or
nature whatsoever under which any of the Araxas Subs may become obligated to
issue, assign, transfer or repurchase any shares of their respective capital
stock or other equity interests in any of them. All of the outstanding shares
of capital stock of the Araxas Subs have been validly issued and are fully paid
and nonassessable
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6.05 Financial Statements. Araxas has furnished or made available to
Newco (i) its audited consolidated financial statements for each of the fiscal
years in the three-year period ended December 31, 1996, including balance sheets
as of the end of 1995 and 1996 and statements of income, cash flows and
shareholders' equity for each of the three years then ended (collectively, the
"Araxas Audited Financial Statements") and (ii) its unaudited balance sheet as
of March 31, 1997 (the "Araxas Unaudited Interim Balance Sheet") and unaudited
statements of income, cash flows and shareholders' equity for the three month
period ended March 31, 1997 (collectively the "Araxas Unaudited Interim
Financial Statements.") (The Araxas Audited Financial Statements and the Araxas
Unaudited Interim Financial Statements are sometimes collectively referred to
herein as the "Araxas Financial Statements"). The Araxas Financial Statements
which are incorporated into this Agreement for all purposes are complete and
correct in all material respects, have been prepared in accordance with GAAP
consistently applied and present fairly the consolidated financial condition of
the Araxas Companies as at the dates thereof and the consolidated results of
their operations and cash flows for the periods covered thereby; provided,
however, that the Araxas Unaudited Interim Financial Statements are subject to
normal year-end adjustments (which will not be material individually or in the
aggregate) and lack footnotes.
6.06 Absence of Undisclosed Liabilities. None of the Araxas Companies has
any material liability (whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due, including
liability for Taxes), except for (i) liabilities set forth on the face of the
Araxas Financial Statements, (ii) liabilities which have arisen after the date
of the Araxas Unaudited Interim Balance Sheet in the ordinary course of business
and consistent with past experience and practice, and (iii) liabilities under
this Agreement.
6.07 Absence of Events. Since March 31, 1997, none of the Araxas Companies
has done any of the following:
(a) mortgaged, pledged or subjected to lien, charge, security interest
or any other encumbrance or restriction any of its properties or assets,
other than Permitted Encumbrances;
(b) sold, leased, transferred or otherwise disposed of (i) any Araxas
Companies' Oil and Gas Interests that, individually or in the aggregate,
were assigned a value in the Reserve Data of $250,000 or more; or (ii) any
other assets other than in the ordinary course of business and consistent
with prior practice;
(c) other than in the ordinary course of business and consistent with
prior practice, made any change in the rate of compensation, commission,
bonus or other direct or indirect remuneration payable, or paid or agreed
or orally promised to pay, conditionally
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or otherwise, any bonus, extra compensation, reimbursement, pension or
severance or vacation pay, to any shareholder, partner, director, officer,
employee or agent;
(d) issued or sold any shares of capital stock or partnership interest
or other securities, or issued, granted or sold any options, rights or
warrants with respect thereto;
(e) paid or declared any dividends or distributions, purchased,
redeemed, acquired or retired any indebtedness, equity interest or other
securities from its equity owners or other security holders, made any loans
or advances or guaranteed any loans or advances to any person, or otherwise
incurred or suffered to exist any liabilities (other than current
liabilities incurred in the ordinary course of business and consistent with
past practices);
(f) canceled, waived or released any rights or claims against, or
indebtedness owed by, third parties;
(g) amended its certificate or articles of incorporation, certificate
of limited partnership, by-laws, or similar documents;
(h) entered into any transaction, contract or commitment other than in
the ordinary course of business and consistent with prior practice;
(i) received any notice of default or termination of any Material
Araxas Contract or suffered any damage, destruction, loss (whether or not
covered by insurance) or any other change, event or condition which in any
case or in the aggregate, has had or may have a Material Adverse Effect on
the Araxas Companies;
(j) instituted, settled or agreed to settle any litigation, action or
proceeding before any court or governmental body;
(k) except as set forth in the Disclosure Schedule, entered into any
swap, hedging or similar arrangements, forward sale of production or
production sales contract that is either (A) not cancelable on thirty (30)
days notice or (B) not tied to an index price, and which remains open on
the date hereof; or
(l) entered into any agreement or made any commitment to take any of
the types of actions described in paragraphs (a) through (k) above.
6.08 Compliance with Laws, Material Agreements and Permits. None of the
Araxas Companies is in violation of, or in default in any material respect
under, and no event has occurred that (with notice or the lapse of time or both)
would constitute a violation of or default under, (i) its articles of
incorporation, certificate of limited partnership, by-laws or partnership
agreement, (ii) any
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applicable law, rule, regulation, order, writ, decree or judgment of any
Governmental Authority, or (iii) any agreement to which any of the Araxas
Companies is a party or to which any of their respective assets is subject or
bound, except (in the case of clause (ii) and (iii) above) for any violation or
default that would not, individually or in the aggregate, have a Material
Adverse Effect on the Araxas Companies. Each of the Araxas Companies has
obtained and holds all permits, licenses, variances, exemptions, orders,
franchises, approvals and authorizations of all Governmental Authorities
necessary for the lawful conduct of its business or the lawful ownership, use
and operation of its assets ("Araxas Companies Permits"), except for Araxas
Companies Permits which the failure to obtain or hold would not, individually or
in the aggregate, have a Material Adverse Effect on the Araxas Companies. Each
of the Araxas Companies is in compliance with the terms of its Araxas Companies
Permits, except where the failure to comply would not, individually or in the
aggregate, have a Material Adverse Effect on the Araxas Companies. No
investigation or review by any Governmental Authority with respect to any of the
Araxas Companies is pending or, to the knowledge of Araxas, threatened, other
than those the outcome of which would not, individually or in the aggregate,
have a Material Adverse Effect on the Araxas Companies.
6.09 Environmental Matters. To the knowledge of Araxas:
(a) Each of the Araxas Companies has conducted its business and
operated its assets, and is conducting its business and operating its
assets, in material compliance with all Environmental Laws;
(b) None of the Araxas Companies has been notified by any Governmental
Authority or other third party that any of the operations or assets of any
of the Araxas Companies is the subject of any investigation or inquiry by
any Governmental Authority or other third party evaluating whether any
remedial action is needed to respond to a release or threatened release of
any Hazardous Material or to the improper storage or disposal (including
storage or disposal at offsite locations) of any Hazardous Material;
(c) None of the Araxas Companies and no other person has filed any
notice under any federal, state or local law indicating that (i) any of the
Araxas Companies is responsible for the improper release into the
environment, or the improper storage or disposal, of any Hazardous
Material, or (ii) any Hazardous Material is improperly stored or disposed
of upon any property of any of the Araxas Companies;
(d) None of the Araxas Companies has any contingent liability in
connection with (i) the release or threatened release into the environment
at, beneath or on any property now or previously owned or leased by any of
the Araxas Companies, (ii) the storage or disposal of any Hazardous
Material, or (iii) any other claims (including common law claims) with
respect to damage to health, safety or the environment;
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(e) None of the Araxas Companies has received any claim, complaint,
notice, inquiry or request for information involving any matter which
remains unresolved as of the date hereof with respect to any alleged
violation of any Environmental Law or regarding potential liability under
any Environmental Law or relating to any other claims (including common law
claims) with respect to damages to health, safety or the environment
relating to operations or conditions of any facilities or property
(including off-site storage or disposal of any Hazardous Material from such
facilities or property) currently or formerly owned, leased or operated by
any of the Araxas Companies;
(f) No property now or previously owned, leased or operated by any of
the Araxas Companies is listed on the National Priorities List pursuant to
CERCLA or on the CERCLIS or on any other federal or state list as sites
requiring investigation or cleanup;
(g) None of the Araxas Companies is directly transporting, has
directly transported, is directly arranging for the transportation of, or
has directly transported, any Hazardous Material to any location which is
listed on the National Priorities List pursuant to CERCLA, on the CERCLIS,
or on any similar federal or state list or which is the subject of federal,
state or local enforcement actions or other investigations that may lead to
material claims against such company for remedial work, damage to natural
resources or personal injury, including claims under CERCLA;
(h) There are no sites, locations or operations at which any of the
Araxas Companies is currently undertaking, or has completed, any remedial
or response action relating to any such disposal or release, as required by
Environmental Laws or in response to a common law claim or a potential
common law claim under Environmental Law; and
(i) All underground storage tanks and solid waste disposal facilities
owned or operated by the Araxas Companies are used and operated in material
compliance with Environmental Laws.
6.10 Title to Non Oil and Gas Properties. Except for Oil and Gas Interests
which are covered in Section 6.11 hereof, the Araxas Companies have good and
marketable title to, or valid leasehold interests in, all of the properties and
assets used in the business of such entities, including but not limited to,
computer hardware and software individually valued at more than $25,000 which
are identified on Schedule 6.10 hereto. Except for any Permitted Encumbrance,
none of such properties and assets are subject to any mortgage, pledge, lien,
charge, security interest, encumbrance, restriction, lease, license, easement,
liability or adverse claim of any nature whatsoever, direct or indirect, whether
accrued, absolute, contingent or otherwise, including, but not limited to, any
seismic license arrangement that will cause a payment to be made by Newco or any
of the Araxas Companies to the licensor as a result of the transactions
contemplated hereby. All of
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such properties and assets owned or leased by the Araxas Companies are in good
operating condition and repair (normal wear and tear excepted).
6.11 Title to Oil and Gas Properties. The Property Schedule of Araxas
attached hereto as Schedule 6.11, contains a complete and accurate list of each
of the Araxas Companies' Oil and Gas Interests, and sets forth the respective
Working Interests and Net Revenue Interests of the Araxas Companies therein
(individually or collectively).
With respect to the Araxas Companies' Oil and Gas Interests:
(a) the Araxas Companies (individually or collectively) have
Defensible Title to the Araxas Companies' Oil and Gas Interests;
(b) the Leases and related agreements forming any part of the Araxas
Companies' Oil and Gas Interests are in full force and effect and are valid
and legally binding agreements among the parties thereto, their successors
and assigns, enforceable in accordance with their terms in all material
respects except for applicable bankruptcy and insolvency laws. All
rentals, royalties and other payments due and payable under any such Leases
and other contracts and agreements forming a part of the Araxas Companies'
Oil and Gas Interests have been properly and timely paid and all other
obligations under such Leases and related agreements attendant to the
ownership of the Araxas Companies' Oil and Gas Interests have been met; and
(c) there are no back-in, reversionary or similar interests (the
vesting of which is subject to future production) held by third parties
which would reduce the interests of the Araxas Companies in the Araxas
Companies' Oil and Gas Interests from that shown on the Property Schedule.
6.12 Broker/Finders. No broker, finder, investment banker or other person
is or will be, in connection with the transactions contemplated by this
Agreement, entitled to any brokerage or investment bankers fees, commissions or
finders fees based on any arrangement made by or on behalf of any of the Araxas
Companies and for which any party hereto will have any liability or obligation.
6.13 Royalties. To the knowledge of Araxas as to wells not operated by the
Araxas Companies, and without qualification as to knowledge as to all wells
operated by the Araxas Companies, all royalties, overriding royalties,
compensatory royalties and other payments due from or in respect of production
with respect to the Araxas Companies' Oil and Gas Interests, have been or will
be, prior to the Closing Date, properly and correctly paid or provided for in
all material respects, except for those for which any of the Araxas Companies
has a valid right to suspend.
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6.14 Litigation. There is no legal, administrative, arbitration or
other proceeding (other than routine oil and gas field regulatory orders), or
governmental investigation, nor any order, decree or judgment in progress, in
effect, pending or, to the best knowledge of Araxas, threatened against any of
the Araxas Companies except where such legal, administrative, arbitration or
other legal proceeding or governmental investigation which, individually or in
the aggregate would not have a Material Adverse Effect.
6.15 Taxes. Each of the Araxas Companies has filed all Tax Returns
required to be filed or has filed extensions with respect to such Tax Returns.
All such filed Tax Returns were correct and complete in all respects. All Taxes
owed by the Araxas Companies (whether or not shown on any Tax Return) have been
paid. No claim has ever been made by an authority with respect to any of the
Araxas Companies in a jurisdiction where no Tax Return is filed that any of the
Araxas Companies is or may be subject to taxation by that jurisdiction. Each of
the Araxas Companies has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, shareholder, or other third party. To the
best knowledge of Araxas, there is no dispute or claim concerning any liability
for Taxes of any of the Araxas Companies claimed or raised by any taxing
authority which is not resolved. Except with respect to the affiliated group
which the Araxas Companies comprise, none of the Araxas Companies is a party to
any income tax allocation or sharing agreement, or has at any time been a member
of any other affiliated group filing a consolidated Federal income tax return.
6.16 Books and Records. All books, records and files of the Araxas
Companies (including those pertaining to the Araxas Companies' Oil and Gas
Interests, wells and other assets, those pertaining to the production,
gathering, transportation and sale of Hydrocarbons, and corporate, accounting,
financial and employee records) (i) have been prepared, assembled and maintained
in accordance with usual and customary policies and procedures and (ii) fairly
and accurately reflect the ownership, use, enjoyment and operation by the Araxas
Companies of their respective assets. True and correct copies of all such
books, records and files have been made available to the South Coast Entities
and Equitable.
6.17 Gas Imbalances. To the knowledge of Araxas and except as identified
on the Disclosure Schedule, none of the Araxas Companies has received any
deficiency payments under gas contracts for which any party has a right to take
deficiency gas from any of the Araxas Companies, nor has any of the Araxas
Companies received any payments for production which are subject to refund or
recoupment out of future production. There is no Oil and Gas Interest with
respect to which any of the Araxas Companies and their predecessors in title to
the Araxas Oil and Gas Interests have collectively taken more (referred to
herein as "over-produced") or less (referred to herein as "under-produced")
production from such well than the ownership would entitle the Araxas Companies
and such predecessors to receive (absent any gas balancing agreement or
arrangement). There exist no gas balancing arrangements or agreements whereby
over-production from wells other than Araxas Oil and Gas Interests can be
balanced with production from the Oil and
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Gas Interests. None of the Araxas Oil and Gas Interests is subject to having
allowable production after the date hereof reduced below the full and regular
allowable (including the maximum permissible tolerance) because of any over-
production (whether or not the same was permissible at the time) prior to the
date hereof.
6.18 Hedging Activities. Except as set forth in the Disclosure Schedule,
the Araxas Companies do not participate in any hedging activities.
6.19 Certain Business Relationships or Transactions With Affiliates. The
Disclosure Schedule sets forth a complete and accurate list of any agreement,
contract, arrangement or understanding to which any of the Araxas Companies is a
party for the direct or indirect benefit of any of the Araxas Owners (or, as the
case may be, their family members, directors, officers or employees, or other
affiliates). None of the Araxas Owners (or, as the case may be, their family
members, directors, officers or employees, or other affiliates) (i) has been
involved in any material transaction or business arrangement or relationship
with any of the Araxas Companies in the past twelve (12) months or (ii) owns any
material asset, tangible or intangible, which is used in the business of the
Araxas Companies.
6.20 No Guaranties. None of the Araxas Companies has directly or
indirectly guaranteed the obligations of or liabilities of any other person,
firm or corporation.
6.21 Employee Benefit Plans. The Disclosure Schedule contains a complete
list of all plans for the benefit of the employees of any of the Araxas
Companies. No such employee benefit plan is a "Defined Benefit Plan" as defined
in Section 3(35) of ERISA. To the knowledge of Araxas, each such employment
benefit plan which is an "Employee Welfare Benefit Plan" or an "Employee Pension
Benefit Plan" as defined in Section 3(1) or Section 3(2), respectively, of ERISA
is and has been administered in material compliance with all applicable
requirements of ERISA and all regulations promulgated thereunder by the Internal
Revenue Service, the Department of Labor and the Pension Benefit Guaranty
Corporation.
6.22 Plugging and Abandonment Liabilities. Except as reflected in the
Araxas Audited Financial Statements or in the Disclosure Schedule, none of the
Araxas Companies has any obligation under applicable contract, statute or
regulation to plug and dismantle any well.
6.23 Prepayments. No prepayment for Hydrocarbon sales has been received by
any of the Araxas Companies for Hydrocarbons which have not been delivered as of
the date hereof.
6.24 Calls on Production. Except as set forth in the Disclosure Schedule,
no party has a call or a preferential right to purchase production from any of
the Araxas Companies' Oil and Gas Interests.
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6.25 Oil and Gas Operations. All wells included in the Oil and Gas
Interests of the Araxas Companies have been drilled and (if completed)
completed, operated and produced in accordance with generally accepted oil and
gas field practices and in compliance in all material respects with applicable
Leases and applicable laws, rules and regulations, except where any failure or
violation could not reasonably be expected to have a Material Adverse Effect on
the Araxas Companies. Proceeds from the sale of Hydrocarbons produced from
Araxas Companies' Oil and Gas Interests are being received by the Araxas
Companies in a timely manner and are not being held in suspense for any reason
(except for amounts, individually or in the aggregate, not in excess of $250,000
and held in suspense in the ordinary course of business). None of the Araxas
Oil and Gas Interests are subject to production curtailments, and, to the
knowledge of the Araxas Companies, no such production curtailment is pending on
threatened.
6.26 Disclosure. No representation or warranty of Araxas set forth in this
Agreement contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein not
misleading.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF NEWCO
As a material part of the consideration for this Agreement, except as
disclosed in the Disclosure Schedule, Newco represents and warrants to the South
Coast Owners and Araxas as of the date of this Agreement and as of the Closing
Date as follows:
7.01 Organization, Standing and Qualification. Newco is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Newco has all requisite corporate power and authority to carry on its
business as now being conducted and to own, lease or operate its properties, if
any, as and in the places where such business is now conducted and such
properties, if any, are now owned, leased or operated. Newco is qualified and
in good standing to do business in all states in which the nature of its
business requires it to be qualified.
7.02 Execution, Delivery and Performance of Agreement; Authority. The
execution, delivery and performance of this Agreement by Newco will not, with or
without the giving of notice or the passage of time, or both, conflict with,
result in a default, right to accelerate or loss of rights under, or result in
the creation of any lien, charge or encumbrance pursuant to, any provision of
Newco's certificate of incorporation or bylaws or any franchise, mortgage, deed
of trust, lease, license, agreement, understanding, or to the knowledge of
Newco, any law, ordinance, rule or regulation or any order, judgment or decree
to which Newco is a party or by which it may be bound or affected. Newco has
full corporate power and authority to enter into this Agreement and to perform
its obligations under this Agreement, and all corporate or other proceedings
required to be
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taken by Newco to authorize the execution, delivery and performance of this
Agreement and the agreements and documents to be delivered by Newco on or before
the Closing pursuant to this Agreement ("Newco Closing Documents"), have been,
or will at Closing be, duly and validly authorized by all necessary corporate
action of Newco. Assuming the due authorization, execution and delivery by each
of the other parties hereto, and the binding effect thereon, this Agreement
constitutes, and the Newco Closing Documents when executed and delivered by
Newco will constitute, legal, valid and binding obligations of Newco enforceable
against Newco in accordance with their respective terms.
7.03 Interim Operations of Newco. Newco was formed solely for the purpose
of engaging in the transactions contemplated by this Agreement and has not
engaged in any business or activity (or conducted any operations) of any kind,
entered into any agreement or arrangement with any person or entity, or
incurred, directly or indirectly, any material liabilities or obligations,
except in connection with its incorporation, the negotiation of this Agreement,
and the transactions contemplated hereby, and except for the financing
transactions contemplated in Section 9.08 hereof (the "Financing Transactions").
After the Closing Date, Newco intends to operate, directly or indirectly, the
trades or businesses conducted by the Araxas Companies and the South Coast
Entities, and has no intention to sell any of the assets of any of such entities
except as contemplated in the ordinary course of business.
7.04 Other Entities. Newco has no wholly-or partially-owned Subsidiaries.
Newco has no interest, direct or indirect, and, except as contemplated by this
Agreement, has no commitment to purchase any interest, direct or indirect, in
any other corporation or in any partnership or other business enterprise or
entity.
7.05 Capitalization. The authorized capital stock of Newco consists of (i)
10,000,000 shares of common stock, par value $0.001 per share, of which one (1)
share is issued and outstanding as of the date hereof, and owned of record and
beneficially by Rowsey, and (ii) 100,000 shares of preferred stock, par value
$0.001 per share, none of which is outstanding. Except as provided by this
Agreement and the Financing Transactions, there are no outstanding
subscriptions, options, warrants, calls, contracts, demands, commitments,
convertible securities or other agreements or arrangements of any character or
nature whatsoever under which Newco may become obligated to issue, assign or
transfer any shares of the capital stock. The outstanding share of Newco
Common Stock has been validly issued and is fully paid and nonassessable.
7.06 Litigation. There is no legal, administrative, arbitration or other
proceeding or governmental investigation nor any order, decree or judgment in
progress, pending or, to the best knowledge of Newco, threatened against Newco.
7.07 No Guaranties. Except pursuant to the Financing Transactions, Newco
has not directly or indirectly guaranteed the obligations or liabilities of any
other person, firm or corporation.
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7.08 Broker/Finders. No broker, investment banker or finder is or will
be, in connection with the transactions contemplated by this Agreement, entitled
to any brokerage or investment bankers fees, commissions or finders fees based
on any arrangement or agreement made by or on behalf of Newco and for which any
party hereto will have any liability or obligation.
7.09 Newco Common Stock. The Newco Common Stock issued at the Closing
pursuant to Sections 2.04 and 3.06(b) hereof is issued in exchange for property
and not services rendered, or to be rendered, to or for the benefit of Newco.
There is no plan or intention for Newco to redeem, directly or indirectly, any
of the shares of Newco Common Stock issued pursuant to this Agreement.
7.10 Tax Representations. To the knowledge of Newco, each of the following
representations are true, correct and complete and will continue to be true,
correct and complete as of the Closing Date:
(i) no Newco Common Stock issued pursuant to this Agreement will be
issued in satisfaction of indebtedness of Newco or of interest on
indebtedness of Newco;
(ii) the transfers of the Araxas Common Stock and the South Coast
Ownership Interests to Newco are not the result of the solicitation of a
promoter, broker, or investment house;
(iii) there is no indebtedness between Newco and any Araxas Owner or
South Coast Owner, and there will be no indebtedness of Newco created in
favor of any Araxas Owner or South Coast Owner as a result of this
transaction, except with respect to the Newco Notes and in connection with
the Bridge Financing;
(iv) taking into account the issuance of Newco Common Stock pursuant
to this Agreement and the transactions contemplated at or in connection
with the Closing, the Araxas Owners and South Coast Owners, collectively,
will be in "control" of Newco within the meaning of Section 368(c) of the
Code on the Closing Date. For this purpose, "control" means the ownership
of stock in Newco possessing at least 80% of the total combined voting
power of all classes of stock entitled to vote and at least 80% of the
total number of shares of all other classes of stock of Newco;
(v) the Araxas Owners and the South Coast Owners each as a group
will receive, at the Closing, Newco Common Stock (and, as provided in
Exhibit "B", Newco Notes) approximately equal to the fair market value of
the assets transferred to Newco;
(vi) each of the parties to the transactions contemplated pursuant to
this Agreement will pay its or his own expenses, if any, incurred in
connection with such transaction; and
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(vii) no Araxas Owner has any plan or intention to sell, exchange or
otherwise dispose of any of the Newco Common Stock to be received pursuant
to this Agreement.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF ROWSEY
As a material part of the consideration for this Agreement, except as
disclosed in the Disclosure Schedule specifically referring to this Article
VIII, Rowsey represents and warrants to Newco and the South Coast Owners as of
the date of this Agreement and as of the Closing Date as follows:
8.01 Title to Araxas Common Stock. Rowsey owns beneficially and of record
all right, title and interest in and to 75,000 shares of Araxas Common Stock.
In his capacity as a shareholder of Araxas, Rowsey will vote in favor of the
Araxas Acquisition, and, at the Effective Time, will deliver certificates
representing such shares of Araxas Common Stock to Newco pursuant to Section
3.07 hereof. Rowsey has, and will deliver to Newco, good, valid and legal title
to all such shares of Araxas Common Stock owned by him, free and clear of all
liens, claims, encumbrances and restrictions whatsoever.
8.02 Authority. Rowsey has full right, power, capacity and authority to
enter into this Agreement and to perform his obligations under this Agreement,
and has duly executed and delivered this Agreement. Assuming the due
authorization, execution and delivery by each of the other parties hereto, and
the binding effect thereon, this Agreement constitutes, and the documents to be
delivered at Closing by Rowsey ("Rowsey Closing Documents"), when executed and
delivered by Rowsey will constitute, legal, valid and binding obligations of
Rowsey enforceable against Rowsey in accordance with their respective terms.
Neither the execution and delivery of this Agreement and the Rowsey Closing
Documents nor the consummation by Rowsey of the transactions contemplated herein
or therein violates or will violate, or conflicts with or will conflict with, or
constitutes a default under, any contract, commitment, lease, agreement,
understanding, arrangement or restriction of any kind to which Rowsey is a party
or by which Rowsey or his properties may be bound.
8.03 Securities Laws and Certain Shareholder Covenants. Rowsey
understands, agrees and represents and warrants as follows:
(i) the Newco Common Stock to be issued to such party at the Closing
has not been registered under the Securities Act or any applicable state
securities laws;
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(ii) he is or will be at the Closing an "accredited investor" as
defined in Regulation D under the Securities Act with respect to the Newco
Common Stock;
(iii) he understands that the shares of Newco Common Stock being
issued to Rowsey at the Closing will be characterized as "restricted
securities" under the Securities Act and may not be offered, sold, pledged
or otherwise transferred except in compliance with the registration
requirements of the Securities Act and any applicable state securities laws
or pursuant to exemptions therefrom (which exemption will be confirmed by
an opinion of counsel acceptable to Newco);
(iv) an appropriate legend reflecting the restrictions on transfer
will be placed on the certificates representing the Newco Common Stock to
be issued to Rowsey pursuant to this Agreement;
(v) such party shall, after the Closing, cause the designated
representatives of the South Coast Owners and Araxas Owners to be nominated
as directors of Newco, and further agrees to vote the shares of Newco
Common Stock owned by Rowsey for all such nominees, in accordance with
Section 9.10 hereof; and
(vi) such party is acquiring the Newco Common Stock for investment
for such party's own account, not as agent or nominee, and not with a view
to the resale or distribution of any part thereof.
8.04 Tax Representations. To the knowledge of Rowsey, each of the
following representations are true, correct and complete and will continue to be
true, correct and complete as of the Closing Date:
(i) the Newco Common Stock to be issued to such party at the Closing
will not be issued in satisfaction of indebtedness of Newco or interest on
indebtedness of Newco;
(ii) such party's transfer of the Araxas Common Stock to Newco is not
the result of the solicitation of a promoter, broker, or investment house;
(iii) Newco will not assume any liabilities of such party in
connection with the transactions contemplated by this Agreement, or receive
the Araxas Common Stock of such party subject to any liabilities;
(iv) there is no indebtedness between Newco and Rowsey and there
will be no indebtedness created in favor of Rowsey as a result of this
transaction;
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(v) taking into account the issuance of Newco Common Stock
pursuant to this Agreement and the transactions contemplated at or in
connection with the Closing, the Araxas Owners and South Coast Owners,
collectively, will be in "control" of Newco within the meaning of Section
368(c) of the Code on the Closing Date. For this purpose, "control" means
the ownership of stock in Newco possessing at least 80% of the total
combined voting power of all classes of stock entitled to vote and at least
80% of the total number of shares of all other classes of stock of Newco;
(vi) Rowsey will receive Newco Common Stock approximately equal to
the fair market value of the Araxas Common Stock which he transfers to
Newco;
(vii) Rowsey has incurred no expenses in connection with the
transactions contemplated pursuant to this Agreement;
(viii) Rowsey is not under the jurisdiction of a court in a title 11
or similar case (within the meaning of Section 368(a)(3)(A) of the Code)
and the Newco Common Stock to be received by Rowsey in the transaction will
not be used to satisfy any indebtedness of Rowsey;
(ix) no Newco Common Stock issued to Rowsey pursuant to this
Agreement will be issued for services rendered, or to be rendered, to or
for the benefit of Newco; and
(x) Rowsey has no plan or intention to sell, exchange or otherwise
dispose of any of the Newco Common Stock to be received by such party
pursuant hereto.
ARTICLE IX
COVENANTS
9.01 Access to Records and Properties. Except to the extent limited by
agreement with third parties, between the date of this Agreement and the Closing
Date, Newco, Araxas and the South Coast Entities shall give each other full
access to all their respective premises, properties and books and records and
will cause their respective employees, agents and representatives to furnish the
other with financial and operating data and other information with respect to
each such other party as the other from time to time reasonably requests;
provided, however, that any such investigation shall be conducted in such a
manner as not to interfere unreasonably with the operation of their respective
businesses. Any such furnishing of such information to the parties or any
investigation by the parties, shall not affect each party's right to rely on any
representations and warranties made in this Agreement. Except as required by
law, all information furnished pursuant hereto shall not be disclosed and shall
be kept confidential from all third parties without the consent of the party who
furnished such information. In the event of any termination of this Agreement,
each
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party will return all documents, work papers and other materials (including all
copies thereof) obtained pursuant hereto and in connection with the transactions
contemplated hereby, and for a period of one (1) year after such termination (i)
will use all reasonable efforts to keep confidential any information obtained
pursuant to this Agreement, except to the extent required by law or unless such
information is readily ascertainable from public or published information or
trade sources, and (ii) will not use any of the information obtained in
connection with the transactions contemplated by this Agreement, except in
connection with such transactions.
9.02 Operation of the Business.
(a) South Coast Entities. From the date hereof to the Closing Date,
except to the extent that Araxas shall otherwise consent, the South Coast
Entities shall operate their respective businesses substantially as
presently operated and only in the ordinary course, and, consistent with
such operation, shall use their best efforts to preserve intact their
respective present business organizations and relationships with persons
having dealings with them. In addition, the South Coast Entities shall
promptly notify Araxas of (i) the receipt by any of the South Coast
Entities of any notice or claim, written or oral, of default or breach by
any of the South Coast Entities, or of any modification, termination or
cancellation, or threat of termination or cancellation, of any South Coast
Material Agreement; (ii) any loss of, damage to, or disposition of any of
the South Coast Entities' Oil and Gas Interests having a value of at least
$125,000 attributable to it in the Reserve Data; and (iii) after receipt of
notice thereof by any of the South Coast Entities, give notice to Araxas of
any claim or litigation, threatened or instituted, against any of the South
Coast Entities, or of any other event or circumstance that has or may have
a Material Adverse Effect on the South Coast Entities. Without the consent
of Araxas, the South Coast Entities (individually or in the aggregate)
shall be prohibited from (iv) entering into any single contract,
commitment, indebtedness or liability in excess of $125,000; (v) making any
change in the outstanding equity interests of any such entities, granting
any options, rights, calls or any other similar commitment or agreement
with respect to the equity interest of such entities, from declaring any
dividend or other distribution in respect of the equity interest of such
entities or from repurchasing any outstanding equity interest; and (vi)
increasing the compensation payable or to become payable by any such
entities to any of its officers, directors, employees or other agents,
other than in the ordinary course of business.
(b) Araxas Companies. From the date hereof to the Closing Date,
except to the extent the South Coast Entities shall otherwise consent,
Araxas shall operate the business of the Araxas Companies substantially as
presently operated and only in the ordinary course and, consistent with
such operation, shall use its best efforts to preserve intact its business
organization and relationships. In addition, Araxas shall promptly notify
the South Coast Entities of (i) the receipt by any of the Araxas Companies
of any notice or claim, written or oral, of default or breach by any of the
Araxas Companies, or of any modification,
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termination or cancellation, or threat of termination or cancellation, of
any Araxas Material Agreement; (ii) any loss of, damage to, or disposition
of any of the Araxas Companies' Oil and Gas Interests having a value of at
least $250,000 attributable to it in the Reserve Data; and (iii) after
receipt of notice thereof by any of the Araxas Companies, give notice to
the South Coast Principals of any claim or litigation, threatened or
instituted, against any of the Araxas Companies, or of any other event or
circumstance that has or may have a Material Adverse Effect on the Araxas
Companies. Without the consent of the South Coast Entities, Araxas shall
prohibit any of the Araxas Companies (individually or in the aggregate)
from (iv) entering into any single contract, commitment, indebtedness or
liability in excess of $250,000; (v) making any change in the outstanding
equity interests of any such entities, granting any options, rights, calls
or any other similar commitment or agreement with respect to the equity
interest of such entities, from declaring any dividend or other
distribution in respect of the equity interest of such entities or from
repurchasing any outstanding equity interests; and (vi) increasing the
compensation payable or to become payable by any such entities to any of
its officers, directors, employees or other agents, other than in the
ordinary course of business.
9.03 Consents. The parties shall each use their best efforts to obtain the
consent or approval of each person or Governmental Authority whose consent or
approval shall be required in order to permit consummation of the transactions
contemplated by this Agreement.
9.04 Announcements. All pre-Closing and post-Closing press releases, and
other public announcements with respect to this Agreement and the transactions
contemplated by this Agreement shall be approved by Newco prior to the issuance
thereof; provided, however, (i) any pre-Closing press release of Newco also
shall be approved prior to the issuance thereof by Krenzke, and (ii) in the case
of any press release by Equitable, such approval shall not be required for (but
Newco shall be consulted in advance of) any press release or announcement
required or advisable under applicable law or obligations pursuant to any
listing agreement with a national securities exchange.
9.05 Exclusivity. Prior to the Closing Date, the South Coast Owners, South
Coast Entities, the Araxas Companies and Rowsey shall refrain from, directly or
indirectly, through any officer, director, agent or otherwise, soliciting,
initiating or encouraging submission of proposals or offers from any person
relating to any acquisition or purchase of all or substantially all of the
assets of, or any equity interest in, any of the South Coast Entities or Araxas
Companies, or any merger, consolidation or business combination or similar
transaction with any of the South Coast Entities or Araxas Companies, or
participating in any discussions or negotiations regarding, furnishing to any
other person any confidential information with respect to, or otherwise
cooperating in any way with, or participating in, facilitating or encouraging
any effort or attempt by any other person to do or seek any of the foregoing.
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9.06 Notification of Certain Matters. The Araxas Companies and/or
Rowsey shall give prompt notice to the South Coast Owners of, and the South
Coast Entities and/or the South Coast Owners shall give prompt notice to Araxas
of, (i) any representation or warranty contained herein and made by such party
or parties being untrue or inaccurate when made, (ii) the occurrence of any
event or development that would cause (or could reasonably be expected to cause)
any representation or warranty of such party or parties contained herein to be
untrue or inaccurate on the Closing Date, or (iii) any failure of a party or of
the parties to comply with or satisfy any covenant, condition, or agreement to
be complied with or satisfied by it or them hereunder.
9.07 Shareholder Approval. Prior to the Closing Date, Araxas shall call
and have a meeting of its shareholders, or solicit the consent of its
shareholders in lieu of such meeting, for purposes of approving this Agreement
pursuant to Section 1090.1 of the OGCA. In connection with such meeting, Araxas
shall provide its shareholders with such information as required by the OGCA
and such other information as the Araxas believes to be appropriate disclosure
under the circumstances.
9.08 Financing Covenants.
(a) New Debt and Bridge Financing. Araxas and Newco are negotiating
with commercial banks for a secured, revolving credit facility in the
amount of $25 million to partially refinance the Araxas Companies'
indebtedness owed to Stratum Group Energy Partners, L.P. ("Stratum Debt"),
and to finance certain exploration and 3-D seismic costs, leasehold
acquisition and development of oil and gas properties, and for general
corporate purposes (the "New Debt"). In addition, Newco will require
additional working capital to finance the operations of Newco and its
Subsidiaries after the Closing Date until the closing of the Public Equity
Transaction ("Bridge Financing"). The amount of Bridge Financing proceeds
will be determined by Newco and Krenzke and will take into account any
reduction or increase in the actual amount of New Debt proceeds. The South
Coast Principals shall cause the South Coast Entities jointly to negotiate
with Araxas and Newco, as requested by Araxas, to obtain a loan commitment
for the New Debt and the Bridge Financing on terms satisfactory to Newco
and Krenzke, with closing to occur contemporaneous with the Closing.
(b) Newco Stock Adjustment. If, to induce the closing of the Bridge
Financing, Newco issues Newco equity, or securities convertible into the
equity of Newco ("Bridge Equity"), and the Equitable Bridge Note (defined
below) is satisfied (or assumed without recourse) in connection with the
closing of the Bridge Financing, then, the dilution attributable to the
Bridge Equity (determined on a fully diluted basis and without giving
effect to this Section 9.08(b)) shall be borne as follows: (i) first, the
incremental dilution shall be borne by the South Coast Owners by a
reduction in the total number of shares of Newco Common Stock to be issued
to the South Coast Owners as set forth on Exhibit "B"
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 41 OF 56 PAGES
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attached hereto, unless otherwise determined by Newco and the South Coast
Owners, provided that such reduction in the number of shares of Newco
Common Stock shall not exceed 9.09% of the number of such shares otherwise
issuable to the South Coast Owners as set forth on Exhibit "B"; and (ii)
second, to the extent that dilution resulting from issuance of the Bridge
Equity exceeds the dilution adjustment limitation pursuant to clause (i) of
this Section 9.08(b), such additional dilution shall be borne by the Araxas
Owners and the South Coast Owners pari passu in accordance with each
group's respective total ownership of Newco Common Stock, as adjusted by
clause (i) of this Section 9.08(b). The term "Equitable Bridge Note" means
the promissory note of Newco and Araxas in the original principal amount of
$5.0 million, delivered to an affiliate of Equitable effective as of
July 7, 1997.
9.09 Public Equity Transaction. Following the Closing, the parties agree
to evaluate the public offer and sale of equity securities of Newco in a firm-
commitment underwritten transaction registered under the Securities Act of 1933
and shall use commercially reasonable efforts to accomplish such transaction
prior to the end of 1997 ("Public Equity Transaction").
9.10 Management of Newco. Following the Closing, Rowsey shall be the
Chairman of the Board of Directors, Steven W. Nance shall be the President and
Chief Executive Officer, and Krenzke shall be Executive Vice President and Chief
Operating Officer of Newco. Until the Board of Directors of Newco, including
the affirmative vote of each of the South Coast Members (as defined below)
determines otherwise, the South Coast Owners as a group shall be entitled to
elect a number of directors of Newco (the "South Coast Members") such that at
all times the proportion that the number of South Coast Members bears to the
full number of directors of Newco is as nearly equal as possible to the
proportion that the number of shares of Newco Common Stock owned of record by
the South Coast Owners as a group bears to the total number of outstanding
shares of Newco Common Stock (plus the shares of Newco Common Stock issuable
upon exercise of the Araxas Stock Options). Notwithstanding the preceding
sentence, the parties agree that the covenant contained in this Section 9.10
shall apply until the agreement of Rowsey and Krenzke that such covenant no
longer shall apply, or the written opinion from the managing underwriter engaged
by Newco in connection with the Public Equity Transaction recommending that the
composition of the Newco Board be changed.
9.11 Newco Ownership Dilution.
(a) Clawback of Certain Araxas Owners. If at any time after Closing
(i) any of the shares of Newco Common Stock issued to Steven W. Nance at
the Effective Time as a result of the Araxas Acquisition are forfeited or
otherwise reacquired by Newco ("Nance Shares"), (ii) any of the shares of
Newco Common Stock issued to GR, Inc. (formerly, Gulfland Resources, Inc.)
are reacquired by Newco ("Gulfland Shares"), and/or (iii) any of the Araxas
Stock Options expire unexercised, then the parties agree that the Araxas
Owners
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 42 OF 56 PAGES
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who are holders of Newco Common Stock at the time of such forfeiture or
reacquisition (excluding the ownership attributable to Araxas Stock Options
and, in the case of: (X) reacquisition of the Nance Shares and/or Gulfland
Shares, excluding Steven W. Nance and GR, Inc., and/or (Y) forfeiture of
any of the Araxas Stock Options, excluding GR, Inc.) shall, as a group, be
entitled to acquire for the aggregate par value thereof a portion of such
reacquired or forfeited shares (or the shares underlying forfeited Araxas
Stock Options) or other shares of Newco Common Stock from Newco, determined
based upon a fraction, the numerator of which is equal to such
shareholder's Total Araxas Ownership Percentage, and the denominator of
which is equal to the group's then aggregate Total Araxas Ownership
Percentage; provided, however, if Newco reacquires (i) the Nance Shares for
any consideration, or (ii) the Gulfland Shares for an amount in excess of
the fixed purchase price included in the option arrangement that currently
encumbers such shares, the Araxas Owners shall pay Newco such consideration
(in the case of clause (i)) or such excess consideration (in the case of
clause (ii)) as a condition of the acquisition of such shares by the Araxas
Owners. The Total Araxas Ownership Percentage of an Araxas Owner may
change from time to time as a result of the restoration of dilution
pursuant to this paragraph (a).
(b) Newco Option Plan. At or prior to Closing, Newco shall adopt a
long-term incentive plan for its employees that is mutually acceptable to
Rowsey and the South Coast Owners ("Newco Option Plan"). The Newco Option
Plan shall provide for grants of stock and stock-oriented awards, including
stock options and similar arrangements with respect to Newco Common Stock.
In addition, the parties agree initially that an amount equal to
approximately fifteen percent (15%) of the shares of the outstanding Newco
Common Stock after giving effect to Closing shall be authorized for awards
under the Newco Option Plan.
ARTICLE X
CONDITIONS
10.01 Conditions to Obligations of South Coast Owners. All obligations
of the South Coast Owners at the Closing are subject, at the option of each such
person, to the fulfillment of each of the following conditions at or prior to
the Closing, any of which may be waived in whole or in part by the mutual
agreement of the South Coast Principals and Equitable:
(a) Representations and Warranties. All representations and
warranties of Araxas, Rowsey and Newco contained herein or in any document
delivered pursuant hereto shall be true and correct in all material
respects when made and as of the Closing.
(b) Covenants, Agreements and Obligations. All covenants, agreements
and obligations required by the terms of this Agreement to be performed by
Araxas and Newco at or before the Closing shall have been properly
performed in all material respects.
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(c) No Material Adverse Effect. Since the date of this Agreement,
there shall not have occurred any Material Adverse Effect with respect to
the Araxas Companies. Changes in the price of oil or natural gas,
irrespective of how large, will not be considered to be a Material Adverse
Effect.
(d) Delivery of Documents. All documents, certificates or other
instruments required to be delivered to the South Coast Owners at or prior
to the Closing shall have been so delivered.
(e) Legal Opinion. The South Coast Owners shall have received an
opinion of Crowe & Dunlevy, a Professional Corporation, counsel for Araxas,
dated as of the Closing Date in form and substance reasonably acceptable to
the South Coast Owners with respect to approval under the OGCA of the Share
Acquisition and the matters covered in Sections 6.01, 6.02, 6.04, 6.14 and
8.02 hereof.
(f) Dissenting Shareholders. None of the holders of outstanding
shares of Araxas Common Stock shall have undertaken to perfect appraisal
rights in accordance with the provisions of the OGCA.
(g) Certificates of Existence and Good Standing. Araxas shall have
delivered to the South Coast Owners certificates of existence and good
standing with respect to each of the Araxas Companies issued by the
Secretary of State of their respective states of organization dated no
earlier than three (3) business days prior to the Closing Date, and
reflecting that each of the Araxas Companies is in existence and is in good
standing, has filed all required franchise tax returns and has paid all
required franchise taxes, and reflecting all instruments filed of record
with respect to each such entity to the date of such certificate in the
office of such Secretary of State. Araxas also shall deliver a certificate
or letter of good standing with respect to each other state where any of
the Araxas Companies are qualified to do business as a foreign corporation
reflecting that such corporation has paid all required franchise taxes and
has filed all required franchise tax returns for all periods ending on or
before the Closing Date.
(h) Disclosure Schedule. The matters described on Araxas' Disclosure
Schedule (as amended) shall not, in the judgment of the South Coast
Principals and Equitable, be reasonably likely to have a Material Adverse
Effect with respect to the Araxas Companies.
10.02 Conditions to Obligations of Araxas. All obligations of Araxas
hereunder are subject, at the option of Araxas, to the fulfillment of each of
the following conditions at or prior to the Closing, any of which may be waived
in whole or in part by Araxas:
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 44 OF 56 PAGES
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(a) Representations and Warranties. All representations and
warranties of each of the South Coast Owners and the South Coast Entities
contained herein or in any document delivered pursuant hereto shall be true
and correct in all material respects when made and as of the Closing.
(b) Covenants, Agreements and Obligations. All covenants, agreements
and obligations required by the terms of this Agreement to be performed by
any of the South Coast Owners or the South Coast Entities at or before the
Closing shall have been properly performed in all material respects.
(c) No Material Adverse Effect. Since the date of this Agreement,
there shall not have occurred any Material Adverse Effect with respect to
any of the South Coast Entities. Changes in the price of oil or natural
gas, irrespective of how large, will not be considered to be a Material
Adverse Effect.
(d) Delivery of Documents. All documents, certificates or other
instruments required to be delivered to Araxas and Newco at or prior to
the Closing shall have been so delivered.
(e) Legal Opinion. Araxas and Newco shall have received an opinion of
Haskell Slaughter & Young, L.L.C., counsel to the South Coast Entities and
the South Coast Owners, dated as of the Closing Date, in the form
reasonably acceptable to Araxas and Newco with respect to the matters
covered in Sections 4.01, 4.02, 4.04, 4.09 and 5.02 hereof.
(f) Certificates of Existence and Good Standing. The South Coast
Entities shall have delivered to Araxas certificates of existence and good
standing with respect to each of the South Coast Entities issued by the
Secretary of State of their respective states of organization dated no
earlier than three (3) business days prior to the Closing Date, and
reflecting that each of the South Coast Entities is in existence and is in
good standing, has filed all required franchise tax returns and has paid
all required franchise taxes, and reflecting all instruments filed of
record with respect to each such entity to the date of such certificate in
the office of such Secretary of State. The South Coast Entities also shall
deliver a certificate or letter of good standing as a foreign entity under
the laws of other states in which each such entity is qualified reflecting
that such entity has paid any required franchise tax and has filed all
required franchise tax returns for all periods ending on or before the
Closing Date.
(g) Resignations. The South Coast Owners shall have delivered (or
caused the delivery of) written resignations to Newco, effective as of the
Closing, of all directors of South Coast and INEXS from their respective
directorships and of all officers of South Coast and INEXS from their
respective offices unless otherwise instructed by Newco.
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 45 OF 56 PAGES
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(h) Waiver of Community Property Rights. Each of the South Coast
Owners who is a natural person shall have delivered (or caused the delivery
of) a written waiver of all community property interests in the South Coast
Ownership Interests by such person's spouse.
(i) Certain Agreements of South Coast Entities. At or before the
Closing, all of the duties, obligations and liabilities (whether fixed or
contingent) of any of the South Coast Entities pursuant to any agreements
entered into by, or binding upon, any of the South Coast Entities related
to the investment in South Coast in 1995 by an affiliate of Equitable
(including, but not limited to, the Weisser, Johnson & Co. ("Weisser")
retainer agreement dated December 16, 1996, and the Weisser option
agreement dated September 1, 1995 (except for the option rights of
Weisser)) shall be waived, released, settled or discharged, without any
payment or other consideration paid or incurred by the South Coast Entities
(except as contemplated in the Disclosure Schedule of the South Coast
Entities).
(j) Disclosure Schedule. The matters described on the South Coast
Disclosure Schedule (as amended) shall not, in the judgment of Araxas, be
reasonably likely to have a Material Adverse Effect with respect to the
South Coast Entities.
10.03 Conditions to Obligations of All Parties. The respective
obligations of each party are subject, at each of their options, to the
fulfillment of each of the following conditions at or prior to the Closing:
(a) Araxas Acquisition Approval. The Araxas Acquisition shall have
been duly and validly approved and adopted by the Board of Directors of
Newco and Araxas and the shareholders of Araxas, all as required by the
OGCA and the certificate of incorporation and bylaws of Newco and Araxas.
(b) Other Consents and Approvals. (i) All consents, approvals,
permits and authorizations required to be obtained prior to the Closing
from any Governmental Authority or other person in connection with the
consummation of the transactions contemplated hereby, and (ii) any
preferential right to purchase an interest in any Oil and Gas Interest of
Araxas Companies or the South Coast Entities as a result of transactions
contemplated hereby, shall have been obtained, made or waived, except where
such failure to obtain such consents, approvals, permits, authorizations or
waiver would not be reasonably likely to result in a Material Adverse
Effect on the South Coast Entities or the Araxas Companies, as the case may
be (assuming the transactions contemplated hereby are consummated).
(c) Related Agreements. The relevant parties shall have negotiated,
executed and delivered at or before the Closing (i) employment agreements
between Newco and each of Krenzke, Davis and Duggan, and (ii) a
registration rights agreement between Equitable and
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 46 OF 56 PAGES
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Newco providing for the registration under the Securities Act of the shares
of Newco Common Stock held by Equitable, on terms acceptable to Newco and
Equitable.
(d) Pending Actions. None of the parties shall be subject to any
writ, order, decree or injunction of a court of competent jurisdiction
which prohibits or restricts the consummation of the transactions
contemplated hereby or any pending or threatened action seeking such relief
or seeking damages as a result thereof.
(e) Certain Employment Agreements. The employment agreements between
any of the Araxas Companies and each of Messrs. Doss, Englert and
Faulkinberry shall be terminated effective as of the Closing Date, and any
rights of such parties to acquire stock in Araxas shall be substituted
effective at the Closing Date for Newco Common Stock (or rights to acquire
such stock) in the amounts set forth on Exhibit "E" attached hereto, in
each case on terms that are satisfactory to the South Coast Principals, and
each such Araxas Owner shall have delivered to Newco (with copies delivered
to the other parties hereto) individual (and not joint) representations
with respect to such person's intention, as of the Closing Date, to hold
for such person's own account for investment the Newco Common Stock
acquired at Closing (or issuable pursuant to Newco stock options that are
substituted for Araxas Stock Options), and that there is no contract or
other arrangement enforceable against such Araxas Owner, nor any plan or
intention of such Araxas Owner, as of the Closing Date, relating to the
sale, disposition or other transfer by such Araxas Owner of the Newco
Common Stock issued (or issuable) to such Araxas Owner. The employment
agreement between South Coast and Nicola Maddox shall be terminated
effective at Closing without any payment made or other consideration given
or liability incurred in favor of Ms. Maddox (except as contemplated in the
Disclosure Schedule of the South Coast Entities).
(f) Agreement of Certain Araxas Owners. At or before the Closing (i)
each of Nance, GR, Inc. and Stratum Group Energy Partners, L.P. shall have
caused each such party's Newco Common Stock or rights to acquire such stock
to be subject to an agreement on the same proportionate terms and
conditions as the arrangement governing such party's rights with respect to
Araxas Common Stock (or right to acquire such stock) without any payments
made or other consideration given to such parties, unless contemplated
under any effective agreement with such party (which agreement shall have
been approved by the South Coast Principals), and each such party shall
have delivered to Newco (with copies delivered to the other parties hereto)
individual (and not joint) representations with respect to such person's
intention as of the Closing Date to hold for such person's own account for
investment the Newco Common Stock acquired at Closing (or issuable pursuant
to Newco stock options that are substituted for Araxas Stock Options), and
that there is no contract or other arrangement enforceable against such
Araxas Owner, nor any plan or intention of such Araxas Owner, as of the
Closing Date, relating to the sale, disposition or other transfer by such
Araxas Owner of the Newco Common Stock issued (or issuable) to such Araxas
Owner.
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 47 OF 56 PAGES
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(g) New Debt. The New Debt financing transaction shall have been
closed at or before the Closing, and the debt of the Araxas Companies to
Stratum Group Energy Partners, L.P. satisfied, on terms that are
satisfactory to Araxas, the South Coast Principals and Equitable.
(h) Additional Agreements. Each person who is not a party to this
Agreement and who will receive at or in connection with the Closing Newco
Common Stock or options or other rights to receive Newco Common Stock
(including Weisser with respect to its option covering shares of Newco
Common Stock held by the South Coast Principals) shall have executed and
delivered to Newco (with a copy delivered to each other party to this
Agreement) an instrument containing representations and warranties similar
in all respects to those set forth in Sections 8.03 (except subsection (v))
and 8.04 (except subsection (v)) thereof.
(i) Newco Bridge Financing. Newco shall have closed (or received
enforceable commitments with respect to) the Bridge Financing.
(j) Officers of South Coast, INEXS and Araxas. The principal officers
of South Coast, INEXS and Araxas shall be designated in writing at the
Closing to take office effective immediately after the Closing.
ARTICLE XI
TERMINATION
11.01 Termination of Agreement. Notwithstanding anything herein to the
contrary, this Agreement and the transactions contemplated hereby may be
terminated and abandoned at any time prior to the Closing in the following
manner:
(a) By the mutual written consent of Araxas and the South Coast
Principals;
(b) By either the South Coast Principals or Equitable, through written
notice to Araxas, if there has been a material breach by Araxas or Rowsey
of any representation or warranty of Araxas or Rowsey set forth in this
Agreement, or if, on the Closing Date, any condition set forth in Section
10.01 has not been satisfied or waived;
(c) By Araxas, through written notice to the South Coast Principals or
Equitable if there has been a material breach by any of the South Coast
Owners or South Coast Entities of any representation or warranty of any of
the South Coast Owners or South Coast Entities set forth in this Agreement,
or if, on the Closing Date, any condition set forth in Section 10.02 has
not been satisfied or waived; or
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 48 OF 56 PAGES
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(d) By Araxas, the South Coast Principals or Equitable, through
written notice to the other parties, if, on the Closing Date, all
conditions set forth in Section 10.03 have not been satisfied or waived, or
if the Closing has not occurred on or before September 5, 1997.
Upon receipt of written notice of termination, pursuant to paragraphs
(b), (c) or (d) above, the breaching or nonperforming party shall have a
period of five (5) business days to cure the breach or remedy, cure,
perform or fulfill the condition which has not been satisfied or waived.
11.02 Obligations Upon Termination. In the event of termination of
this Agreement pursuant to the terms and provisions hereof, each party shall
return all books, records, maps, files, papers and other property in such
party's possession to the party entitled thereto, whereupon this Agreement shall
become void, except as provided herein and no party shall have any character of
liability to the other parties hereunder, including any liability for damages;
provided that in the event of termination because of breach of or default under
a representation, warranty, covenant or agreement contained herein, the party
not in breach or default shall have and retain all rights afforded to it under
this Agreement and in law or at equity by reason of such breach or default.
ARTICLE XII
CLOSING
12.01 Time and Place. Subject to the provisions of this Agreement, the
closing of the transactions contemplated hereby (the "Closing") shall take place
at the offices of Araxas, The Woodlands, Texas, on September 5, 1997, at 10:00
a.m. local time, or as soon as practicable thereafter, provided each of the
conditions set forth in Article X has been satisfied or waived by the party or
parties entitled to the benefit of such conditions on or before Closing.
12.02 Certificate of Acquisition. Subject to the provisions of this
Agreement, a properly executed certificate of acquisition shall be filed with
the Secretary of State of Oklahoma in accordance with the OGCA, to be effective
on the Closing Date.
12.03 Further Assurances. At any time and from time to time after the
Closing, at Newco's request and without additional consideration, any party
hereto will execute and deliver such other instruments of sale, transfer,
conveyance, assignment and confirmation and take such action as Newco may deem
reasonably necessary or desirable in order to more effectively transfer, convey
and assign to Newco, and to confirm Newco's title to, all of the South Coast
Shares, the INEXS Shares and the SOCO Partnership Interest and to assist Newco
in exercising all rights with respect thereto, including the exclusive right to
use the corporate names and other trademarks and service marks used by any of
the South Coast Entities.
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 49 OF 56 PAGES
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12.04 Concurrent Conditions. The performance or tender of performance
of all matters applicable to a party at the Closing under this Agreement shall
be deemed concurrent conditions and no party shall be required to perform, or
tender performance of, the obligations of such party hereunder unless,
coincident therewith, each other party for whom performance is required under
this Agreement performs or tenders performance of its obligations hereunder.
ARTICLE XIII
GENERAL PROVISIONS
13.01 Nonsurvival of Representations, Warranties and Covenants. Except
for the provisions of Sections 3.07, 9.04, 9.09, 9.10, 9.11, and 12.03, the
representations, warranties, covenants and agreements made by each of the
parties hereto shall not survive, and shall be terminated and extinguished by
the Closing.
13.02 Entire Agreement; Amendment and Waiver. This Agreement, together
with all Exhibits and Schedules attached hereto and all agreements and
instruments to be executed and delivered by the parties pursuant hereto,
contains the entire agreement between the parties relating to the subject matter
hereof and supersedes the Letter Agreement and any other prior agreement
arrangement and understanding between the parties regarding the subject matter
hereof. No representation, warranty, covenant, obligation, promise, inducement
or statement of intention has been made by any of the parties which is not
expressed in this Agreement. This Agreement may be amended or changed only by
written instrument duly executed by all the parties hereto, and any alleged
amendment or change which is not so documented shall not be effective as to the
parties. Except as expressly provided herein to the contrary, provisions of
this Agreement may be waived only by the party(ies) hereto who is entitled to
the benefit thereof by evidencing such waiver in writing, executed by such
party(ies). Except to the extent waiver or satisfaction is deemed to exist by
the express terms of this Agreement, the failure of any party hereto to enforce
at any time any of the provisions of this Agreement shall in no way be construed
to be a waiver of any such provision, nor in any to affect the validity of this
Agreement or any party thereof or the right of any party thereafter to enforce
each and every provision. No waiver of any breach of this Agreement shall be
held to be a waiver of any other or subsequent breach.
13.03 Severability. This Agreement is intended to be performed in
accordance with and only to the extent permitted by all applicable legal
requirements. If any provision of this Agreement or the application thereof to
any person or circumstance shall for any reason and to any extent, be invalid or
unenforceable, then the performance of such offending provision shall be excused
by the parties hereto, but the remainder of this Agreement and the application
of such provision to other persons or circumstances shall not be affected
thereby, but rather shall be enforced to the greatest extent permitted by law.
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 50 OF 56 PAGES
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13.04 Applicable Law. This Agreement shall in all respects be governed
by, and construed in accordance with, the substantive federal laws of the United
States and the internal laws of the State of Texas (principles of conflict of
laws excluded).
13.05 Assignment. This Agreement may not be assigned by any party
without the prior written consent of each other party hereto; provided, however,
that Equitable may assign its rights and obligations hereunder to an entity all
the outstanding equity interests of which are owned directly or indirectly by
Equitable Resources, Inc. without the necessity of obtaining such consent. No
such permitted assignment shall alter any of the obligations of an assigning
party under this Agreement or release an assigning party from obligations of
such party under this Agreement. Upon any such assignment, the assignee shall
succeed to all rights assigned to it by, and shall become bound by all of the
obligations of, the assigning party. Nothing in this Agreement is intended to
confer upon any person not a party hereto any rights, benefits or remedies under
or by reason of this Agreement.
13.06 Notices. All notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be delivered personally or by facsimile communication to the number set forth
below, or by first class mail, postage prepaid, registered or certified with
return receipt requested, at the addresses set forth below. Notice deposited in
the mail in the manner hereinabove provided shall be effective upon expiration
of five (5) business days from the date on which it is so deposited. Notice
given in any other manner shall be effective only if and when received by the
addressee. For purposes of notice, the addresses of the parties shall be as
follows:
If to South Coast Entities c/o R.A. Krenzke
and/or South Coast Owners: Two Post Oak Central, Suite 2050
1980 Post Oak Blvd.
Houston, TX 77056
Telecopy: (713) 960-1157
With Copies to: Donald T. Locke, Esq.
Haskell Slaughter & Young, L.L.C.
1200 AmSouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, AL 35203
Telecopy: (205) 324-1133
- and -
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Equitable Resources, Inc.
420 Boulevard at the Allies
Pittsburgh, PA 15219
Telecopy: (412) 553-5853
Attention: Jeff Swoveland
- and -
Michael L. Bengtson, Esq.
Thompson & Knight
1700 Pacific Avenue, Suite 3300
Dallas, TX 75201-4893
Telecopy: (214) 969-1751
If to Equitable or Energy: Equitable Resources, Inc.
420 Boulevard at the Allies
Pittsburgh, PA 15219
Telecopy: (412) 553-5853
Attention: Jeff Swoveland
With a Copy to: Michael L. Bengtson, Esq.
Thompson & Knight
1700 Pacific Avenue, Suite 3300
Dallas, TX 75201-4893
Telecopy: (214) 969-1751
If to Araxas or Rowsey: Steven W. Nance
10200 Grogans Mill Road, Suite 500
The Woodlands, TX 77380
Telecopy: (281) 364-3759
With a Copy to: Reeder E. Ratliff, Esq.
Crowe & Dunlevy
1800 Mid-America Tower
20 North Broadway
Oklahoma City, OK 73102
Telecopy: (405) 272-5246
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If to Newco: Steven W. Nance
10200 Grogans Mill Road, Suite 500
The Woodlands, TX 77380
Telecopy: (281) 364-3759
With Copies to: R. A. Krenzke
Two Post Oak Central, Suite 2050
1980 Post Oak Blvd.
Houston, TX 77056
Telecopy: (713) 960-1157
- and -
Donald T. Locke, Esq.
Haskell Slaughter & Young, L.L.C.
1200 AmSouth/Harbert Plaza
1902 Sixth Avenue North
Birmingham, AL 35203
Telecopy: (205) 324-1133
- and -
Michael L. Bengtson, Esq.
Thompson & Knight
1700 Pacific Avenue, Suite 3300
Dallas, TX 75201-4893
Telecopy: (214) 969-1751
- and -
Reeder E. Ratliff, Esq.
Crowe & Dunlevy
1800 Mid-America Tower
20 North Broadway
Oklahoma City, OK 73102
Telecopy: (405) 272-5246
provided that each party shall have the right to change its address for notice,
and the person who is to receive notice hereunder, by the giving of fifteen (15)
days' prior written notice to the other parties hereto in the manner set forth
above.
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 53 OF 56 PAGES
<PAGE>
13.07 Incorporation of Exhibits and Schedules by Reference. All
Exhibits and Schedules expressly referenced herein are hereby incorporated
herein for any and all purposes as a part of this Agreement, to the same extent
as if stated herein.
13.08 Gender and Number. Whenever required by the context, as used in
this Agreement, the singular number shall include the plural and vice versa and
pronouns of whatever gender shall be deemed to include and designate the
masculine, feminine or neuter gender.
13.09 Multiple Counterparts. This Agreement will be executed in one or
more counterparts, each of which shall be an original, but all of which shall
constitute but one instrument.
13.10 Expenses. Each party shall be responsible for its own fees and
expenses, including fees and expenses of legal counsel, incurred in connection
with the negotiation of this Agreement and the consummation of the transactions
contemplated hereby.
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.
ARAXAS: NEWCO:
ARAXAS ENERGY CORPORATION ARAXAS HOLDINGS, INC.
/s/ STEVEN W. NANCE /s/ W.E. ROWSEY, III
By:_______________________________ By: ______________________________
Name: Steven W. Nance Name: W.E. Rowsey, III
Title: President Title: Chairman
SOUTH COAST: INEXS:
SOUTH COAST EXPLORATION INTERACTIVE EXPLORATION
COMPANY SOLUTIONS, INC.
/s/ R.A. KRENZKE /s/ CRAIG DAVIS
By: ______________________________ By: ______________________________
Name: R.A. Krenzke Name: Craig Davis
Title: President Title: President
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 54 OF 56 PAGES
<PAGE>
SOCO: EQUITABLE:
SOCO EXPLORATION, L.P. ERI INVESTMENTS, INC.
By: South Coast Exploration Company,
General Partner
/s/ R.A. KRENZKE /s/ JEFFREY C. SWOVELAND
By:______________________________ By: ______________________________
Name: R.A. Krenzke Name: Jeffrey C. Swoveland
Title: President Title: President
ENERGY: ROWSEY:
420 ENERGY INVESTMENTS, INC.
/s/ JEFFREY C. SWOVELAND /s/ W.E. ROWSEY, III
By:______________________________ __________________________________
Name: Jeffrey C. Swoveland W.E. Rowsey,III
Title: President
KRENZKE: DAVIS:
/s/ R.A. KRENZKE /s/ CRAIG DAVIS
_________________________________ __________________________________
R.A. Krenzke Craig Davis
DUGGAN:
/s/ PHIL DUGGAN
_________________________________
Phil Duggan
SHAUN PHILIP DUGGAN TRUST KELLY FRANCES DUGGAN TRUST
/s/ EDWIN L. ROBERTS /s/ EDWIN L. ROBERTS
By: _____________________________ By: ______________________________
Name: Edwin L. Roberts Name: Edwin L. Roberts
Title: Trustee Title: Trustee
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 55 OF 56 PAGES
<PAGE>
EMMA CATHERINE KRENZKE TRUST JAMES FREDERICK KRENZKE TRUST
/s/ EDWIN L. ROBERTS /s/ EDWIN L. ROBERTS
By: _____________________________ By: ______________________________
Name: Edwin L. Roberts Name: Edwin L. Roberts
Title: Trustee Title: Trustee
LUKE LUNDGREN DAVIS TRUST ETHAN CRAIG DAVIS TRUST
/s/ EDWIN L. ROBERTS /s/ EDWIN L. ROBERTS
By: _____________________________ By: ______________________________
Name: Edwin L. Roberts Name: Edwin L. Roberts
Title: Trustee Title: Trustee
HANNAH JAMIE DAVIS TRUST
/s/ EDWIN L. ROBERTS
By: _____________________________
Name: Edwin L. Roberts
Title: Trustee
ACQUISITION AGREEMENT AND PLAN OF ORGANIZATION PAGE 56 OF 56 PAGES
<PAGE>
EXHIBIT "A"
-----------
PROMISSORY NOTE
Due August __, 1998
$1,000,000 The Woodlands, Texas
August __, 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, Araxas Holdings, Inc., a Delaware
corporation (the "Maker"), promises to pay _____________ ("Payee"), the
principal sum of One Million and No/100 Dollars ($1,000,000.00), without
interest, on August __, 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 Acquisition Agreement and Plan of Organization
("Agreement") dated August __, 1997, and shall be subject to the terms of the
Agreement.
EXHIBIT "A" TO ACQUISITION AGREEMENT AND PLAN
OF ORGANIZATION PAGE 1 OF 2 PAGES
<PAGE>
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 any New Debt and/or Bridge Financing
lender(s) (as such terms are defined in the Agreement), who shall be granted a
security interest in the Collateral that will be first and superior in all
respect to the rights of the holders.
To induce holder to accept this Note, Newco 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, Newco shall not sell, assign,
exchange, or transfer the Collateral, or all or substantially all of the assets
of INEXS, except as security for the New Debt or Bridge Financing indebtedness;
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.
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 ____ day of ____________ 1997.
ARAXAS HOLDINGS, INC.
By:_______________________________________
W.E. Rowsey, III, Chairman of the Board
EXHIBIT "A" TO ACQUISITION AGREEMENT AND PLAN
OF ORGANIZATION PAGE 2 OF 2 PAGES
<PAGE>
Exhibit 10.1
CREDIT AGREEMENT
between
ARAXAS SPV-I, INC.
Borrower
CREDIT LYONNAIS NEW YORK BRANCH
Agent
and
CERTAIN LENDERS
Lenders
September 24, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
SECTION 1. DEFINITIONS AND TERMS................................. 1
1.1 Definitions........................................... 1
1.2 Time References....................................... 14
1.3 Other References...................................... 14
1.4 Accounting Principles................................. 14
SECTION 2. COMMITMENT............................................ 14
2.1 Bridge Facility....................................... 15
2.2 Borrowing Procedure................................... 15
2.3 Letters of Credit..................................... 16
2.4 Borrowing Notices and LC Requests..................... 18
2.5 Termination........................................... 18
2.6 Borrowing Base Determinations......................... 19
2.7 Extension of Termination Date......................... 20
SECTION 3. TERMS OF PAYMENT...................................... 20
3.1 Notes and Payments.................................... 20
3.2 Interest and Principal Payments....................... 21
3.3 Interest Options...................................... 21
3.4 Quotation of Rates.................................... 21
3.5 Default Rate.......................................... 22
3.6 Interest Recapture.................................... 22
3.7 Interest Calculations................................. 22
3.8 Maximum Rate.......................................... 22
3.9 Interest Periods...................................... 22
3.10 Conversions........................................... 23
3.11 Order of Application.................................. 23
3.12 Sharing of Payments, Etc.............................. 23
3.13 Offset................................................ 24
3.14 Booking Borrowings.................................... 24
3.15 Basis Unavailable or Inadequate for LIBOR Rate........ 24
3.16 Additional Costs...................................... 24
3.17 Change in Laws........................................ 25
3.18 Funding Loss.......................................... 25
3.19 Foreign Lenders, Participants, and Assignees.......... 26
SECTION 4. FEES.................................................. 26
4.1 Treatment of Fees..................................... 26
4.2 Fees/Warrants to Agent and Affiliates................. 26
4.3 LC Fees............................................... 26
4.4 Commitment Fees....................................... 26
SECTION 5. SECURITY.............................................. 27
5.1 Guaranty.............................................. 27
5.2 Collateral............................................ 27
5.3 Collateral Account.................................... 28
5.4 Further Assurances.................................... 29
5.5 Release of Collateral................................. 29
SECTION 6. CONDITIONS PRECEDENT.................................. 29
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 7. REPRESENTATIONS AND WARRANTIES........................ 30
7.1 Purpose and Regulation U.............................. 30
7.2 Corporate Existence, Good Standing, and Authority..... 30
7.3 Subsidiaries and Names................................ 30
7.4 Authorization and Contravention....................... 30
7.5 Binding Effect........................................ 31
7.6 Financials and Existing Debt.......................... 31
7.7 Budget................................................ 31
7.8 Solvency.............................................. 31
7.9 Litigation............................................ 31
7.10 Taxes................................................. 31
7.11 Environmental Matters................................. 31
7.12 Employee Plans........................................ 32
7.13 Properties; Liens..................................... 32
7.14 Government Regulations................................ 33
7.15 Transactions with Affiliates.......................... 33
7.16 Debt.................................................. 33
7.17 Leases................................................ 33
7.18 Labor Matters......................................... 33
7.19 Intellectual Property................................. 34
7.20 Full Disclosure....................................... 34
7.21 Estimated Oil and Gas Reserves; Material Prospects.... 34
7.22 Working Interest...................................... 34
7.23 Net Revenue Interest.................................. 34
7.24 Burdensome Contracts.................................. 34
7.25 Regulatory Defects.................................... 34
7.26 Agreements Affecting Mineral Interests................ 35
7.27 Locations of Business, Offices........................ 35
SECTION 8. AFFIRMATIVE COVENANTS................................. 35
8.1 Certain Items Furnished............................... 35
8.2 Use of Credit......................................... 37
8.3 Books and Records..................................... 37
8.4 Inspections........................................... 37
8.5 Taxes................................................. 38
8.6 Payment of Obligation................................. 38
8.7 Expenses.............................................. 38
8.8 Maintenance of Existence, Assets, and Business........ 38
8.9 Insurance............................................. 38
8.10 Environmental Matters................................. 38
8.11 Subsidiaries.......................................... 39
8.12 Indemnification....................................... 39
8.13 Operations and Properties............................. 40
8.14 Leases................................................ 40
8.15 Development and Maintenance........................... 40
8.16 Maintenance of Liens.................................. 40
SECTION 9. NEGATIVE COVENANTS.................................... 40
9.1 Payroll Taxes......................................... 40
9.2 Debt.................................................. 40
9.3 Letters of Credit..................................... 41
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C>
9.4 Liens................................................. 41
9.5 Employee Plans........................................ 41
9.6 Transactions with Affiliates.......................... 41
9.7 Compliance with Laws and Documents.................... 41
9.8 Loans, Advances, and Investments...................... 41
9.9 Distributions......................................... 41
9.10 Disposition of Assets................................. 41
9.11 Mergers, Consolidations, and Dissolutions............. 42
9.12 Assignment............................................ 42
9.13 Fiscal Year and Accounting Methods.................... 42
9.14 New Businesses........................................ 42
9.15 Government Regulations................................ 42
9.16 Strict Compliance..................................... 42
9.17 Alteration of Material Agreements..................... 42
9.18 Operating Agreements.................................. 42
9.19 Burdensome Contracts.................................. 42
9.20 Marketing Contracts................................... 43
SECTION 10. FINANCIAL COVENANTS................................... 43
10.1 Current Ratio......................................... 43
10.2 Fixed-Charge Coverage................................. 43
10.3 Tangible-Net Worth.................................... 43
SECTION 11. DEFAULT............................................... 43
11.1 Payment of Obligation................................. 43
11.2 Covenants............................................. 43
11.3 Debtor Relief......................................... 43
11.4 Judgments and Attachments............................. 44
11.5 Government Action..................................... 44
11.6 Misrepresentation..................................... 44
11.7 Ownership of Companies................................ 44
11.8 Change of Control of Borrower......................... 44
11.9 Other Funded Debt..................................... 44
11.10 SEC Reporting Requirements............................ 45
11.11 Validity and Enforceability........................... 45
11.12 LCs................................................... 45
11.13 Failure to Pursue XPLOR IPO........................... 45
SECTION 12. RIGHTS AND REMEDIES................................... 45
12.1 Remedies Upon Default................................. 45
12.2 Company Waivers....................................... 46
12.3 Performance by Agent.................................. 46
12.4 Not in Control........................................ 46
12.5 Course of Dealing..................................... 46
12.6 Cumulative Rights..................................... 46
12.7 Application of Proceeds............................... 46
12.8 Certain Proceedings................................... 47
12.9 Expenditures by Lenders............................... 47
12.10 Diminution in Value of Collateral..................... 47
SECTION 13. AGENT AND LENDERS..................................... 47
13.1 Agent................................................. 47
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
13.2 Expenses.............................................. 48
13.3 Proportionate Absorption of Losses.................... 48
13.4 Delegation of Duties; Reliance........................ 49
13.5 Limitation of Agent's Liability....................... 49
13.6 Default............................................... 50
13.7 Collateral Matters.................................... 50
13.8 Limitation of Liability............................... 51
13.9 Relationship of Lenders............................... 51
13.10 Benefits of Agreement................................. 51
SECTION 14. MISCELLANEOUS......................................... 51
14.1 Nonbusiness Days...................................... 51
14.2 Communications........................................ 51
14.3 Form and Number of Documents.......................... 51
14.4 Exceptions to Covenants............................... 52
14.5 Survival.............................................. 52
14.6 Governing Law......................................... 52
14.7 Invalid Provisions.................................... 52
14.8 Amendments, Consents, Conflicts, and Waivers.......... 52
14.9 Multiple Counterparts................................. 53
14.10 Parties............................................... 53
14.11 Venue, Service of Process, and Jury Trial............. 54
14.12 Entirety.............................................. 55
</TABLE>
SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
Schedule 2 - Lenders and Commitments
Schedule 5.4 - Material Prospects
Schedule 6 - Closing Documents
Schedule 7.1 - Use of Proceeds of Bridge Facility
Schedule 7.3 - Companies and Names
Schedule 7.9 - Litigation
Schedule 7.11 - Environmental Matters
Schedule 7.13 - Take-or-Pay, Prepayments, Gas Balancing, or
Other Similar Oblications
Schedule 7.15 - Affiliate Transactions
Schedule 7.25 - Regulatory Defects
Schedule 9.2 - Permitted Debt
Schedule 9.4 - Permitted Liens
Schedule 9.8 - Permitted Loans, Advances, and Investments
Exhibit A - Promissory Note
Exhibit B - Mortgaged Properties
Exhibit C - Form of Production Report
Exhibit D-1 - Borrowing Request
Exhibit D-2 - Conversion Notice
Exhibit D-3 - LC Request
Exhibit D-4 - Compliance Certificate
Exhibit E-1 - Opinion of Counsel to Companies
Exhibit E-2 - Opinion of Louisiana Counsel to Companies
Exhibit E-3 - Opinion of Texas Counsel to Companies
Exhibit F - Assignment and Assumption Agreement
</TABLE>
(iv)
<PAGE>
CREDIT AGREEMENT
----------------
THIS AGREEMENT is entered into as of September 24, 1997, between
ARAXAS SPV-I, INC., an Oklahoma corporation ("BORROWER") Lenders (defined
below), and 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 Lenders.
Borrower has requested that Lenders extend credit to Borrower not to exceed
a total outstanding principal amount of $35,000,000 to be used by Borrower as
provided in SECTION 7.1(A) consisting of a multiple advance term loan to be
funded by Lenders from time to time, a portion of which may, upon the
satisfaction of certain conditions as provided herein, be converted into a
revolving-credit facility of $20,000,000 (the "REVOLVING FACILITY") to be funded
by Lenders from time to time in a combination of advances and letters of credit
(as that amount may be reduced by certain Borrowing Base restrictions) to be
used by the Borrower as provided in SECTION 7.1(B). Lenders are willing to
extend the requested credit on the terms and conditions of this agreement.
ACCORDINGLY, for adequate and sufficient consideration, Borrower, Lenders,
and Agent agree as follows:
SECTION 1. DEFINITIONS AND TERMS.
- ---------- ---------------------
1.1 Definitions. As used in the Loan Documents:
-----------
ACQUISITION NOTE SUBORDINATION AGREEMENT means that certain Subordination
Agreement dated as of September 24, 1997 by and among Craig S. Davis, Phillip V.
Duggan, Ron A. Krenzke (individually and as agent for the holders of the
Subordinate Notes defined therein), Agent and XPLOR.
AFFILIATE of a Person means any other individual or entity who directly or
indirectly controls, is controlled by, or is under common control with that
Person. For purposes of this definition (a) "control," "controlled by," and
"under common control with" mean possession, directly or indirectly, of power to
direct or cause the direction of management or policies (whether through
ownership of voting securities or other interests, by contract, or otherwise),
and (b) the Companies are "Affiliates" of each other.
AGENT means, at any time, 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 -- or its successor appointed under
SECTION 13 -- acting as "agent" for Lenders under the Loan Documents.
APPLICABLE MARGIN means, for any day, a margin of interest over the Base
Rate or the LIBOR Rate, as the case may be, that is applicable when the Base
Rate or LIBOR Rate, as applicable, is determined under this agreement.
(a) For all Bridge Facility Borrowings, the Applicable Margin shall be
as stated in the following table:
<PAGE>
<TABLE>
<CAPTION>
================================================================================
FOR THE PERIOD OF TIME APPLICABLE MARGIN FOR APPLICABLE MARGIN
BASE-RATE BORROWING FOR LIBOR-RATE
BORROWINGS
--------------------------------------------------------------------------------
<S> <C> <C>
From the Closing Date to but 2.50% 4.30%
excluding March 24, 1998
--------------------------------------------------------------------------------
From and including March 24, 3.50% 5.30%
1998 to but excluding
April 24, 1998
--------------------------------------------------------------------------------
From and including April 24, 4.50% 6.30%
1998 until the earlier to occur
of the Facility Conversion
Date or the date such Bridge
Facility Borrowing is repaid.
================================================================================
</TABLE>
(b) For all Revolving Facility Borrowings, if any, the Applicable
Margin shall be calculated as follows:
(i) The Applicable Margin is subject to adjustment (upwards or
downwards, as appropriate) based on the ratio of the Companies' Funded
Debt to Capitalization and the ratio of the outstanding Principal Debt
under the Revolving Facility to the Borrowing Base, as stated in the
table below.
(ii) From the Facility Conversion Date through the date that
Agent receives the Current Financials and Compliance Certificate for
the quarter ending December 31, 1997, the Applicable Margin shall be
calculated assuming that the ratio of the Companies' Funded Debt to
Capitalization is less than 40% and the ratio of the outstanding
Principal Debt under the Revolving Facility to the Borrowing Base is
less than 50%.
(iii) After receipt of the Current Financials and Compliance
Certificate for the quarter ending December 31, 1997, the Applicable
Margin in effect at any time (whether in the middle of an Interest
Period or otherwise) is based upon the ratio of the Companies' Funded
Debt to Capitalization as determined from the Current Financials and
related Compliance Certificate then most recently received by Agent,
effective as of the date received by Agent.
(iv) For purposes of the definition of APPLICABLE MARGIN, (i)
Capitalization and Funded Debt are each determined as of the last day
of the most recently completed fiscal-quarter and (ii) the ratio of
the outstanding Principal Debt under the Revolving Facility to the
Borrowing Base is determined as of the last day of the most recently
completed fiscal quarter by dividing the average outstanding Principal
Debt under the Revolving Facility for each day during such quarter by
the Borrowing Base in effect as of the last day of such quarter.
(v) If Borrower fails to timely furnish to Agent any
Financials and related Compliance Certificate as required by this
agreement, then the maximum Applicable Margin shall apply from the
date those Financials and related Compliance Certificate
2
<PAGE>
are required to be delivered and remain in effect until Borrower
furnishes them to Agent.
For all Revolving Facility Borrowings:
-------------------------------------
<TABLE>
<CAPTION>
==============================================================================================================
RATIO OF APPLICABLE MARGIN FOR BASE-RATE APPLICABLE MARGIN FOR LIBOR-RATE
OUTSTANDING BORROWINGS BORROWINGS
PRINCIPAL DEBT
-----------------------------------------------------------------------------------------
UNDER THE IF THE RATIO OF IF THE RATIO OF IF THE RATIO OF IF THE RATIO OF
REVOLVING FUNDED DEBT TO FUNDED DEBT TO FUNDED DEBT TO FUNDED DEBT TO
FACILITY TO THE CAPITALIZATION IS CAPITALIZATION IS CAPITALIZATION IS CAPITALIZATION IS
BORROWING BASE LESS THAN 40% EQUAL TO OR LESS THAN 40% EQUAL TO OR
GREATER THAN 40% GREATER THAN 40%
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
less than or equal 0.00% 0.25% 1.00% 1.25%
to 50%
--------------------------------------------------------------------------------------------------------------
greater than 50% 0.00% 0.25% 1.25% 1.50%
but less than or
equal to 75%
--------------------------------------------------------------------------------------------------------------
greater than 75% 0.00% 0.25% 1.50% 1.75%
--------------------------------------------------------------------------------------------------------------
</TABLE>
APPLICABLE PERCENTAGE means, for any day, a commitment-fee percentage
applicable under SECTION 4.4, equal to (a) 0.500% for the Bridge Facility, and
(b) 0.375% for the Revolving Facility.
ASSIGNEE is defined in SECTION 14.10(C).
ASSIGNMENTS is defined in SECTION 14.10(C).
BASE RATE means, for any day, the greater of either (a) the annual interest
rate most recently announced by Agent as its reference rate of interest for
short-term commercial loans in U.S. dollars to domestic borrowers (which may not
necessarily represent the lowest or best rate actually charged to any customer)
in effect at its principal office in New York, New York, automatically
fluctuating upward and downward as specified in each announcement without
special notice to Borrower or any other Person, or (b) the sum of the Federal-
Funds Rate plus 0.5%.
BASE-RATE BORROWING means a Borrowing bearing interest at the sum of the
Base Rate plus the Applicable Margin.
BORROWER is defined in the preamble to this agreement.
BORROWING means any amount disbursed under the Loan Documents by one or
more Lenders to or on behalf of Borrower under the Loan Documents, either as an
original disbursement of funds, a renewal, extension, or continuation of an
amount outstanding, or a payment under an LC.
BORROWING BASE shall mean the loan value of the Mortgaged Properties as
Lenders determine, in their sole discretion, from time to time pursuant to
SECTION 2.6 hereof.
BORROWING-BASE DEFICIENCY means, with respect to the Revolving Facility,
any amount by which the limitation in SECTION 2.1(B)(III) is exceeded, whether
because the Revolving Commitments have been fully or partially terminated or
canceled, the Borrowing Base has been reduced or for any other reason.
3
<PAGE>
BORROWING DATE is defined in SECTION 2.2(A).
BORROWING REQUEST means a request, subject to SECTION 2.2(A), substantially
in the form of EXHIBIT D-1.
BRIDGE COMMITMENT means, at any time and for any Lender, the amounts stated
beside that Lender's name on the most-recently amended SCHEDULE 2 for the Bridge
Facility (which amount is subject to reduction and cancellation as provided in
this agreement).
BRIDGE FACILITY means the term credit facility in the amount of the total
Bridge Commitments of the Lenders to make advances in accordance with SECTION
2.1(A) and issue letters of credit in accordance with SECTION 2.3(A)(I), subject
to the other terms and conditions of this agreement, and includes the LC
Subfacility.
BRIDGE STATED-TERMINATION DATE means the earlier to occur of (a) May 24,
1998, and (b) the Facility Conversion Date.
BRIDGE TERMINATION DATE means the earlier to occur of either (a) the Bridge
Stated-Termination Date or (b) the effective date that Lenders' commitments to
lend under this agreement are fully canceled or terminated.
BUDGET is defined in SECTION 8.1(E).
BUSINESS DAY means any day, other than a Saturday or Sunday or legal
holiday, on which (i) commercial banks generally are open for business in New
York, New York and Houston, Texas and (ii) in the case of LIBOR Rate Borrowings,
dealings in eurodollar deposits are generally carried out in the London
interbank eurodollar market.
CAPITAL LEASE means any capital lease or sublease that is required by GAAP
to be capitalized on a balance sheet.
CAPITALIZATION means -- for any Person, at any time, and without
duplication -- the sum of (a) its stockholders' equity plus (b) its Funded Debt.
CERCLA means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. (S)(S)9601 et seq.
CLOSING DATE means the date agreed to by Borrower and Agent for the initial
Borrowing, which must be a Business Day occurring no later than September 30,
1997.
CODE means the Internal Revenue Code of 1986.
COLLATERAL is defined in SECTION 5.2.
COLLATERAL DOCUMENTS is defined in SECTION 5.2.
COMMITMENT means, at any time and for any Lender, an amount equal to either
such Lender's Bridge Commitment or its Revolving Commitment, as applicable.
COMMITMENT PERCENTAGE means, for any Lender, the proportion (stated as a
percentage) that its Commitment bears to the total Commitments of all Lenders.
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COMMITMENT USAGE means, at any time, the sum of (a) the Principal Debt plus
(b) the LC Exposure.
COMPANIES means, at any time, XPLOR and each of its Subsidiaries.
COMPLIANCE CERTIFICATE means a certificate substantially in the form of
EXHIBIT D-4 and signed by a Responsible Officer.
CONVERSION NOTICE means a request, subject to SECTION 3.10, substantially
in the form of EXHIBIT D-2.
CURRENT FINANCIALS, unless otherwise specified means either (i) the audited
consolidated Financials of Araxas Energy Corporation and the audited combined
Financials of the South Coast Entities for the year ended December 31, 1996,
together with the unaudited Financials of Araxas Energy Corporation and the
unaudited combined Financials of the South Coast Entities for the six months
ended on June 30, 1997, or (ii) at any time after annual Financials are first
delivered under SECTION 8.1, the Companies' annual Financials then most recently
delivered to Lenders under SECTION 8.1(A), together with the Companies'
quarterly Financials then most recently delivered to Lenders under SECTION
8.1(B).
DEBT means -- for any person, at any time, and without duplication -- the
sum of (a) all obligations required by GAAP to be classified upon that Person's
balance sheet as liabilities, (b) liabilities secured (or for which the holder
of the Debt has an existing Right, contingent or otherwise, to be so secured) by
any Lien existing on property owned or acquired by that Person, (c) obligations
that have been (or under GAAP should be) capitalized for financial reporting
purposes, plus (d) all guaranties, endorsements, and other contingent
obligations for Debt of others.
DEBTOR LAWS means the Bankruptcy Code of the United States of America and
all other applicable liquidation, conservatorship, bankruptcy, moratorium,
rearrangement, receivership, insolvency, reorganization, suspension of payments,
or similar Laws affecting creditors' Rights.
DEFAULT is defined in SECTION 11.
DEFAULT RATE means, for any day, an annual interest rate equal from day to
day to the lesser of either (a) the then-existing Base Rate plus 3.00% or (b)
the Maximum Rate.
DETERMINING LENDERS means, at any time, any combination of Lenders holding
(directly or indirectly) at least either (a) 60% of the total Commitments while
there is no Principal Debt or LC Exposure or (b) 60% of the Principal Debt plus
the LC Exposure while there is any Principal Debt or LC Exposure.
DISTRIBUTION means, with respect to any shares of any capital stock or
other equity securities issued by a Person (a) the retirement, redemption,
purchase, or other acquisition for value of those securities, (b) the
declaration or payment of any dividend on or with respect to those securities,
(c) any loan or advance by that Person to, or other investment by that Person
in, the holder of any of those securities, and (d) any other payment by that
Person with respect to those securities.
EBITX means for any Person, for any period, and without duplication -- the
sum of (a) Net Income, minus (b) extraordinary items, plus (c) to the extent
actually deducted in calculating Net Income, Interest Expense and income Taxes.
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EBITDAX means for any Person, for any period, and without duplication --
the sum of (a) EBITX plus (b) to the extent actually deducted in calculating Net
Income, depreciation, depletion and amortization.
EMPLOYEE PLAN means an employee-pension-benefit plan covered by Title IV of
ERISA and established or maintained by any Company.
ENVIRONMENTAL INDEMNITY AGREEMENT means any agreement (including, without
limitation, insurance policies) by which a Restricted Company or Predecessor is
entitled to receive reimbursement or other payment on account of any
Environmental Liability other than any agreements (a) in the nature of
environmental consulting or engineering agreements for professional services or
(b) the terms of which preclude that Company or Predecessor from asserting a
claim for reimbursement or other payment on account of any Environmental
Liability.
ENVIRONMENTAL INVESTIGATION means any health, safety, or environmental site
assessment, investigation, study, review, audit, compliance audit, or compliance
review conducted at any time or from time to time -- whether at the request of
Agent or any Lender, upon the order or request of any Tribunal, or at the
voluntary instigation of any Company -- concerning any Real Property or the
business operations or activities of any Company, including, without limitation
(a) air, soil, groundwater, or surface-water sampling and monitoring, (b)
repair, cleanup, remediation, or detoxification, (c) preparation and
implementation of any closure, remedial, spill, emergency, or other plans, and
(d) any health, safety, or environmental compliance audit or review.
ENVIRONMENTAL LAW means any applicable Law that relates to (a) the
condition of air, ground or surface water, soil, or other environmental media,
(b) the environment or natural resources, (c) safety or health, or (d) the
regulation of any contaminants, wastes, and Hazardous Substances, including,
without limitation, CERCLA, OSHA, the Hazardous Materials Transportation Act (49
U.S.C. (S) 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.
(S) 6901 et seq.), the Clean Water Act (33 U.S.C. (S) 1251 et seq.), the Clean
Air Act (42 U.S.C. (S) 7401 et seq.), the Toxic Substances Control Act (15
U.S.C. (S) 2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide
Act (7 U.S.C. (S) 136 et seq.), the Emergency Planning and Community Right-to-
Know Act (42 U.S.C. (S) 11001 et seq.), the Safe Drinking Water Act (42 U.S.C.
(S) 201 and (S) 300f et seq.), the Rivers and Harbors Act (33 U.S.C. (S) 401 et
seq.), the Oil Pollution Act (33 U.S.C. (S) 2701 et seq.), analogous state and
local Laws, and any analogous future enacted or adopted Law, or (c) to the
Release or threatened Release of Hazardous Substances.
ENVIRONMENTAL LIABILITY means any liability, loss, fine, penalty, charge,
lien, damage, cost, or expense of any kind that results directly or indirectly,
in whole or in part (a) from the violation of any Environmental Law, (b) from
the Release or threatened Release of any Hazardous Substance, (c) from removal,
remediation, or other actions in response to the Release or threatened Release
of any Hazardous Substance, (d) from actual or threatened damages to natural
resources, (e) from the imposition of injunctive relief or other orders, (f)
from personal injury, death, or property damage which occurs as a result of any
Company's use, storage, handling, or the Release or threatened Release of a
Hazardous Substance, or (g) from any Environmental Investigation performed at,
on, or for any Real Property (including, without limitation, the Leases and the
Mineral Interests).
ENVIRONMENTAL PERMIT means any permit, license, or other authorization from
any Tribunal that is required under any Environmental Law for the lawful conduct
of any business, process, or other activity.
ENVIRONMENTAL REPORT means any written or verbal report memorializing any
Environmental Investigation.
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ERISA means the Employee Retirement Income Security Act of 1974.
FACILITY CONVERSION CONDITIONS means the occurrence of each of the
following on or before May 24, 1998: (a) the XPLOR IPO shall have occurred and
Borrower shall have delivered to Agent copies of such documents, instruments and
other agreements as Agent may reasonably request evidencing that all
transactions contemplated by the XPLOR IPO have been consummated, (b) Borrower
shall have repaid the outstanding Principal Debt (together with all accrued and
unpaid interest thereon) such that, after giving effect to such repayment, the
sum of the Principal Debt plus the LC Exposure shall not exceed the lesser of
the aggregate Revolving Commitments of the Lenders or the Borrowing Base, (c) no
Material Adverse Event, Default or Potential Default shall have occurred and be
continuing, (d) all of the representations and warranties of the Companies in
the Loan Documents are true and correct in all material respects, (e) Borrower
shall have executed and delivered a Compliance Certificate, (f) Borrower shall
have paid all accrued and unpaid commitment fees on the unused portion of the
Bridge Facility in accordance with SECTION 4.4 of this agreement, and (g) Agent
shall have received copies of a funds flow statement describing, in reasonable
detail, the sources and uses of cash attributable to the XPLOR IPO and all
transactions related thereto or contemplated thereby and such other information,
documents and agreements, including opinions of counsel, related to any of the
foregoing and reasonably requested by the Agent.
FACILITY CONVERSION DATE means the date, if any, that all of the Facility
Conversion Conditions shall have been completely fulfilled to the satisfaction
of Agent, in the exercise of its sole discretion.
FEDERAL-FUNDS RATE means, for any day, the annual rate (rounded upwards, if
necessary, to the nearest 0.01%) determined (which determination is conclusive
and binding, absent manifest error) by Agent to be equal to (a) the weighted
average of the rates on overnight federal-funds transactions with member banks
of the Federal Reserve System arranged by federal-funds brokers on that day, as
published by the Federal Reserve Bank of New York on the next Business Day, or
(b) if those rates are not published for any day, the average of the quotations
at approximately 10:00 a.m. received by Agent from three federal-funds brokers
of recognized standing selected by Agent in its sole discretion.
FINANCIALS of a Person means balance sheets, profit and loss statements,
reconciliations of capital and surplus, and statements of cash flow prepared (a)
according to GAAP (subject to year end audit adjustments with respect to interim
Financials) and (b) with respect to the Financials for the fiscal year and
quarter ended December 31, 1998 and thereafter, except as stated in SECTION 1.4,
in comparative form to prior year-end figures or corresponding periods of the
preceding fiscal year or other relevant period, as applicable.
FO&G means Faulkinberry Oil and Gas Company, Inc., a Texas corporation.
FO&G ACQUISITION means the acquisition by Borrower of one hundred percent
(100%) of the capital stock of FO&G pursuant to and in accordance with the terms
and provisions of that certain letter Agreement dated September 24, 1997, by and
among John L. Faulkinberry, Greta G. Faulkinberry, and XPLOR.
FO&G ACQUISITION CONDITIONS means the occurrance of each of the following
on or before December 31, 1997: (1) the closing of the FO&G Acquisition shall
have occurred and all transactions contemplated thereby shall have been
consummated, and Borrower shall have delivered to Agent copies of such
documents, instruments and agreement evidencing such transactions as Agent may
reasonably request; (b) FO&G shall guaranty the Obligation and all of the
capital stock of FO&G shall be subjected to a first priority security interest
in favor of Agent in accordance with the provisions of Section 8.11; (c) all
Debt of the Restricted Companies (and any collateral security therefor) arising
from the transactions contemplated by the FO&G Acquisition shall be subordinated
to the Obligation
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pursuant to a written subordination agreement, in form and substance acceptable
to Agent, executed and delivered by the holders of such Debt; (d) all Mineral
Interests owned by FO&G shall become Mortgaged Properties pursuant to such
mortgages, deeds of trust, security agreements, financing statements and other
instruments reasonably requested by Agent; (e) Borrower shall have delivered
such UCC searches, lien searches, title reports, environmental reports and other
information reasonably requested by, and in form and substance acceptable to,
Agent for the Mineral Interests owned by FO&G"S; (f) no Material Adverse Event,
Default or Potential Default shall have occurred and be continuing; and (g)
Agent shall have received the documents and instruments described in items [23]
- - [25] of Schedule 6 with respect to FO&G and such other information documents
and agreements including opinions of counsel, related to any of the foregoing
and reasonably request by Agent.
FO&G ACQUISITION DATE means the date, if any, that all of the FO&G
Acquisition Conditions shall have been completely fulfilled to the satisfaction
of Agent, in the exercise of its sole discretion.
FUNDED DEBT means -- for any Person, at any time, and without duplication
- -- the sum of (a) the balance of any obligation for borrowed money, plus (b) the
total amount capitalized on the balance sheet of that Person with respect to
Capital Leases.
FUNDING LOSS means any loss, expense, or reduction in yield that any Lender
reasonably incurs because (a) Borrower fails or refuses (for any reason
whatsoever other than a default by Agent or that Lender claiming that loss,
expense, or reduction in yield) to take any LIBOR-Rate Borrowing that it has
requested under this agreement, or (b) Borrower prepays or pays any LIBOR-Rate
Borrowing or converts any LIBOR-Rate Borrowing to a Borrowing of another Type,
in each case, other than on the last day of the applicable Interest Period.
GAAP means generally accepted accounting principles of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
the Financial Accounting Standards Board that are applicable from time to time.
GUARANTORS mean the Restricted Companies now or hereafter guaranteeing the
full payment and performance of the Obligation in accordance with SECTION 5.1.
HAZARDOUS SUBSTANCE means (a) any substance that is reasonably expected to
require, removal, remediation, or other response under any Environmental Law,
(b) any substance that is designated, defined or classified as a hazardous
waste, hazardous material, pollutant, contaminant, explosive, corrosive,
flammable, infectious, carcinogenic, mutagenic, radioactive, dangerous, or toxic
or hazardous substance under any Environmental Law, including, without
limitation, any hazardous substance within the meaning of (S) 101(14) of CERCLA,
(c) petroleum, oil, gasoline, natural gas, fuel oil, motor oil, waste oil,
diesel fuel, jet fuel, and other petroleum hydrocarbons, (d) asbestos and
asbestos-containing materials in any form, (e) polychlorinated biphenyls, (f)
urea formaldehyde foam, or (g) any substance the presence of which on any Real
Property (including, without limitation, the Leases and the Mineral Interests)
either (i) poses or threatens to pose a hazard to the health or safety of
persons or to the environment or (ii) could constitute a health or safety hazard
to persons or the environment if it emanated or migrated from the Real Property
(including, without limitation, the Leases and the Mineral Interests).
INTEREST EXPENSE means -- for any Person, for any period, and without
duplication -- all interest on Debt, whether paid in cash or accrued as a
liability and payable in cash during that period, including, without limitation,
the interest component of Capital Leases and any premium or penalty for
repayment, redemption, or repurchase of Debt.
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INTEREST PERIOD is determined under SECTION 3.9.
ISSUING LENDER means any Lender, or any of its Affiliates, that issues an
LC under this agreement.
LAWS means all applicable statutes, laws, treaties, ordinances, rules,
regulations, orders, writs, injunctions, decrees, judgments, opinions, and
interpretations of any Tribunal.
LC means a documentary or standby letter of credit issued for the account
of Borrower by an Issuing Lender under this agreement and under an LC Agreement.
LC AGREEMENT means a letter of credit application and agreement (in form
and substance satisfactory to Agent) submitted and executed by Borrower to the
Issuing Lender for an LC for the account of Borrower.
LC EXPOSURE means, without duplication, the sum of (a) the total face
amount of all undrawn and uncancelled LCs plus (b) the total unpaid
reimbursement obligations of Borrower under drawings under any LC.
LC REQUEST means a request substantially in the form of EXHIBIT D-3.
LC SUBFACILITY means a subfacility of the Bridge Facility or the Revolving
Facility, as applicable, for the issuance of LCs, as described in SECTION 2.3,
under which the LC Exposure (a) may never collectively exceed twenty percent
(20%) of the Borrowing Base and (b) together with Principal Debt under (i) the
Bridge Facility may never exceed the total Bridge Commitments and (ii) the
Revolving Facility may never exceed the lesser of either (x) the total Revolving
Commitments or (y) the Borrowing Base.
LEASES shall have the meaning assigned to it in SECTION 7.17 hereof.
LENDER LIEN means any present or future first-priority Lien (subject only
to any applicable Permitted Lien) securing the Obligation and assigned,
conveyed, or granted to or created in favor of Agent for the benefit of Lenders.
LENDERS means the financial institutions -- including, without limitation,
Agent (possibly acting through one or more of its Affiliates for LCs) in respect
of its share of Borrowings and LCs --named on SCHEDULE 2 or on the most-
recently-amended SCHEDULE 2, if any, delivered by Agent under this agreement,
and, subject to this agreement, their respective successors and permitted
assigns (but not any Participant who is not otherwise a party to this
agreement).
LIBOR RATE means, for a LIBOR-Rate Borrowing and for the relevant Interest
Period, the annual interest rate (rounded upward, if necessary, to the nearest
0.01%) equal to the quotient obtained by dividing (a) the rate displayed on page
3750 on the Teleratesystem Incorporated Service (or such other page as may
replace such page on such service) at approximately 11:00 a.m. London time two
Business Days before the first day of that Interest Period in an amount
comparable to that LIBOR-Rate Borrowing and having a maturity approximately
equal to that Interest Period, by (b) one minus the Reserve Requirement
(expressed as a decimal) applicable to the relevant Interest Period.
LIBOR-RATE BORROWING means a Borrowing bearing interest at the sum of the
LIBOR Rate plus the Applicable Margin.
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LIEN means any lien, mortgage, security interest, pledge, assignment,
charge, title retention agreement, or encumbrance of any kind and any other
arrangement for a creditor's claim to be satisfied from assets or proceeds prior
to the claims of other creditors or the owners.
LITIGATION means any action by or before any Tribunal.
LOAN DOCUMENTS means (a) this agreement, certificates and reports delivered
under this agreement, and exhibits and schedules to this agreement, (b) the
Notes, Collateral Documents, the Subordination Agreements, and all other
agreements, documents, and instruments in favor of Agent or Lenders (or Agent on
behalf of Lenders) ever delivered under this agreement or otherwise delivered in
connection with all or any part of the Obligation (other than Assignments), (c)
all LCs and LC Agreements, (d) the Warrant Agreement and the letter agreement
described in SECTION 4.2, and (e) all renewals, extensions, and restatements of,
and amendments and supplements to, any of the foregoing.
MATERIAL ADVERSE EVENT means any circumstance or event that, individually
or collectively, is reasonably expected to result in any (a) material impairment
of (i) the ability of Borrower to perform any of its payment or other material
obligations under any Loan Document, (ii) the Restricted Companies as a whole to
perform any of their payment or other material obligations under any Loan
Document, or (iii) the ability of Agent or any Lender to enforce any of those
obligations or any of their respective Rights under the Loan Documents, (b)
material and adverse effect on the financial condition of the Companies as a
whole as represented to Lenders in the Current Financials most recently
delivered before the date of this agreement or (c) Default or Potential Default.
MATERIAL PROSPECTS means the Mineral Interests associated with or relating
to the oil and gas exploration prospects of the Restricted Companies identified
on Schedule 5.4 attached hereto.
MAXIMUM AMOUNT and MAXIMUM RATE respectively mean, for a Lender, the
maximum non-usurious amount and the maximum non-usurious rate of interest that,
under applicable Law, that Lender is permitted to contract for, charge, take,
reserve, or receive on the Obligation.
MINERAL INTERESTS shall mean all present and future rights, titles and
interests that Borrower or any other Company may now have or hereafter acquire
in and to all (i) oil, gas and/or mineral leases, royalty and overriding royalty
interests, production payments, farm-out agreements, net profit interests and
mineral fee interests, (ii) present and future unitization, communication and
pooling arrangements (and all properties covered and units created thereby),
whether arising by contract or operation of law, which now or hereafter include
all or any part of the foregoing; and (iii) lands now or hereafter subject to
any of the foregoing.
MORTGAGED PROPERTIES shall mean all Mineral Interests described in the
Collateral Documents and all related personal property and rights to payments or
proceeds thereon or therefrom, and all other properties in which Borrower or any
other Company has heretofore granted or purported to grant or hereinafter grants
or purports to grant to Agent, for the benefit of the Lenders, a Lender Lien in
accordance with SECTION 5.2 hereof, in order to secure the Notes and the
Obligation.
MULTIEMPLOYER PLAN means a multiemployer plan as defined in Sections 3(37)
or 4001(a)(3) of ERISA or Section 414(f) of the Code to which any Company (or
any Person that, for purposes of Title IV of ERISA, is a member of Borrower's
controlled group or is under common control with Borrower within the meaning of
Section 414 of the Code) is making, or has made, or is accruing, or has accrued,
an obligation to make contributions.
NET INCOME of any Person means that Person's profit or loss after deducting
its Tax expense.
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NOTES means one of the promissory notes substantially in the form of
Exhibit A.
OBLIGATION means all present and future (a) Debts, liabilities, and
obligations of any Company to Agent or any Lender and related to any Loan
Document, whether principal, interest, fees, costs, attorneys' fees, or
otherwise, (b) Debts, liabilities, or obligations owed by any Company to any
Lender or its one or more Affiliates under any Swap Agreement, and (c) renewals,
extensions, and modifications of any of the foregoing.
OSHA means the Occupational Safety and Health Act of 1970, 29 U.S.C. (S)
651 et seq.
PARTICIPANT is defined in SECTION 14.10(B).
PBGC means the Pension Benefit Guaranty Corporation.
PERMITTED DEBT means Debt described on SCHEDULE 9.2.
PERMITTED LIENS means the Liens described on SCHEDULE 9.4.
PERSON means any individual, entity, or Tribunal.
POTENTIAL DEFAULT means any event's occurrence or any circumstance's
existence that would --upon any required notice, time lapse, or both -- become a
Default.
PREDECESSOR means any Person for whose obligations and liabilities any
Company is reasonably expected to be liable as the result of any merger, de
facto merger, stock purchase, asset purchase or divestiture, combination, joint
venture, investment, reclassification, or other similar business transaction.
PRINCIPAL DEBT means, at any time, the unpaid principal balance of all
Borrowings.
PRO RATA and PRO RATA PART mean, at any time and for any Lender, the
proportion (stated as a percentage) that the Principal Debt owed to it bears to
the total Principal Debt owed to all Lenders.
REAL PROPERTY means any land, buildings, fixtures, and other improvements
to land now or in the future directly or indirectly owned by any Restricted
Company, leased to or otherwise operated by any Restricted Company, or subleased
by any Restricted Company to any other Person, including, without limitation,
the Leases and the Mineral Interests.
REFINANCED DEBT means Debt evidenced by or arising in connection with that
certain Term Loan and Security Master Agreement dated as of April 4, 1996 among
Borrower and Stratum Group Energy Partners, L.P., as modified and amended and
all promissory notes, mortgages, security agreements and other instruments and
agreements executed in connection therewith or related thereto.
RELEASE means any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping, disposal, migrating, or
other movement into the air, ground or surface water, or soil.
REPRESENTATIVES means representatives, officers, directors, employees,
accountants, attorneys, and agents.
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RESERVE REPORT means each report delivered to the Agent by the Borrower
pursuant to SECTION 8.1(C).
RESERVE REQUIREMENT means, for any LIBOR-Rate Borrowing and for the
relevant Interest Period, the total reserve requirements (including all basic,
supplemental, emergency, special, marginal, and other reserves required by
applicable Law) applicable to eurocurrency fundings or liabilities as of the
first day of that Interest Period.
RESPONSIBLE OFFICER means Borrower's chairman, president, chief executive
officer, chief financial officer, or treasurer.
RESTRICTED COMPANY means XPLOR and each Subsidiary of XPLOR other than any
Subsidiary that has no assets except its corporate name and conducts no
operations.
REVOLVING COMMITMENT means, at any time and for any Lender, the amount
stated beside that Lender's name on the most recently amended Schedule 2 for the
Revolving Facility (which amount is subject to reduction and cancellation as
provided in this agreement).
REVOLVING FACILITY means the revolving credit facility in the amount of the
total Revolving Commitments of the Lenders to make advances in accordance with
SECTION 2.1(B) and issue letters of credit in accordance with SECTION
2.3(A)(II), subject to the other terms and conditions of this agreement and
includes the LC Subfacility.
REVOLVING STATED-TERMINATION DATE means September 24, 2000.
REVOLVING TERMINATION DATE means the earlier of either (a) the Revolving
Stated-Termination Date or (b) the effective date that Lenders' commitments to
lend and issue LCs under this agreement are fully canceled or terminated.
RIGHTS means rights, remedies, powers, privileges, and benefits.
SOLVENT means, as to any Person, that (a) the aggregate fair market value
of its assets exceeds its liabilities, (b) it has sufficient cash flow to enable
it to pay its Debts as they mature, and (c) it does not have unreasonably small
capital to conduct its businesses.
SOUTH COAST ENTITIES means South Coast Exploration Company, a Texas
corporation, Interactive Exploration Solutions, Inc. a Texas corporation, and
SOCO Exploration, L.P., a Texas limited partnership.
SOUTH COAST MERGER means the acquisition of the South Coast Entities by
XPLOR pursuant to that certain Acquisition and Plan of Reorganization Agreement
dated August 19, 1997 among the South Coast Entities and XPLOR (then known as
Araxas Holdings, Inc.).
SUBORDINATED DEBT means a collective reference to the obligations and
indebtedness evidenced by (i) that certain promissory note dated July 7, 1997
executed by XPLOR (then known as Araxas Holdings, Inc.) and Araxas Energy
Corporation payable to the order of ERI Investments, Inc. in the original
principal amount of $5,000,000, (ii) the "Subordinate Notes" as defined in the
Acquisition Note Subordination Agreement, (iii) from and after the FO&G
Acquisition Date, all Debt incurred by the Restricted Companies in connection
with the FO&G Acquisition, and (iv) all renewals, modifications and extensions
(but not increases) of any of the foregoing.
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SUBORDINATION AGREEMENTS means (i) that certain Subordination Agreement of
even date herewith by and among Agent, ERI Investments, Inc., XPLOR, and Araxas
Energy Corporation, (ii) the Acquisition Note Subordination Agreement, and (iii)
any subordination or similar agreement executed and delivered pursuant to clause
(c) of the definition of FO&G Acquisition Conditions, as any of the foregoing
may be from time to time modified or amended.
SUBSIDIARY of any Person means any entity of which more than 50% (in
number of votes) of the stock (or equivalent interests) is owned of record or
beneficially, directly or indirectly, by that Person.
SWAP AGREEMENT means any present or future, whether master or single,
agreement, document, or instrument providing for -- or constituting an agreement
to enter into -- an interest-rate, basis, or commodity swap; forward-rate
arrangement; commodity option; equity or equity-index swap or option; bond or
interest-rate option; forward-foreign-exchange arrangement; rate-cap, -collar,
or -floor arrangement; currency- or cross-currency-swap arrangement; swaption;
currency-option; or any similar arrangement.
TANGIBLE-NET WORTH means -- at any time and for any Person -- the sum of
(i) its stockholders' equity, plus (ii) amounts excluded from stockholders'
equity under GAAP relating to the establishment of an employee stock ownership
plan, minus (iii) the total (without duplication of deductions already made in
arriving at stockholders' equity) of the book value of all assets that would be
treated as intangible assets under GAAP, including, without limitation,
goodwill, trademarks, trade names, copyrights, patents, and unamortized debt
discount and expense.
TAXES means, for any Person, taxes, assessments, or other governmental
charges or levies imposed upon it, its income, or any of its properties,
franchises, or assets.
TRIBUNAL means any (a) local, state, territorial, federal, or foreign
judicial, executive, regulatory, administrative, legislative, or governmental
agency, board, bureau, commission, department, or other instrumentality, (b)
private arbitration board or panel, or (c) central bank.
TYPE means any type of Borrowing determined with respect to the applicable
interest option.
WARRANT AGREEMENT has the meaning given such term in SECTION 4.2.
WORKING CAPITAL means -- for any Person and at any time -- the sum of (a)
current assets minus (b) current liabilities.
XPLOR means XPLOR Energy, Inc., a Delaware corporation, formerly known as
Araxas Holdings, Inc.
XPLOR IPO means the completion of an initial public offering of the common
capital stock of XPLOR in accordance with all applicable securities and other
Laws, which results in net proceeds (after deducting all costs and expenses
associated therewith, including, without limitation all underwriting fees,
printing costs, placement fees and expenses, accountants, attorneys' and other
professional fees) of at least $25,000,000.00.
1.2 Time References. Unless otherwise specified, in the Loan Documents
---------------
(a) time references (e.g., 11:00 a.m.) are to time in New York, New York, and
(b) in calculating a period from one date to another, the word "from" means
"from and including" and the word "to" or "until" means "to but excluding."
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1.3 Other References. Unless otherwise specified, in the Loan Documents
----------------
(a) where appropriate, the singular includes the plural and vice versa, and
words of any gender include each other gender, (b) heading and caption
references may not be construed in interpreting provisions, (c) monetary
references are to currency of the United States of America, (d) section,
paragraph, annex, schedule, exhibit, and similar references are to the
particular Loan Document in which they are used, (e) references to "telecopy,"
"facsimile," "fax," or similar terms are to facsimile or telecopy transmissions,
(f) references to "including" mean including without limiting the generality of
any description preceding that word, (g) the rule of construction that
references to general items that follow references to specific items are limited
to the same type or character of those specific items is not applicable in the
Loan Documents, (h) references to any Person include that Person's heirs,
personal representatives, successors, trustees, receivers, and permitted
assigns, (i) references to any Law include every amendment or supplement to it,
rule and regulation adopted under it, and successor or replacement for it, and
(j) references to any Loan Document or other document include every renewal and
extension of it, amendment and supplement to it, and replacement or substitution
for it.
1.4 Accounting Principles. Unless otherwise specified, in the Loan
---------------------
Documents (a) GAAP determines all accounting and financial terms and compliance
with financial covenants, (b) GAAP in effect on the date of this agreement
determines compliance with financial covenants, (c) otherwise, all accounting
principles applied in a current period must be comparable in all material
respects to those applied during the preceding comparable period, and (d) while
XPLOR has any consolidated Subsidiaries (i) all accounting and financial terms
and compliance with reporting covenants must be on a consolidating and
consolidated basis, as applicable, and (ii) compliance with financial covenants
must be on a consolidated basis, and (iii) all references to financial
statements or financial terms of the "Companies" shall refer to such financial
statements or financial terms as calculated for XPLOR and its consolidated
Subsidiaries on a consolidated basis.
SECTION 2. COMMITMENT. Subject to the provisions in the Loan Documents, each
- ---------- ----------
Lender severally but not jointly agrees to extend credit to Borrower in
accordance with the following provisions.
2.1 (a) Bridge Facility. Each Lender severally but not jointly agrees
---------------
to lend to Borrower that Lender's Commitment Percentage of requested Borrowings
under the Bridge Facility which Borrower may borrow and repay under this
agreement subject to the following conditions:
(i) Each Borrowing may only occur on a Business Day on or after
the Closing Date and before the Bridge Termination Date;
(ii) Each Borrowing may only be $500,000 or a greater integral
multiple of $100,000 if a Base-Rate Borrowing or $1,000,000 or a greater
integral multiple of $500,000 if a LIBOR-Rate Borrowing;
(iii) The sum of the Principal Debt outstanding under the Bridge
Facility plus the LC Exposure may never exceed the total Bridge
Commitments; and
(iv) The Commitment Usage (whether direct or participated) may
never exceed that Lender's Bridge Commitment.
No Borrowing under the Bridge Facility which has been repaid may be reborrowed.
(b) Revolving Facility. Provided that each of the Facility Conversion
------------------
Conditions shall have been fully satisfied, each Lender severally but not
jointly agrees to lend to Borrower that Lender's
14
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Commitment Percentage of requested Borrowings under the Revolving Facility which
Borrower may borrow, repay, and reborrow under this agreement subject to the
following conditions:
(i) Each Borrowing may only occur on a Business Day on or after
the Facility Conversion Date and before the Revolving Termination Date;
(ii) Each Borrowing may only be $500,000 or a greater integral
multiple of $100,000 if a Base-Rate Borrowing or $1,000,000 or a greater
integral multiple of $500,000 if a LIBOR-Rate Borrowing;
(iii) The sum of the Principal Debt outstanding under the Revolving
Facility plus the LC Exposure may never exceed at any time, the lesser of
EITHER the total Revolving Commitments OR the Borrowing Base;
(iv) The Commitment Usage (whether direct or participated) may
never exceed that Lender's Revolving Commitment; and
(v) All remaining Borrowings outstanding under the Bridge Facility
on the Facility Conversion Date (after giving effect to all prepayments of
Principal Debt made on such date) shall be and be deemed to be Borrowings
under the Revolving Facility.
2.2 Borrowing Procedure. The following procedures apply to Borrowings:
-------------------
(a) Borrowing Request. Borrower may request a Borrowing by making
-----------------
or delivering a Borrowing Request (that may be telephonic if confirmed
immediately in writing by 2:00 p.m. on the same Business Day) to Agent,
which is irrevocable and binding on Borrower, stating the Type, amount, and
Interest Period for each Borrowing and which must be received by Agent no
later than 11:00 a.m. on the (i) third Business Day before the date on
which funds are requested (the "BORROWING DATE") for any LIBOR-Rate
Borrowing, or (ii) Borrowing Date for any Base-Rate Borrowing. Agent shall
promptly notify each Lender of any Borrowing Request.
(b) Funding. Each Lender shall remit its Commitment Percentage of
-------
each requested Borrowing to Agent's principal office in New York, New York,
in funds that are available for immediate use by Agent by 1:00 p.m. on the
applicable Borrowing Date. Subject to receipt of those funds, Agent shall
(unless to its actual knowledge any of the applicable conditions precedent
have not been satisfied by Borrower or waived by the requisite Lenders
under SECTION 14.8) make those funds available to Borrower by (at
Borrower's option) (i) wiring the funds to or for the account of Borrower
at the direction of Borrower or (ii) depositing the funds in Borrower's
account with Agent.
(c) Funding Assumed. Absent contrary written notice from a Lender,
---------------
Agent may assume that each Lender has made its Commitment Percentage of the
requested Borrowing available to Agent on the applicable Borrowing Date,
and Agent may, in reliance upon such assumption (but shall not be required
to), make available to Borrower a corresponding amount. If a Lender fails
to make its Commitment Percentage of any requested Borrowing available to
Agent on the applicable Borrowing Date, Agent may recover the applicable
amount on demand, (i) from that Lender together with interest, commencing
on the Borrowing Date and ending on (but excluding) the date Agent recovers
the amount from that Lender, at an annual interest rate equal to the
Federal-Funds Rate, or (ii) if that Lender fails to pay its amount upon
demand, then from Borrower. No Lender is responsible for the failure of
any other Lender to make its Commitment Percentage of any Borrowing
available as required by
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SECTION 2.2(B); however, failure of any Lender to make its Commitment
Percentage of any Borrowing so available does not excuse any other Lender
from making its Commitment Percentage of any Borrowing so available.
2.3 Letters of Credit.
-----------------
(a) Conditions. Subject to the terms and conditions of this agreement
----------
each Lender, if requested, agrees to issue LCs from and after (i) the
Closing Date to and excluding the Bridge Termination Date under the Bridge
Facility upon Borrower's making or delivering an LC Request and delivering
an LC Agreement, both of which must be received by Agent and the Issuing
Lender no later than the third Business Day before the Business Day on
which the requested LC is to be issued, so long as (x) no such LC may
expire after the Bridge Stated-Termination Date, (y) the LC Exposure (after
giving effect to such requested LC) would not exceed twenty percent (20%)
of the Borrowing Base and (z) the limitations in SECTION 2.1(A)(III) are
not exceeded, and (ii) the Facility Conversion Date upon Borrower's making
or delivering an LC Request and delivering an LC Agreement, both of which
must be received by Agent and the Issuing Lender no later than the third
Business Day before the Business Day on which the requested LC is to be
issued, so long as (x) no such LC may expire after the earlier to occur of
the first anniversary of its issuance date or three Business Days before
the Revolving Stated-Termination Date, (y) the LC Exposure (after giving
effect to such requested LC) would not exceed twenty percent (20%) of the
Borrowing Base and (z) the limitations in SECTION 2.1(B)(III) are not
exceeded.
(b) Participation. Immediately upon an Issuing Lender's issuance of
-------------
any LC, that Issuing Lender shall be deemed to have sold and transferred to
each other Lender, and each other Lender shall be deemed irrevocably and
unconditionally to have purchased and received from that Issuing Lender,
without recourse or warranty, an undivided interest and participation to
the extent of such Lender's Commitment Percentage in the LC and all
applicable Rights of that Issuing Lender in the LC -- other than Rights to
receive certain fees provided in SECTION 4.3 to be for that Issuing
Lender's sole account.
(c) Reimbursement Obligation. To induce each Issuing Lender to issue
------------------------
and maintain LCs, and to induce Lenders to participate in issued LCs,
Borrower agrees to pay or reimburse each Issuing Lender (i) on the first
Business Day after an Issuing Lender notifies Agent and Borrower that it
has made payment under an LC, the amount paid by that Issuing Lender and
(ii) within five Business Days after demand, the amount of any additional
fees Agent customarily charges for amending LCs Agreements, for honoring
drafts, and for taking similar action in connection with letters of credit.
If Borrower has not reimbursed that Issuing Lender for any drafts paid by
the date on which reimbursement is required under this section, then Agent
is irrevocably authorized to fund Borrower's reimbursement obligations as a
Base-Rate Borrowing under the Bridge Facility or the Revolving Facility, as
applicable, if proceeds are available under the Revolving Facility and if
the conditions in this agreement for such a Borrowing (other than any
notice requirements or minimum funding amounts) have, to Agent's knowledge,
been satisfied. The proceeds of that Borrowing shall be advanced directly
to that Issuing Lender to pay Borrower's unpaid reimbursement obligations.
If funds cannot be advanced under the Bridge Facility or the Revolving
Facility, as applicable, then Borrower's reimbursement obligation shall
constitute a demand obligation. Borrower's obligations under this section
are absolute and unconditional under any and all circumstances and
irrespective of any setoff, counterclaim, or defense to payment that
Borrower may have at any time against any Issuing Lender or any other
Person. From the date that an Issuing Lender pays a draft under a LC until
Borrower either reimburses or is obligated to reimburse that Issuing Lender
for that draft under this section, the amount of that draft bears interest
payable to that
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Issuing Lender at the rate then applicable to Base-Rate Borrowings. From
the due date of the respective amounts due under this section, to the date
paid (including any payment from proceeds of a Base-Rate Borrowing), unpaid
reimbursement amounts accrue interest that is payable on demand at the
Default Rate.
(d) General. The applicable Issuing Lender shall promptly notify
-------
Agent and Borrower of the date and amount of any draft presented for honor
under any LC (but failure to give notice will not affect Borrower's
obligations under this agreement). That Issuing Lender shall pay the
requested amount upon presentment of a draft unless presentment on its face
does not comply with the terms of the applicable LC. When making payment,
that Issuing Lender may disregard (i) any default or potential default that
exists under any other agreement (other than the applicable LC) and (ii)
obligations under any other agreement (other than the applicable LC) that
have or have not been performed by the beneficiary or any other Person (and
that Issuing Lender is not liable for any of those obligations).
Borrower's reimbursement obligations to that Issuing Lender and Lenders,
and each Lender's obligations to that Issuing Lender, under this section
are absolute and unconditional irrespective of, and that Issuing Lender is
not responsible for, (i) the validity, enforceability, sufficiency,
accuracy, or genuineness of documents or endorsements (even if they are in
any respect invalid, unenforceable, insufficient, inaccurate, fraudulent,
or forged), (ii) any dispute by any Company with or any Company's claims,
setoffs, defenses, counterclaims, or other Rights against that Issuing
Lender, any Lender, or any other Person, or (iii) the occurrence of any
Potential Default or Default. However, nothing in this agreement
constitutes a waiver of Borrower's Rights to assert any claim or defense
based upon the gross negligence or willful misconduct of any Lender. The
Issuing Lender shall promptly pay to Agent for Agent to promptly distribute
reimbursement payments received from Borrower to all Lenders according to
their Pro Rata Part of the Revolving Facility.
(e) Obligation of Lenders. If Borrower fails to reimburse an Issuing
---------------------
Lender as provided in SECTION 2.3(C) by the date on which reimbursement is
due under that section, and funds cannot be advanced under the Bridge
Facility or the Revolving Facility, as applicable, to satisfy the
reimbursement obligations, then Agent shall promptly notify each Lender of
Borrower's failure, of the date and amount paid, and of each Lender's
Commitment Percentage of the unreimbursed amount. Each Lender shall
promptly and unconditionally make available to Agent in immediately
available funds its Commitment Percentage of the unpaid reimbursement
obligation, subject to the limitations of SECTION 2.1(A) (IV) or (B)(IV),
as the case may be. Funds are due and payable to Agent before the close of
business on the Business Day when Agent gives notice to each Lender of
Borrower's reimbursement failure (if notice is given before 1:00 p.m.) or
on the next succeeding Business Day (if notice is given after 1:00 p.m.).
All amounts payable by any Lender accrue interest after the due date at the
Federal-Funds Rate from the day the applicable draft or draw is paid by
Agent to (but not including) the date the amount is paid by the Lender to
Agent. Upon receipt of those funds, Agent shall make them available to the
Issuing Lender.
(f) Duties of Issuing Lender. Each Issuing Lender agrees with each
------------------------
Lender that it will exercise and give the same care and attention to each
LC as it gives to its other letters of credit. Each Lender and Borrower
agree that, in paying any draft under any LC, no Issuing Lender has any
responsibility to obtain any document (other than any documents expressly
required by the respective LC) or to ascertain or inquire as to any
document's validity, enforceability, sufficiency, accuracy, or genuineness
or the authority of any Person delivering it. Neither any Issuing Lender
nor its Representatives will be liable to any Lender or any Company for any
LC's use or for any beneficiary's acts or omissions. Any action, inaction,
error, delay, or omission taken or suffered by any Issuing Lender or any of
its Representatives
17
<PAGE>
in connection with any LC, applicable drafts or documents, or the
transmission, dispatch, or delivery of any related message or advice, if in
good faith and in conformity with applicable Laws and in accordance with
the standards of care specified in the Uniform Customs and Practices for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500 (as amended or modified), is binding upon the Companies
and Lenders and, except as provided in Section 2.4(e), does not place that
Issuing Lender or any of its Representatives under any resulting liability
to any Company or any Lender. Agent is not liable to any Company or any
Lender for any action taken or omitted, in the absence of gross negligence
or willful misconduct, by that Issuing Lender or its Representative in
connection with any LC.
(g) Cash Collateral. On the Bridge Termination Date or the Revolving
---------------
Termination Date, as applicable, and if requested by Determining Lenders
while a Default pursuant to SECTION 11.1 exists, Borrower shall provide
Agent, for the benefit of Lenders, cash collateral in an amount equal to
the then-existing LC Exposure, which cash collateral shall be invested by
Agent solely in Permitted Investments of the type described in items 1-3 of
SCHEDULE 9.8 as Agent, in its sole discretion, may determine. All income
and proceeds from the investment of such cash collateral shall be and be
deemed to constitute additional cash collateral for the Obligation.
Borrower hereby acknowledges and agrees that any loss of the principal of,
and/or accrued interest on, any such cash collateral invested by Agent as
provided herein shall be for the account of Borrower and shall not reduce
or diminish in any manner whatsoever the Obligation or Borrower's
obligation to provide cash collateral as provided herein.
(h) INDEMNIFICATION. BORROWER SHALL PROTECT, INDEMNIFY, PAY, AND SAVE
---------------
AGENT, EACH LENDER, AND THEIR RESPECTIVE REPRESENTATIVES HARMLESS FROM AND
AGAINST ANY AND ALL CLAIMS, DEMANDS, LIABILITIES, DAMAGES, LOSSES, COSTS,
CHARGES, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) WHICH ANY OF
THEM MAY INCUR OR BE SUBJECT TO AS A CONSEQUENCE OF THE ISSUANCE OF ANY LC,
ANY DISPUTE ABOUT IT, OR THE FAILURE OF ANY ISSUING LENDER TO HONOR A
DRAW REQUEST UNDER ANY LC AS A RESULT OF ANY ACT OR OMISSION (WHETHER RIGHT
OR WRONG) OF ANY PRESENT OR FUTURE TRIBUNAL. HOWEVER, NO PERSON IS
ENTITLED TO INDEMNITY UNDER THE FOREGOING FOR ITS OWN GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT.
(i) LC Agreements. Although referenced in any LC, terms of any
-------------
particular agreement or other obligation to the beneficiary are not
incorporated into this agreement in any manner. The fees and other amounts
payable with respect to each LC are as provided in this agreement, drafts
under each LC are part of the Obligation, only the events specified in this
agreement as a Default shall constitute a default under any LC, and the
terms of this agreement control any conflict between the terms of this
agreement and any LC Agreement.
2.4 Borrowing Notices and LC Requests. Each Borrowing Request (whether
---------------------------------
telephonic or written) and LC Request constitutes a representation and warranty
by Borrower that as of the Borrowing Date or the date of issuance of the
requested LC, as the case may be, that all of the conditions precedent in
SECTION 6 have been satisfied.
2.5 Termination. Borrower may -- upon giving at least five Business Days
-----------
prior written and irrevocable notice to Agent -- terminate all or part of the
Bridge Facility or the Revolving Facility. Each partial termination must be in
an amount of not less than $1,000,000 or a greater integral multiple of
$1,000,000 and must be ratable in accordance with each Lender's Commitment
Percentage. At the time of any termination, Borrower shall pay to Agent, for the
account of each Lender, as applicable, the amount of (i) with respect to any
such termination of the Bridge Facility, the excess,
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<PAGE>
if any, of the sum of the outstanding Principal Debt plus the LC Exposure over
the total Bridge Commitments after giving effect to such termination, and (ii)
with respect to any such termination of the Revolving Facility, any Borrowing
Base Deficiency then existing or which would result after giving effect to such
termination, in each case together with all accrued and unpaid fees under this
agreement and the interest attributable to the amount of that reduction, and any
related Funding Loss. Any part of the Bridge Commitments or the Revolving
Commitments that are terminated may not be reinstated.
2.6 Borrowing Base Determinations.
-----------------------------
(a) As of the Closing Date, the Borrowing Base is acknowledged by the
Borrower, the Agent and the Lenders to be $20,000,000.
(b) The Borrowing Base shall be redetermined by the Lenders semi-
annually through the Revolving Termination Date, within ninety (90) days after
each December 31 and within sixty (60) days after each June 30, with the first
such Borrowing Base redetermination under this Agreement to be made on or before
March 31, 1998 for the Mortgaged Properties as of December 31, 1997, in
accordance with the standard engineering and lending policies and practices
customary for loans of this nature and on the basis of information supplied by
the Borrower in compliance with the provisions of this Agreement, including,
without limitation, the Reserve Reports, and all other information available to
the Lenders. Notwithstanding the foregoing, the Lenders may at their discretion
make redeterminations of the Borrowing Base at any time and from time to time
after (but not before) the first semi-annual redetermination made hereunder,
including, without limitation, upon the occurrence of any sale, transfer,
release or other disposition or loss or relinquishment of any Collateral by the
Borrower, provided, that nothing in this provision shall be deemed to authorize
any sale of any property prohibited pursuant to this agreement or any other Loan
Document; and provided, further, that Lenders may only make one such
redetermination during each six month period between the required, semi-annual
redeterminations described in the first sentence of this Section 2.6(b). In
addition to the determinations of the Borrowing Base required pursuant to this
SECTION 2.6(B) hereof, special determinations thereof may at any time be
requested by Borrower if it, in good faith, (i) believes that events have
occurred or conditions exist that could increase the then current Borrowing Base
by at least ten percent (10%) or (ii) desires to mortgage, or cause to be
mortgaged, additional Mineral Interests to increase the Borrowing Base by at
least ten percent (10%), and Borrower has tendered to the Agent, to be
distributed by Agent to each Lender, an engineering fee in the amount of
$5,000.00 for each Lender. Upon any such special determination of the Borrowing
Base and, if requested by Agent, Borrower shall submit both (i) a current report
of a firm of independent petroleum engineers acceptable to Agent, prepared in
accordance with customary standards and procedures of the petroleum industry
which report shall (A) evaluate the additional Mineral Interests subject to such
redetermination not previously evaluated in the most recent Reserve Report
delivered to Agent (in the same manner as provided in this SECTION 2.6(B) for
other such redeterminations) and (B) be dated within sixty (60) days of such
requested redetermination, and, (ii) title opinions, environmental reports and
other information reasonably requested by and in form and substance acceptable
to Agent, for those additional Mineral Interests which Borrower desires to be
considered within the Borrowing Base. Adjustments to the Borrowing Base based
upon the addition of Mineral Interests shall not be effective prior to the date
of filing and recording of such Collateral Documents as required by Agent.
(c) Upon each borrowing base redetermination, the Agent shall notify
the Borrower verbally (confirming such notice promptly in writing) of such
determination, and the Borrowing Base so communicated to the Borrower shall
become effective upon such verbal notification and shall remain in effect until
the next subsequent borrowing base redetermination in accordance with the terms
hereof.
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(d) The Borrowing Base shall represent the determination by all of the
Lenders, in their sole discretion and in accordance with their standard
engineering and lending policies and practices customary for loans of this
nature, of the value, for loan purposes, of the Collateral. Furthermore, the
Borrower acknowledges that the determination of the Borrowing Base contains an
equity cushion (market value in excess of loan value), which is acknowledged by
the Borrower to be essential for the adequate protection of the Lenders. In any
event, the Borrowing Base shall at no time exceed 60% of the Agent's base case
net present value determination.
2.7 Extension of Termination Date. Provided that the Facility Conversion
-----------------------------
Date shall have occurred and the Revolving Termination Date shall not have
occurred, Borrower may request the Lenders, by written notice to the Agent, at
least 90 but not more than 180 days prior to the then effective Revolving
Stated-Termination Date, to consent to a one-year extension of the Revolving
Stated-Termination Date to August 31, 2001. Each Lender shall, in its sole
discretion, determine whether to consent to such request and shall notify the
Agent of its determination within 30 days of such Lender's receipt of notice of
such request. If such request shall have been consented to by all the Lenders,
the Agent shall notify Borrower in writing of such consent, and such extension
shall become effective upon the delivery by Borrower to the Agent and each
Lender, on or prior to the then effective Revolving Stated-Termination Date of
(i) a certificate of a Responsible Officer of Borrower, dated such date, as to
the accuracy, both before and after giving effect to such proposed extension, of
the representations and warranties set forth in Section 7 and as to the absence,
both before and after giving effect to such proposed extension, of any Default
or Potential Default and (ii) such other information, instruments, reports and
documents as Agent may reasonably request.
SECTION 3. TERMS OF PAYMENT.
--------- ----------------
3.1 Notes and Payments.
------------------
(a) Notes. Principal Debt under the Bridge Facility and, if
-----
applicable, the Revolving Facility is evidenced by the Notes, one payable
to each Lender in amount equal to its Pro Rata Part of $100,000,000.
Borrower understands, acknowledges and agrees that the execution and
delivery by Borrower of each Lender's Note in such original principal
amount does not imply, and shall not be construed to create, any obligation
or commitment on the part of any Lender to make any advances or issue or
participate in any LC's in excess of, in the aggregate, such Lender's
Commitment; the higher amount represented by such Lender's Note being for
ease of administration only in the event that the Lenders and the Borrower
may hereafter agree, in writing, to increase the Commitments upon the
request of Borrower and in accordance with such terms and conditions as the
Lenders may then require after receipt of new and independent credit
approvals by each Lender, based upon such financial and engineering
information, industry trends and other economic conditions as each Lender,
in the exercise of its sole discretion, may deem appropriate at the time to
evaluate such request.
(b) Payment. Borrower must make each payment and prepayment on
-------
the Obligation to Agent's principal office in New York, New York in
immediately available funds by 1:00 p.m. on the day due; otherwise, but
subject to SECTION 3.8, those funds continue to accrue interest as if they
were received on the next Business Day. Agent shall promptly pay to each
Lender the part of any payment or prepayment to which that Lender is
entitled under this agreement on the same day Agent receives the funds from
Borrower.
(c) Payment Assumed. Unless Agent has received notice from
---------------
Borrower prior to the date on which any payment is due under this agreement
that Borrower will not make that payment in full, Agent may assume that
Borrower has made the full payment due and Agent may, in reliance upon that
assumption, cause to be distributed to each Lender on that date the
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<PAGE>
amount then due to each Lender. If and to the extent Borrower does not
make the full payment due to Agent, each Lender shall repay to Agent on
demand the amount distributed to that Lender by Agent together with
interest for each day from the date that Lender received payment from Agent
until the date that Lender repays Agent (unless such repayment is made on
the same day as such distribution), at an interest rate equal to the
Federal-Funds Rate.
3.2 Interest and Principal Payments.
-------------------------------
(a) Interest. Accrued interest on each LIBOR-Rate Borrowing is due
--------
and payable on the last day of its respective Interest Period. If any
Interest Period for a LIBOR-Rate Borrowing is greater than three months,
then accrued interest is also due and payable on the date three months
after the commencement of the Interest Period. Accrued interest on each
Base-Rate Borrowing is due and payable on the last day of each March, June,
September, and December -- commencing on the first of those dates that
follows the Closing Date -- and, with respect to Borrowings under the (i)
Bridge Facility, on the Bridge Termination Date and (ii) Revolving
Facility, on the Revolving Termination Date.
(b) Principal. The entire outstanding Principal Debt under the Bridge
---------
Facility is due and payable on the Bridge Termination Date. The entire
outstanding Principal Debt under the Revolving Facility, if any, is due and
payable on the Revolving Facility Termination Date. Before such dates,
Borrower may at any time prepay, without penalty and in whole or in part,
the Principal Debt so long as (i) each voluntary partial prepayment must be
in a principal amount not less than $500,000 or a greater integral multiple
of $100,000 and (ii) Borrower shall pay any related Funding Loss upon
demand. Conversions under SECTION 3.10 are not prepayments.
(c) Mandatory Prepayments. If at any time prior to the Facility
---------------------
Conversion Date, the outstanding Principal Debt under the Bridge Facility
exceeds the total Bridge Facility Commitments, Borrower shall immediately
make prepayments to Agent (with any related Funding Loss) of the
outstanding Principal Debt in an amount equal to such excess. At any time
a Borrowing-Base Deficiency under the Revolving Facility exists, Borrower
shall make prepayments to Agent (with any related Funding Loss) of the
outstanding Principal Debt under the Revolving Facility so that (i) such
Borrowing-Base Deficiency has been reduced by at least 50% within 90 days
after notice from Agent of the existence of such Borrowing-Base Deficiency,
and (ii) such Borrowing-Base Deficiency no longer exists on or before the
day which is 180 days after notice from the Agent of the existence of such
Borrowing-Base Deficiency.
3.3 Interest Options. Except that the LIBOR Rate may not be selected when
----------------
a Default or Potential Default exists and except as otherwise provided in this
agreement, Borrowings bear interest at an annual rate equal to the lesser of
either (a) the Base Rate plus the Applicable Margin or the LIBOR Rate plus the
Applicable Margin (in each case as designated or deemed designated by Borrower),
as the case may be, or (b) the Maximum Rate. Each change in the Base Rate and
Maximum Rate is effective, without notice to Borrower or any other Person, upon
the effective date of change.
3.4 Quotation of Rates. Borrower may call Agent before delivering a
------------------
Borrowing Request to receive an indication of the interest rates then in effect,
but the indicated rates do not bind Agent or Lenders or affect the interest rate
that is actually in effect when Borrower makes a Borrowing request or on the
Borrowing Date.
3.5 Default Rate. If permitted by Law, all past-due Principal Debt,
------------
Borrower's past-due payment and reimbursement obligations in connection with
LCs, and past-due interest accruing on
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any of the foregoing bears interest from the date due (stated or by
acceleration) at the Default Rate until paid, regardless whether payment is made
before or after entry of a judgment.
3.6 Interest Recapture. If the designated interest rate applicable to any
------------------
Borrowing exceeds the Maximum Rate, the interest rate on that Borrowing is
limited to the Maximum Rate, but any subsequent reductions in the designated
rate shall not reduce the interest rate thereon below the Maximum Rate until the
total amount of accrued interest equals the amount of interest that would have
accrued if that designated rate had always been in effect. If at maturity
(stated or by acceleration), or at final payment of the Notes, the total
interest paid or accrued is less than the interest that would have accrued if
the designated rates had always been in effect, then, at that time and to the
extent permitted by Law, Borrower shall pay an amount equal to the difference
between (a) the lesser of the amount of interest that would have accrued if the
designated rates had always been in effect and the amount of interest that would
have accrued if the Maximum Rate had always been in effect, and (b) the amount
of interest actually paid or accrued on the Notes.
3.7 Interest Calculations. Interest will be calculated on the basis of
---------------------
actual number of days (including the first day but excluding the last day)
elapsed but computed as if each calendar year consisted of 360 days (unless the
calculation would result in an interest rate greater than the Maximum Rate or in
the case of interest on Base-Rate Borrowings in which event interest will be
calculated on the basis of a year of 365 or 366 days, as the case may be). All
interest rate determinations and calculations by Agent are conclusive and
binding absent manifest error.
3.8 Maximum Rate. Regardless of any provision contained in any Loan
------------
Document, no Lender is entitled to contract for, charge, take, reserve, receive,
or apply, as interest on all or any part of the Obligation, any amount in excess
of the Maximum Rate, and, if Lenders ever do so, then any excess shall be
treated as a partial prepayment of principal and any remaining excess shall be
refunded to Borrower. In determining if the interest paid or payable exceeds
the Maximum Rate, Borrower and Lenders shall, to the maximum extent permitted
under applicable Law, (a) treat all Borrowings as but a single extension of
credit (and Lenders and Borrower agree that is the case and that provision in
this agreement for multiple Borrowings is for convenience only), (b)
characterize any nonprincipal payment as an expense, fee, or premium rather than
as interest, (c) exclude voluntary prepayments and their effects, and (d)
amortize, prorate, allocate, and spread the total amount of interest throughout
the entire contemplated term of the Obligation. However, if the Obligation are
paid in full before the end of their full contemplated term, and if the interest
received for its actual period of existence exceeds the Maximum Amount, Lenders
shall refund any excess (and Lenders may not, to the extent permitted by Law, be
subject to any penalties provided by any Laws for contracting for, charging,
taking, reserving, or receiving interest in excess of the Maximum Amount). If
the Laws of the State of Texas are applicable for purposes of determining the
"Maximum Rate" or the "Maximum Amount," then those terms mean the "indicated
rate ceiling" from time to time in effect under Article 5069-1.04, Title 79,
Revised Civil Statutes of Texas, as amended. Borrower agrees that Chapter 15,
Subtitle 79, Revised Civil Statutes of Texas, 1925, as amended (which regulates
certain revolving credit loan accounts and revolving triparty accounts), does
not apply to the Obligation.
3.9 Interest Periods. When Borrower requests any LIBOR-Rate Borrowing,
----------------
Borrower may elect the applicable interest period (each an "INTEREST PERIOD"),
which may be, at Borrower's option, one, two, three, or six months for LIBOR-
Rate Borrowings, subject to SECTION 14.1 and the following conditions: (a) the
initial Interest Period for a LIBOR-Rate Borrowing commences on the applicable
Borrowing Date or conversion date, and each subsequent Interest Period
applicable to any Borrowing commences on the day when the next preceding
applicable Interest Period expires; (b) if any Interest Period for a LIBOR-Rate
Borrowing begins on a day for which no numerically corresponding Business Day in
the calendar month at the end of the Interest Period exists, then the Interest
Period ends on the last Business Day of that calendar month; (c) if Borrower is
required to pay any of a LIBOR-Rate
22
<PAGE>
Borrowing before the end of its Interest Period in order to comply with the
payment provisions of the Loan Documents, Borrower shall also pay any related
Funding Loss; and (d) no more than five Interest Periods may be in effect at one
time.
3.10 Conversions. Subject to the dollar limits of SECTION 2.1 and
-----------
provided that Borrower may not convert to or select a new Interest Period for a
LIBOR-Rate Borrowing at any time when a Default or Potential Default exists,
Borrower may (a) convert a LIBOR-Rate Borrowing on the last day of the
applicable Interest Period to a Base-Rate Borrowing, (b) convert a Base-Rate
Borrowing at any time to a LIBOR-Rate Borrowing, and (c) elect a new Interest
Period for a LIBOR-Rate Borrowing. That election may be made by telephonic
request to Agent no later than 11:00 a.m. on the third Business Day before the
conversion date or the last day of the Interest Period, as the case may be (for
conversion to a LIBOR-Rate Borrowing or election of a new Interest Period), and
no later than 11:00 a.m. on the last day of the Interest Period (for conversion
to a Base-Rate Borrowing). Borrower shall provide a Conversion Notice to Agent
no later than two days after the date of the conversion or election. Absent
Borrower's telephonic request for conversion or election of a new Interest
Period or if a Default or Potential Default exists, then, a LIBOR-Rate Borrowing
shall be deemed converted to a Base-Rate Borrowing effective when the applicable
Interest Period expires.
3.11 Order of Application.
--------------------
(a) No Default. If no Default or Potential Default exists, any
----------
payment shall be applied to the Obligation -- except as otherwise
specifically provided in the Loan Documents --in the order and manner as
Borrower directs.
(b) Default. If a Default or Potential Default exists or if Borrower
-------
fails to give direction, any payment (including proceeds from the exercise
of any Rights) shall be applied in the following order: (i) To all fees
and expenses for which Agent or Lenders have not been paid or reimbursed in
accordance with the Loan Documents (and if such payment is less than all
unpaid or unreimbursed fees and expenses, then the payment shall be paid
against unpaid and unreimbursed fees and expenses in the order of
incurrence or due date); (ii) to accrued interest on the Principal Debt;
(iii) to any LC reimbursement obligations that are due and payable and that
remain unfunded by any Borrowing under the Revolving Facility; (iv) to the
remaining Principal Debt in the order as Determining Lenders may elect (but
Determining Lenders agree to apply proceeds in an order that will minimize
any Funding Loss); (v) to the remaining Obligation in the order and manner
Determining Lenders deem appropriate; and (vi) as a deposit with Agent, for
the benefit of Lenders, as security for and payment of any subsequent LC
reimbursement obligations.
(c) Pro Rata. Each payment or prepayment shall be distributed to each
--------
Lender in accordance with its Pro Rata Part of that payment or prepayment.
3.12 Sharing of Payments, Etc. If any Lender obtains any payment or
-------------------------
prepayment with respect to the Obligation (whether voluntary, involuntary, or
otherwise, including, without limitation, as a result of exercising its Rights
under SECTION 3.13) that exceeds the part of that payment or prepayment that it
is then entitled to receive under the Loan Documents, then that Lender shall
purchase from the other Lenders participations that will cause the purchasing
Lender to share the excess payment or prepayment ratably with each other Lender.
If all or any portion of any excess payment or prepayment is subsequently
recovered from the purchasing Lender, then the purchase shall be rescinded and
the purchase price restored to the extent of the recovery. Borrower agrees that
any Lender purchasing a participation from another Lender under this section
may, to the fullest extent permitted by Law, exercise all of its Rights of
payment (including the Right of offset) with
23
<PAGE>
respect to that participation as fully as if that Lender were the direct
creditor of Borrower in the amount of that participation.
3.13 Offset. If a Default exists, each Lender is entitled to exercise
------
(for the benefit of all Lenders in accordance with SECTION 3.12) the Rights of
offset and banker's Lien against each and every account and other property, or
any interest therein, that any Company may now or hereafter have with, or which
is now or hereafter in the possession of, that Lender to the extent of the full
amount of the Obligation owed (directly or participated) to it.
3.14 Booking Borrowings. To the extent permitted by Law, any Lender may
------------------
make, carry, or transfer its Borrowings at, to, or for the account of any of its
branch offices or the office or branch of any of its Affiliates. However, no
Affiliate or branch is entitled to receive any greater payment under SECTION
3.16 than the transferor Lender would have been entitled to receive with respect
to those Borrowings, and a transfer may not be made if, as a direct result of
it, SECTION 3.15 or 3.17 would apply to any of the Obligation. If any of the
conditions of SECTIONS 3.16 or 3.17 ever apply to a Lender, that Lender shall
carry or transfer its Borrowings at, to, or for the account of any of its branch
offices or the office or branch of any of its Affiliates so long as the transfer
is consistent with the other provisions of this section, does not create any
burden or adverse circumstance for that Lender that would not otherwise exist,
and eliminates the conditions of SECTIONS 3.16 or 3.17 as applicable.
3.15 Basis Unavailable or Inadequate for LIBOR Rate. If, on or before
----------------------------------------------
any date when a LIBOR Rate is to be determined for a Borrowing, Agent reasonably
determines that the basis for determining the applicable rate is not available
or any Lender reasonably determines that the resulting rate does not accurately
reflect the cost to that Lender of making or converting Borrowings at that rate
for the applicable Interest Period, then Agent shall promptly notify Borrower
and Lenders of that determination (which is conclusive and binding on Borrower
absent manifest error) and the applicable Borrowing shall bear interest at the
sum of the Base Rate plus the Applicable Margin. Until Agent notifies Borrower
that those circumstances no longer exist, Lenders' commitments under this
agreement to make, or to convert to, LIBOR-Rate Borrowings, as the case may be,
are suspended.
3.16 Additional Costs. Each Lender severally and not jointly agrees to
----------------
notify Agent, the other Lenders, and Borrower within 90 days after it has actual
knowledge that any circumstances exist that would give rise to any payment
obligation by Borrower under CLAUSES (A) through (C) below. Although no Lender
shall have any liability to Agent, any other Lender, or any Company for its
failure to give that notice, Borrower is not obligated to pay any amounts under
those clauses that arise, accrue, or are imposed more than 90 days before that
notice to the extent it is applicable to those amounts. Any Lender demanding
payment of any additional costs under this section must generally be making
similar demand for similar additional costs under credit agreements to which it
is party that contain similar provisions to this section.
(a) Reserves. With respect to any or LIBOR-Rate Borrowing (i) if any
--------
present or future Law imposes, modifies, or deems applicable (or if
compliance by any Lender with any requirement of any Tribunal results in)
any requirement that any reserves (including, without limitation, any
marginal, emergency, supplemental, or special reserves) be maintained
(other than any reserve included in the Reserve Requirement), and if (ii)
those reserves reduce any sums receivable by that Lender under this
agreement or increase the costs incurred by that Lender in advancing or
maintaining any portion of any LIBOR-Rate Borrowing, then (iii) that Lender
(through Agent) shall deliver to Borrower a certificate setting forth in
reasonable detail the calculation of the amount necessary to compensate it
for its reduction or increase (which certificate is conclusive and binding
absent manifest error), and (iv) Borrower shall pay that amount to that
Lender within five Business Days after demand. The provisions of and
24
<PAGE>
undertakings and indemnification in this CLAUSE (A) survive the
satisfaction and payment of the Obligation and termination of this
agreement.
(b) Capital Adequacy. With respect to any Commitment, Borrowing or LC
----------------
if any present or future Law regarding capital adequacy or compliance by
Agent (as issuer of LCs) or any Lender with any request, directive, or
requirement now existing or hereafter imposed by any Tribunal regarding
capital adequacy, or any change in its written policies or in the risk
category of this transaction, reduces the rate of return on its capital as
a consequence of its obligations under this agreement to a level below that
which it otherwise could have achieved (taking into consideration its
policies with respect to capital adequacy) by an amount deemed by it to be
material (and it may, in determining the amount, utilize reasonable
assumptions and allocations of costs and expenses and use any reasonable
averaging or attribution method in apportioning such costs to its customers
generally), then (unless the effect is already reflected in the rate of
interest then applicable under this agreement) Agent or that Lender
(through Agent) shall notify Borrower and deliver to Borrower a certificate
setting forth in reasonable detail the calculation of the amount necessary
to compensate it (which certificate is conclusive and binding absent
manifest error), and Borrower shall pay that amount to Agent or that Lender
within five Business Days after demand. The provisions of and undertakings
and indemnification in this CLAUSE (B) shall survive the satisfaction and
payment of the Obligation and termination of this agreement.
(c) Taxes. Subject to SECTION 3.19, any Taxes payable by Agent or any
-----
Lender or ruled (by a Tribunal) payable by Agent or any Lender in respect
of this agreement or any other Loan Document shall, if permitted by Law, be
paid by Borrower, together with interest and penalties, if any except for
Taxes payable on or measured by the overall net income of Agent or that
Lender (or Agent or that Lender, as the case may be, together with any
other Person with whom Agent or that Lender files a consolidated, combined,
unitary, or similar Tax return) and except for interest and penalties
incurred as a result of the gross negligence or willful misconduct of Agent
or any Lender). Agent or that Lender (through Agent) shall notify Borrower
and deliver to Borrower a certificate setting forth in reasonable detail
the calculation of the amount of payable Taxes, which certificate is
conclusive and binding (absent manifest error), and Borrower shall pay that
amount to Agent for its account or the account of that Lender, as the case
may be within five Business Days after demand. If Agent or that Lender
subsequently receives a refund of the Taxes paid to it by Borrower, then
the recipient shall promptly pay the refund to Borrower.
3.17 Change in Laws. If any Law makes it unlawful for any Lender to make
--------------
or maintain LIBOR-Rate Borrowings, then that Lender shall promptly notify
Borrower and Agent, and (a) as to undisbursed funds, that requested Borrowing
shall be made as a Base-Rate Borrowing, and (b) as to any outstanding Borrowing
(i) if maintaining the Borrowing until the last day of the applicable Interest
Period is unlawful, the Borrowing shall be converted to a Base-Rate Borrowing as
of the date of notice, in which event Borrower will not be required to pay any
related Funding Loss, or (ii) if not prohibited by Law, the Borrowing shall be
converted to a Base-Rate Borrowing as of the last day of the applicable Interest
Period, or (iii) if any conversion will not resolve the unlawfulness, Borrower
shall promptly prepay the Borrowing, without penalty but with related Funding
Loss.
3.18 FUNDING LOSS. BORROWER SHALL INDEMNIFY EACH LENDER AGAINST, AND PAY
------------
TO IT UPON DEMAND, ANY FUNDING LOSS OF THAT LENDER. WHEN ANY LENDER DEMANDS
THAT BORROWER PAY ANY FUNDING LOSS, THAT LENDER SHALL DELIVER TO BORROWER AND
AGENT A CERTIFICATE SETTING FORTH IN REASONABLE DETAIL THE BASIS FOR IMPOSING
FUNDING LOSS AND THE CALCULATION OF THE AMOUNT, WHICH CALCULATION IS CONCLUSIVE
AND BINDING ABSENT MANIFEST ERROR. THE PROVISIONS OF AND UNDERTAKINGS AND
INDEMNIFICATION IN THIS SECTION
25
<PAGE>
SURVIVE THE SATISFACTION AND PAYMENT OF THE OBLIGATION AND TERMINATION OF THIS
AGREEMENT.
3.19 Foreign Lenders, Participants, and Assignees. Each Lender,
--------------------------------------------
Participant (by accepting a participation interest under this agreement), and
Assignee (by executing an Assignment) that is not organized under the Laws of
the United States of America or one of its states (a) represents to Agent and
Borrower that (i) no Taxes are required to be withheld by Agent or Borrower with
respect to any payments to be made to it in respect of the Obligation and (ii)
it has furnished to Agent and Borrower two duly completed copies of either U.S.
Internal Revenue Service Form 4224, Form 1001, Form W-8, or any other form
acceptable to Agent and Borrower that entitles it to a complete exemption from
U.S. federal withholding Tax on all interest payments under the Loan Documents,
and (b) covenants to (i) provide Agent and Borrower a new Form 4224, Form 1001,
Form W-8, or other form acceptable to Agent upon the expiration or obsolescence
according to Law of any previously delivered form, duly executed and completed
by it, entitling it to a complete exemption from U.S. federal withholding Tax on
all interest and fee payments under the Loan Documents, and (ii) comply from
time to time with all Laws with regard to the withholding Tax exemption. If any
of the foregoing is not true at any time or the applicable forms are not
provided, then Borrower and Agent (without duplication) may deduct and withhold
from interest and fee payments under the Loan Documents any Tax at the maximum
rate under the Code or other applicable Law, and amounts so deducted and
withheld shall be treated as paid to that Lender for all purposes under the Loan
Documents.
SECTION 4. FEES.
- ---------- ----
4.1 Treatment of Fees. The fees described in this SECTION 4 (a) are not
-----------------
compensation for the use, detention, or forbearance of money, (b) are in
addition to, and not in lieu of, interest and expenses otherwise described in
this agreement, (c) are payable in accordance with SECTION 3.1, (d) are non-
refundable, and (e) to the fullest extent permitted by Law, bear interest, if
not paid when due, at the Default Rate.
4.2 Fees/Warrants to Agent and Affiliates. Borrower shall (a) pay to
-------------------------------------
Agent, and its Affiliates as Agent may designate, the arrangement/structuring
fee and borrowing base fees described in the letter agreement (as it may be
renewed, extended, or modified) of even date herewith between Borrower and
Agent, and (b) cause XPLOR to comply with the terms and provisions of that
certain Stock Purchase Warrant of even date herewith issued by XPLOR to Agent
and that certain Registration Rights Agreement of even date herewith between
XPLOR and Agent (as the same may be modified or amended, herein collectively
referred to as the "Warrant Agreement"). Those fees and the rights and benefits
of Agent under the Warrant Agreement are solely for the account of Agent and its
Affiliates except to the extent that Agent may unilaterally agree in writing
with any Lender in respect of the sharing of such fees.
4.3 LC Fees. As an inducement for the issuance (including, without
-------
limitation, the extension) of each LC, Borrower agrees to pay to the Issuing
Lender:
(a) For the account of each Lender according to each Lender's
Commitment Percentage on the day the fee is payable for a standby LC, an
issuance fee equal to the greater of (i) $300.00 or (ii) a per annum rate
equal to the Applicable Margin for LIBOR-Rate Borrowings in effect on the
date of issuance, payable quarterly in arrears, of the average-face amount
of that LC during each applicable quarterly period.
(b) For the account of the Issuing Lender a fronting fee of 0.125% of
the face amount of the LC , payable on the date of issuance.
26
<PAGE>
4.4 Commitment Fees. From and after the (i) Closing Date to and including
---------------
the Bridge Termination Date, Borrower shall pay to Agent commitment fees for
Lenders according to each Lender's Commitment Percentage based on the unused
portion of the Bridge Facility, and (ii) Facility Conversion Date to and
including the Revolving Termination Date, Borrower shall pay to Agent commitment
fees for Lenders according to each Lender's Commitment Percentage based on the
unused portion of the Revolving Facility. The fees are payable as they accrue
on the last day of each March, June, September, and December -- commencing on
the first of those dates that follows the date of this agreement -- and, with
respect to the Bridge Facility, on the Bridge Termination Date and with respect
to the Revolving Facility, on the Revolving Termination Date. Each payment of
the fees is equal to the following, determined for the calendar quarter (or
portion of a calendar quarter commencing on the date of this agreement or
ending, with respect to the Bridge Facility, on the Bridge Termination Date and
with respect to the Revolving Facility, on the Revolving Termination Date)
preceding and including the date it is due: (a) From the Closing Date until the
Bridge Termination Date, the product of (i) the Applicable Percentage for the
Bridge Facility times (ii) the amount by which the total Bridge Commitments
exceed the sum of the average-daily Principal Debt outstanding under the Bridge
Facility times (iii) a fraction with the number of days in the applicable
quarter or portion of it as the numerator and 360 as the denominator; and (b)
From the Facility Conversion Date until the Revolving Termination Date, the
product of (i) the Applicable Percentage for the Revolving Facility times (ii)
the amount by which the total Revolving Commitments exceed the average-daily
Principal Debt outstanding under the Revolving Facility plus the average-daily
LC Exposure, times (iii) a fraction with the number of days in the applicable
quarter or portion of it as the numerator and 360 as the denominator.
SECTION 5. SECURITY.
- ---------- --------
5.1 Guaranty. Borrower shall cause XPLOR and all of XPLOR's present and
--------
future Subsidiaries (other than Borrower) -- whether now existing or in the
future formed or acquired as permitted by the Loan Documents -- that are
Restricted Companies to unconditionally guarantee the full payment and
performance of the Obligation by execution of a written guaranty agreement in
form and substance satisfactory to Agent.
5.2 Collateral. Borrower shall cause full payment and performance of the
----------
Obligation to be secured by Lender Liens on all of the items and types of
property -- (together with the additional collateral described in SECTIONS
2.3(G) and 5.3, if any, and the cash and non-cash proceeds of all of the
foregoing, the "COLLATERAL") -- described in the present and future mortgages,
deeds of trust, security agreements, pledge agreements, financing statements and
other documents and instruments creating Lender Liens (said documents and any
documents and instruments from time to time modifying, amending or supplementing
same are herein collectively referred to as the "COLLATERAL DOCUMENTS"),
including, without limitation:
(a) all of the Mineral Interests described in Exhibit B attached
---------
hereto and all other Mineral Interests hereafter included in the calculation of
the Borrowing Base and the oil, gas and mineral production therefrom or
attributable thereto, and in all operating agreements and oil or gas purchase
contracts (now existing or hereafter arising) relating to such Mineral Interests
and in related personal properties, fixtures and other properties, pursuant to
mortgages, deeds of trust, assignments of production, security agreements,
financing statements and other documents satisfactory to Agent;
(b) all of the present and future issued and outstanding capital stock
or other equity securities or ownership interests issued by (i) Borrower and all
of XPLOR's present and future Subsidiaries who are required to guarantee the
payment and performance of the Obligation pursuant to SECTION 5.1., (ii) AXEX,
L.L.C. and owned by any Restricted Company, and (iii) D-O-R Production
Management, L.L.C. and owned by any Restricted Company; and
27
<PAGE>
(c) all accounts, equipment, contract rights and general intangibles
of the Borrower and the other Restricted Companies, whether now owned or
hereafter acquired, and all products and proceeds thereof.
5.3 Collateral Account. In order to secure further the performance by
------------------
Borrower of the Obligation and to effect and facilitate Agent's right of offset,
immediately following Agent's request, Borrower shall, and shall cause the other
Companies to execute such forms, authorizations, documents and instruments, and
do such other things, as Agent shall request, in order to require that pipeline
companies, operators of the Mortgaged Properties and others (collectively, the
"Purchasers") purchasing (or acting as agents for, or making payments on behalf
----------
of, those purchasing) the oil, gas and other minerals produced or to be produced
from, or relating to, the Mineral Interests deliver to a post office box number
specified by Agent all royalties, production payments, checks, cash, proceeds
and monies now or hereafter payable by the Purchasers (or any of them) on
account of oil, gas or other minerals produced from or relating to the Mineral
Interests or otherwise with respect to the Mineral Interests; provided that
Agent shall not deliver any such forms or documents to any Purchaser or
otherwise notify or request any Purchaser to so deliver such proceeds unless and
until a Default shall have occurred. Borrower agrees that all such royalties,
payments and monies delivered to such post office box shall be deposited by
Agent in a cash collateral account at Agent styled "Araxas Production Account."
After the occurrence of a Default, Borrower shall, and shall cause the other
Companies to, upon receipt, deposit in the Araxas Production Account all such
royalties, payments and monies which Borrower or any other Company receives
directly from the Purchasers. Borrower hereby irrevocably authorizes and
directs Agent to charge from time to time after the occurrence of a Default, the
Araxas Production Account and any other accounts of Borrower at Agent or any
Lender for amounts due to the Lenders hereunder and under the Notes. After the
occurrence of a Default, Agent is hereby authorized, in its own name or the name
of the Borrower, to notify any or all parties obligated to Borrower with respect
to the Mineral Interests to make all payments due or to become due thereon
directly to the Agent, or such other person or officer as Agent may require
whereupon the power and authority of the Borrower to collect the same in the
ordinary course of its business shall be deemed to be immediately revoked and
terminated. With or without such general notification, after the occurrence of
a Default, Agent may take or bring in Borrower's name or that of the Agent all
steps, actions, suits or proceedings deemed by the Agent necessary or desirable
to effect possession or collection of payments, may complete any contract or
agreement of the Borrower in any way related to any of the Mineral Interests,
may make allowances or adjustments related to the Mineral Interests, may
compromise any claims related to the Mineral Interests or may issue credit in
its own name or the name of the Borrower. Regardless of any provision hereof,
however, Agent shall never be liable for its failure to collect or for its
failure to exercise diligence in the collection, possession, or any transaction
concerning, all or part of the Mineral Interests or sums due or paid thereon,
nor shall it or they be under any obligation whatsoever to anyone by virtue of
its security interests and liens relating to the Mortgaged Properties.
The Agent is hereby authorized and empowered on behalf of the Borrower to
endorse the name of the Borrower upon any check, draft, instrument, receipt,
instruction or other document or items, including, but not limited to, all items
evidencing payment upon any indebtedness of any Person to the Borrower coming
into the Agent's possession, and to receive and apply the proceeds therefrom in
accordance with the terms hereof. The Agent is hereby granted an irrevocable
power of attorney, which is coupled with an interest, to execute all checks,
drafts, receipts, instruments, instructions or other documents, agreements or
items on behalf of the Borrower, either before or after demand of payment on the
Notes, as shall be deemed by the Agent to be necessary or advisable, in the sole
discretion of the Agent, to protect its security interests and liens in the
Mineral Interests or the repayment of the Obligation, and the Agent shall not
incur any liability in connection with or arising from its exercise of such
power of attorney.
28
<PAGE>
Borrower acknowledges that all funds so transferred into the Araxas
Production Account shall be the property of the Borrower and the other Companies
only and not subject to any claim by any party other than Agent, for the benefit
of the Lenders.
5.4 Further Assurances. Borrower covenants and agrees that the Lender
------------------
Liens otherwise described in SECTION 5.2 and, when required, SECTION 2.3(G) and
5.3 must be created and perfected as a condition to funding any Borrowings or
the issuance of any LC. Furthermore, Borrower shall --and shall cause each
other appropriate Company to -- perform the acts, duly authorize, execute,
acknowledge, deliver, file, and record any additional writings, and pay all
filings fees and costs as Agent or Determining Lenders may reasonably deem
appropriate or necessary to perfect and maintain the Lender Liens and preserve
and protect the Rights of Agent and Lenders under any Loan Document.
5.5 Release of Collateral.
---------------------
(a) Whenever no Lender has any commitment to extend credit under any
Loan Document and the Obligation has been fully paid and performed, Agent
shall, upon Borrower's written request and at Borrower's cost and expense,
cause the Lender Liens on all Collateral to be released.
(b) In connection with any sale or other disposition of assets
permitted by SECTION 9.10, Agent shall, upon Borrower's request and at
Borrower's cost and expense, release the Lender Liens on the assets sold or
disposed of.
(c) If the Facility Conversion Date shall have occurred, Agent shall,
at Borrower's cost and expense, execute and deliver all documents and
instruments reasonably necessary to release and terminate all Lender Liens
on any of the Material Prospects not then comprising a portion of the
Borrowing Base within a reasonable time of Borrower's request therefor.
SECTION 6. CONDITIONS PRECEDENT. No Lender is obligated to fund the initial
- ---------- --------------------
Borrowing or issue the initial LC under the Bridge Facility unless Agent has
received all of the items described in PART A on SCHEDULE 6. No Lender is
obligated to fund the initial Borrowing (including any deemed Borrowings
pursuant to SECTION 2.1(B)(V) or issue any LC under the Revolving Facility
unless all Facility Conversion Conditions have been completely fulfilled to the
satisfaction of Agent, in the exercise of its sole discretion. In addition, no
Lender is obligated to fund (as opposed to continue or convert) any Borrowing or
issue any LC unless on the applicable Borrowing Date, or issue date (and after
giving effect to the requested Borrowing or LC), as the case may be: (a) Agent
(and the Issuing Lender, if applicable) timely receives a Borrowing Request or
LC Request (together with the applicable LC Agreement), as the case may be; (b)
the Issuing Lender receives any applicable LC fee or other amounts then due and
payable with respect to any LC; (c) all of the representations and warranties of
the Companies in the Loan Documents are true and correct in all material
respects (unless they speak to a specific date or are based on facts which have
changed by transactions contemplated or expressly permitted by this agreement);
(d) no Material Adverse Event, Default, or Potential Default exists; (e) no
Borrowing-Base Deficiency will exist after giving effect to the Borrowing or LC
issuance; and (f) no limitation in SECTION 2.1 or 2.3 is exceeded. Each
Borrowing Request and LC Request, however delivered, constitutes Borrower's
representation and warranty that the conditions in CLAUSES (C) through (F) above
are satisfied. Upon Agent's or any Lender's reasonable request, Borrower shall
deliver to Agent or such Lender evidence substantiating any of the matters in
the Loan Documents that are necessary to enable Borrower to qualify for the
Borrowing or LC, as the case may be. Each condition precedent in this agreement
(including, without limitation, those on SCHEDULE 6) is material to the
transactions contemplated by this agreement, and time is of the essence with
respect to each condition precedent.
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<PAGE>
SECTION 7. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants
- ---------- ------------------------------
to Agent and Lenders as follows:
7.1 Purpose and Regulation U.
------------------------
(a) Borrower will use LCs and the proceeds of the Bridge Facility
solely in accordance with the use of funds schedule provided in SCHEDULE
7.1.
(b) Borrower will use LCs and the proceeds of the Revolving Facility
solely for (i) refinancing a portion of the Borrowings under the Bridge
Facility, (ii) the Restricted Companies' working capital, (iii) the
acquisition and development of Mineral Interests, (iv) the payment of
settlement obligations under Swap Agreements otherwise permitted hereunder,
and (v) other general corporate purposes.
(b) No Company is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of
purchasing or carrying any "margin stock" within the meaning of Regulation
U of the Board of Governors of the Federal Reserve System, as amended. No
part of the proceeds of any LC draft or drawing or Borrowing will be used,
directly or indirectly, for a purpose that violates any Law, including,
without limitation, Regulation U.
7.2 Corporate Existence, Good Standing, and Authority. Each Restricted
-------------------------------------------------
Company is duly organized, validly existing, and in good standing under the Laws
of its jurisdiction of incorporation. Each Restricted Company is duly qualified
to transact business and is in good standing as a foreign corporation in each
jurisdiction where the nature and extent of its business and properties require
due qualification and good standing (each of which jurisdictions is identified
on SCHEDULE 6). Each Restricted Company possesses all requisite authority and
power to conduct its business as is now being conducted and as proposed under
the Loan Documents to be conducted and to own and operate its assets as now
owned and operated and as proposed to be owned and operated under the Loan
Documents.
7.3 Subsidiaries and Names. SCHEDULE 7.3 -- as supplemented from time to
----------------------
time by written notice from Borrower to Agent and Lenders specifically referring
to that schedule and this section and reflecting changes to that schedule as a
result of transactions permitted by the Loan Documents -- describes (a) all of
Borrower's direct and indirect Subsidiaries, (b) all Restricted Companies, (c)
every name or trade name used by each Restricted Company during the five-year
period before the date of this agreement, and (d) every change of each
Subsidiary's name during the four-month period before the date of this
agreement. All of the outstanding shares of capital stock (or similar voting
interests) of XPLOR's Subsidiaries are (a) duly authorized, validly issued,
fully paid, and nonassessable, (b) owned of record and beneficially as described
in that schedule or those writings, free and clear of any Liens, except
Permitted Liens, and (c) not subject to any warrant, option, or other
acquisition Right of any Person or subject to any transfer restriction except
restrictions imposed by securities Laws and general corporate Laws.
7.4 Authorization and Contravention. The execution and delivery by each
-------------------------------
Restricted Company of each Loan Document to which it is a party and the
performance by it of its obligations under those Loan Documents (a) are within
its corporate power, (b) have been duly authorized by all necessary corporate
action, (c) require no action by or filing with any Tribunal (except any action
or filing that has been taken or made on or before the Closing Date), (d) do not
violate any provision of its charter or bylaws, and (e) do not violate any
provision of Law applicable to it or any material agreement to which it is a
party except violations that individually or collectively are not a Material
Adverse Event.
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<PAGE>
7.5 Binding Effect. Upon execution and delivery by all parties to it,
--------------
each Loan Document will constitute a legal and binding obligation of each
Restricted Company party to it, enforceable against it in accordance with that
Loan Document's terms except as that enforceability may be limited by Debtor
Laws and general principles of equity.
7.6 Financials and Existing Debt. The Current Financials were prepared in
----------------------------
accordance with GAAP and present fairly, in all material respects, the
Companies' consolidated financial condition, results of operations, and cash
flows as of, and for the portion of the fiscal year ending on their dates
(subject only to normal year-end adjustments for interim statements). All
material liabilities of the Companies as of those dates are reflected in those
Current Financials or in the notes to them or have otherwise been disclosed to
Lenders in writing. Except for transactions directly related to, specifically
contemplated by, or expressly permitted by the Loan Documents (a) no material
adverse changes have occurred in the Companies' consolidated financial condition
from that shown in the Current Financials, and (b) no Company has incurred any
material liability except Debt that is not prohibited by the Loan Documents.
7.7 Budget. Although Borrower cannot assure Agent or Lenders that the
------
Budget will be achieved, the Budget is based upon reasonable assumptions, which
are consistent with each other and with all facts then known to Borrower and
which includes all other material assumptions necessary in order for the Budget
to not be misleading in any material respect.
7.8 Solvency. On each Borrowing Date and the date any LC is issued, each
--------
Restricted Company is -- and after giving effect to the requested Borrowing or
LC will be -- Solvent.
7.9 Litigation. Except as disclosed on SCHEDULE 7.9 and matters covered
----------
(subject to reasonable and customary deductible and retention) by insurance or
indemnification agreements (a) no Restricted Company is subject to, or aware of
the threat of, any Litigation that is reasonably likely to be determined
adversely to any Restricted Company and, if so adversely determined, is a
Material Adverse Event, and (b) no outstanding and unpaid judgments against any
Restricted Company exist.
7.10 Taxes. Except where not a Material Adverse Event (a) all Tax
-----
returns of each Restricted Company required to be filed have been filed (or
extensions have been granted) before delinquency, and (b) all Taxes imposed upon
each Restricted Company that are due and payable have been paid before
delinquency except as being contested as permitted by SECTION 8.5.
7.11 Environmental Matters. Except as disclosed on SCHEDULE 7.11:
---------------------
(a) No consent or other approval of -- or declaration or other filing
with -- any Tribunal is required under any Environmental Law in connection
with any transaction contemplated by the Loan Documents.
(b) Except where adequately covered by an Environmental Indemnity
Agreement or where not a Material Adverse Event, none of the following are
present at any Real Property (including, without limitation, the Leases and
the Mineral Interests) of any Restricted Company in violation of any
Environmental Law: (i) Any asbestos or asbestos-containing material; (ii)
any underground or aboveground storage tank or tank system subject to
regulation under any Environmental Law; or (iii) any electrical or other
fixtures or equipment containing polychlorinated biphenyls.
(c) Except where adequately covered by an Environmental Indemnity
Agreement or where not a Material Adverse Event, no unreported Release of
any Hazardous Substance has occurred at or in the vicinity to any Real
Property (including, without limitation, the
31
<PAGE>
Leases and the Mineral Interests) (i) in a quantity that requires any
report or other notice to any Tribunal under any Environmental Law or (ii)
that has resulted or that threatens to result in the presence of any
Hazardous Substance in the environment in a quantity, concentration, state,
or other condition that exceeds any applicable standard for the protection
of human health or the environment under any Environmental Law.
(d) Except where not a Material Adverse Event, no Real Property
(including, without limitation, the Leases and the Mineral Interests) has
been used for the storage (other than short-term storage not requiring an
Environmental Permit), treatment, or disposal of any Hazardous Substance in
any amounts that are reasonably likely to result in any Environmental
Liabilities or violation of any Environmental Law while owned or operated
by any Company or any Predecessor.
(e) Except where adequately covered by an Environmental Indemnity
Agreement or where not a Material Adverse Event, no Restricted Company or
Predecessor is -- or has received any notice from any Tribunal during the
last five years that it is -- potentially liable for any removal,
remediation, or other response costs under any Environmental Law as the
result of the Release or threatened Release of any Hazardous Substance.
(f) No Company knows of any material error or omission in any
Environmental Report delivered to Agent or any Lender.
7.12 Employee Plans. Except where not a Material Adverse Event (a) no
--------------
Employee Plan has incurred an "accumulated funding deficiency" (as defined in
Section 302 of ERISA or Section 412 of the Code), (b) no Company has incurred
liability -- except for liabilities for premiums that have been paid or that are
not past due -- under ERISA to the PBGC in connection with any Employee Plan,
(c) no Company has withdrawn in whole or in part from participation in a
Multiemployer Plan, (d) no Company has engaged in any "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the Code), (e) no
"reportable event" (as defined in Section 4043 of ERISA) has occurred, excluding
events for which the notice requirement is waived under applicable PBGC
regulations, (f) no Company or Affiliate of any Company has any liability under
or is subject to any Lien under ERISA or the Code to or on account of any
employee benefit plan, program, scheme, or arrangement established or maintained
by any Company or Affiliate of any Company or to which any Company or any
Affiliate of any Company contributes or had an obligation to contribute, (g)
each Employee Plan complies in all material respects, both in form and
operation, with ERISA and the Code, and (h) no Multiemployer Plan is in
reorganization within the meaning of (S) 418 of the Code.
7.13 Properties; Liens. Each Restricted Company has indefeasible title
-----------------
to the Mortgaged Properties and all of its other property reflected on the
Current Financials as being owned by it except for property that is obsolete or
that has been disposed of in the ordinary course of business between the date of
the Current Financials and the date of this agreement or, with respect to its
property (other than the Mortgaged Properties), failure of such Restricted
Company to have such title would not constitute a Material Adverse Event, or,
after the date of this agreement, as permitted by SECTION 9.10 or SECTION 9.11.
No Lien exists on any property (including, without limitation, the Mortgaged
Properties) of any Company except Permitted Liens. No Restricted Company is
party or subject to any agreement, instrument, or order which in any way
restricts any Restricted Company's ability to allow Liens to exist upon any of
its assets except relating to Permitted Liens. The provisions of each
Collateral Document are effective to create in favor of the Agent for the
ratable benefit of the Lenders, a legal, valid and enforceable Lender Lien in
all right, title and interest of the Restricted Companies in the Collateral
described therein, which Lender Liens shall constitute fully perfected first-
priority Liens on all right, title and interest of the Restricted Companies in
the Collateral described therein, subject only to Permitted Liens. No orders
of, proceedings pending before, or other
32
<PAGE>
requirements of, the Federal Energy Regulatory Commission or any other Tribunal
exist which could result in the Restricted Companies being required to refund
any material portion of the proceeds received or to be received from the sale of
hydrocarbons constituting part of the Mortgaged Properties. Except as disclosed
on SCHEDULE 7.13 attached hereto, no Restricted Company (a) is obligated in any
material respect by virtue of any prepayment made under any contract containing
a "take-or-pay" or "prepayment" provision or under any similar agreement to
deliver hydrocarbons produced from or allocated to any of the Mortgaged
Properties at some future date without receiving full payment therefor at the
time of delivery, and (b) has produced gas, in any material amount, subject to,
and is, nor is any of the Mortgaged Properties, subject to balancing rights of
third parties or subject to balancing duties under governmental requirements,
except as to such matters for which such Restricted Company has established
monetary reserves adequate in an amount to satisfy such obligations and has
segregated such reserves from other accounts.
7.14 Government Regulations. No Restricted Company is subject to
----------------------
regulation under the Investment Company Act of 1940, as amended, or the Public
Utility Holding Company Act of 1935, as amended.
7.15 Transactions with Affiliates. Except for transactions with other
----------------------------
Restricted Companies and as otherwise disclosed on SCHEDULE 7.15, no Restricted
Company is a party to a material transaction with any of its Affiliates except
transactions in the ordinary course of business and upon fair and reasonable
terms not materially less favorable than it could obtain or could become
entitled to in an arm's-length transaction with a Person that was not its
Affiliate.
7.16 Debt. No Restricted Company has any Debt except Permitted Debt.
----
7.17 Leases. Except where not a Material Adverse Event (a) each
------
Restricted Company enjoys peaceful and undisturbed possession of all leases
necessary for the operation of its properties and assets, none of which contains
any unusual or burdensome provisions which might materially affect or impair the
operation of those properties and assets, and (b) all material leases under
which any Restricted Company is a lessee are in full force and effect, and no
default -- or event that, with notice, time lapse, or both, would become a
default -- exists. The leases which underlie or constitute part of the Mineral
Interests (the "Leases") are in full force and effect, and no Restricted Company
------
nor any other person has defaulted on any of its obligations thereunder so as to
impair the value of such Leases.
7.18 Labor Matters. Except where not a Material Adverse Event (a) no
-------------
actual or threatened strikes, labor disputes, slow downs, walkouts, work
stoppages, or other concerted interruptions of operations that involve any
employees employed at any time in connection with the business activities or
operations at the Real Property exist, (b) hours worked by and payment made to
the employees of any Restricted Company or any Predecessor have not been in
violation of the Fair Labor Standards Act or any other applicable Laws
pertaining to labor matters, (c) all payments due from any Restricted Company
for employee health and welfare insurance, including, without limitation,
workers compensation insurance, have been paid or accrued as a liability on its
books, (d) the business activities and operations of each Company are in
compliance with OSHA and other applicable health and safety Laws.
7.19 Intellectual Property. Except where not a Material Adverse Event (a)
---------------------
each Restricted Company owns or has the right to use all material licenses,
patents, patent applications, copyrights, service marks, trademarks, trademark
applications and trade names necessary to continue to conduct its businesses as
presently conducted by it and proposed to be conducted by it immediately after
the date of this agreement, (b) each Restricted Company is conducting its
business without infringement or claim of infringement of any license, patent,
copyright, service mark, trademark, trade name, trade
33
<PAGE>
secret or other intellectual property right of others, and (c) no infringement
or claim of infringement by others of any material license, patent, copyright,
service mark, trademark, trade name, trade secret or other intellectual property
of any Restricted Company exists.
7.20 Full Disclosure. Each fact or condition relating to the Loan
---------------
Documents or any Restricted Company's financial condition, business, or property
that is a Material Adverse Event has been disclosed in writing to Agent. All
information previously furnished to Agent by or at the direction of a
Responsible Officer or the General Counsel of or the attorneys for Borrower in
connection with the Loan Documents was -- and all information furnished to Agent
in the future by or at the direction of a Responsible Officer or the General
Counsel of or the attorneys for Borrower will be -- true and accurate in all
material respects or based on reasonable estimates on the date the information
is stated or certified.
7.21 Estimated Oil and Gas Reserves; Material Prospects. Borrower has
--------------------------------------------------
heretofore delivered or caused to be delivered to Agent copies of all requested
reports (prepared by independent consulting engineers), which have been obtained
by the Restricted Companies and concern the estimated oil and gas reserves and
future net revenues attributable to the Mineral Interests. The statements of
fact contained in said reports with respect to the character and ownership of
the Mineral Interests (including, without limitation, the revenue interest and
working interest of the Restricted Companies stated therein) and the other
factual data furnished by the Restricted Companies as a basis for the estimates
set forth therein are true and correct and do not omit any material fact
necessary to make said statements not misleading. The Mortgaged Properties
described in EXHIBIT B include all Leases and other Mineral Interests
constituting the Material Prospects.
7.22 Working Interest. The Restricted Companies own a "working
----------------
interest" in each of the Mortgaged Properties described in Exhibit B which is
---------
not greater than the interest specified in the description of such property in
Exhibit B, with the term "working interest", as used herein, meaning the right
- ---------
to explore for, drill and produce oil, gas or other minerals, whether such right
is created by lease or otherwise, and being equivalent to the proportionate part
of the cost of exploration, development and marketing of oil, gas and other
minerals borne by the Restricted Companies with respect to each respective
property.
7.23 Net Revenue Interest. The Restricted Companies own a "net revenue
--------------------
interest" in each of the Mortgaged Properties described on Exhibit B which is
---------
not less than the interest specified in the description of such property on
Exhibit B, with the term "net revenue interest", as used herein, meaning the
- ---------
proportionate share of the production of oil, gas or other minerals to which the
Restricted Companies are entitled after deduction of all royalties, overriding
royalties and other interests payable from or measured by production.
7.24 Burdensome Contracts. No Restricted Company is a party to, or bound
--------------------
by, nor are any of the Mineral Interests or other Mortgaged Properties subject
to, any contract which could reasonably result in a Material Adverse Event.
7.25 Regulatory Defects. All regulatory defects of which the Restricted
------------------
Companies have been advised or have actual knowledge with respect to the
ownership or operation of the Mortgaged Properties are described on SCHEDULE
7.25. No such regulatory defect results in a Material Adverse Event or affects
the Restricted Companies intended operation of any of the Mineral Interests or
the value of the sale of production therefrom.
7.26 Agreements Affecting Mineral Interests. Borrower has advised Agent
--------------------------------------
of, and delivered or caused to be delivered (to the extent requested by Agent)
true and correct copies to Agent of, all
34
<PAGE>
material operating agreements, pooling or unitization agreements, sales or
processing contracts, restrictions, preferential purchase right agreements,
farm-out, drilling and/or development agreements, pipeline transportation
agreements, gas purchase or other marketing agreements, Swap Agreements and
other material agreements which pertain to the Mineral Interests, the operation
thereof or the disposition of production attributable thereto.
7.27 Locations of Business, Offices. The principal place of business and
------------------------------
chief executive office of each Restricted Company is located at the address of
the Borrower, set forth next to its name on the signature pages hereof or at
such other location as the Borrower may have, by proper written notice
hereunder, advised the Agent and the Lenders, provided that such other location
--------
of the Borrower or other Restricted Company is within a state in which
appropriate financing statements from the Borrower, as applicable in favor of
the Agent have been filed.
SECTION 8. AFFIRMATIVE COVENANTS. For so long as any Lender is committed to
- ---------- ---------------------
lend or issue LCs under this agreement and until the Obligation has been fully
paid and performed, Borrower covenants and agrees with Agent and Lenders that,
without first obtaining Agent's written notice of Determining Lenders' consent
to the contrary:
8.1 Certain Items Furnished. Borrower shall furnish or cause to be
-----------------------
furnished the following to each Lender:
(a) Annual Financials, Etc. Promptly after preparation but no later
----------------------
than 90 days after the last day of each fiscal year of XPLOR, Financials
showing the Companies' consolidated financial condition and results of
operations as of, and for the year ended on, that last day, accompanied by
(i) the opinion, without material qualification, of KPMG Peat Marwick,
L.L.P. or other firm of nationally-recognized independent certified public
accountants reasonably acceptable to Determining Lenders, based on an audit
using generally accepted auditing standards, that the consolidated portion
of those Financials were prepared in accordance with GAAP and present
fairly, in all material respects, the Companies' consolidated financial
condition and results of operations, and (ii) a Compliance Certificate.
(b) Quarterly Financials, Etc. Promptly after preparation but no
-------------------------
later than 45 days after the last day of each of the first three fiscal
quarters of XPLOR each year, Financials showing the Companies' consolidated
financial condition and results of operations for that fiscal quarter and
for the period from the beginning of the current fiscal year to the last
day of that fiscal quarter, accompanied by (i) a Compliance Certificate.
(c) Reserve Report(s).
-----------------
(1) The Borrower shall deliver to the Agent and each Lender no
later than February 28 of each year during the term of this agreement,
engineering reports in form and substance acceptable to the Lenders
prepared and certified by Netherland, Sewell and Associates, Inc. or such
other nationally-recognized or regionally-recognized independent consulting
petroleum engineers acceptable to the Lenders setting forth (i) the proven
producing, non-producing and undeveloped oil and gas reserves (separately
classified as such) attributable to the Mortgaged Properties as of December
31 of the year for which such reserve reports are furnished, (ii) the
aggregate present value determined on the basis of stated pricing
assumptions, of the future net income with respect to such Mortgaged
Properties, discounted at a stated per annum discount rate, (iii)
projections of the annual rate of production, gross income and net income
with respect to such reserves, and (iv) information with respect to any
"take or pay," "prepayment" and gas balancing liabilities of the Restricted
Companies.
35
<PAGE>
(2) The Borrower shall deliver to the Agent and each Lender no
later than July 31 of each year during the term of this Agreement, a
supplement to the most recent year-end Reserve Report, satisfactory to the
Agent, prepared by or under the supervision of the chief petroleum engineer
of the Borrower and containing an update of the information described in
Subsection 8.1(c)(1)(i)-(iv) as of June 30 of such year to reflect changes
from the most recent year-end Reserve Report delivered pursuant to
Subsection 8.1(c)(1).
(3) Each of the reports provided pursuant to this Section shall
be submitted to the Agent and each Lender together a certificate of a
Responsible Officer certifying that such report is true and correct in all
material respects and stating the value of the Mortgaged Properties as a
percentage of all Mineral Interests evaluated in such report based on the
discounted future net income contained therein, and with additional data as
the Agent or any Lender may reasonably request concerning pricing,
quantities of production from the Mortgaged Properties, purchasers of
production and engineering and geological data.
(d) Production Information. Within 45 days after the last day of each
----------------------
month hereafter, commencing with the month ending June 30, 1997, a
production and operations report in the form of Exhibit C, duly completed
and certified by a Responsible Officer.
(e) Semi-Annual Budget. Prior to each June 30 and December 31 of each
-----------------
year during the term of this agreement, commencing December 31, 1997, a
financial budget and projection of the Companies in form and substance
satisfactory to the Agent (each a "Budget") for the following six month
period ending on the next December 31 and June 30, respectively.
(f) Other Reports. Promptly after preparation and distribution,
--------------
accurate and complete copies of all reports and other material
communications about material financial matters or material corporate plans
or projections by or for any Company for distribution to any Tribunal or
any existing or potential creditor (i) including, without limitation, each
Form 10-K, 10-Q, 8-K and S-8 filed with the Securities and Exchange
Commission but (ii) excluding (A) credit, trade, and other reports prepared
and distributed in the ordinary course of business, and (B) information
otherwise furnished to Agent and Lenders under this agreement. Promptly
upon Agent's reasonable request therefor, copies of (i) any statements or
other reports describing reserves, future income or value attributable to
any of the Mineral Interests and monthly production reports filed with the
Minerals Management Service by the operator of any of the Mortgaged
Properties; (ii) all material operating agreements, pooling or unitization
agreements, sales or processing contracts, restrictions, preferential
purchase right agreements, drilling and/or development agreements, pipeline
transportation agreements and other material agreements which pertain to
the Mineral Interests, the operation thereof or the disposition of
production attributable thereto; and (iii) all reports, forms and other
documents and data submitted by Borrower to the United States Department of
the Interior Bureau of Land Management Minerals Management Service, the
Louisiana Oil Conservation Commission, United States Department of Energy,
United States Federal Energy Regulatory Commission, the Texas Railroad
Commission or other Tribunal, concerning the operation of, drilling of
wells on, sale of production from, or the prices received for the sale of
production from, the Mineral Interests.
(g) Employee Plans. As soon as possible and within 30 days after
-------------
Borrower knows that any event which would constitute a reportable event
under Section 4043(b) of Title IV of ERISA with respect to any Company's
employee pension or other benefit plan subject to ERISA has occurred, or
that the PBGC has instituted or will institute proceedings under ERISA to
terminate that plan, deliver a certificate of a Responsible Officer of
Borrower setting forth details as to that reportable event and the action
which the Companies propose to take with
36
<PAGE>
respect to it, together with a copy of any notice of that reportable event
which may be required to be filed with the PBGC, or any notice delivered by
the PBGC evidencing its intent to institute those proceedings or any notice
to the PBGC that the plan is to be terminated, as the case may be. For all
purposes of this section, Borrower is deemed to have all knowledge or
knowledge of all facts attributable to the plan administrator under ERISA.
(h) Other Notices. Promptly after Borrower has knowledge of, but in
------------
any event prior to five days after the occurrence of any of the following
events, notice of (i) the existence and status of any Litigation that is
reasonably likely to be adversely determined and, if determined adversely
to any Company, would be a Material Adverse Event, (ii) any change in any
material fact or circumstance represented or warranted by any Company in
any Loan Document, (iii) a Default or Potential Default, specifying the
nature thereof and what action the Companies have taken, are taking, or
propose to take or (iv) claims made against any Restricted Company by any
Person in excess of $250,000 and which would not be fully covered by
adequate insurance pursuant to policies acceptable to Agent, other than for
accounts payable in the ordinary course of business.
(i) PARTS B AND C on SCHEDULE 6. Promptly as they become available
---------------------------
(subject to the other requirements of this agreement), the items, if any,
described in PARTS B AND C on SCHEDULE 6.
(j) XPLOR IPO Status Report. Until the Facility Conversion Date shall
-----------------------
have occurred, on or before the last day of each calender month, a progress
and status report with respect to the XPLOR IPO including, without
limitation, copies of all material correspondence, reports and other
information received by any Company from underwriters, rating agencies,
financial consultants or other parties in connection therewith or relating
thereto.
(k) Swap Agreements. Within five (5) Business Days after entering
---------------
into, or the amendment, modification, termination or unwinding of, any Swap
Agreement or any transaction confirmation with respect thereto, written
notice of the relevant terms thereof and the applicable counterparty
thereto, including copies of all documentation executed and delivered in
connection therewith.
(l) Other Information. Promptly when reasonably requested by Agent or
-----------------
any Lender, such information (not otherwise required to be furnished under this
agreement) about any Company's business affairs, assets, and liabilities.
8.2 Use of Credit. Borrower shall use LCs and the proceeds of Borrowings
-------------
only for the purposes represented in this agreement.
8.3 Books and Records. Each Company shall maintain books, records, and
-----------------
accounts necessary to prepare Financials in accordance with GAAP.
8.4 Inspections. Upon reasonable request, each Company shall allow Agent
-----------
or any Lender (or their respective Representatives) to inspect any of its
properties, to review reports, files, and other records and to make and take
away copies, to conduct tests or investigations, and to discuss any of its
affairs, conditions, and finances with its other creditors, directors, officers,
employees, or representatives from time to time, during reasonable business
hours. Any reviews and investigations shall be limited to matters relevant to
the present or future financial condition of the Companies and their compliance
with -- or ability to comply with -- the Loan Documents.
37
<PAGE>
8.5 Taxes. Each Restricted Company shall promptly pay when due any and
-----
all Taxes except Taxes that are being contested in good faith by lawful
proceedings diligently conducted, against which reserve or other provision
required by GAAP has been made, and in respect of which levy and execution of
any Lien has been and continues to be stayed.
8.6 Payment of Obligation. Each Restricted Company shall promptly pay (or
---------------------
renew and extend) all of its material obligations as they become due (unless the
obligations are being contested in good faith by appropriate proceedings).
8.7 Expenses. Within five Business Days of demand by Agent, Borrower
--------
shall pay (a) all costs, fees, and expenses paid or incurred by Agent incident
to any Loan Document (including, without limitation, the reasonable fees and
expenses of Agent's counsel in connection with the negotiation, preparation,
delivery, and execution of the Loan Documents and any related amendment, waiver,
or consent), (b) all out-of-pocket costs paid or incurred by the Lenders in
connection with any special redetermination of the Borrowing Base requested by
Borrower pursuant to SECTION 2.6, (c) all other costs and expenses paid or
incurred by the Agent in connection with the normal, ongoing administration, of
this agreement and the other Loan Documents, including, without limitation,
independent insurance reviews or third party engineering support, in an
aggregate amount not to exceed the sum of (i) $20,000.00 during the period of
time from the Closing Date to and including the Facility Conversion Date, and
(ii) $10,000 in any twelve consecutive month period thereafter, and (d) all
reasonable costs and expenses incurred by Agent or any Lender in connection with
the enforcement of the obligations of any Restricted Company under the Loan
Documents or the exercise of any Rights under the Loan Documents (including,
without limitation, reasonable allocated costs of in-house counsel, other
reasonable attorneys' fees, and court costs), all of which are part of the
Obligation, bearing interest, if not paid when due at the Default Rate until
paid.
8.8 Maintenance of Existence, Assets, and Business. Each Restricted
----------------------------------------------
Company shall (a) except in connection with dispositions permitted under SECTION
9.10 and mergers and consolidations permitted under SECTION 9.11, maintain its
corporate existence and good standing in its state of incorporation, and (b) (i)
maintain its authority to transact business and good standing in all other
states where required or necessary for its business, (ii) maintain all licenses,
permits, and franchises (including, without limitation, Environmental Permits)
necessary for its business, and (iii) keep all of its assets that are useful in
and necessary to its business in good working order and condition (ordinary wear
and tear excepted) and make all necessary repairs and replacements.
8.9 Insurance. Each Restricted Company shall, at its cost and expense,
---------
maintain with financially sound, responsible, and reputable insurance companies
or associations -- or, as to workers' compensation or similar insurance, with an
insurance fund or by self-insurance authorized by the jurisdictions in which it
operates -- insurance concerning its properties and businesses against
casualties, risks and contingencies and of types and in amounts (and with co-
insurance and deductibles) as is customary in the case of similar businesses.
8.10 Environmental Matters. Each Restricted Company shall (a) operate
---------------------
and manage its businesses, processes, and other activities in compliance with
all Environmental Laws, Environmental Permits, and Environmental Indemnity
Agreements and in a manner to avoid incurring Environmental Liabilities, to
prevent any Release of Hazardous Substances, and to minimize the risk of loss or
damage in the event of any Release of Hazardous Substances, (b) keep each
Environmental Indemnity Agreement in full force and effect according to its
terms, take all steps that may be necessary or appropriate to timely assert and
receive payment or all claims under it, and (to the extent that the material
remediation or indemnity protections or benefits provided by it would be
jeopardized) not consent to any modification or amendment of any Environmental
Indemnity Agreement or waive, compromise, settle, or otherwise release or
discharge any obligation or indemnity of any indemnitor
38
<PAGE>
or other obligor under it, and (c) continuously and diligently carry out such
removal, remedial, or other response actions as may be necessary or appropriate
(A) in respect of each matter (whether or not disclosed on SCHEDULE 7.11) that
constitutes non-compliance with any Environmental Law and (B) to prevent or
minimize potential Environmental Liabilities from any of those matters (whether
or not disclosed on SCHEDULE 7.11) or any Release of Hazardous Substances.
8.11 Subsidiaries. In respect of each applicable present and future
------------
Subsidiary of XPLOR (whether as a result of acquisition, creation, or
otherwise), Borrower shall cause such Subsidiary to promptly and fully comply
with SECTION 5 and its capital stock or other equity securities to become
subject to Lender Liens as required by SECTION 5.2.
8.12 INDEMNIFICATION.
---------------
(a) BORROWER AND (PURSUANT TO ITS GUARANTY) EACH OTHER RESTRICTED
COMPANY SHALL, JOINTLY AND SEVERALLY INDEMNIFY AGENT AND LENDERS AND THEIR
RESPECTIVE PARENTS, SUBSIDIARIES, DIRECTORS, OFFICERS, EMPLOYEES,
REPRESENTATIVES, AGENTS, SUCCESSORS, ASSIGNS, AND ATTORNEYS (COLLECTIVELY,
THE "INDEMNIFIED PARTIES"), PROTECT AND DEFEND (WITH COUNSEL ACCEPTABLE TO
-------------------
DETERMINING LENDERS) AGAINST, HOLD THEM HARMLESS FROM AND AGAINST, AND ON
DEMAND PAY OR REIMBURSE THEM FOR ANY AND ALL LIABILITIES, OBLIGATION,
LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS, AND
PROCEEDINGS AND ALL COSTS, EXPENSES (INCLUDING, WITHOUT LIMITATION, ALL
REASONABLE ATTORNEYS' FEES AND LEGAL EXPENSES WHETHER OR NOT SUIT IS
BROUGHT), AND DISBURSEMENTS OF ANY KIND OR NATURE (THE "INDEMNIFIED
-----------
LIABILITIES") THAT MAY AT ANY TIME BE IMPOSED ON, INCURRED BY, OR ASSERTED
-----------
AGAINST THE INDEMNIFIED PARTIES, IN ANY WAY RELATING TO OR ARISING OUT OF
(I) ANY LOAN DOCUMENT, (II) ANY TRANSACTION CONTEMPLATED BY ANY LOAN
DOCUMENT, (III) ANY COLLATERAL, (IV) ANY REAL PROPERTY (INCLUDING, WITHOUT
LIMITATION, THE LEASES AND MINERAL INTERESTS) OR OIL AND GAS PROPERTY, (V)
ANY ENVIRONMENTAL LIABILITY IN ANY WAY RELATED TO ANY COMPANY, PREDECESSOR,
COLLATERAL, REAL PROPERTY (INCLUDING, WITHOUT LIMITATION, THE LEASES AND
MINERAL INTERESTS) OIL AND GAS PROPERTY, OR ANY ACT, OMISSION, STATUS,
OWNERSHIP, OR OTHER RELATIONSHIP, CONDITION, OR CIRCUMSTANCE CONTEMPLATED
BY, CREATED UNDER, OR ARISING PURSUANT TO OR IN CONNECTION WITH ANY LOAN
DOCUMENT, OR (VI) ANY INDEMNIFIED PARTY'S SOLE OR CONCURRENT ORDINARY
NEGLIGENCE ARISING FROM OR RELATED TO ANY OF THE FOREGOING.
(B) THE FOREGOING PROVISIONS (I) ARE NOT LIMITED IN AMOUNT, EVEN IF
THAT AMOUNT EXCEEDS THE AMOUNT OF THE OBLIGATION, (II) INCLUDE, WITHOUT
LIMITATION, REASONABLE FEES AND EXPENSES OF ATTORNEYS AND OTHER COSTS OR
EXPENSES OF LITIGATION OR OF PREPARING FOR LITIGATION, DAMAGES OR INJURY TO
PERSONS, PROPERTY, OR NATURAL RESOURCES ARISING UNDER ANY STATUTORY OR
COMMON LAW, PUNITIVE DAMAGES, FINES, AND OTHER PENALTIES, AND LOSS OF VALUE
OF ANY REAL PROPERTY OR COLLATERAL, (III) ARE NOT AFFECTED BY ANY ACT OR
OMISSION OF ANY TRIBUNAL OR OTHER THIRD PARTY, OR THE SOURCE OR ORIGIN OF
ANY HAZARDOUS SUBSTANCE, AND (IV) ARE NOT AFFECTED BY ANY INDEMNIFIED
PARTY'S INVESTIGATION, ACTUAL OR CONSTRUCTIVE KNOWLEDGE, COURSE OF DEALING,
OR WAIVER.
(c) However, no Indemnified Party has the right to be indemnified
under the Loan Documents for its own fraud, gross negligence, or willful
misconduct.
(d) The provisions of and undertakings and indemnification in this
section survive the foreclosure of any Lender Lien or any transfer in lieu
of that foreclosure, the sale or other
39
<PAGE>
transfer of any Collateral or real property to any Person, the satisfaction
of the obligation, the termination of the Loan Documents, and the release
of any or all Lender Liens.
8.13 Operations and Properties. Each Company will act prudently and in
-------------------------
accordance with customary industry standards in managing or operating its
assets, properties, business and investments. Each Company will keep in good
working order and condition, ordinary wear and tear excepted, all of its assets
and properties which are necessary to the conduct of its business, including
without limitation all wells and equipment necessary or useful in the operation
of the Mineral Interests.
8.14 Leases. Each Company will pay and discharge promptly, or cause to
------
be paid and discharged promptly, all rentals, delay rentals, royalties,
overriding royalties, payments out of production and other indebtedness or
obligations accruing under, and perform or cause to be performed each and every
act, matter or thing required by each and all of, the Leases and all other
agreements and contracts constituting or affecting the Mineral Interests, and do
all other things necessary to keep unimpaired its rights thereunder and prevent
any forfeiture thereof or default thereunder, and operate or cause to be
operated such properties in a diligent, careful and efficient manner and in
compliance with all applicable proration and conservation laws and all
applicable rules and regulations of every Tribunal, whether state, federal,
municipal or other jurisdiction, from time to time constituted to regulate the
development and operations of oil and gas properties and the production and sale
of oil, gas and other hydrocarbons therefrom.
8.15 Development and Maintenance. Each Company will explore, develop and
---------------------------
maintain (or cause to be explored, developed and maintained) the Leases, wells,
units and acreage to which the Mineral Interests pertain in a prudent manner,
and as may be reasonably necessary for the prudent and economical operation of
(and in an effort to maximize the production capacity of) such Leases, wells,
units and acreage. Each Company will develop or cause to be developed the
proved non-producing and undeveloped reserves described in the most recent
Reserve Report furnished to Agent in accordance with the most recent Budget
furnished to Agent under this agreement.
8.16 Maintenance of Liens. Each Company shall perform all such acts and
--------------------
execute all such documents as Agent may reasonably request in order to enable
Agent to report, file and record every instrument that Agent may deem necessary
in order to perfect and maintain the Lender Liens in the Mortgaged Properties
and otherwise to preserve and protect the rights of the Agent and the Lenders in
and to the Collateral.
SECTION 9. NEGATIVE COVENANTS. For so long as any Lender is committed to lend
- --------- ------------------
or issue LCs under this agreement and until the Obligation has been fully paid
and performed, Borrower covenants and agrees with Agent and Lenders that,
without first obtaining Agent's written notice of Determining Lenders' consent
to the contrary:
9.1 Payroll Taxes. No Company may use any proceeds of any Borrowing to
-------------
pay the wages of employees unless a timely payment to or deposit with the United
States of America of all amounts of Tax required to be deducted and withheld
with respect to such wages is also made.
9.2 Debt. No Restricted Company may:
----
(a) Have any Debt except Permitted Debt.
(b) Pay or cause to be paid any principal of, or any interest on,
any of its Debt except (i) the Obligation, (ii) any of its other Debt
(other than the Subordinated Debt) if no
40
<PAGE>
Default or Potential Default exists, and (iv) the Subordinated Debt solely
in accordance with the terms and provisions of the Subordination
Agreements.
(c) Amend or modify the terms of any of the Subordinated Debt except
as may be expressly permitted pursuant to the terms of the Subordination
Agreements.
9.3 Letters of Credit. No Restricted Company may have issued for its
-----------------
account -- or otherwise become obligated for any reimbursement obligations for
- -- any letter of credit except LCs.
9.4 Liens. No Restricted Company may (a) create, incur, or suffer or
-----
permit to be created or incurred or to exist any Lien upon any of its assets
except Permitted Liens or (b) enter into or permit to exist any arrangement or
agreement that directly or indirectly prohibits any Restricted Company from
creating or incurring any Lien on any of its assets except the Loan Documents.
9.5 Employee Plans. No Restricted Company may permit any of the events or
--------------
circumstances described in SECTION 7.12 to exist or occur.
9.6 Transactions with Affiliates. No Restricted Company may enter into
----------------------------
any material transaction with any of its Affiliates except (a) those described
on SCHEDULE 7.15, (b) transactions between one or more Restricted Companies, (c)
transactions permitted under SECTION 9.8, (d) transactions in the ordinary
course of business and upon fair and reasonable terms not materially less
favorable than it could obtain or could become entitled to in an arm's-length
transaction with a Person that was not its Affiliate, and (e) compensation
arrangements in the ordinary course of business with directors and officers of
the Companies.
9.7 Compliance with Laws and Documents. No Restricted Company may (a)
----------------------------------
violate the provisions of any Laws (including, without limitation, Environmental
Laws) applicable to it or of any material agreement to which it is a party if
that violation alone, or when aggregated with all other violations, would be a
Material Adverse Event, (b) violate in any material respect any provision of its
charter or bylaws, or (c) repeal, replace, or amend any provision of its charter
or bylaws if that action would be a Material Adverse Event.
9.8 Loans, Advances, and Investments. No Restricted Company may make any
--------------------------------
loan, advance, extension of credit, or capital contribution to, make any
investment in, or purchase or commit to purchase any stocks or other securities
or evidences of Debt of, or interests in, any other Person except those
described on SCHEDULE 9.8.
9.9 Distributions. No Restricted Company may declare, make, or pay any
-------------
Distribution except Distributions paid in the form of additional common stock,
and distributions to any other Restricted Company.
9.10 Disposition of Assets. No Restricted Company may sell, assign, lease,
---------------------
transfer, or otherwise dispose of any of its assets except (a) sales and
dispositions of oil and gas production in the ordinary course of business for a
fair and adequate consideration, (b) sales of assets which are obsolete or are
no longer in use and which are not significant to the continuation of that
Restricted Company's business, (c) sales and dispositions from any Restricted
Company to any other Restricted Company, (d) dispositions of equipment where
substantially similar equipment has been or is being acquired, and (e) (i) for
the period of time from the Closing Date to and including the Facility
Conversion Date, dispositions of other assets (other than Collateral) for an
aggregate consideration not to exceed, in any fiscal year, the greater of (x)
$1,000,000 or (y) five percent (5.0%) of the lesser of the total Bridge
Commitments or the Borrowing Base in effect on the last day of such fiscal year,
and (ii) at any time after the Facility Conversion Date, dispositions of any
other assets (other than Collateral).
41
<PAGE>
9.11 Mergers, Consolidations, and Dissolutions. No Restricted Company may
-----------------------------------------
merge or consolidate with any other Person or dissolve except:
(a) if no Default or Potential Default exists or will exist as a
result of it, any merger or consolidation between Restricted Companies (so
long as, if Borrower is involved, it is the survivor); and
(b) dissolution of any Subsidiary (other than Borrower) of a
Restricted Company if substantially all of its assets have been conveyed to
any Restricted Company.
9.12 Assignment. No Restricted Company may assign or transfer any of its
----------
Rights, duties, or obligations under any of the Loan Documents.
9.13 Fiscal Year and Accounting Methods. No Restricted Company may change
----------------------------------
its fiscal year for accounting purposes or any material aspect of its method of
accounting except (i) for changes which do not affect, change or alter the
calculation of any of the financial or accounting terms (or any component
thereof) described in any of the financial covenants provided in Section 10 of
this agreement, or (ii) to conform any new Subsidiary's accounting methods to
XPLOR's accounting methods.
9.14 New Businesses. No Restricted Company may engage in any business
--------------
except the businesses in which it is presently engaged and any other reasonably
related business.
9.15 Government Regulations. No Restricted Company may conduct its business
----------------------
in a way that it becomes regulated under the Investment Company Act of 1940, as
amended, or the Public Utility Holding Company Act of 1935, as amended.
9.16 Strict Compliance. No Restricted Company may indirectly do anything
-----------------
that it may not directly do under any covenant in any Loan Document.
9.17 Alteration of Material Agreements. No Restricted Company will consent
---------------------------------
to or permit any material alterations, amendments, modifications, releases,
waivers or terminations of any material agreement to which it is a party,
including without limitation, any of the documents and agreements executed and
delivered in connection with the South Coast Merger.
9.18 Operating Agreements. No Restricted Company shall enter into any
--------------------
operating agreement or material amendment of an existing operating agreement
after the date hereof covering any of the Mortgaged Properties, except for those
affecting the Material Prospects only and which are entered into in the ordinary
course of business and upon terms and provisions customary in the industry.
9.19 Burdensome Contracts. No Restricted Company shall enter into, become
--------------------
bound by, or subject the Mortgaged Properties to any contract or agreement which
is unduly burdensome in comparison to customary industry standards on any
Restricted Company or materially and adversely affects the operation of the
Mortgaged Properties.
9.20 Marketing Contracts. No Restricted Company shall (without the prior
-------------------
written consent of Determining Lenders, which consent shall not be unreasonably
withheld) enter into any contract relating to the marketing of hydrocarbons or
gas production from the Mortgaged Properties except upon market terms, or
terminate or amend any such existing contracts; provided, however, that Borrower
shall provide written notice to Agent within five (5) days after Borrower sells
any production of hydrocarbons from the Mortgaged Properties under sales
contracts with terms in excess of six (6)
42
<PAGE>
months and, in such event, the Lenders shall have the right to immediately
redetermine the Borrowing Base in accordance with SECTION 2.6 (such
redetermination to be in addition to, and not in substitution of, the rights of
the Lenders to redetermine the Borrowing Base as provided in SECTION 2.6).
SECTION 10. FINANCIAL COVENANTS. For so long as any Lender is committed to
- ----------- -------------------
lend or issue LCs under this agreement and until the Obligation has been fully
paid and performed, Borrower covenants and agrees with Agent and Lenders that,
without first obtaining Agent's written notice of Determining Lenders' consent
to the contrary, it may not directly or indirectly permit:
10.1 Current Ratio. The ratio -- determined as of the last day of each
-------------
fiscal quarter of XPLOR -- of the Companies' current assets to current
liabilities (excluding current maturities of Principal Debt) to ever be less
than 1.00 to 1.00.
10.2 Fixed-Charge Coverage. The ratio -- determined as of the last day
---------------------
of each fiscal quarter (commencing September 30, 1997) of XPLOR for the fiscal
quarter then ended -- of the Companies' EBITDAX to Interest Expense to ever be
less than 3.00 to 1.00.
10.3 Tangible-Net Worth. The Companies' Tangible-Net Worth -- determined
------------------
as of the last day of each fiscal quarter of XPLOR -- to ever be less than the
sum of (a) $5,500,000, plus (b) 75% of the Companies' cumulative Net Income
(without deduction for losses) after July 31, 1997, plus (c) 75% of the net
(i.e., gross less usual and customary underwriting, placement, and other related
costs and expenses) proceeds of the issuance of any equity securities by XPLOR
after the date of this agreement.
SECTION 11. DEFAULT. The term "DEFAULT" means the occurrence of any one or more
- ----------- -------
of the following:
11.1 Payment of Obligation. Borrower's failure or refusal to pay (a)
---------------------
principal of any Note or any LC Exposure or any part thereof on or before the
date due or (b) any other part of the Obligation on or before one Business Day
after the date due.
11.2 Covenants. Any Company's failure or refusal to punctually and properly
---------
perform, observe, and comply with any covenant (other than covenants to pay the
Obligation) applicable to it:
(a) In SECTIONS 8.1(G), 8.2 OR 9; or
(b) In any other provision of any Loan Document, and that failure or
refusal continues for 15 days after the earlier of either any Company
knowing of it or any Company is notified of it by Agent or any Lender.
11.3 Debtor Relief. Any Restricted Company (a) is not Solvent, (b) fails
-------------
to pay its Debts generally as they become due, (c) voluntarily seeks, consents
to, or acquiesces in the benefit of any Debtor Relief Law, or (d) becomes a
party to or is made the subject of any proceeding provided for by any Debtor
Relief Law -- except as a creditor or claimant -- that could suspend or
otherwise adversely affect the Rights of Agent or any Lender granted in the Loan
Documents (unless, if the proceeding is involuntary, the applicable petition is
dismissed within 60 days after its filing).
11.4 Judgments and Attachments. Where the amounts in controversy or of
-------------------------
any judgments, as the case may be, not covered in full by adequate insurance
pursuant to policies acceptable to Agent, exceed -- from and after the Closing
Date and individually or collectively for all of the Restricted Companies --
$250,000.00, the Restricted Companies fail (a) to have discharged, within 60
days after its commencement, any attachment, sequestration, or similar
proceeding against any assets of any
43
<PAGE>
Restricted Company or (b) to pay any money judgment against any Restricted
Company within ten days before the date on which any Restricted Company's assets
may be lawfully sold to satisfy that judgment.
11.5 Government Action. Where the fair value of the assets involved
-----------------
exceed -- from and after the Closing Date and individually or collectively for
all of the Restricted Companies --$250,000.00, (a) a final non-appealable order
is issued by any Tribunal (including, but not limited to, the United States
Justice Department) seeking to cause any Company to divest a significant portion
of its assets under any antitrust, restraint of trade, unfair competition,
industry regulation, or similar Laws, or (b) any Tribunal condemns, seizes, or
otherwise appropriates, or takes custody or control of all or any substantial
portion of any Restricted Company's assets.
11.6 Misrepresentation. Any material representation or warranty made by
-----------------
any Company in any Loan Document at any time proves to have been materially
incorrect when made.
11.7 Ownership of Companies. Except as a result of transactions permitted
----------------------
by this agreement, one or more Restricted Companies fail to own, beneficially
and of record, with power to vote, 100% of the issued and outstanding shares of
capital stock of each other Restricted Company other than XPLOR.
11.8 Change of Control of Borrower. The individuals who, as of the date
-----------------------------
of this agreement, constitute the members of XPLOR board of directors (for
purposes of this SECTION 11.8, the "INCUMBENT BOARD") do not constitute or cease
for any reason to constitute at least 75% of:
(a) XPLOR's board of directors; or
(b) The surviving corporation's board of directors in the event of
any merger or consolidation (if permitted by SECTION 9.11) involving XPLOR.
For purposes of this SECTION 11.8, any individual who becomes a member of the
board of directors under CLAUSES (A) OR (B) above, after the date of this
agreement and whose election, or nomination for election, was approved by a vote
of the individuals comprising at least 75% of the incumbent board -- other than
an election or nomination of an individual whose initial assumption of office is
in connection with an actual or threatened election contest, as those terms are
used in Rule 14a-11 of Regulation 14A under the Securities and Exchange Act of
1934) -- shall be deemed to be a member of the incumbent board.
11.9 Other Funded Debt. In respect of any Funded Debt (other than the
-----------------
Obligation) (a) any Restricted Company fails to make any payment when due beyond
any applicable grace or cure period, or (b) any default or other event or
condition occurs or exists beyond the applicable grace or cure period, the
effect of which is to cause or to permit any holder of that Funded Debt to cause
- -- whether or not it elects to cause -- any of that Funded Debt to become due
before its stated maturity or regularly scheduled payment dates, or (c) any of
that Funded Debt is declared to be due and payable or required to be prepaid by
any Restricted Company before its stated maturity.
11.10 SEC Reporting Requirements. Any Restricted Company fails to comply
--------------------------
with any applicable reporting requirements of the Securities Exchange Act of
1934, as amended, for which the failure to report would constitute a Material
Adverse Event.
11.11 Validity and Enforceability. Once executed, this agreement, any
---------------------------
Note, any LC Agreement, any Guaranty, the Warrant Agreement or any document or
instrument executed in connection therewith, any Collateral Document ceases to
be in full force and effect in any material
44
<PAGE>
respect or is declared to be null and void or its validity or enforceability is
contested in writing by any Restricted Company party to it or any Restricted
Company party to it denies in writing that it has any further liability or
obligations under it except in accordance with that document's express
provisions or as the appropriate parties under SECTION 14.8 below may otherwise
agree in writing.
11.12 LCs. Agent is served with, or becomes subject to, a court order,
---
injunction, or other process or decree restraining or seeking to restrain it
from paying any amount under any LC and either (a) a drawing has occurred under
the LC, and Borrower has refused to reimburse the Issuing Lender for payment, or
(b) the expiration date of the LC has occurred, but the Right of the beneficiary
to draw under the LC has been extended past the expiration date in connection
with the pendency of the related court action or proceeding, and Borrower has
failed to deposit with Agent cash collateral in an amount equal to the Issuing
Lender's maximum exposure under the LC.
11.13 Failure to Pursue XPLOR IPO. The Companies shall fail to continuously
---------------------------
and diligently pursue completion of the XPLOR IPO, or any Company admits in
writing that it has terminated or suspended (or intends to terminate or suspend)
its efforts toward completing the XPLOR IPO, or any underwritten retained by the
Companies in connection with the XPLOR IPO shall notify the Companies or Agent
that the XPLOR IPO cannot be completed on or prior to May 24, 1998.
SECTION 12. RIGHTS AND REMEDIES.
- ----------- --------------------
12.1 Remedies Upon Default.
---------------------
(a) Debtor Relief. If a Default exists under SECTION 11.3, the
-------------
commitment to extend credit under this agreement automatically terminates,
the entire unpaid balance of the Obligation automatically becomes due and
payable without any action of any kind whatsoever.
(b) Other Defaults. If any Default exists, subject to the terms of
--------------
SECTION 13.5(B), Agent may (with the consent of, and must, upon the request
of, Determining Lenders), do any one or more of the following: (i) If the
maturity of the Obligation has not already been accelerated under SECTION
12.1(A), declare the entire unpaid balance of all or any part of the
Obligation immediately due and payable, whereupon it is due and payable;
(ii) terminate the commitments of Lenders to extend credit under this
agreement; (iii) reduce any claim to judgment; (iv) demand payment of an
amount equal to the LC Exposure then existing and retain as collateral for
the LC Exposure any amounts received from any Company, from any property of
any Company, through offset, or otherwise; and (v) exercise any and all
other legal or equitable Rights afforded by the Loan Documents, by
applicable Laws, or in equity.
(c) Offset. If a Default exists, to the extent permitted by
------
applicable Law, each Lender may exercise the Rights of offset and banker's
lien against each and every account and other property, or any interest
therein, which any Restricted Company may now or hereafter have with, or
which is now or hereafter in the possession of, that Lender to the extent
of the full amount of the Obligation owed to that Lender.
(d) Production Proceeds. Notify any and all purchasers of production
-------------------
and take all other actions specified in SECTION 5.3 of this agreement.
12.2 Company Waivers. To the extent permitted by Law, Borrower and
---------------
(pursuant to its Guaranty) each other Restricted Company waives presentment and
demand for payment, protest, notice of intention to accelerate, notice of
acceleration, and notice of protest and nonpayment, and agrees that its
liability with respect to all or any part of the Obligation is not affected by
any renewal
45
<PAGE>
or extension in the time of payment of all or any part of the Obligation, by any
indulgence, or by any release or change in any security for the payment of all
or any part of the Obligation.
12.3 Performance by Agent. If any Company's covenant, duty, or agreement
--------------------
is not performed in accordance with the terms of the Loan Documents, Agent may,
while a Default exists, at its option (but subject to the approval of
Determining Lenders), perform or attempt to perform that covenant, duty, or
agreement on behalf of that Company (and any amount expended by Agent in its
performance or attempted performance is payable by the Companies, jointly and
severally, to Agent on demand, becomes part of the Obligation, and bears
interest at the Default Rate from the date of Agent's expenditure until paid).
However, Agent does not assume and shall never have, except by its express
written consent, any liability or responsibility for the performance of any
Company's covenants, duties, or agreements.
12.4 Not in Control. Nothing in any Loan Document gives or may be deemed
--------------
to give to Agent or any Lender the Right to exercise control over any Company's
Real Property (including, without limitation, the Leases and the Mineral
Interests), other assets, affairs, or management or to preclude or interfere
with any Company's compliance with any Law or require any act or omission by any
Company that may be harmful to Persons or property. Any "Material Adverse
Event" or other materiality or substantiality qualifier of any representation,
warranty, covenant, agreement, or other provision of any Loan Document is
included for credit documentation purposes only and does not imply or be deemed
to mean that Agent or any Lender acquiesces in any non-compliance by any Company
with any Law, document, or otherwise or does not expect the Companies to
promptly, diligently, and continuously carry out all appropriate removal,
remediation, compliance, closure, or other activities required or appropriate in
accordance with all Environmental Laws. Agent's and Lenders' power is limited
to the Rights provided in the Loan Documents. All of those Rights exist solely
- -- and may be exercised in manner calculated by Agent or Lenders in their
respective good faith business judgment --to preserve and protect the Collateral
and to assure payment and performance of the Obligation.
12.5 Course of Dealing. The acceptance by Agent or Lenders of any
-----------------
partial payment on the Obligation is not a waiver of any Default then existing.
No waiver by Agent, Determining Lenders, or Lenders of any Default is a waiver
of any other then-existing or subsequent Default. No delay or omission by
Agent, Determining Lenders, or Lenders in exercising any Right under the Loan
Documents impairs that Right or is a waiver thereof or any acquiescence therein,
nor will any single or partial exercise of any Right preclude other or further
exercise thereof or the exercise of any other Right under the Loan Documents or
otherwise.
12.6 Cumulative Rights. All Rights available to Agent, Determining
-----------------
Lenders, and Lenders under the Loan Documents are cumulative of and in addition
to all other Rights granted to Agent, Determining Lenders, and Lenders at law or
in equity, whether or not the Obligation are due and payable and whether or not
Agent, Determining Lenders, or Lenders have instituted any suit for collection,
foreclosure, or other action in connection with the Loan Documents.
12.7 Application of Proceeds. Any and all proceeds ever received by
-----------------------
Agent or Lenders from the exercise of any Rights pertaining to the Obligation
shall be applied to the Obligation according to SECTION 3.
12.8 Certain Proceedings. Borrower shall promptly execute and deliver,
-------------------
or cause the execution and delivery of, all applications, certificates,
instruments, registration statements, and all other documents and papers Agent
or Determining Lenders reasonably request in connection with the obtaining of
any consent, approval, registration (other than securities Law registrations
except as may otherwise be expressly provided in the Warrant Agreement),
qualification, permit, license, or authorization of any Tribunal or other Person
necessary or appropriate for the effective exercise of any
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Rights under the Loan Documents. Because Borrower agrees that Agent's and
Determining Lenders' remedies at Law for failure of Borrower to comply with the
provisions of this section would be inadequate and that failure would not be
adequately compensable in damages, Borrower agrees that the covenants of this
section may be specifically enforced.
12.9 Expenditures by Lenders. Any sums spent by Agent or any Lender in
-----------------------
the exercise of any Right under any Loan Document is payable by the Companies to
Agent within five Business Days after demand, becomes part of the Obligation,
and bears interest at the Default Rate from the date spent until the date
repaid.
12.10 Diminution in Value of Collateral. Neither Agent nor any Lender
---------------------------------
has any liability or responsibility whatsoever for any diminution in or loss of
value of any collateral now or in the future securing payment or performance of
any of the Obligation (other than diminution in or loss of value caused by its
own gross negligence or willful misconduct).
SECTION 13. AGENT AND LENDERS.
- ----------- -----------------
13.1 Agent.
-----
(a) Appointment. Each Lender appoints Agent (and Agent accepts
-----------
appointment) as its nominee and agent, in its name and on its behalf: (i)
To act as its nominee and on its behalf in and under all Loan Documents;
(ii) to arrange the means whereby its funds are to be made available to
Borrower under the Loan Documents; (iii) to take any action that it
properly requests under the Loan Documents (subject to the concurrence of
other Lenders as may be required under the Loan Documents); (iv) to receive
all documents and items to be furnished to it under the Loan Documents; (v)
to be the secured party, mortgagee, beneficiary, recipient, and similar
party in respect of any collateral for the benefit of Lenders; (vi) to
promptly distribute to it all material information, requests, documents,
and items received from Borrower under the Loan Documents; (vii) to
promptly distribute to it its ratable part of each payment or prepayment
(whether voluntary, as proceeds of collateral upon or after foreclosure, as
proceeds of insurance thereon, or otherwise) in accordance with the terms
of the Loan Documents; and (viii) to deliver to the appropriate Persons
requests, demands, approvals, and consents received from it. However,
Agent may not be required to take any action that exposes it to personal
liability or that is contrary to any Loan Document or applicable Law.
(b) Successor. Agent may voluntarily resign and shall resign upon
---------
the request of Determining Lenders for cause (i.e., Agent is continuing to
fail to perform its responsibilities as Agent under the Loan Documents). If
the initial or any successor Agent ever ceases to be a party to this
agreement or if the initial or any successor Agent ever resigns (whether
voluntarily or at the request of Determining Lenders), then Determining
Lenders shall (which, if no Default or Potential Default exists, is subject
to Borrower's approval that may not be unreasonably withheld) appoint the
successor Agent from among Lenders (other than the resigning Agent). If
Determining Lenders fail to appoint a successor Agent within 30 days after
the resigning Agent has given notice of resignation or Determining Lenders
have removed the resigning Agent, then the resigning Agent may, on behalf
of Lenders, appoint a successor Agent, which must be a commercial bank
having a combined capital and surplus of at least $1,000,000,000 (as shown
on its most recently published statement of condition). Upon its acceptance
of appointment as successor Agent, the successor Agent succeeds to and
becomes vested with all of the Rights of the prior Agent, and the prior
Agent is discharged from its duties and obligations of Agent under the Loan
Documents (but, when used in connection with LCs issued and outstanding
before the appointment of the successor Agent, "Agent" shall continue to
refer solely to the prior Agent -- but, any LCs issued or renewed after the
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appointment of any successor Agent shall be issued or renewed by the
successor Agent), and each Lender shall execute the documents that any
Lender, the resigning or removed Agent, or the successor Agent reasonably
request to reflect the change. After any Agent's resignation or removal as
Agent under the Loan Documents, the provisions of this section inure to its
benefit as to any actions taken or not taken by it while it was Agent under
the Loan Documents.
(c) Rights as Lender. Agent, in its capacity as a Lender, has the
----------------
same Rights under the Loan Documents as any other Lender and may exercise
those Rights as if it were not acting as Agent. The term "Lender", unless
the context otherwise indicates, includes Agent. Agent's resignation or
removal does not impair or otherwise affect any Rights that it has or may
have in its capacity as an individual Lender. Each Lender and Borrower
agree that Agent is not a fiduciary for Lenders or for Borrower but is
simply acting in the capacity described in this agreement to alleviate
administrative burdens for Borrower and Lenders, that Agent has no duties
or responsibilities to Lenders or Borrower except those expressly set forth
in the Loan Documents, and that Agent in its capacity as a Lender has the
same Rights as any other Lender.
(d) Other Activities. Agent or any Lender may now or in the future be
----------------
engaged in one or more loan, letter of credit, leasing, or other financing
transactions with Borrower, act as trustee or depositary for Borrower, or
otherwise be engaged in other transactions with Borrower (collectively, the
"OTHER ACTIVITIES") not the subject of the Loan Documents. Without
limiting the Rights of Lenders specifically set forth in the Loan
Documents, neither Agent nor any Lender is responsible to account to the
other Lenders for those other activities, and no Lender shall have any
interest in any other Lender's activities, any present or future guaranties
by or for the account of Borrower that are not contemplated by or included
in the Loan Documents, any present or future offset exercised by Agent or
any Lender in respect of those other activities, any present or future
property taken as security for any of those other activities, or any
property now or hereafter in Agent's or any other Lender's possession or
control that may be or become security for the obligations of Borrower
arising under the Loan Documents by reason of the general description of
indebtedness secured or of property contained in any other agreements,
documents, or instruments related to any of those other activities (but, if
any payments in respect of those guaranties or that property or the
proceeds thereof is applied by Agent or any Lender to reduce the
Obligation, then each Lender is entitled to share ratably in the
application as provided in the Loan Documents).
13.2 Expenses. Each Lender shall pay its Pro Rata Part of any reasonable
--------
expenses (including, without limitation, court costs, reasonable attorneys' fees
and other costs of collection) incurred by Agent (while acting in such capacity)
in connection with any of the Loan Documents if Agent is not reimbursed from
other sources within 30 days after incurrence. Each Lender is entitled to
receive its Pro Rata Part of any reimbursement that it makes to Agent if Agent
is subsequently reimbursed from other sources.
13.3 Proportionate Absorption of Losses. Except as otherwise provided in
----------------------------------
the Loan Documents, nothing in the Loan Documents gives any Lender any advantage
over any other Lender insofar as the Obligation is concerned or relieves any
Lender from ratably absorbing any losses sustained with respect to the
Obligation (except to the extent unilateral actions or inactions by any Lender
result in Borrower or any other obligor on the Obligation having any credit,
allowance, setoff, defense, or counterclaim solely with respect to all or any
part of that Lender's Pro Rata Part of the Obligation).
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13.4 Delegation of Duties; Reliance. Lenders may perform any of their
------------------------------
duties or exercise any of their Rights under the Loan Documents by or through
Agent, and Lenders and Agent may perform any of their duties or exercise any of
their Rights under the Loan Documents by or through their respective
Representatives. Agent, Lenders, and their respective Representatives (a) are
entitled to rely upon (and shall be protected in relying upon) any written or
oral statement believed by it or them to be genuine and correct and to have been
signed or made by the proper Person and, with respect to legal matters, upon
opinion of counsel selected by Agent or that Lender (but nothing in this CLAUSE
(A) permits Agent to rely on (i) oral statements if a writing is required by
this agreement or (ii) any other writing if a specific writing is required by
this agreement), (b) are entitled to deem and treat each Lender as the owner and
holder of its portion of the Obligation for all purposes until, written notice
of the assignment or transfer is given to and received by Agent (and any
request, authorization, consent, or approval of any Lender is conclusive and
binding on each subsequent holder, assignee, or transferee of or Participant in
that Lender's portion of the Obligation until that notice is given and
received), (c) are not deemed to have notice of the occurrence of a Default
unless a responsible officer of Agent, who handles matters associated with the
Loan Documents and transactions thereunder, has actual knowledge or Agent has
been notified by a Lender or Borrower, and (d) are entitled to consult with
legal counsel (including counsel for Borrower), independent accountants, and
other experts selected by Agent and are not liable for any action taken or not
taken in good faith by it in accordance with the advice of counsel, accountants,
or experts.
13.5 Limitation of Agent's Liability.
-------------------------------
(a) Exculpation. Neither Agent nor any of its Representatives will
-----------
be liable for any action taken or omitted to be taken by it or them under
the Loan Documents in good faith and believed by it or them to be within
the discretion or power conferred upon it or them by the Loan Documents or
be responsible for the consequences of any error of judgment (except for
fraud, gross negligence, or willful misconduct), and neither Agent nor any
of its representatives has a fiduciary relationship with any Lender by
virtue of the Loan Documents (but nothing in this agreement negates the
obligation of Agent to account for funds received by it for the account of
any Lender).
(b) Indemnity. Unless indemnified to its satisfaction against loss,
---------
cost, liability, and expense, Agent may not be compelled to do any act
under the Loan Documents or to take any action toward the execution or
enforcement of the powers thereby created or to prosecute or defend any
suit in respect of the Loan Documents. If Agent requests instructions from
Lenders, or Determining Lenders, as the case may be, with respect to any
act or action in connection with any Loan Document, Agent is entitled to
refrain (without incurring any liability to any Person by so refraining)
from that act or action unless and until it has received instructions. In
no event, however, may Agent or any of its Representatives be required to
take any action that it or they determine could incur for it or them
criminal or onerous civil liability. Without limiting the generality of
the foregoing, no Lender has any right of action against Agent as a result
of Agent's acting or refraining from acting under this agreement in
accordance with instructions of Determining Lenders.
(c) Reliance. Agent is not responsible to any Lender or any
--------
Participant for, and each Lender represents and warrants that it has not
relied upon Agent in respect of, (i) the creditworthiness of any Company
and the risks involved to that Lender, (ii) the effectiveness,
enforceability, genuineness, validity, or the due execution of any Loan
Document (except by Agent), (iii) any representation, warranty, document,
certificate, report, or statement made therein (except by Agent) or
furnished thereunder or in connection therewith, (iv) the adequacy of any
collateral now or hereafter securing the Obligation or the existence,
priority, or perfection of any Lien now or hereafter granted or purported
to be granted on the collateral
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<PAGE>
under any Loan Document, or (v) observation of or compliance with any of
the terms, covenants, or conditions of any Loan Document on the part of any
Company. EACH LENDER AGREES TO INDEMNIFY AGENT AND ITS REPRESENTATIVES AND
HOLD THEM HARMLESS FROM AND AGAINST (BUT LIMITED TO SUCH LENDER'S
COMMITMENT PERCENTAGE OF) ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, REASONABLE EXPENSES,
AND REASONABLE DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER THAT MAY BE
IMPOSED ON, ASSERTED AGAINST, OR INCURRED BY THEM IN ANY WAY RELATING TO OR
ARISING OUT OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THEM
UNDER THE LOAN DOCUMENTS IF AGENT AND ITS REPRESENTATIVES ARE NOT
REIMBURSED FOR SUCH AMOUNTS BY ANY COMPANY. ALTHOUGH AGENT AND ITS
REPRESENTATIVES HAVE THE RIGHT TO BE INDEMNIFIED UNDER THIS AGREEMENT FOR
ITS OR THEIR OWN ORDINARY NEGLIGENCE, AGENT AND ITS REPRESENTATIVES DO NOT
HAVE THE RIGHT TO BE INDEMNIFIED UNDER THIS AGREEMENT FOR ITS OR THEIR OWN
FRAUD, GROSS NEGLIGENCE, OR WILLFUL MISCONDUCT.
13.6 Default. While a Default exists, Lenders agree to promptly confer
-------
in order that Determining Lenders or Lenders, as the case may be, may agree upon
a course of action for the enforcement of the Rights of Lenders. Agent is
entitled to act or refrain from taking any action (without incurring any
liability to any Person for so acting or refraining) unless and until it has
received instructions from Determining Lenders. In actions with respect to any
Company's property, Agent is acting for the ratable benefit of each Lender.
13.7 Collateral Matters.
------------------
(a) Each Lender authorizes and directs Agent to enter into the Loan
Documents for the Lender Liens and agrees that any action taken by Agent
concerning any Collateral (with the consent or at the request of
Determining Lenders) in accordance with any Loan Document, that Agent's
exercise (with the consent or at the request of Determining Lenders) of
powers concerning the Collateral in any Loan Document, and that all other
reasonably incidental powers are authorized and binding upon all Lenders.
(b) Agent is authorized on behalf of all Lenders, without the
necessity of any notice to or further consent from any Lender, from time to
time before a Default or Potential Default, to take any action with respect
to any Collateral or Loan Documents related to Collateral that may be
necessary to perfect and maintain perfected the Lender Liens upon the
Collateral.
(c) Except to use the same standard of care that it ordinarily uses
for collateral for its sole benefit, Agent has no obligation whatsoever to
any Lender or to any other Person to assure that the Collateral exists or
is owned by any Company or is cared for, protected, or insured or has been
encumbered or that the Lender Liens have been properly or sufficiently or
lawfully created, perfected, protected, or enforced or are entitled to any
particular priority.
(d) Agent shall exercise the same care and prudent judgment with
respect to the Collateral and the Loan Documents as it normally and
customarily exercises in respect of similar collateral and security
documents.
(e) Lenders irrevocably authorize Agent, at its option and in its
discretion, to release any Lender Lien upon any Collateral (i) upon full
payment of the Obligation, (ii) constituting property being disposed of as
permitted under any Loan Document, (iii) constituting property in which no
Company owned any interest at the time the Lender Lien was granted or at
any time after that, (iv) constituting property leased to any Company under
a lease that has expired or been terminated in a transaction permitted
under the Loan
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Documents or is about to expire and that has not been, and is not intended
by that Company to be, renewed, (v) consisting of an instrument evidencing
Debt pledged to Agent (for the benefit of Lenders), if the underlying Debt
has been paid in full, or (vi) if approved, authorized, or ratified in
writing by Lenders. Upon request by Agent at any time, Lenders shall
confirm in writing Agent's authority to release particular types or items
of Collateral under this CLAUSE (E).
13.8 Limitation of Liability. No Lender or any Participant will incur
-----------------------
any liability to any other Lender or Participant except for acts or omissions in
bad faith, and neither Agent nor any Lender or Participant will incur any
liability to any other Person for any act or omission of any other Lender or any
Participant.
13.9 Relationship of Lenders. The Loan Documents do not create a
-----------------------
partnership or joint venture among Agent and Lenders or among Lenders.
13.10 Benefits of Agreement. None of the provisions of this section
---------------------
inure to the benefit of any Company or any other Person except Agent and
Lenders. Therefore, no Company or any other Person is responsible or liable
for, entitled to rely upon, or entitled to raise as a defense -- in any manner
whatsoever -- the failure of Agent or any Lender to comply with these
provisions.
SECTION 14. MISCELLANEOUS.
- ----------- --------------
14.1 Nonbusiness Days. Any payment or action that is due under any
----------------
Loan Document on a non-Business Day may be delayed until the next-succeeding
Business Day (but interest shall continue to accrue on any applicable payment
until payment is in fact made) unless the payment concerns a LIBOR-Rate
Borrowing, in which case if the next-succeeding Business Day is in the next
calendar month, then such payment shall be made on the next-preceding Business
Day.
14.2 Communications. Unless otherwise specifically provided, whenever
--------------
any Loan Document requires or permits any consent, approval, notice, request, or
demand from one party to another, communication must be in writing (which may be
by telex or fax) to be effective and shall be deemed to have been given (a) if
by telex, when transmitted to the appropriate telex number and the appropriate
answer back is received, (b) if by fax, when transmitted to the appropriate fax
number (and all communications sent by fax must be confirmed promptly thereafter
by telephone; but any requirement in this parenthetical shall not affect the
date when the fax shall be deemed to have been delivered), (c) if by mail, on
the third Business Day after it is enclosed in an envelope and properly
addressed, stamped, sealed, and deposited in the appropriate official postal
service, or (d) if by any other means, when actually delivered. Until changed
by notice pursuant to this agreement, the address (and fax number) for Borrower
and Agent is stated beside their respective signatures to this agreement and for
each Lender is stated beside its name on SCHEDULE 2.
14.3 Form and Number of Documents. The form, substance, and number of
----------------------------
counterparts of each writing to be furnished under this agreement must be
satisfactory to Agent and its counsel.
14.4 Exceptions to Covenants. No Company may take or fail to take any
-----------------------
action that is permitted as an exception to any of the covenants contained in
any Loan Document if that action or omission would result in the breach of any
other covenant contained in any Loan Document.
14.5 Survival. All covenants, agreements, undertakings,
--------
representations, and warranties made in any of the Loan Documents survive all
closings under the Loan Documents and, except as otherwise indicated, are not
affected by any investigation made by any party.
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14.6 Governing Law. Unless otherwise stated in any Loan Document, the
-------------
laws of the State of New York and of the United States of America govern the
Rights and duties of the parties to the Loan Documents and the validity,
construction, enforcement, and interpretation of the Loan Documents.
14.7 Invalid Provisions. Any provision in any Loan Document held to be
------------------
illegal, invalid, or unenforceable is fully severable; the appropriate Loan
Document shall be construed and enforced as if that provision had never been
included; and the remaining provisions shall remain in full force and effect and
shall not be affected by the severed provision. Agent, Lenders, and each
Company party to the affected Loan Document agree to negotiate, in good faith,
the terms of a replacement provision as similar to the severed provision as may
be possible and be legal, valid, and enforceable.
14.8 Amendments, Consents, Conflicts, and Waivers.
--------------------------------------------
(a) Determining Lenders. Unless otherwise specifically provided (i)
-------------------
the provisions of this agreement may be amended, modified, or waived, only
by an instrument in writing executed by Borrower, Agent, and Determining
Lenders and supplemented only by documents delivered or to be delivered in
accordance with the express terms of this agreement, and (ii) the other
Loan Documents may only be the subject of an amendment, modification, or
waiver that has been approved by Determining Lenders and Borrower.
(b) All Lenders. Any amendment to or consent or waiver under this
-----------
agreement or any Loan Document that purports to accomplish any of the
following must be by an instrument in writing executed by Borrower and
Agent and executed (or approved, as the case may be) by each Lender: (i)
Extends the due date or decreases the amount of any scheduled payment or
amortization of the Obligation beyond the date specified in the Loan
Documents; (ii) decreases any rate or amount of interest, fees, or other
sums payable to Agent or Lenders under this agreement (except such
reductions as are contemplated by this agreement); (iii) changes the
definition of "COMMITMENT," "COMMITMENT PERCENTAGE," "DETERMINING LENDERS,"
and "PRO RATA PART" or the definition of "BORROWING BASE" (iv) increases
any one or more Lender's Commitment; (v) waives compliance with, amends, or
fully or partially releases -- except as expressly provided by the Loan
Documents or when a Company merges into another Person or dissolves when
specifically permitted in the Loan Documents -- any Guaranty or Collateral;
(vi) change the requirement that any redetermination of the Borrowing Base
be approved and consented to by all of the Lenders; or (vii) changes this
CLAUSE (B) or any other matter specifically requiring the consent of all
Lenders under this agreement.
(c) Agency Fees; Warrant Agreement. Any amendment or consent or
------------------------------
waiver with respect to (i) fees payable solely to Agent under a separate
letter agreement must be in writing and executed only by Agent and
Borrower, and (ii) the Warrant Agreement must be in writing and executed
only by Agent and XPLOR.
(d) Conflicts. Any conflict or ambiguity between the terms and
---------
provisions of this agreement and terms and provisions in any other Loan
Document is controlled by the terms and provisions of this agreement.
(e) Waivers. No course of dealing or any failure or delay by Agent,
-------
any Lender, or any of their respective Representatives with respect to
exercising any Right of Agent or any Lender under this agreement operates
as a waiver thereof. A waiver must be in writing and signed by Agent and
Lenders (or Determining Lenders, if permitted under this agreement) to be
effective, and a waiver will be effective only in the specific instance and
for the specific purpose for which it is given.
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14.9 Multiple Counterparts. Any Loan Document may be executed in a
---------------------
number of identical counterparts with the same effect as if all signatories had
signed the same document. All counterparts must be construed together to
constitute one and the same instrument.
14.10 Parties.
-------
(a) Parties Bound. Each Loan Document binds and inures to the
-------------
parties to it, any intended beneficiary of it, and each of their respective
successors and permitted assigns. No Company may assign or transfer any
Rights or obligations under any Loan Document without first obtaining all
Lenders' consent, and any purported assignment or transfer without Lenders'
consent is void. No Lender may transfer, pledge, assign, sell any
participation in, or otherwise encumber its portion of the Obligation
except as permitted by CLAUSES (B) or (C) below.
(b) Participations. Any Lender may (subject to the provisions of
--------------
this section, in accordance with applicable Law, in the ordinary course of
its business, and at any time) sell to one or more Persons (each a
"PARTICIPANT") participating interests in its portion of the Obligation.
The selling Lender remains a "Lender" under the Loan Documents, the
Participant does not become a "Lender" under the Loan Documents, and the
selling Lender's obligations under the Loan Documents remain unchanged. The
selling Lender remains solely responsible for the performance of its
obligations and remains the holder of its share of the Principal Debt for
all purposes under the Loan Documents. Borrower and Agent shall continue to
deal solely and directly with the selling Lender in connection with that
Lender's Rights and obligations under the Loan Documents, and each Lender
must retain the sole right and responsibility to enforce due obligations of
the Companies. Participants have no Rights under the Loan Documents except
as provided below. Subject to the following, each Lender may obtain (on
behalf of its Participants) the benefits of SECTION 3 with respect to all
participations in its part of the Obligation outstanding from time to time
so long as Borrower is not obligated to pay any amount in excess of the
amount that would be due to that Lender under SECTION 3 calculated as
though no participations have been made. No Lender may sell any
participating interest under which the Participant has any Rights to
approve any amendment, modification, or waiver of any Loan Document except
as to matters in SECTION 14.8(B)(I) and (II).
(c) Assignments. Each Lender may make assignments to the Federal
-----------
Reserve Bank. Each Lender may also assign to one or more assignees (each an
"ASSIGNEE") all or any part of its Rights and obligations under the Loan
Documents so long as (i) the assignor Lender and Assignee execute and
deliver to Agent and Borrower for their consent and acceptance (that may
not be unreasonably withheld in any instance and is not required if the
Assignee is an Affiliate of the assigning Lender) an assignment and
assumption agreement in substantially the form of EXHIBIT F (an
"ASSIGNMENT") and pay to Agent a processing fee of $2,500, (ii) the
assignment is for an identical percentage of the assignor Lender's Rights
and obligations under the Bridge Facility and the Revolving Facility, (iii)
the assignment must be for a minimum total Commitment of $5,000,000 and the
assigning Lender must retain a minimum total Commitment of $5,000,000, and
(iv) the conditions for that assignment set forth in the applicable
Assignment are satisfied. The Effective Date in each Assignment must
(unless a shorter period is agreeable to Borrower and Agent) be at least
five Business Days after it is executed and delivered by the assignor
Lender and the Assignee to Agent and Borrower for acceptance. Once that
Assignment is accepted by Agent and Borrower, and subject to all of the
following occurring, then, on and after the Effective Date stated in it (i)
the Assignee automatically becomes a party to this agreement and, to the
extent provided in that Assignment, has the Rights and obligations of a
Lender under the Loan Documents, (ii) the assignor Lender, to the extent
provided in that Assignment, is released from its obligations
53
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to fund Borrowings under this agreement and its reimbursement obligations
under this agreement and, in the case of an Assignment covering all of the
remaining portion of the assignor Lender's Rights and obligations under the
Loan Documents, that Lender ceases to be a party to the Loan Documents,
(iii) Borrower shall execute and deliver to the assignor Lender and the
Assignee the appropriate Notes in accordance with this agreement following
the transfer, (iv) upon delivery of the Notes under CLAUSE (III) preceding,
the assignor Lender shall return to Borrower all Notes previously delivered
to that Lender under this agreement, and (v) SCHEDULE 2 is automatically
deemed to be amended to reflect the name, address, telecopy number, and
Commitment of the Assignee and the remaining Commitment (if any) of the
assignor Lender, and Agent shall prepare and circulate to Borrower and
Lenders an amended SCHEDULE 2 reflecting those changes.
14.11 Venue, Service of Process, and Jury Trial. BORROWER AND (PURSUANT
-----------------------------------------
TO ITS GUARANTY) EACH RESTRICTED COMPANY, IN EACH CASE FOR ITSELF AND ITS
SUCCESSORS AND ASSIGNS, IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION
OF THE STATE AND FEDERAL COURTS IN NEW YORK, (B) WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION THAT IT MAY NOT OR IN THE FUTURE HAVE TO THE
LAYING OF VENUE OF ANY LITIGATION ARISING OUT OF OR IN CONNECTION WITH ANY LOAN
DOCUMENT AND THE OBLIGATION BROUGHT IN THE COURTS OF THE STATE OF NEW YORK, OR
IN THE UNITED STATES COURTS LOCATED IN THE BOROUGH OF MANHATTAN, (C) WAIVES ANY
CLAIMS THAT ANY LITIGATION BROUGHT IN ANY OF THE FOREGOING COURTS HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM, (D) CONSENTS TO THE SERVICE OF PROCESS OUT OF
ANY OF THOSE COURTS IN ANY LITIGATION BY THE MAILING OF COPIES OF THAT PROCESS
BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, BY HAND DELIVERY,
OR BY DELIVERY BY A NATIONALLY-RECOGNIZED COURIER SERVICE, AND SERVICE SHALL BE
DEEMED COMPLETE UPON DELIVERY OF THE LEGAL PROCESS AT ITS ADDRESS FOR PURPOSES
OF THIS AGREEMENT, (E) AGREES THAT ANY LEGAL PROCEEDING AGAINST ANY PARTY TO ANY
LOAN DOCUMENT ARISING OUT OF OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE
OBLIGATION MAY BE BROUGHT IN ONE OF THE FOREGOING COURTS, AND (F) WAIVES TO THE
FULLEST EXTENT PERMITTED BY LAW, ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUR OF ANY LOAN DOCUMENT. The
scope of each of the foregoing waivers is intended to be all encompassing of any
and all disputes that may be filed in any court and that relate to the subject
matter of this transaction, including, without limitation, contract claims, tort
claims, breach of duty claims, and all other common law and statutory claims.
BORROWER AND (PURSUANT TO ITS GUARANTY) EACH OTHER RESTRICTED COMPANY
ACKNOWLEDGES THAT THESE WAIVERS ARE A MATERIAL INDUCEMENT TO AGENT'S AND EACH
LENDER'S AGREEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT AGENT AND EACH
LENDER HAS ALREADY RELIED ON THESE WAIVERS IN ENTERING INTO THIS AGREEMENT, AND
THAT AGENT AND EACH LENDER WILL CONTINUE TO RELY ON EACH OF THESE WAIVERS IN
RELATED FUTURE DEALINGS. BORROWER AND (PURSUANT TO ITS GUARANTY) EACH OTHER
RESTRICTED COMPANY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THESE
WAIVERS WITH ITS LEGAL COUNSEL, AND THAT IT KNOWINGLY AND VOLUNTARILY AGREES TO
EACH WAIVER FOLLOWING CONSULTATION WITH LEGAL COUNSEL. The waivers in this
section are irrevocable, meaning that they may not be modified either orally or
in writing, and these waivers apply to any future renewals, extensions,
amendments, modifications, or replacements in respect of the applicable Loan
Document. In connection with any Litigation, this agreement may be filed as a
written consent to a trial by the court.
14.12 ENTIRETY. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
--------
BETWEEN BORROWER, LENDERS, AND AGENT 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.
REMAINDER OF PAGE INTENTIONALLY BLANK.
54
<PAGE>
SIGNATURE PAGES FOLLOW.
55
<PAGE>
EXECUTED as of the date first stated above.
Address for notices:
- -------------------
10200 Grogans Mill Road, Suite 500 ARAXAS SPV-I, INC.
The Woodlands, Texas 77380 as Borrower
Attention: Mr. Stephen M. Clark
Chief Financial Officer
By: /s/ W E Rowsey
---------------------------
Fax: 281-364-3707 Name: W E ROWSEY
--------------------------
Title: PRESIDENT
-------------------------
CREDIT LYONNAIS NEW YORK BRANCH,
1000 Louisiana St., Suite 5360 As Agent and a Lender
Houston, Texas 77002
Attention: Mr. John M. Falbo
Vice President and Group Manager By: /s/ Pascal Poupelle
----------------------------
Fax: 713-751-0307 Name: PASCAL POUPELLE
--------------------------
Title: EXECUTIVE VICE PRESIDENT
-------------------------
56
<PAGE>
SCHEDULE 2
----------
LENDERS AND COMMITMENTS
-----------------------
<TABLE>
<CAPTION>
================================================================================
LENDER BRIDGE REVOLVING COMMITMENT
COMMITMENT COMMITMENT PERCENTAGE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Credit Lyonnais New York Branch $35,000,000 $20,000,000 100.00%
Address for Notices:
1301 Avenue of the Americas
New York, New York 10019
with a copy to:
1000 Louisiana Street, Suite 5360
Houston, Texas 77002
Attn: Mr. John Falbo
Vice President and Group Manager
- -------------------------------------------------------------------------------
TOTAL COMMITMENTS $35,000,000 $20,000,000 100.%
===============================================================================
</TABLE>
SCHEDULE 2
----------
<PAGE>
SCHEDULE 7.1
------------
USE OF PROCEEDS OF BRIDGE FACILITY
----------------------------------
Borrower will use proceeds of Bridge Facility for:
1. Repayment of existing indebtedness (including interest) to Stratum
Energy Partners, L.P. in the approximate amount of $26,000,000.
2. Arrangement/Structuring Fees of $667,000 and Funding Fees for the
Obligation (approximately $200,000) as set out in the fee letter
agreement described in Section 4.2(a).
3. Legal and other expenses incurred in connection with the Bridge
Facility.
4. Costs incurred in connection with the XPLOR IPO to the extent that
such costs must be paid prior to the closing of the XPLOR IPO, such
amount currently projected as less than $500,000.
5. Interest Expense on Debt.
6. LC's to secure any Swap Agreement in place on the Closing Date or
entered into after the Closing Date, the aggregate face amount of all
such LC's shall not be greater than $2,000,000 if all existing Swap
Agreements on the Closing Date remain in place after the Closing Date.
7. Costs of unwinding any commodity swaps currently in place at or
following the Closing Date, such amount estimated to be approximately
$2,500,000.
8. Acquisition, exploration and development of Mineral Interests.
9. Working capital.
10. Other general corporate purposes.
SCHEDULE 7.1
------------
<PAGE>
SCHEDULE 9.2
------------
PERMITTED DEBT
--------------
1. The following existing Debt of the Restricted Companies, other than the
Refinanced Debt, together with all renewals and extensions but not
principal increases of the following:
(a) Note dated August 6, 1996, executed by Araxas Energy Corporation
payable to Gulfland Resources, Inc. in the principal amount of
$620,000.00, due in three (3) annual installments beginning July 30,
1997. (Araxas has trade receivables due form Gulfland which can
possibly be offset against this note.)
(b) Note dated November 8, 1994, executed by New West Resources, Inc.
(assumed by Araxas Energy Corporation) payable to Blue Ridge Oil & Gas
Exploration, Inc., et al, in the principal amount of $427,500.00 due
on February 1, 1998.
(c) Debt (other than the Refinanced Debt) as disclosed in the
Current Financials.
2. The Obligation.
3. Debt owed to other Restricted Companies.
4. Swap Agreements so long as the total for all the Restricted Companies
thereunder never exceeds, (i) with respect to any interest rate swaps, an
aggregate notional amount of $3,000,000.00, and (ii) with respect to any
oil and/or gas commodity swaps, fifty percent (50%) of the aggregate
monthly production of oil and gas from the Mineral Interests.
5. Trade payables, accrued taxes and other liabilities that do not constitute
Funded Debt.
6. Endorsements of negotiable instruments in the ordinary course of business,
and guarantees by any Restricted Company of any other Restricted Company's
Permitted Debt.
7. In addition to the above, purchase-money Debt and capital-lease obligations
incurred by any Restricted Company to acquire assets (other than
Collateral) that never exceed $2,000,000.00 total outstanding for all of
the Restricted Companies; provided that no such Debt shall exceed 75% of
the fair market value of the assets being so acquired or leased at the time
such Debt is incurred.
8. The Subordinated Debt.
SCHEDULE 9.2
------------
<PAGE>
SCHEDULE 9.4
------------
PERMITTED LIENS
---------------
1. The following existing Liens on assets of the Restricted Companies,
together with all renewals and extensions but not principal increases of
the following:
Liens in favor of Ron A. Krenzke, as agent for himself,
Craig S. Davis and Phillip V. Duggan on the capital
stock of Interactive Exploration Solutions, Inc., which
Liens are junior and subordinate in all respects to the
Lender Liens on such capital stock pursuant to, among
other things, the Subordination Agreements.
2. Lender Liens.
3. Any interest or title of a lessor in assets being leased under an
operating lease that does not constitute Debt.
4. Pledges or deposits -- that may not cover any Collateral except cash
proceeds of Collateral arising in the ordinary course of business -- made
to secure payment of workers' compensation, unemployment insurance, or
other forms of governmental insurance or benefits or to participate in any
fund in connection with workers' compensation, unemployment insurance,
pensions, or other social security programs.
5. Good-faith pledges or deposits -- that may not cover any Collateral except
cash proceeds of Collateral arising in the ordinary course of business --
(a) for 10% or less (or more if for the purchase of equipment) of the
amounts due under --and made to secure -- any Restricted Company's
performance of bids, tenders, contracts (except for the repayment of
borrowed money), or leases, or (b) made to secure statutory obligations,
surety or appeal bonds, or indemnity, performance, or other similar bonds
benefitting any Restricted Company in the ordinary course of its business.
6. Zoning, easements, rights of way and similar restrictions on the use of
real property that do not materially impair the use of the real property
and that are not violated by existing or proposed structures or land use.
7. If no Lien has been filed in any jurisdiction or agreed to (a) claims and
Liens for Taxes not yet due and payable, (b) mechanic's Liens and
materialman's Liens for services or materials for which payment is not yet
due and payable, and (c) landlord's Liens for rental not yet due and
payable.
8. The following -- if the validity or amount is being contested in good faith
and by appropriate and lawful proceedings diligently conducted, reserve or
other appropriate provision (if any) required by GAAP has been made, levy
and execution continue to be stayed, they do not individually or
collectively detract materially from the value of the property of the
Person in question or materially impair the use of that property in the
operation of its business, and (other than ad valorem Tax Liens given
statutory priority) they are subordinate to the Lender Liens to the extent
that they cover any Collateral: (a) Claims and Liens for Taxes due and
payable; (b) claims and Liens upon, and minor defects of title to, real or
personal property, including any attachment of personal or real property or
other legal process before adjudication of a dispute on the merits, which
are customarily accepted in the oil and gas financing industry; (c) claims
and Liens of mechanics, materialmen, warehousemen, carriers, landlords, or
other like Liens; and (d) adverse judgments or orders on appeal for the
payment of money.
9. Liens arising under Swap Agreements if the related Debt thereunder is
Permitted Debt.
10. Liens that secure any of the Permitted Debt described as ITEM 7 on SCHEDULE
9.2 so long as those Liens never cover any assets except the assets
acquired with that Permitted Debt and do not cover any other Collateral.
11. Liens of operators and non-operators under joint operating agreements
arising in the ordinary course of the business of the Restricted Companies
to secure amounts owing, which amounts are not yet due or are being
contested in good faith.
12. Liens under production sales agreements, division orders, operating
agreements and other agreements customary in the oil and gas business for
processing, producing and selling hydrocarbons.
13. Liens of record under terms and provisions of the leases, unit agreements,
assignments and other transfer of title documents in the chain of title
under which the Restricted Companies acquired the relevant property.
SCHEDULE 9.4
------------
<PAGE>
SCHEDULE 9.8
------------
PERMITTED LOANS, ADVANCES, AND INVESTMENTS
------------------------------------------
1. The following (i.e., "GOVERNMENT SECURITIES") if due within one year after
issuance: (a) Readily marketable direct full faith and credit obligations
of the United States of America or obligations guaranteed by the full faith
and credit of the United States of America; and (b) readily marketable
obligations of an agency or instrumentality of, or corporation owned,
controlled or sponsored by, the United States of America that are generally
considered in the securities industry to be implicit obligations of the
United States of America.
2. Readily marketable direct obligations of any state of United States of
America given on the date of such investment a credit rating of at least Aa
by Moody's Investors Service, Inc. or AA by Standard & Poor's Corporation,
in each case due within one year from the making of the investment.
3. Certificates of deposit issued by, bank deposits in, eurodollar deposits
through, bankers' acceptances of, and repurchase agreements covering
Government Securities executed by, any (a) Lender or (b) bank incorporated
under the Laws of the United States of America or any of its states and
given on the date of the investment a short-term certificate of deposit
credit rating of at least P-2 by Moody's Investors Service, Inc., or A-2 by
Standard & Poor's Corporation, in each case due within one year after the
date of the making of the investment.
4. Certificates of deposit issued by, bank deposits in, eurodollar deposits
through, bankers' acceptances of, and repurchase agreements covering
Government Securities executed by, any branch or office located in the
United States of America of a bank incorporated under the Laws of any
jurisdiction outside the United States of America having on the date of the
investment a short-term certificate of deposit credit rating of a least P-2
by Moody's Investors Service, Inc., or A-2 by Standard & Poor's
Corporation, in each case due within on year after the date of the making
of the investment.
5. Repurchase agreements covering Government Securities executed by a broker
or dealer registered under Section 15(b) of the Securities Exchange Act of
1934 having on the date of the investment capital of at least $100,000,000,
due within 30 days after the date of the making of the investment, so long
as the maker of the investment receives written confirmation of the
transfer to it of record ownership of the Government Securities on the
books of a "primary dealer" in the Government Securities as soon as
practicable after the making of the investment.
6. Readily marketable commercial paper of corporations doing business in and
incorporated under the Laws of the United States of America or any State
thereof or of any corporation that is the holding company for a bank
described in ITEMS 3 and 4 above given on the date of the investment a
credit rating of at least P-1 by Moody's Investors Service, Inc., or A-1 by
Standard & Poor's Corporation, in each case due within 90 days after the
date of the making of the investment.
7. "Money market preferred stock" issued by a corporation incorporated under
the Laws of the United States of America or any of its states given on the
date of the investment a credit rating of at least Aa by Moody's Investors
Services, Inc., and AA by Standard & Poor's Corporation, in each case
having an investment period not exceeding 50 days, so long as (a) the
amount of all the investments issued by the same issuer does not exceed
$10,000,000 and (b) the aggregate amount of all the investments does not
exceed $50,000,000.
8. A readily redeemable "money market mutual fund" sponsored by a bank
described in ITEMS 3 or 4 above, or a registered broker or dealer described
in ITEM 5 above, that has and maintains an investment policy limiting its
investments primarily to instruments of the types described in ITEMS 1
through 7 above and having on the date of those investment total assets of
at least $1,000,000,000.
9. Loans or advances to any Restricted Companies' directors, officers, and
employees that never exceed a total of $250,000.00 outstanding for all of
the Restricted Companies.
10. Loans or advances to or investments in Restricted Companies.
11. Other investments that never exceed a total of $250,000.00 outstanding at
any time.
2
SCHEDULE 9.8
------------
<PAGE>
EXHIBIT A
---------
PROMISSORY NOTE
---------------
$___________________________________ _____________________________
FOR VALUE RECEIVED, Araxas SPV-I, Inc., an Oklahoma corporation ("MAKER")
promises to pay to the order of_______________________________, a_______________
_______________________("PAYEE"), that portion of the principal amount of
$____________________ that may from time to time be disbursed and outstanding
under this note, together with interest.
This note is a "NOTE" under the Credit Agreement (as renewed, extended,
amended, or restated, the "CREDIT AGREEMENT") dated as of September 24 , 1997,
between Maker as Borrower, Payee, certain other "Lenders," and Credit Lyonnais
New York Branch, as "Agent" for Lenders. All of the terms defined in the Credit
Agreement have the same meanings when used--unless otherwise defined--in this
Note.
This Note incorporates by reference the principal and interest payment
terms in the Credit Agreement for this Note, including, without limitation, the
final maturity date for this Note. Principal and interest are payable to the
holder of this Note through Agent at its offices at 1301 Avenue of the Americas,
New York, New York 10019, or at any other address of which Agent may notify
Maker in writing.
This Note also incorporates by reference all other provisions in the Credit
Agreement applicable to this Note--such as provisions for disbursement of
principal, applicable-interest rates before and after Default, voluntary and
mandatory prepayments, acceleration of maturity, exercise of rights, payment of
attorney's fees, court costs, and other costs of collection, certain waivers by
Maker and other obligors, assurances and security, choice of New York and United
States federal law, usury savings, and other matters applicable to Loan
Documents under the Credit Agreement.
ARAXAS SPV-I, INC., as Maker
By:_____________________________________
Name:___________________________________
Title:__________________________________
A-1
<PAGE>
EXHIBIT C
---------
FORM OF PRODUCTION REPORT
-------------------------
XPLOR ENERGY, INC.:
- -----------------
Monthly Operations Report for the Month of __________, _______
A.
========================================================
Production Sales Volumes
========================================================
Oil (Bbls)
--------------------------------------------------------
Gas (MMcf)
--------------------------------------------------------
Water (Bbls)
--------------------------------------------------------
Sales
Oil ($000)
Gas ($000)
Total ($(000)
--------------------------------------------------------
Average Realized Product Prices
--------------------------------------------------------
Oil ($/Bbl)
--------------------------------------------------------
Gas ($/Mcf)
--------------------------------------------------------
Recurring Lease Operating Expenses (listed) ($000)
--------------------------------------------------------
Non-Recurring Lease Operating Expenses (listed) ($000)
--------------------------------------------------------
Capital Expenditures ($000)
--------------------------------------------------------
Net Revenues ($000)
========================================================
B. MANAGEMENT'S DISCUSSION OF MONTH'S OPERATIONS
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
C. ATTACHED HERETO AS ANNEX I ARE COPIES OF RELEVANT AFE'S AND OTHER
INFORMATION WHICH DESCRIBE ALL PROPOSED OPERATIONS WHICH THE RESTRICTED
COMPANIES HAVE CONSENTED TO OR AGREED TO PARTICIPATE UNDER ANY PRESENTLY
EXISTING OPERATING AGREEMENT AFFECTING ANY MORTGAGED PROPERTY DURING THE
MONTH OF____________,_____.
Prepared By: _____________________________
Signature
Name:________________________
Title:_______________________
Date:________________________
C-1
<PAGE>
EXHIBIT D-1
-----------
BORROWING REQUEST
-----------------
AGENT: Credit Lyonnais New York Branch DATE: _____________, 19___
BORROWER: Araxas SPV-I, Inc.
================================================================================
This notice is delivered under SECTION 2.2(A) of the Credit Agreement (as
renewed, extended, and amended, the "CREDIT AGREEMENT") dated as of September 24
, 1997, between Borrower, Agent, and certain lenders. Terms defined in the
Credit Agreement have the same meanings when used -- unless otherwise defined --
in this request.
Borrower requests a Borrowing under the Credit Agreement as follows:
Borrowing Facility [Bridge Facility] [Revolving Facility]
Borrowing Date/1/ _____________________________, 199__
-
Amount of Borrowing/2/ $____________________________________
-
Type of Borrowing/1/ ____________________________________
-
For LIBOR-Rate Borrowing, the
Interest Period/4/ ______________________________months
-
Borrower certifies that on the above Borrowing Date -- after giving effect
to the requested Borrowing -- (a) all of the representations and warranties in
the Loan Documents will be true and correct in all material respects and (b) no
Material Adverse Event, Default, or Potential Default will exist.
ARAXAS SPV-I, INC., as Borrower
By________________________________________________
(Name)____________________________________________
(Title)/5/ _______________________________________
-
_____________________________
/1/ Business Day of request for Base-Rate Borrowing or at least third
Business Day after request for LIBOR-Rate Borrowing.
/2/ Not less than $500,000 or a $100,000 greater multiple if a Base-Rate
Borrowing, and not less than $1,000,000 or a $500,000 greater multiple
if a LIBOR-Rate Borrowing.
/3/ LIBOR-Rate Borrowing or Base-Rate Borrowing.
/4/ 1, 2, 3, or 6 months.
/5/ Must be a Responsible Officer
D-2
<PAGE>
EXHIBIT D-2
-----------
NOTICE OF CONVERSION
--------------------
AGENT: Credit Lyonnais New York Branch DATE: ____________________
BORROWER: Araxas SPV-I, Inc.
================================================================================
This notice is delivered under SECTION 3.10 of the Credit Agreement (as
renewed, extended, amended, or restated, the "CREDIT AGREEMENT") dated as of
September 24, 1997, between Borrower, Agent, and certain lenders. Terms defined
in the Credit Agreement have the same meanings when used -- unless otherwise
defined -- in this notice.
Borrower presently has a ______________/1/ Borrowing (the "EXISTING
-
BORROWING") under the [Bridge] [Revolving] Facility in the amount of $_________
which, if a Libor-Rate Borrowing, has an Interest Period of ____________/2/
-
ending on ______________. On _______________ (the "CONVERSION DATE"), Borrower
shall partially pay, continue in full or part as the same Type of Borrowing, or
convert in full or part to another Type of Borrowing and -- if applicable --
with the Interest Period(d) designated below [check applicable boxes]:
[_] Amount to be paid, if any, $______________
[_] Balance to be in the following Types of Borrowings with -- if
applicable --the following Interest Period(s):
=========================================================
TYPE/1/ AMOUNT/3/ INTEREST PERIOD/2/
=========================================================
$
---------------------------------------------------------
$
---------------------------------------------------------
$
---------------------------------------------------------
$
=========================================================
Borrower certifies that on the Conversion Date -- and after giving effect
to the above action(s) -- (a) all of the representations and warranties in the
Loan Documents will be true and correct in all material respects and (b) no
Material Adverse Event, Default, or Potential Default will exist.
ARAXAS SPV-I, INC.
By___________________________________
Name_________________________________
Title/4/_____________________________
_________________________
/1/ Base-Rate or LIBOR-Rate
/2/ 1, 2, 3, or 6 months
/3/ Must be $500,000 or $100,000 greater multiple for a Base-Rate
Borrowing and $1,000,000 or $500,000 greater multiple for a LIBOR-Rate
Borrowing
/4/ Must be a Responsible Officer
D-3
<PAGE>
EXHIBIT D-3
-----------
LC REQUEST
----------
AGENT: Credit Lyonnais New York Branch DATE: ______________,19___
ISSUING LENDER:
BORROWER: Araxas SPV-I, Inc.
================================================================================
This notice is delivered under SECTION 2.3(A) of the Credit Agreement (as
renewed, extended, and amended, the "CREDIT AGREEMENT") dated as of September
24, 1997, between Borrower, Agent, Issuing Lender, and certain other lenders.
Terms defined in the Credit Agreement have the same meanings when used -- unless
otherwise defined -- in this request.
Borrower requests Issuing Lender to issue a LC under the Credit Agreement
as follows:
Issue Date ____________________________, 19____
Beneficiary ___________________________________
Expiry Date ___________________________________/5/
-
Face Amount $__________________________________
Borrower certifies that on the above Issue Date -- after giving effect to
the requested LC -- (a) all of the representations and warranties in the Loan
Documents will be true and correct in all material respects and (b) no Material
Adverse Event, Default, or Potential Default will exist.
ARAXAS SPV-I, INC., as Borrower
By_________________________________________
(Name)_____________________________________
(Title)/6/ ________________________________
-
_____________________________
/5/ Must be on or before (i) three Business Days before the Bridge
Termination Date if issued under the Bridge Facility, or (ii) the
earlier of either one year after the Issue Date or three Business Days
before the Revolving Termination Date if issued under the Revolving
Facility.
/6/ Must be a Responsible Officer.
D-4
<PAGE>
EXHIBIT D-4
-----------
COMPLIANCE CERTIFICATE
----------------------
FOR THE FISCAL QUARTER/YEAR ENDED ____________________ (the "SUBJECT PERIOD")
AGENT: Credit Lyonnais New York Branch DATE: ____________________
BORROWER: Araxas SPV-I, Inc.
================================================================================
This certificate is delivered under the Credit Agreement (as renewed,
extended, amended, or restated, the "CREDIT AGREEMENT") dated as of September
24, 1997, between Borrower, Agent, and certain lenders, all defined terms in
which have the same meanings when used -- unless otherwise defined -- in this
certificate.
In my capacity as a Responsible Officer of -- and on behalf of -- Borrower,
I certify to Agent and Lenders on the date of this certificate that (a) I am a
Responsible Officer of Borrower, (b) XPLOR's Financial Statements attached to
this certificate were prepared in accordance with GAAP and present fairly the
Companies' consolidated financial condition and results of operations as of, and
for the fiscal quarter or year, as the case may be, ended on, the last day of
the Subject Period, (c) a review of the activities of the Companies during the
Subject Period has been made under my supervision with a view to determining
whether, during the Subject Period, the Companies performed and complied with
all of their obligations under the Loan Documents, and, during the Subject
Period, to my knowledge (i) the Companies performed, and complied with all of
their obligations under the Loan Documents (except for the deviations, if any,
described on a schedule to this certificate) in all material respects, and (ii)
no Default (nor any Potential Default) has occurred which has not been cured or
waived (except the Defaults or Potential Defaults, if any, described on the
schedule to this certificate), and (d) to my knowledge, the status of compliance
by the Companies with SECTIONS 10.1, 10.2, and 10.3 of the Credit Agreement at
the end of the Subject Period is as described on the schedule to this
certificate.
By_____________________________________
Name___________________________________
Title/7/ ______________________________
_______________________
/7/ Must be a Responsible Officer
D-5
<PAGE>
SCHEDULE TO COMPLIANCE CERTIFICATE
----------------------------------
(For Fiscal Quarter/Year Ended ________________________.)
A. Describe deviations from performance or compliance with covenants, if
any, pursuant to CLAUSE (C)(I) of the attached certificate. If none, so state.
B. Describe Potential Defaults and Defaults, if any, pursuant to CLAUSE
(C)(II) of the attached certificate. If none, so state.
C. Reflect compliance with SECTIONS 10.1, 10.2 and 10.3 at the end of
the Subject Period on a consolidated basis pursuant to CLAUSE (D) of the
attached certificate.
TABLE 1
-------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
COVENANT AT END OF SUBJECT PERIOD
==========================================================================================================
<S> <C> <C>
(S)10.1 CURRENT RATIO
==========================================================================================================
(a) Current assets $
- ----------------------------------------------------------------------------------------------------------
(b) Current liabilities $
- ----------------------------------------------------------------------------------------------------------
(c) Current Maturities of Principal Debt $
- ----------------------------------------------------------------------------------------------------------
(d) RATIO of Line (a) to (Line (b) - Line (c)) ____ to 1.00
- ----------------------------------------------------------------------------------------------------------
(e) MINIMUM 1.00 to 1.00
==========================================================================================================
(S)10.2 FIXED-CHARGE COVERAGE
- ----------------------------------------------------------------------------------------------------------
(a) Net Income for the fiscal quarter then ended $
- ----------------------------------------------------------------------------------------------------------
(b) Interest expense (including capitalized interest) in that applicable $
period
- ----------------------------------------------------------------------------------------------------------
(c) Taxes for that applicable period $
- ----------------------------------------------------------------------------------------------------------
(d) Extraordinary expense/(income) for that applicable period $
- ----------------------------------------------------------------------------------------------------------
(e) Depreciation, depletion and amortization for that applicable period $
- ----------------------------------------------------------------------------------------------------------
(f) EBITDAX for that applicable period (sum of Lines (a)-(e)) $
- ----------------------------------------------------------------------------------------------------------
(g) RATIO of Line (f) to Line (b) ____ to 1.00
- ----------------------------------------------------------------------------------------------------------
(h) MINIMUM 3.00 to 1.00
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
==========================================================================================================
COVENANT AT END OF SUBJECT PERIOD
==========================================================================================================
<S> <C>
(S)10.3 MINIMUM TANGIBLE NET WORTH
- ----------------------------------------------------------------------------------------------------------
(a) Tangible Net Worth at the end of the Subject Period $
- ----------------------------------------------------------------------------------------------------------
</TABLE>
D-6
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================
COVENANT AT THE END OF SUBJECT PERIOD
=============================================================================================================
<S> <C> <C>
(b) Cumulative Net Income (without deduction for losses) from
July 31, 1997 through the end of the Subject Period $
- -------------------------------------------------------------------------------------------------------------
(c) Net proceeds of the issuance of any equity securities by XPLOR $
after the Closing Date
- -------------------------------------------------------------------------------------------------------------
(d) Minimum Tangible Net Worth [Sum of $5,500,000 plus (75% X $
Line(b)) plus (75% X Line (c))]
=============================================================================================================
</TABLE>
D-7
<PAGE>
EXHIBIT F
---------
ASSIGNMENT AND ASSUMPTION AGREEMENT
-----------------------------------
THIS AGREEMENT is entered into as of ______________, between _____________
("ASSIGNOR") and _____________("ASSIGNEE").
ARAXAS SPV-I, INC., an Oklahoma corporation ("BORROWER"), certain lenders
("LENDERS"), and 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 (in its capacity as Agent for Lenders, "AGENT"),
are party to the Credit Agreement (as renewed, extended, amended, or restated,
the "CREDIT AGREEMENT") dated as of September 24, 1997, all of the defined terms
in which have the same meanings when used -- unless otherwise defined -- in this
agreement. This agreement is entered into as required by SECTION 14.10(C) of the
Credit Agreement and is not effective until consented to by Borrower and Agent,
which consents may not under the Credit Agreement be unreasonably withheld.
ACCORDINGLY, for adequate and sufficient consideration, Assignor and
Assignee agree as follows:
1. ASSIGNMENT AND ASSUMPTION. By this agreement, and effective as of
-------------------------
_____________________________ (which must be at least five Business Days after
the execution and delivery of this agreement to both Borrower and Agent for
consent, the "EFFECTIVE DATE"), Assignor sells and assigns to Assignee (without
recourse to Assignor) and Assignee purchases and assumes from Assignor a ___%
interest (the "ASSIGNED INTEREST"), which, if not equal to 100%, must be a
percentage, when computed as an aggregate dollar amount, that is at least
$5,000,000, in and to all of Assignor's Rights and obligations under the Credit
Agreement as of the Effective Date, including, without limitation, the Assigned
Interest in (a) Assignor's Commitment as of the Effective Date, (b) the Note
held by Assignor as of the Effective Date, (c) all Principal Debt owed to
Assignor on the Effective Date, (d) all unpaid reimbursement obligations under
drawings or drafts under any LC on the Effective Date, (e) all outstanding
participations owned by Assignor under SECTION 2.3(B) of the Credit Agreement on
the Effective Date, (f) all interest accruing in respect of the Assigned
Interest after the Effective Date, (g) all LC fees paid in advance before the
Effective Date under SECTION 4.3(A) of the Credit Agreement in respect of the
Assigned Interest and in respect of any period or periods after the Effective
Date, and (h) all commitment fees accruing in respect of the Assigned Interest
under SECTION 4.4 of the Credit Agreement after the Effective Date.
2. ASSIGNOR PROVISIONS. Assignor (a) represents and warrants to Assignee that
-------------------
as of the Effective Date (i) the following principal amounts and LC liabilities
are owed to it without reduction for any assignments that have not yet become
effective:
<TABLE>
<CAPTION>
===========================================
ITEM AMOUNT
===========================================
<S> <C>
Principal Debt $
-------------------------------------------
LC reimbursement obligations $
-------------------------------------------
(S) 2.3(B) participations $
===========================================
</TABLE>
and (ii) Assignor is the legal and beneficial owner of the Assigned Interest,
which is free and clear of any adverse claim, and (b) makes no representation or
warranty to Assignee and assumes no responsibility to Assignee with respect to
(i) any statements, warranties, or representations made in or in connection with
any Loan Document, (ii) the execution, legality, validity, enforceability,
genuineness, sufficiency, or value of any Loan Document, or (iii) the financial
condition of any Company or the performance or observance by any Company of any
of its obligations under any Loan Document.
F-1
<PAGE>
3. ASSIGNEE PROVISIONS. Assignee (a) represents and warrants to Assignor,
-------------------
Borrower, and Agent that Assignee is legally authorized to enter into this
agreement, (b) confirms that it has received a copy of the Credit Agreement,
copies of the Current Financials, and such other documents and information as it
deems appropriate to make its own credit analysis and decision to enter into
this agreement, (c) agrees with Assignor, Borrower, and Agent that Assignee
shall -- independently and without reliance upon Agent, Assignor, or any other
Lender and based on such documents and information as Assignee deems appropriate
at the time -- continue to make its own credit decisions in taking or not taking
action under the Loan Documents, (d) appoints and authorizes Agent to take such
action as agent on its behalf and to exercise such powers under the Loan
Documents as are delegated to Agent by the terms of the Loan Documents and all
other reasonably-incidental powers, (e) agrees with Assignor, Borrower, and
Agent that Assignee shall perform and comply with all provisions of the Loan
Documents applicable to Lenders in accordance with their respective terms, and
(f) if Assignee is not organized under the Laws of the United States of America
or one of its states, it (i) represents and warrants to Assignor, Agent, and
Borrower that no Taxes are required to be withheld by Assignor, Agent, or
Borrower with respect to any payments to be made to it in respect of the
Obligations, and it has furnished to Agent and Borrower two duly completed
copies of either U.S. Internal Revenue Service Form 4224, Form 1001, Form W-8,
or any other form acceptable to Agent that entitles Assignee to exemption from
U.S. federal withholding Tax on all interest payments under the Loan Documents,
(ii) covenants to provide Agent and Borrower a new Form 4224, Form 1001, Form W-
8, or other form acceptable to Agent upon the expiration or obsolescence of any
previously delivered form according to Law, duly executed and completed by it,
and to comply from time to time with all Laws with regard to the withholding Tax
exemption, and (iii) agrees with Agent and Borrower that, if any of the
foregoing is not true or the applicable forms are not provided, then Agent and
Borrower (without duplication) may deduct and withhold from interest payments
under the Loan Documents any United States federal-income Tax at the full rate
applicable under the Code.
4. CREDIT AGREEMENT AND COMMITMENTS. From and after the Effective Date (a)
--------------------------------
Assignee shall be a party to the Credit Agreement and (to the extent provided in
this agreement) have the Rights and obligations of a Lender under the Loan
Documents and (b) Assignor shall (to the extent provided in this agreement)
relinquish its Rights and be released from its obligations under the Loan
Documents. On the Effective Date, after giving effect to this agreement, but
without giving effect to any other assignments that have not yet become
effective, Assignor's [Bridge Commitment and] Revolving Commitment (which, if
positive, must be at least $5,000,000) and Assignee's [Bridge Commitment and]
Revolving Commitment will be as follows:
<TABLE>
<CAPTION>
=============================================
LENDER [BRIDGE REVOLVING
COMMITMENT] COMMITMENT
---------------------------------------------
<S> <C> <C>
Assignor $ $
---------------------------------------------
Assignee $ $
=============================================
</TABLE>
5. NOTES. Assignor and Assignee request Borrower to issue new Notes to
-----
Assignor and Assignee in the amounts of their respective Commitments under
PARAGRAPH 4 above and otherwise issued in accordance with the Credit Agreement.
Upon delivery of those Notes, Assignor shall return to Borrower the Note
previously delivered to Assignor under the Credit Agreement.
6. PAYMENTS AND ADJUSTMENTS. From and after the Effective Date, Agent shall
------------------------
make all payments in respect of the Assigned Interest (including payments of
principal, interest, fees, and other amounts) to Assignee. Assignor and
Assignee shall make all appropriate adjustments in payments for periods before
the Effective Date by Agent or with respect to the making of this assignment
directly between themselves.
7. CONDITIONS PRECEDENT. PARAGRAPHS 1 through 5 above are not effective until
--------------------
(a) counterparts of this agreement are executed and delivered by Assignor and
Assignee to -- and are
F-2
<PAGE>
executed in the spaces below by -- Borrower and Agent and (b) Agent receives
from Assignor or Assignee a $2,500 processing fee.
8. INCORPORATED PROVISIONS. Although this agreement is not a Loan Document,
-----------------------
the provisions of SECTIONS 1 and 14 of the Credit Agreement applicable to Loan
Documents are incorporated into this instrument by reference the same as if this
agreement were a Loan Document and those provisions were set forth in this
agreement verbatim.
9. COMMUNICATIONS. For purposes of SECTION 14.2 of the Credit Agreement,
--------------
Assignee's address and telecopy number -- until changed under that section --
are beside its signature below.
10. AMENDMENTS, ETC. No amendment, waiver, or discharge to or under this
---------------
agreement is valid unless in writing that is signed by the party against whom it
is sought to be enforced and is otherwise in conformity with the requirements of
the Credit Agreement.
11. ENTIRETY. THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN ASSIGNOR
--------
AND ASSIGNEE ABOUT ITS SUBJECT MATTER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF ASSIGNOR AND ASSIGNEE.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN ASSIGNOR AND ASSIGNEE.
12. PARTIES. This agreement binds and benefits Assignor, Assignee, and their
-------
respective successors and assigns that are permitted under the Credit Agreement.
EXECUTED as of the date first stated above.
[ASSIGNOR] [ASSIGNEE]
By_________________________________ By_________________________________
(Name)_____________________________ (Name)_____________________________
(Title)____________________________ (Title)____________________________
(Address)__________________________
___________________________________
___________________________________
(Telecopy No.)_____________________
As of the Effective Date, Borrower and Agent consent to this agreement and
the transactions contemplated in it.
ARAXAS SPV-I, INC., as Borrower CREDIT LYONNAIS NEW YORK BRANCH, as
Agent
By:________________________________ By:________________________________
Name:______________________________ Name:______________________________
Title:_____________________________ Title:_____________________________
F-3
<PAGE>
EXHIBIT 10.5
XPLOR ENERGY, INC.
LONG-TERM INCENTIVE PLAN
1. OBJECTIVES. The XPLOR Energy, Inc. Long-Term Incentive Plan (the
"Plan") is designed to retain selected employees of XPLOR Energy, Inc. (the
"Company") and its Subsidiaries and reward them for making significant
contributions to the success of the Company and its Subsidiaries. These
objectives are to be accomplished by making awards under the Plan and thereby
providing Participants with a proprietary interest in the growth and performance
of the Company and its Subsidiaries.
2. DEFINITIONS. As used herein, the terms set forth below shall have the
following respective meanings:
"AWARD" means the grant of any form of ISO, Nonqualified Option, stock
appreciation right, stock award or cash award, whether granted singly, in
combination or in tandem, to a Participant pursuant to any applicable terms,
conditions and limitations as the Committee may establish in order to fulfill
the objectives of the Plan.
"AWARD AGREEMENT" means a written agreement between the Company and a
Participant that sets forth the terms, conditions and limitations applicable to
an Award.
"BOARD" means the Board of Directors of the Company.
"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) of 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; provided, however, that no Change of Control shall be
deemed to occur 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 shareholders of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"COMMITTEE" means such committee of the Board as is designated by the
Board to administer the Plan. The Committee shall be constituted to permit the
Plan to comply with Rule 16b-3.
<PAGE>
"COMMON STOCK" means the Common Stock, par value $.01 per share, of the
Company.
"DIRECTOR" means an individual serving as a member of the Board.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from
time to time.
"FAIR MARKET VALUE" means, as of a particular date, (a) if the shares of
Common Stock are listed on a national securities exchange, the mean between the
highest and lowest sales price per share of Common Stock on the consolidated
transaction reporting system for the principal such national securities exchange
on that date, or, if there shall have been no such sale so reported on that
date, on the last preceding date on which such a sale was so reported, (b) if
the shares of Common Stock are not so listed but are quoted on the Nasdaq
National Market, the mean between the highest and lowest sales price per share
of Common Stock on the Nasdaq National Market on that date, or, if there shall
have been no such sale so reported on that date, on the last preceding date on
which such a sale was so reported, (c) if the Common Stock is not so listed or
quoted, the mean between the closing bid and asked price on that date, or, if
there are no quotations available for such date, on the last preceding date on
which such quotations shall be available, as reported by Nasdaq, or, if not
reported by Nasdaq, by the National Quotation Bureau, Inc. or (d) if none of the
above is applicable, such amount as may be determined by the Board (or an
Independent Third Party, should the Board elect in its sole discretion to
instead utilize an Independent Third Party for this purpose), in good faith, to
be the fair market value per share of Common Stock.
"INDEPENDENT THIRD PARTY" means an individual or entity independent of the
Company (and any transferor or transferee of Common Stock acquired upon the
exercise of an option under the Plan, if applicable) with experience in
providing investment banking appraisal or valuation services and with expertise
generally in the valuation of securities or other property of the type at issue,
that is chosen by the Board, in its sole discretion, to value securities or
other property for purposes of this Plan. The Company's independent accountants
shall be deemed to satisfy the criteria for an Independent Third Party if
selected by the Board for that purpose. The Board may utilize one or more
Independent Third Parties.
"ISO" means an incentive stock option within the meaning of Code Section
422.
"NONQUALIFIED OPTION" means a nonqualified stock option within the meaning
of Code Section 83.
"PARTICIPANT" means an employee of the Company or any of its Subsidiaries
to whom an Award has been made under this Plan.
-2-
<PAGE>
"RESTRICTED STOCK" means Common Stock that is restricted or subject to
forfeiture provisions.
"RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act, or any
successor rule.
"SUBSIDIARY" means (i) with respect to grants of ISOs, any subsidiary
within the meaning of Section 424(f) of the Code or any successor provision, and
(ii) with respect to all Awards other than ISOs, any corporation, limited
liability company or similar entity of which the Company directly or indirectly
owns shares representing more than 50% of the voting power of all classes or
series of capital stock of such corporation which have the right to vote
generally on matters submitted to a vote of the shareholders of such
corporation.
3. ELIGIBILITY. All employees of the Company and its Subsidiaries are
eligible for Awards under this Plan. The Committee shall select the Participants
in the Plan from time to time by the grant of Awards under the Plan.
4. COMMON STOCK AVAILABLE FOR AWARDS. There shall be available for
Awards granted wholly or partly in Common Stock (including rights or options
which may be exercised for or settled in Common Stock) during the term of this
Plan an aggregate of 43,000 shares of Common Stock, subject to adjustment as
provided in Paragraph 14. The Board and the appropriate officers of the Company
shall from time to time take whatever actions are necessary to file required
documents with governmental authorities and stock exchanges and transaction
reporting systems to make shares of Common Stock available for issuance pursuant
to Awards. Common Stock related to Awards that are forfeited or terminated,
expire unexercised, are settled in cash in lieu of Common Stock or in a manner
such that all or some of the shares covered by an Award are not issued to a
Participant, or are exchanged for Awards that do not involve Common Stock, shall
immediately become available for Awards hereunder.
5. ADMINISTRATION. This Plan shall be administered by the Committee,
which shall have full and exclusive power to interpret this Plan and to adopt
such rules, regulations and guidelines for carrying out this 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 this Plan. The
Committee may correct any defect or supply any omission or reconcile any
inconsistency in this Plan or in any Award in the manner and to the extent the
Committee deems necessary or desirable to carry it into effect. Any decision of
the Committee in the interpretation and administration of this Plan shall lie
within its sole and absolute discretion and shall be final, conclusive and
binding on all parties concerned. No member of the Committee or officer of the
Company to whom it has delegated authority in accordance with the provisions of
Paragraph 6 of this Plan shall be liable for anything done or omitted to be done
by him or her, by any member of the Committee or by any officer of the Company
in connection with the performance of any duties under this Plan, except for his
or her own willful misconduct or as expressly provided by statute.
-3-
<PAGE>
6. DELEGATION OF AUTHORITY. The Committee may delegate to the President
and to other senior officers of the Company its duties under this Plan pursuant
to such conditions or limitations as the Committee may establish, except that
the Committee may not delegate to any person the authority to grant Awards to,
or take other action with respect to, Participants who are subject to Section 16
of the Exchange Act.
7. AWARDS. The Committee shall determine the type or types of Awards to
be made to each Participant under this Plan. Each Award made hereunder shall be
embodied in an Award Agreement, which shall contain such terms, conditions and
limitations as shall be determined by the Committee in its sole discretion and
shall be signed by the Participant and by the President or by any Vice President
of the Company to whom the President has delegated such authority for and on
behalf of the Company. An Award Agreement may include provisions for the
repurchase by the Company of Common Stock acquired pursuant to the Plan and the
repurchase of a Participant's option rights under the Plan. Awards may consist
of those listed in this Paragraph 7 and may be granted singly, in combination or
in tandem. Awards may also be made in combination or in tandem with, in
replacement of, or as alternatives to grants or rights (a) under this Plan or
any other employee plan of the Company or any of its Subsidiaries, including the
plan of any acquired entity, or (b) made to any Company or Subsidiary employee
by the Company or any Subsidiary. An Award may provide for the granting or
issuance of additional, replacement or alternative Awards upon the occurrence of
specified events, including the exercise of the original Award. The occurrence
of a Change of Control shall result in acceleration of the vesting and
exercisability of and lapse of restrictions with respect to, all Awards.
Notwithstanding anything herein to the contrary, no Participant may be granted
Awards consisting of stock options or stock appreciation rights exercisable for
more than 25% of the shares of Common Stock originally authorized for Awards
under this Plan, subject to adjustment as provided in Paragraph 14. In the event
of an increase in the number of shares authorized under the Plan, the 25%
limitation will apply to the number of shares authorized.
(i) STOCK OPTION. An Award may consist of a right to purchase a
specified number of shares of Common Stock at a price specified by the Committee
in the Award Agreement or otherwise. A stock option may be in the form of an
incentive stock option ("ISO") which, in addition to being subject to applicable
terms, conditions and limitations established by the Committee, complies with
Section 422 of the Code, or in the form of a Nonqualified Option.
Notwithstanding the foregoing, no ISO can be granted under the Plan more than
ten years following the Effective Date of the Plan.
(ii) STOCK APPRECIATION RIGHT. An Award may consist of a right to receive
a payment, in cash or Common Stock, equal to the excess of the Fair Market Value
or other specified valuation of a specified number of shares of Common Stock on
the date the stock appreciation right ("SAR") is exercised over a specified
strike price as set forth in the applicable Award Agreement.
-4-
<PAGE>
(iii) STOCK AWARD. An Award may consist of Common Stock or may be
denominated in units of Common Stock. All or part of any stock Award may be
subject to conditions established by the Committee and set forth in the Award
Agreement, which conditions may include, but are not limited to, continuous
service with the Company and its Subsidiaries, achievement of specific business
objectives, increases in specified indices, attaining specified growth rates and
other comparable measurements of performance. Such Awards may be based on Fair
Market Value or other specified valuations. The certificates evidencing shares
of Common Stock issued in connection with a stock Award shall contain
appropriate legends and restrictions describing the terms and conditions of the
restrictions applicable thereto.
(iv) CASH AWARD. An Award may be denominated in cash with the amount of
the eventual payment subject to future service and such other restrictions and
conditions as may be established by the Committee and set forth in the Award
Agreement, including, but not limited to, continuous service with the Company
and its Subsidiaries, achievement of specific business objectives, increases in
specified indices, attaining specified growth rates and other comparable
measurements of performance.
8. PAYMENT OF AWARDS.
(a) GENERAL. Payment of Awards may be made in the form of cash or
Common Stock or combinations thereof and may include such restrictions as the
Committee shall determine including, in the case of Common Stock, restrictions
on transfer and forfeiture provisions.
(b) DEFERRAL. The Committee may, in its discretion, (i) permit selected
Participants to elect to defer payments of some or all types of Awards in
accordance with procedures established by the Committee or (ii) provide for the
deferral of an Award in an Award Agreement or otherwise. Any such deferral may
be in the form of installment payments or a future lump sum payment. Any
deferred payment, whether elected by the Participant or specified by the Award
Agreement or by the Committee, may be forfeited if and to the extent that the
Award Agreement so provides.
(c) DIVIDENDS AND INTEREST. Dividends or dividend equivalent rights may
be extended to and made part of any Award denominated in Common Stock or units
of Common Stock, subject to such terms, conditions and restrictions as the
Committee may establish. The Committee may also establish rules and procedures
for the crediting of interest on deferred cash payments and dividend equivalents
for deferred payment denominated in Common Stock or units of Common Stock.
(d) SUBSTITUTION OF AWARDS. At the discretion of the Committee, a
Participant may be offered an election to substitute an Award for another Award
or Awards of the same or different type.
-5-
<PAGE>
9. STOCK OPTION EXERCISE. The price at which shares of Common Stock may
be purchased under a stock option shall be paid in full at the time of exercise
in cash or, if permitted by the Committee, by means of tendering Common Stock or
surrendering all or part of that or any other Award, including Restricted Stock,
valued at Fair Market Value on the date of exercise, or any combination thereof.
The Committee shall determine acceptable methods for tendering Common Stock or
Awards to exercise a stock option as it deems appropriate. If permitted by the
Committee, payment may be made by successive exercises by the Participant. The
Committee may provide for procedures to permit the exercise or purchase of
Awards by (a) loans from the Company or (b) use of the proceeds to be received
from the sale of Common Stock issuable pursuant to an Award. Unless otherwise
provided in the applicable Award Agreement, in the event shares of Restricted
Stock are tendered as consideration for the exercise of a stock option, a number
of the shares issued upon the exercise of the stock option, equal to the number
of shares of Restricted Stock used as consideration therefor, shall be subject
to the same restrictions as the Restricted Stock so submitted as well as any
additional restrictions that may be imposed by the Committee.
10. TAX WITHHOLDING. The Company shall have the right to deduct
applicable taxes from any Award payment and withhold, at the time of delivery or
vesting of cash or shares of Common Stock under this Plan, an appropriate amount
of cash or number of shares of Common Stock or a combination thereof for payment
of taxes required by law or to take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for withholding of such taxes.
The Committee may also permit withholding to be satisfied by the transfer to the
Company of shares of Common Stock theretofore owned by the holder of the Award
with respect to which withholding is required. If shares of Common Stock are
used to satisfy tax withholding, such shares shall be valued based on the Fair
Market Value when the tax withholding is required to be made.
11. AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION. The Board
may amend, modify, suspend or terminate this Plan for the purpose of meeting or
addressing any changes in legal requirements or for any other purpose permitted
by law except that (a) 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 (b) no amendment or alteration
shall be effective prior to approval by the Company's shareholders to the extent
such approval is then required pursuant to Rule 16b-3 in order to preserve the
applicability of any exemption provided by such rule to any Award then
outstanding (unless the holder of such Award consents) or to the extent
shareholder approval is otherwise required by applicable legal requirements.
12. TERMINATION OF EMPLOYMENT. Upon the termination of employment by a
Participant, any unexercised, deferred or unpaid Awards shall be treated as
provided in the specific Award Agreement evidencing the Award. Unless otherwise
specifically provided in the Award Agreement, each Award granted pursuant to
this Plan which is a stock option shall provide that if the Participant ceases
to be employed by the Company or its affiliates for any reason whatsoever, the
option shall immediately terminate to the extent the option is not vested (or
does
-6-
<PAGE>
not become vested as a result of such termination of employment) on the date the
Participant terminates employment.
13. ASSIGNABILITY. Except as otherwise provided herein, no Award granted
under this Plan shall be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated by a Participant other than by will or the laws of
descent and distribution, and during the lifetime of a Participant, any Award
shall be exercisable only by him, or, in the case of a Participant who is
mentally incapacitated, the Award shall be exercisable by his guardian or legal
representative. The Committee may prescribe and include in applicable Award
Agreements other restrictions on transfer. Any attempted assignment or transfer
in violation of this Paragraph 13 shall be null and void. Upon the Participant's
death, the personal representative or other person entitled to succeed to the
rights of the Participant (the 'Successor Participant') may exercise such
rights. A Successor Participant must furnish proof satisfactory to the Company
of his or her right to exercise the Award under the Participant's will or under
the applicable laws of descent and distribution.
Subject to approval by the Committee in its sole discretion, all or a
portion of the Awards granted to a Participant under the Plan which are not
intended to be ISOs may be transferable by the Participant, to the extent and
only to the extent specified in such approval, to (i) the spouse, parent,
brother, sister, children or grandchildren of the Participant ('Immediate Family
Members'), (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members ('Immediate Family Member Trusts'), or (iii) a partnership or
partnerships in which such Immediate Family Members have at least 99% of the
equity, profit and loss interests ('Immediate Family Member Partnerships');
provided that the Award Agreement pursuant to which such Awards are granted (or
an amendment thereto) must expressly provide for transferability in a manner
consistent with this Section. Subsequent transfers of transferred Awards shall
be prohibited except by will or the laws of descent and distribution, unless
such transfers are made to the original Participant or a person to whom the
original Participant could have made a transfer in the manner described herein.
No transfer shall be effective unless and until written notice of such transfer
is provided to the Committee, in the form and manner prescribed by the
Committee. Following transfer, any such Awards shall continue to be subject to
the same terms and conditions as were applicable immediately prior to transfer,
and, except as otherwise provided herein, the term 'Participant' shall be deemed
to refer to the transferee. The events of termination of service in Paragraph 12
shall continue to be applied with respect to the original Participant, following
which the Awards shall be exercisable by the transferee only to the extent and
for the periods specified in this Plan and the Award Agreement.
14. ADJUSTMENTS.
(a) The existence of outstanding Awards shall not affect in any manner
the right or power of the Company or its shareholders to make or authorize any
or all adjustments, recapitalizations, reorganizations or other changes in the
capital stock of the Company or its business or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior preference
stock (whether or not such issue is prior to, on a parity with or junior to the
Common Stock) or the dissolution or liquidation of the Company, or any sale or
-7-
<PAGE>
transfer of all or any part of its assets or business, or any other corporate
act or proceeding of any kind, whether or not of a character similar to that of
the acts or proceedings enumerated above.
(b) 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, the
Committee may adjust proportionally (i) the number of shares of Common Stock
reserved under this Plan and covered by outstanding Awards denominated in Common
Stock or units of Common Stock; (ii) the exercise or other price in respect of
such Awards; and (iii) the appropriate Fair Market Value and other price
determinations for such Awards. In the event of 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), the Committee shall make such adjustments or
other provisions as it may deem equitable, including adjustments to avoid
fractional shares, to give proper effect to such event. In the event of a
corporate merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Committee shall be authorized, in its
discretion, (i) to issue or assume stock options, regardless of whether in a
transaction to which Section 424(a) of the Code applies, by means of
substitution of new options for previously issued options or an assumption of
previously issued options, (ii) to make provision, prior to the transaction, for
the acceleration of the vesting and exercisability of, or lapse of restrictions
with respect to, Awards (to the extent not otherwise provided under paragraph 7)
and the termination of options that remain unexercised at the time of such
transaction or (iii) to provide for the acceleration of the vesting and
exercisability of the options and SARs and the cancellation thereof (to the
extent not otherwise provided under paragraph 7) in exchange for such payment as
shall be mutually agreeable to the Participant and the Committee.
15. RESTRICTIONS. No Common Stock or other form of payment shall be
issued with respect to any Award unless the Company shall be satisfied based on
the advice of its counsel that such issuance will be in compliance with
applicable federal and state securities laws. It is the intent of the Company
that this Plan comply with Rule 16b-3 with respect to persons subject to Section
16 of the Exchange Act unless otherwise provided herein or in an Award
Agreement, that any ambiguities or inconsistencies in the construction of this
Plan be interpreted to give effect to such intention and that, if any provision
of this Plan is found not to be in compliance with Rule 16b-3, such provision
shall be null and void to the extent required to permit this Plan to comply with
Rule 16b-3. Certificates evidencing shares of Common Stock delivered under this
Plan may be subject to such stop transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations and other requirements
of the Securities and Exchange Commission, any securities exchange or
transaction reporting system upon which the Common Stock is then listed and any
applicable federal and state securities law. The Committee may cause a legend
or legends to be placed upon any such certificates to make appropriate reference
to such restrictions.
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16. UNFUNDED PLAN. Insofar as it provides for Awards of cash, Common
Stock or rights thereto, this Plan shall be unfunded. Although bookkeeping
accounts may be established with respect to Participants who are entitled to
cash, Common Stock or rights thereto under this Plan, any such accounts shall be
used merely as a bookkeeping convenience. The Company shall not be required to
segregate any assets that may at any time be represented by cash, Common Stock
or rights thereto, nor shall this Plan be construed as providing for such
segregation, nor shall the Company, the Board or the Committee be deemed to be a
trustee of any cash, Common Stock or rights thereto to be granted under this
Plan. Any liability or obligation of the Company to any Participant with respect
to a grant of cash, Common Stock or rights thereto under this Plan shall be
based solely upon any contractual obligations that may be created by this Plan
and any Award Agreement, and no such liability or obligation of the Company
shall be deemed to be secured by any pledge or other encumbrance on any property
of the Company. None of the Company, the Board or the Committee shall be
required to give any security or bond for the performance of any obligation that
may be created by this Plan.
17. PARACHUTE PAYMENT LIMITATION. Notwithstanding any contrary provision
of the Plan, the Committee may provide in the Award Agreement for a limitation
on the acceleration of vesting and exercisability of unmatured Awards to the
extent necessary to avoid or mitigate the impact of the golden parachute excise
tax under Section 4999 of the Code on the Participant or may provide for a
supplemental payment to be made to the Participant as necessary to offset or
mitigate the impact of the golden parachute excise tax on the Participant. In
the event the Award Agreement does not contain any contrary provision regarding
the method of avoiding or mitigating the impact of the golden parachute excise
tax under Section 4999 of the Code on the Participant, then notwithstanding any
contrary provision of this Plan, the aggregate present value of all parachute
payments payable to or for the benefit of a Participant, whether payable
pursuant to this Plan or otherwise, shall be limited to three times the
Participant's base amount less one dollar and, to the extent necessary, the
exercisability of an unmatured Award shall be reduced in order that this
limitation not be exceeded. For purposes of this Section 17, the terms
"parachute payment," "base amount" and "present value" shall have the meanings
assigned thereto under Section 280G of the Code. It is the intention of this
Section 17 to avoid excise taxes on the Participant under Section 4999 of the
Code or the disallowance of a deduction to the Company pursuant to Section 280G
of the Code.
18. GOVERNING LAW. This Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by mandatory
provisions of the Code or the securities laws of the United States, shall be
governed by and construed in accordance with the laws of the State of Texas.
19. EFFECTIVE DATE OF PLAN. This Plan shall be effective as of the date
(the "Effective Date") it is approved by the Board of Directors of the Company.
Notwithstanding the foregoing, the adoption of this Plan is expressly
conditioned upon the approval by written consent of the holders of a majority of
shares of outstanding shares of Common Stock on or before the first anniversary
of the Effective Date. If the shareholders of the Company should fail so to
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approve this Plan prior to such date, this Plan shall terminate and cease to be
of any further force or effect and all grants of Awards hereunder shall be null
and void.
Attested to by the Secretary of XPLOR Energy, Inc.
as adopted by the Board of Directors and
Shareholders of XPLOR Energy, Inc. effective as of
the 16th day of September, 1997 (the
"Effective Date").
/s/ Stephen M. Clark
__________________________________________
Secretary
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EXHIBIT 10.6
XPLOR ENERGY, INC.
LONG-TERM INCENTIVE PLAN
First Amendment
---------------
XPLOR Energy, Inc. (the "Company"), having established the XPLOR
Energy, Inc. Long-Term Incentive Plan, effective September 30, 1997 (the
"Plan"), and having reserved the right under Section 11 thereof to amend the
Plan, does hereby amend the Plan as follows:
1. Section 3 of the Plan is hereby amended in its entirety, to read
as follows:
"3. Eligibility. All employees, independent contractors and consultants
of the Company and its Subsidiaries are eligible for Awards under this Plan;
provided, however that only an employee of the Company and its Subsidiaries will
be deemed eligible for an ISO under this Plan. The Committee shall select the
Participants in the Plan from time to time by the grant of Awards under the
Plan."
Attested to by the Secretary of XPLOR Energy, Inc.
as adopted by the Board of Directors and
Shareholders of XPLOR Energy, Inc. effective as of
the 30th day of September, 1997 (the "Effective
Date").
/s/ Stephen M. Clark
------------------------------------
Secretary
<PAGE>
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
--------------------
(REVISED)
This revised Agreement is entered into this 18th day of June, 1997, to be
effective on the date set forth below, by and between Araxas Energy Corporation,
an Oklahoma corporation ("Corporation"), and Steven W. Nance ("Employee").
WITNESSETH:
----------
WHEREAS, Corporation desires to employ Employee, and Employee desires to
accept such employment;
WHEREAS, Corporation and Employee desire to agree to the specific term of
such employment set forth in this Agreement.
NOW, THEREFORE, in consideration of the recitations stated above and the
mutual terms, covenants and conditions contained herein, Corporation and
Employee agree as follows:
1. EMPLOYMENT
----------
1.1 Employment. Corporation hereby employs Employee and
Employee hereby accepts such employment, as President and Chief Executive
Officer, subject to the supervision and direction of Corporation's Chairman
and its Board of Directors. No later than June 30, 1997, W. E. Rowsey, III
will nominate Employee to serve on the Board of Directors of Corporation
(the "Board of Directors") as a full member thereof, and will vote in favor
of such nomination. It is the intention of the parties that Employee will
be elected to and will serve on the Board of Directors while serving
hereunder as President and Chief Executive Officer. W. E. Rowsey, III and
Employee agree to work together to identify and install mutually acceptable
independent Directors as provided in Corporation's Bylaws. W. E. Rowsey,
III has executed this Agreement in his individual capacity for the sole
purpose of agreeing to the foregoing three sentences.
1.2 Term of Employment. The term of employment shall commence
on January 22, 1997, or as soon thereafter as possible ("Effective Date"),
and shall terminate on the third anniversary of the Effective Date, unless
further extended as hereinbelow provided or sooner terminated as provided
in Section 4 hereof. On the third anniversary of the Effective Date, and on
each following annual anniversary thereafter, the term of Employee's
employment shall be automatically extended on the terms and condition then
in effect for one (1) additional year unless, at least ninety (90) days
prior to any such anniversary date, either
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party shall have delivered to the other, written notice that the term
hereof shall not be extended.
2. DUTIES
------
2.1 Full-time Employment. Unless otherwise authorized by
Corporation, Employee shall devote substantially all of his business time,
attention and skills to the performance of his duties as President and
Chief Executive Officer of Corporation. During the term of this Agreement,
Employee shall not render services for any other than Corporation unless
otherwise authorized by Corporation. Provided that no conflict exists with
Corporation or the performance by Employee of his duties hereunder, this
provision is not intended to preclude personal oil and gas investments or
other passive investments that will not require services on the part of
Employee nor to preclude the performance of community services by Employee.
2.2 Employer-Employee Relationship. The relationship between
Corporation and Employee is that of an employer and employee. Corporation
shall have the right to instruct, control, review and, subject to the terms
of this Agreement, modify the nature as requested by Corporation and scope
of services, and manner in which Employee performs such services for
Corporation.
3. COMPENSATION AND RELATED MATTERS. Subject to the terms and
conditions hereof, Employee shall receive the following salary and other
benefits as full consideration for the services to be rendered hereunder:
3.1 Regular Salary. A salary shall be paid to Employee for all
services rendered under this Agreement at the rate of $175,000 per year,
payable in equal semi-monthly installments of $7,291.67 as nearly as
practicable to the 15th and the last day of each month in arrears. In the
event that, prior to January 1, 1998, Corporation becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, Employee's
salary will be increased to a rate of $200,000 per year, payable in equal
semi-monthly installments of $8,333.33 as nearly as practical to the 15th
and the last day of each month in arrears. Effective January 1, 1998,
Employee's salary will be increased to a rate of at least $225,000 per
year, payable in equal semi-monthly installments as nearly as practical to
the 15th and the last day of each month in arrears. If Employee is employed
for less than the entire pay period, the salary shall be prorated in
accordance with the number of days during such pay period in which he is
employed. The salary shall be reviewed annually, and may be increased, but
not decreased, from the salary then in effect or the salary prescribed by
this Section 3.1, in Corporation's discretion, as determined by the
Compensation Committee of the Board of Directors.
3.2 Expenses. The Employee shall be reimbursed for all
reasonable and necessary business expenses incurred in the performance of
service hereunder, and are
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accounted for in accordance with the policies and procedures established
from time to time by Corporation.
3.3 Vacation. Employee shall be entitled to four (4) weeks
paid vacation during each full 12-month period during the term hereof and
such other vacation time and paid holidays, if any, as shall from time to
time be determined by Corporation.
3.4 Employee Benefit Plans. Employee shall be included in all
of the employee benefit plans existing now or in the future providing
pension, thrift, profit sharing or similar benefits as are provided
generally to officers of Corporation, subject to the terms and conditions
of all such plans. In addition, Employee shall be eligible to participate
in all executive compensation programs applicable to other officers of
Corporation, subject to the terms and conditions of such programs;
provided, however, that Employee shall not participate in any overriding
royalty plan unless and only to the extent that it is made available to
other officers after July 31, 1998.
3.5 Insurance and Welfare Benefit Plans. Corporation shall
cover Employee under its group medical and hospitalization plan, shall
provide Employee term life insurance coverage, and will cover Employee
under other insurance and employee welfare benefit plans maintained for its
officers generally.
3.6 Stock Grant. Employee shall receive a restricted grant of
Corporation common stock in accordance with the terms set forth in Exhibit
A. Corporation represents and warrants that there were 118,628.65 shares of
common stock of Corporation outstanding on the Effective Date and no other
class of common stock and no preferred stock was outstanding on the
Effective Date. Corporation has approximately 30,000 shares of Common Stock
subject to outstanding options, with an aggregate exercise price of
$1,675,000. Employee waives and revokes any right to a restricted grant of
common stock under the terms of the Employment Agreement dated January 21,
1997.
3.7 Stock Option Plan. Employee shall receive an option to
acquire Corporation common stock in accordance with the terms set forth in
Exhibit B. Employee waives and revokes any right to an option award under
the terms of the Employment Agreement dated January 21, 1997.
3.8 Incentive Bonus. Employee shall be eligible to receive up
to one hundred percent (100%) of annual base salary as an annual bonus. The
bonus for 1997 shall be fixed at $200,000 and shall be paid no later than
the end of January, 1998; provided, however, that this bonus shall be
payable only if, prior to January 1, 1998, Corporation has become subject
to the reporting requirements of the Securities Exchange Act of 1934 and
the outstanding liability to the Stratum Group, LP has been paid. Beginning
in 1998, the bonus shall be based on attainment of performance goals to be
established no later than the end of the first quarter of each calendar
year, subject to approval of those performance goals by the
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Board of Directors, which will provide for at least the following: (i)
financial targets, (ii) operating targets, and (iii) stock price targets.
4. TERMINATION OF AGREEMENT. This Agreement will continue in effect
until the expiration of the term stated in Section 1 hereof unless sooner
terminated as set forth below. If such termination occurs, Employee shall
continue to be subject to Section 5 hereof.
4.1 Death of Employee. If Employee shall terminate employment
due to death during the term of this Agreement, this Agreement shall
terminate and his spouse, if she is then surviving or if not, his legal
representative, shall be entitled to receive (i) his compensation as
provided in Section 3.1 through the end of the month in which death occurs
and (ii) a pro rata share of incentive compensation under Section 3.8 based
on the number of days in the year that elapsed prior to death and as if all
performance goals had been met.
4.2 Illness or Other Incapacity. If during the term of this
Agreement, Employee shall fail to perform his duties hereunder as a result
of illness or other incapacity and such illness or incapacity shall
continue for a period of more than three (3) months, Corporation shall have
the right to terminate this Agreement and the employment hereunder as of
date to be specified in a notice of termination, such date to be not less
than thirty (30) days after the mailing by certified mail of such notice.
If Employee's illness or incapacity shall have ended, and the Employee
shall have assumed his duties hereunder, prior to the date specified in the
notice of termination, he shall be entitled to resume his employment
hereunder as if such notice had not been given. If such termination occurs,
Employee shall continue to be bound by the covenants contained in Section 5
hereof, but in all other regards, this Agreement shall terminate as of such
termination date, and Corporation shall pay to Employee or his legal
representative (i) the amount of any accrued but unpaid compensation under
Section 3.1 hereof through termination of employment, (ii) a pro rata share
of incentive compensation under Section 3.8 based on the number of days in
the year that elapsed prior to such termination and as if all performance
goals had been met, and (iii) such other benefits, if any, as may be
determined by Corporation.
4.3 Termination by Corporation for Cause. Corporation may
terminate this Agreement and the employment of Employee by service of
written notice of termination to Employee specifying the circumstances and
an effective date for such termination upon the earlier to occur of any of
the following events: (i) Employee willfully misappropriates the property
of Corporation or commits any other act of dishonesty which results in
injury to Corporation or reasonably could result in injury to Corporation;
(ii) Employee engages in personal misconduct which results in injury to
Corporation, or could reasonably result in injury to Corporation unless
Employee in good faith reasonably believed that his actions were in the
best interest of Corporation; (iii) Employee is convicted of a felony; or
(iv) the Board of Directors has determined in good faith that Employee has
failed to diligently perform his duties hereunder as specified by
Corporation and in a manner consistent with prudent business practice and
such failure continues after Employee has been given at least
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ten (10) days' written notice of the failure. In the event this Agreement
is terminated for cause set forth in paragraphs (i) through (iv) above,
Corporation will have no obligation to provide any further salary payments
or other benefits hereunder to Employee, including, but not limited to
salary and incentive compensation, for any period after the effective date
of such termination.
4.4 Termination by Corporation for Other than Cause. In the
event Corporation terminates Employee's employment for any reason other
than under Section 4.3, Employee shall be entitled to a payment from
Corporation in an amount equal to the Termination Payment (as hereinafter
defined). For purposes of this Agreement, the term "Termination Payment"
shall mean an amount equal to the sum of (i) all base salary that would
have been paid to Employee pursuant to Section 3.1 during the balance of
the term of employment provided for in Section 1.2 (but in no event less
than 12 months of such base salary) (the "Salary Portion"), and (ii)
subject to the execution by Employee of a waiver and release of all claims
against Corporation, all incentive compensation that would have been paid
to Employee pursuant to Section 3.8 (determined based on an annual
incentive bonus of 100% of annual base salary and as if all performance
goals had been met) during the balance of the term provided for in Section
1.2 (but in no event less than one such annual incentive bonus) (the "Bonus
Portion"). The Termination Payment shall be paid (i) with respect to the
Bonus Portion, in a single lump sum cash payment within five (5) days after
Employee has signed a release and any applicable revocation period has
expired and (ii) with respect to the Salary Portion, in a single lump sum
cash payment within five (5) days after such termination of employment.
4.5 Termination Following Change of Control. In the event
that a "Change of Control" (as hereinafter defined) occurs and following
such Change of Control Employee's employment is terminated by Corporation
for a reason other than as described in Section 4.3, or he voluntarily
terminates employment due to a substantial diminishment in his job
responsibilities or duties or a material breach by Corporation of any
material provision of this Agreement or any other agreement with Employee
which remains uncorrected for 10 days following written notice of such
diminishment or breach by Employee to Corporation, then, in lieu of any
payments pursuant to Sections 4.4 or 4.6 hereof, Employee shall be entitled
to a Termination Payment under terms and conditions applicable pursuant to
Section 4.4, provided that the reference therein to 12 months shall be
deemed to be a reference to 24 months and the reference to one such annual
incentive bonus shall be deemed to be a reference to two such annual
incentive bonuses. A "Change of Control" shall mean (i) any sale by
Corporation of substantially all of its assets or (ii) the resignation,
removal or failure to re-elect W. E. Rowsey, III as a member of the Board
of Directors for any reason other than disability or death, or (iii) the
acquisition by any "person," including a "group" as determined in
accordance with Section 13(d)(3) of the Securities Exchange Act of 1934, of
beneficial ownership, directly or indirectly, of securities of Corporation
representing 50% or more of the combined voting power of Corporation's then
outstanding securities; provided, however, that no Change of Control shall
be deemed
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to occur if beneficial ownership in Corporation's then outstanding
securities is acquired pursuant to any reorganization of Corporation 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 shareholders of Corporation.
4.6 Termination by Employee for Good Reason. If Employee's
employment hereunder shall be terminated by Employee due to a substantial
diminishment in Employee's job responsibilities or duties or a material
breach by Corporation of any material provision of this Agreement or any
other agreement with Employee which remains uncorrected for 10 days
following written notice of such diminishment or breach by Employee to
Corporation, then Employee shall be entitled to a Termination Payment under
terms and conditions applicable pursuant to Section 4.4.
4.7 Voluntary Termination by Employee. Notwithstanding any
provision herein to the contrary, Employee shall have the right to
terminate his employment under this Agreement at any time and for any
reason whatsoever. If Employee's employment hereunder shall be terminated
by Employee for any reason whatsoever other than the reasons specified in
Sections 4.1, 4.2, 4.5 or 4.6, then, upon such termination, all
compensation and all benefits to Employee hereunder shall terminate
contemporaneously with the termination of such employment.
4.8 No Duty to Mitigate Losses. Employee shall have no duty to
find new employment following the termination of his employment under
circumstances which required Corporation to pay any amount to Employee
pursuant to this Section 4. Any salary or remuneration received by Employee
from a third party for the providing of personal services (whether by
employment or by functioning as an independent contractor) following the
termination of his employment under circumstances pursuant to which
Sections 4.2, 4.4, 4.5, 4.6 or 6.7 apply shall not reduce Corporation's
obligation to make a payment to Employee (or the amount of such payment)
pursuant to the terms of any such Section.
4.9 Liquidated Damages. In light of the difficulties in
estimating the damages for an early termination of this Agreement,
Corporation and employee hereby agree that the payments, if any, to be
received by Employee pursuant to Sections 4.1, 4.2, 4.4, 4.5, 4.6 or 6.7
shall be received by Employee as liquidated damages.
4.10 Incentive and Deferred Compensation. This Agreement
governs the rights and obligations of Employee and Corporation with respect
to Employee's base salary, incentive compensation pursuant to Section 3.8
and certain perquisites of employment. Employee's rights and obligations
both during the term of his employment and thereafter with respect to stock
options, restricted stock, incentive and deferred compensation (other than
incentive compensation payable pursuant to Section 3.8), life insurance
policies insuring
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the life of Employee, and other benefits under the plans and programs
maintained by Corporation shall be governed by the separate agreements,
plans and other documents and instruments governing such matters
(including, without limitation, the Restricted Stock Agreement and Stock
Option Agreement referenced in Exhibits A and B hereof).
5. AGREEMENT RESTRICTING TRADE SECRETS AND COMPETITION
5.1 Confidential Information and Trade Secrets. Employee
acknowledges that he will have access to and that there will be disclosed
to him during the course of this employment, information of a proprietary
nature owned by Corporation, which is of a confidential nature and all of
which have great value to Corporation and which is a substantial basis and
foundation upon which Corporation's business is predicated. Employee
acknowledges that except for his employment and the duties assigned to him
which he will be fulfilling, that he would not otherwise have access to the
foregoing information. Employee agrees that any and all confidential
knowledge or information which may be obtained by him in the course of his
employment will be held inviolate by him and that he will conceal the same
from any and all other persons, including, but not limited to, competitors
of Corporation, and that he will not impart any such knowledge acquired by
him as an employee of Corporation to anyone whomsoever either during this
employment or after his employment by Corporation has terminated, except to
the extent (i) such disclosure is required by law, (ii) such information is
otherwise made public by Corporation (other than by Employee in violation
hereof), or (iii) such disclosure is made in the normal course of business
and is consistent with Corporation's interests.
Employee agrees that upon termination of his employment hereunder
he will immediately surrender and turn over to Corporation all books,
records, forms data, electric logs, geological maps, scout cards, seismic
tapes and all papers and writing relating to the business of Corporation
and other information which reflects or reveals Corporation's confidential
or trade secret information protected by this Section, and all other
property belonging to Corporation, it being understood and agreed that the
same are the sole property of Corporation and that Employee will not make
any copies thereof; provided, however, the parties agree that Employee's
personnel files and any logs, records, and maps which were Employee's
property prior to the Effective Date shall remain Employee's property. For
purposes of this Section 5, the term "Corporation" shall include
Corporation as herein defined and any of its subsidiaries, affiliates or
parent organizations.
5.2 Noncompetition Agreement. Except as provided in Section
2.1, for so long as this Agreement is in effect and for a period of six (6)
months after termination of this Agreement, Employee will not, without
Corporation's written permission, directly or indirectly, own, manage,
operate, control, be employed by, participate in or be connected in any
manner with the ownership, management, operation, or control of any
business which is in direct competition with Corporation, specifically with
respect to the geologic prospects
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or any planned or completed acquisitions (of stock, equity or assets) in or
through which Corporation does explore, develop or produce oil and gas or
has current plans to explore, develop or produce oil and gas. For so long
as this Agreement is in effect and for a period of six (6) months after
termination of this Agreement, Employee shall refrain from contacting or
encouraging any third party to contact any individual who is employed by
Corporation or its affiliates for the purpose of recruiting or placing that
individual with any other employer.
5.3 Injunctive Relief. Employee specifically acknowledges and
agrees that the remedy at law for any breach of the provisions of Sections
5.1 or 5.2 will be inadequate and that Corporation shall be entitled to
temporary and permanent injunctive relief without the necessity of proving
actual damage.
5.4 Reformation. In the event that the provisions of this
Section 5 should ever be deemed to exceed the time or geographic
limitations permitted by applicable law, then such provisions shall be
deemed reformed to the maximum time or geographic limitations permitted by
applicable law.
6. GENERAL
6.1 Indemnity and Directors' & Officers' Liability Insurance
Coverage. Corporation agrees to indemnify and defend Employee, at
Corporation's sole expense, in any matters arising from Employee's
performance of his duties as an employee, officer or director of
Corporation or any of Corporation's subsidiaries or affiliates to the
fullest extent permitted by law. The Corporation will take reasonable
steps to obtain Directors' and Officers' liability insurance prior to
becoming subject to the reporting requirements of the Securities Exchange
Act of 1934.
6.2 Headings. Section headings are included solely for
convenience and should not be used in the interpretation of this Agreement.
6.3 Severability. In the event any one or more of the
provisions contained in the Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not effect any other provisions of
this Agreement, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provisions were omitted.
6.4 Notices. Any notice, demand and all other communications
required or permitted to be given under this Agreement shall be in writing
and shall have been deemed duly given when delivered or (unless otherwise
specified herein) three (3) business days after mailed by United States
registered mail, return receipt requested, postage prepaid, to the address
set forth on the signature page hereof, or to such other address as any
part may
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have furnished to the other in writing in accordance herewith, except that
notices of change of address shall be effective only upon receipt.
6.5 Waiver of Breach; Expenses. The waiver by Employee or
Corporation of a breach of any provision of this Agreement shall not
operate or be construed as a waiver of any subsequent breach. In any
action brought by any party hereto, the prevailing party shall be entitled
to collect such party's reasonable attorney's fees, court costs and
expenses in such action.
6.6 Binding Effect; Assignment. The respective rights and
obligations of Corporation and Employee under the Agreement shall inure to
the benefit of and shall be binding upon Corporation and the respective
successors and assigns of Corporation. This Agreement shall not be
assignable by Employee. As used herein, the term "successors and assigns"
shall include any corporation or corporations which acquire all or
substantially all of the assets and businesses of Corporation whether by
purchase, merger, consolidation or otherwise. The parties hereto presently
contemplate that Corporation will enter into certain transactions resulting
in a reorganization of Corporation and in connection therewith this
Agreement shall automatically be assigned to the parent of Corporation and
all references herein to Corporation shall thereafter be deemed to be
references to such parent entity.
6.7 Certain Additional Payments by Company. Notwithstanding
anything to the contrary in this Agreement, in the event that any payment
or distribution by Corporation to or for the benefit of Employee, whether
paid or payable or distributed or distributable pursuant to the terms of
this Agreement or otherwise (a "Payment"), would be subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended, or any interest or penalties with respect to such excise tax (such
excise tax, together with any such interest or penalties, are hereinafter
collectively referred to as the "Excise Tax"), Corporation shall pay to
Employee an additional payment (a "Gross-up Payment") in an amount such
that after payment by employee of all taxes (including any interest or
penalties imposed with respect to such taxes), including any Excise Tax
imposed on any Gross-up Payment, Employee retains an amount of the Gross-up
Payment equal to the Excise Tax imposed upon the Payments. Corporation and
Employee shall make an initial determination as to whether a Gross-up
Payment is required and the amount of any such Gross-up Payment. Employee
shall notify Corporation in writing of any claim by the Internal Revenue
Service which, if successful, would require Corporation to make a Gross-up
Payment (or a Gross-up Payment in excess of that, if any, initially
determined by Corporation and Employee) within ten days of the receipt of
such claim. Corporation shall notify Employee in writing at least ten days
prior to the due date of any response required with respect to such claim
if it plans to contest the claim. If Corporation decides to contest such
claim, Employee shall cooperate fully with Corporation in such action;
provided, however, Corporation shall bear and pay directly or indirectly
all costs and expenses (including additional interest and penalties)
incurred in connection with such action and shall indemnify and hold
Employee harmless, on an after-tax basis, for any Excise Tax or income
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tax, including interest and penalties with respect thereto, imposed as a
result of Corporation's action. If, as a result of Corporation's action
with respect to a claim, Employee receives a refund of any amount paid by
Corporation with respect to such claim, Employee shall promptly pay such
refund to Corporation. If Corporation fails to timely notify Employee
whether it will contest such claim or Corporation determines not to contest
such claim, then Corporation shall immediately pay to Employee the portion
of such claim, if any, which it has not previously paid to Employee.
6.8 Entire Agreement Counterparts. Except as provided in (i)
the benefits, plans, and programs referenced in Sections 3.4 and 3.5 hereof
and (ii) any signed written agreements contemporaneously or hereafter
executed by Corporation and Employee (including, but not limited to, the
Restricted Stock Agreement and the Stock Option Agreement referenced in
Exhibits A and B hereof), this Agreement contains the entire agreement of
the parties hereto, notwithstanding any oral representation of the parties
to the contrary. This Agreement supersedes as of the Effective Date all
agreements, oral or in writing, and other arrangements between the parties
with respect to all matters related to the subject matter hereof. This
Agreement may be executed in multiple counterparts, all of which shall
constitute one Agreement, but both parties must execute and deliver one
signed counterpart before this Agreement is effective.
6.9 Applicable Law. The execution, performance and enforcement
of this Agreement shall be governed by and construed in accordance with the
internal laws of the State of Texas without giving effect to its conflict
of laws provisions.
6.10 Survival. All covenants, representations and warranties of
the parties hereto will survive the termination of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
"CORPORATION" ARAXAS ENERGY CORPORATION
By: /s/ W. E. Rowsey, III
____________________________
W. E. Rowsey, III
Chairman
Address: 10200 Grogans Mill Road, Suite 500
The Woodlands, Texas 77380
/s/ Steven W. Nance
"EMPLOYEE" _______________________________
Steven W. Nance
Address: 31 Meadow Brook Place
The Woodlands, Texas 77382
W. E. ROWSEY, III Executed For the Limited Purpose Described in
Section 1.1 of the Agreement
/s/ W. E. Rowsey, III
_______________________________
W. E. Rowsey, III
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EXHIBIT A TO EMPLOYMENT AGREEMENT
TERMS OF RESTRICTED COMMON STOCK AWARD
--------------------------------------
1. FORM OF AWARD.
As soon as practicable after June 18, 1997, Employee shall receive 1,456
shares of common stock of Corporation (the "Awarded Shares").
2. VESTING OF AWARD.
Subject to Employee's continued service with Corporation, he shall become
vested in one-third of the Awarded Shares on January 21, 1998, in an additional
installment of one-third of the Awarded Shares on January 21, 1999, and in the
remaining one-third of the Awarded Shares on January 21, 2000. All of the
Awarded Shares shall become vested immediately upon the occurrence of a Change
of Control. In the event of Employee's termination of employment for any reason
prior to January 21, 2000, any Awarded Shares that have not previously become
vested shall be forfeited to Corporation.
3. PAYMENT BY EMPLOYEE.
Employee agrees to pay Corporation the $.01 per share par value of the
Awarded Shares contemporaneously with the transfer of the Awarded Shares.
Employee represents and warrants that he is an "accredited investor" as such
term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as
amended.
4. REPURCHASE RIGHTS.
In the event that Employee terminates employment prior to the date
Corporation has become subject to the reporting requirements of the Securities
Exchange Act of 1934, then Corporation shall have the obligation to repurchase
all of the Awarded Shares that have become vested, or any lesser number
designated by Employee, if the Employee gives a written sale notice to
Corporation within 90 days of termination. Corporation shall purchase the
vested Awarded Shares to be sold by Employee for their fair market value,
determined as of the termination date in good faith by the Board of Directors
without regard to any minority discount or limitations on liquidity. In the
event that Employee is not satisfied with the fair market value determination of
the Board of Directors, Employee may require such fair market value to be
determined by an independent appraiser mutually acceptable to Employee and
Corporation, and Employee and Corporation agree to be bound by the determination
of such appraiser. Employee agrees to pay one-half of the appraiser's fees and
expenses, but not to exceed $10,000, and Corporation shall pay the balance of
the appraiser's fees and expenses. If Employee exercises his right to require
Corporation to repurchase his vested Awarded Shares, Corporation and Employee
agree that the repurchase and payment for the shares
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will be made in a single lump-sum cash payment and will occur within 30 days
after receipt by Corporation of notice of exercise, or, if later, within 30 days
after a fair market value determination is made by an independent appraiser. In
the event Employee does not elect to require Corporation to repurchase his
vested Awarded Shares, Corporation shall have a right of first refusal with
respect to any third-party sale of the vested Awarded Shares by Employee at the
price offered by the third party, and a right to repurchase the vested Awarded
Shares at their fair market value (established in the same manner as described
above) in the event of an involuntary transfer by Employee or gift or other
below-market transfer of the shares. Employee will have rights to transfer the
vested Awarded Shares to immediate family members or trusts and partnerships
benefitting such immediate family members provided such rights of first refusal
will continue to apply to the transferred Awarded Shares. Employee's right to
require Corporation to repurchase vested Awarded Shares and Corporation's right
of first refusal and repurchase shall terminate in the event Corporation becomes
subject to the reporting requirements of the Securities Exchange Act of 1934.
5. REGISTRATION RIGHTS.
Promptly after Corporation has become subject to the reporting requirements
of the Securities Exchange Act of 1934, Corporation shall file with the
Securities and Exchange Commission a registration statement on Form S-8 (or any
successor form) and shall include the Awarded Shares in that registration
statement, or shall take other appropriate steps as may be necessary to allow
Employee to resell the vested Awarded Shares in compliance with applicable
federal and state laws after transfer restrictions lapse.
6. TRANSFER RESTRICTIONS.
The nonvested Awarded Shares shall be subject to restrictions on transfers
to third parties, but Employee will have the right to participate, on the same
terms as other shareholders, in any sale of common stock that would constitute a
Change of Control. In addition, Employee will enter into any reasonable lock-up
provision that is requested by underwriters pursuant to any public offering of
the common stock of Corporation and that is similar to that given by other
officers of Corporation restricting the transfer of common stock.
7. TAXES.
Corporation agrees to loan Employee up to, but not in excess of, $100,000
to enable Employee to satisfy his demonstrated income tax obligation arising as
a result of the grant of, or lapse of restrictions on, the Awarded Shares. The
loan shall be evidenced by a Promissory Note executed by Employee with a three-
year term, with interest payable quarterly at Corporation's borrowing rate from
its principal lender as in effect on the date of the Promissory Note. The
Promissory Note shall be secured by a number of Awarded Shares having a value
equal to the amount of the loan or, if greater, such value as will satisfy any
applicable margin restrictions or other legal requirements, and shall be fully
recourse against Employee. The Promissory Note shall be payable in full upon
termination of employment by Employee for any reason. Corporation shall be
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entitled to withhold from the loan proceeds the amount of income tax withholding
applicable with respect to the Awarded Shares. In the event Employee does not
borrow from Corporation an amount sufficient to satisfy Corporation's income tax
withholding obligation, Employee agrees to make a cash payment to Corporation in
an amount equal to the balance of that income tax withholding obligation.
8. RESTRICTED STOCK AGREEMENT.
The parties agree to use their best efforts to more fully document the
terms described in this Exhibit A on or before June 30, 1997, (and agree in any
event to more fully document the terms prior to any merger of the Corporation
with another entity) in a form of a Restricted Stock Agreement, which will
contain terms permitting Corporation to retain custody of the Awarded Shares,
together with a stock power signed in blank by Employee, while the Awarded
Shares remain subject to forfeiture. In addition, the Restricted Stock
Agreement shall be, to the extent not inconsistent with the terms set forth in
this Exhibit A, subject to the terms and conditions of a Long-Term Incentive
Plan intended to be implemented by Corporation and pursuant to which restricted
awards of common stock will be authorized. The parties presently contemplate
that Corporation will enter into certain transactions resulting in a
reorganization of Corporation and in connection therewith references to
Corporation herein shall become references to the parent entity where
appropriate.
9. TERMS.
Terms used in this Exhibit A but not defined herein have the same meaning
as the terms set forth in the Employment Agreement dated June 18, 1997 between
Araxas Energy Corporation and Steven W. Nance.
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EXHIBIT B TO EMPLOYMENT AGREEMENT
TERMS OF STOCK OPTION AWARD
---------------------------
1. OPTION AWARD.
Employee is hereby awarded, effective as of June 18, 1997, an option to
acquire 5,590 shares of Corporation common stock (the "Option Shares"). The per
share exercise price of the Option Shares shall be $250.00. To the extent
consistent with the limitations of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), this option shall be an incentive stock option,
and the remainder of this option shall be a nonqualified option within the
meaning of Section 83 of the Code.
2. EXERCISABILITY OF OPTION.
One-third (1/3) of the Option Shares shall become exercisable on January
21, 1998, one-third (1/3) on January 21, 1999 and one-third (1/3) on January 21,
2000.
In the event of a Change of Control, all of the Option Shares shall be
fully exercisable and the Vested Portion (as hereinafter defined) of Option
Shares shall thereafter mean all outstanding Option Shares.
The Option Shares that become exercisable under the terms set forth above
will remain exercisable until termination of the option.
3. TERMINATION OF EMPLOYMENT.
In the event that Employee terminates employment due to an "Approved
Event," then Employee shall have the right to exercise the "Vested Portion" of
any Option Shares (determined as of the date of termination) during the period
ending ninety (90) days after termination of employment (or one year in the
case of termination due to death or disability under Sections 4.1 or 4.2 of the
Agreement) and thereafter the option hereby granted shall terminate and be of no
force and effect with respect to any Option Shares not previously purchased by
Employee. In the event Employee terminates employment for any reason other than
an "Approved Event," then the option hereby granted shall terminate and be of no
force and effect with respect to any Option Shares not previously purchased by
Employee upon the date of termination of employment. An "Approved Event" shall
mean any termination of employment governed by Sections 4.1, 4.2, 4.4, 4.5 or
4.6 of the Agreement.
With respect to Option Shares, the "Vested Portion" of Option Shares shall
mean the number of Option Shares multiplied by a fraction (not to exceed 1.0),
the numerator of which is the number of days elapsed from the Effective Date to
the date of termination of employment, and the denominator of which is 947.
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4. TERM OF OPTION.
The Option Term shall be the period ending on the tenth anniversary of the
Effective Date. The option to acquire the Option Shares shall terminate and be
of no force and effect with respect to any Option Shares not previously
purchased by Employee upon the expiration of the Option Term.
5. ADJUSTMENTS.
The number of Option Shares and the exercise price for the Option Shares
shall be proportionally adjusted 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 shares
of outstanding shares of Common Stock, unless Corporation has received cash or
property or labor or services in exchange therefor or is issuing securities
pursuant to rights or options outstanding as of the Effective Date. The parties
presently contemplate that Corporation will enter into certain transactions
resulting in a reorganization of Corporation and in connection therewith this
option shall become an option to buy a number of shares of the parent of
Corporation proportional to the number of shares of each class of stock or other
securities of the parent corporation distributed to holders of common stock of
Corporation with respect to such shares, and references to Corporation herein
shall become references to the parent entity where appropriate.
6. REGISTRATION RIGHTS.
Promptly after Corporation has become subject to the reporting requirements
of the Securities Exchange Act of 1934, Corporation shall file with the
Securities and Exchange Commission a registration statement on Form S-8 (or any
successor form) and shall include the Option Shares in that registration
statement, or shall take other appropriate steps as may be necessary to allow
Employee to resell the Option Shares purchased in compliance with applicable
federal and state laws.
7. REPURCHASE RIGHTS.
In the event Employee terminates employment, Employee and Corporation shall
have the same rights and obligations with respect to the purchase and sale of
any Option Shares acquired by Employee due to exercise of the option under the
same terms and conditions as are applicable to restricted common stock acquired
by Employee pursuant to Exhibit A to the Agreement.
8. STOCK OPTION AGREEMENT.
The parties agree to use their best efforts to more fully document the
terms described in this Exhibit B by June 30, 1997 (and agree in any event to
more fully document the terms prior to any merger of the Corporation with
another entity) in a form of Stock Option Agreement, which will contain
customary terms regarding the procedure for exercise of the option. In addition,
the Stock Option Agreement shall be, to the extent not inconsistent with the
terms set forth in this Exhibit B,
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subject to the terms and conditions of a Long-Term Incentive Plan intended to be
implemented by Corporation and pursuant to which stock option awards will be
authorized.
9. TERMS.
Terms used in this Exhibit B but not defined herein have the same meaning
as the terms set forth in the Employment Agreement dated June 18, 1997 between
Araxas Energy Corporation and Steven W. Nance.
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EXHIBIT 10.19
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into this 24th day
of September, 1997, to be effective on the date set forth below, by and between
XPLOR Energy, Inc., a Delaware corporation ("Corporation"), and R. A. Krenzke
("Employee").
WITNESSETH:
WHEREAS, Corporation desires to employ Employee, and Employee desires to
accept such employment;
WHEREAS, Corporation and Employee desire to agree to the specific terms of
such employment set forth in this Agreement.
NOW, THEREFORE, in consideration of the recitations stated above and the
mutual terms, covenants and conditions contained herein, Corporation and
Employee agree as follows:
1. EMPLOYMENT
1.1 Employment. Corporation hereby employs Employee and Employee hereby
accepts such employment, as Executive Vice President and Chief Operating
Officer, subject to the supervision and direction of Corporation's President,
other Officers of the Corporation as applicable and its Board of Directors.
1.2 Term of Employment. The term of employment provided for in this
Agreement shall commence on September 24, 1997("Effective Date"), shall
remain in full force and effect for a period of three years thereafter and shall
terminate on the third anniversary of the Effective Date, unless terminated
sooner as provided in Section 4 hereof. Beginning on the second anniversary of
the Effective Date, and on the last day of each succeeding month following the
second anniversary ("Monthly Renewal Date"), the term of Employee's employment
shall be automatically extended on the terms and condition then in effect for
one (1) additional month such that there shall always be at least one (1) year
remaining on the term of this agreement at all times, unless, at least fifteen
(15) days prior to the second anniversary of the Effective Date or any such
Monthly Renewal Date, either party shall have delivered to the other, written
notice that the term hereof shall not be extended.
2. DUTIES
2.1 Full-time Employment. Unless otherwise authorized by Corporation,
Employee shall devote substantially all of his business time, attention and
skills to the performance of his duties as Executive Vice President and Chief
Operating Officer of Corporation; provided, however, that upon the approval of
Corporation, Employee may serve as a director of other corporations or entities
that engage in other activities to the extent that they do
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not inhibit the performance of Employee's duties hereunder, or conflict with the
business of the Corporation, its subsidiaries, or affiliates. During the term of
this Agreement, Employee shall not render services for any other person or
entity than Corporation unless otherwise authorized by Corporation. The
voluntary performance by Employee of any duties assigned to him which are not of
the type provided for herein shall not constitute a waiver of his rights
hereunder or an abrogation, abandonment or termination by him of this Agreement.
Employee shall not be restricted from engaging in a business or from
investing his assets in a manner which is non-competitive with Corporation and
its affiliates or subsidiaries and which will not require any significant
services on his part in the operation of the affairs of the companies in which
such investments are made or from engaging in charitable or voluntary activities
to the extent that the total amount of time expended on such business,
investing, charitable or voluntary activities is reasonable, is consistent with
Employee's duties hereunder, and does not conflict with Employee's ability or
time necessary to perform his duties hereunder.
2.2 Employer-Employee Relationship. The relationship between Corporation
and Employee is that of an employer and employee. Corporation shall have the
right to instruct, control, review and, subject to the terms of this Agreement,
modify the nature as requested by Corporation and scope of services, and manner
in which Employee performs such services for Corporation.
3. COMPENSATION AND RELATED MATTERS. Subject to the terms and conditions
hereof, Employee shall receive the following salary and other benefits as full
consideration for the services to be rendered hereunder.
3.1 Regular Salary. A salary shall be paid to Employee for all services
rendered under this Agreement at the annual rate of $165,000 per year, payable
in accordance with the general payroll practices of the Corporation in effect
from time to time. Employee's salary shall be reviewed annually, and may be
increased, but not decreased, from the salary then in effect or the salary
prescribed by this Section 3.1, in Corporation's discretion, as determined by
the Compensation Committee of the Board of Directors.
3.2 Expenses. The Employee shall be reimbursed for all reasonable and
necessary business expenses incurred in the performance of service hereunder,
and accounted for in accordance with the policies and procedures established
from time to time by Corporation. In addition, employee shall receive an
automobile allowance of $500 per month payable in accordance with the general
payroll practices of the Corporation in effect from time to time.
3.3 Vacation. Employee shall be entitled to four (4) weeks paid vacation
during each full 12-month period during the term hereof; provided, however that
in taking such vacation Employee shall give and exercise reasonable
consideration to and for the needs and interests of Corporation. Employee shall
also be entitled to such other vacation time and paid holidays, if any, as shall
from time to time be determined by the Corporation.
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3.4 Employee Benefit Plans. Employee shall be included in all of the
employee benefit plans existing now or in the future providing pension, thrift,
profit sharing, bonus or similar benefits as they are provided generally to
officers of the Corporation, subject to the terms and conditions of all such
plans. In addition, Employee shall be eligible to participate in all executive
compensation programs or other perquisites available to other officers of
Corporation, subject to the terms and conditions of such programs.
3.5 Insurance and Welfare Benefit Plans. Corporation shall cover Employee
under its group dental, medical and hospitalization plans, shall provide
Employee term life insurance coverage, and will cover Employee under other
insurance and employee welfare benefit plans maintained for its officers
generally. Corporation shall also use its best efforts to evaluate and provide
disability insurance coverage and life insurance coverage which are payable to
the beneficiary of employee's choice.
3.6 Place of Performance. The headquarters for the performance of
Employee's duties shall be located in The Woodlands, Texas, and/or other office
location of the Corporation within the metropolitan Houston area, but from time
to time Employee shall be required to travel to other locations in the proper
conduct of his responsibilities under this Agreement. As it is Corporation's
intention to expand the business of Corporation on a national scale, Corporation
may require Employee to spend a reasonable amount of time traveling, as his
duties and the business of Corporation and its affiliates or subsidiaries may
require.
3.7 Stock Option Awards, Other Awards. The Board of Directors or its
Compensation Committee, as the case may be, shall consider Employee for the
grant of options to purchase common stock or other awards, as Employee's
performance dictates, no less frequent than annually during the term of this
Agreement under any plan of the Corporation which provides for such stock
options or other awards. Unless modified by the Board of the Directors any
awards granted to Employee pursuant to any other such plans adopted by the
Corporation (the "Incentive Plans") shall be immediately vested in full and
exercisable upon the occurrence of any of the following: (i) any Change of
Control (as defined herein); (ii) termination of Employee by the Corporation
without just cause (as defined herein); (iii) any substantial or material
diminishment in Employee's reporting responsibilities as designated in this
Agreement; (iv) Employee's death; or (v) at the termination of this agreement
due to Employee's disability as defined in Section 4.2 of this agreement. Any
agreement for an award under the Incentive Plans granted to Employee shall
reflect the provisions of this Section 3.7.
3.8 Incentive Bonus. Employee shall receive a bonus of $125,000 for 1997,
payable no later than the end of January 1998; provided, however, that this
bonus shall be payable only if, prior to January 1, 1998, Corporation has become
subject to the reporting requirements of the Securities Exchange Act of 1394.
Beginning in 1998, Employee shall be eligible to receive a bonus of up to 75% of
annual base salary as an annual incentive bonus subject to the achievement of
certain performance goals established by the Board of Directors as discussed
below. The bonus for 1998 shall be paid no later than the end of January, 1999.
The bonus shall be based on attainment of performance goals to be established no
later than the end of the first quarter of each calendar year, subject to
approval of those performance goals by the Board of
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Directors, which will provide for at least the following: (i) financial targets;
(ii) operating targets, and (iii) exploration success targets.
4. TERMINATION OF AGREEMENT. This Agreement will continue in effect until
the expiration of the term stated in Section 1 hereof unless sooner terminated
as set forth below. If such termination occurs, Employee shall continue to be
subject to Section 5 hereof.
4.1 Death of Employee. If Employee shall terminate employment due to
death during the term of this Agreement, this Agreement shall terminate and his
spouse, if she is then surviving or if not, his legal representative, shall be
entitled to receive in one lump sum a pro rata share of incentive compensation
under Section 3.8 based on the number of days in the year that elapsed prior to
death and as if all performance goals had been met.
4.2 Illness or Other Incapacity. If during the term of this Agreement,
Employee shall fail to perform his duties hereunder as a result of illness or
other incapacity and such illness or incapacity shall continue for a period of
more than three (3) months, Corporation shall have the right to terminate this
Agreement and the employment hereunder as of date to be specified in a notice of
termination, such date to be not less than thirty (30) days after the mailing by
certified mail of such notice. If Employee's illness or incapacity shall have
ended, and the Employee shall have assumed his duties hereunder, prior to the
date specified in the notice of termination, he shall be entitled to resume his
employment hereunder as if such notice had not been given. If such termination
occurs, Employee shall continue to be bound by the covenants contained in
Section 5 hereof, but in all other regards, this Agreement shall terminate as of
such termination date, and Corporation shall pay to Employee or his legal
representative (i) compensation provided for in Section 3.1 of this Agreement
for the remaining term of this Agreement, but in no event less than one year, if
the Corporation has not provided disability insurance pursuant to Section 3.5
(ii) a pro rata share of incentive compensation under Section 3.8 based on the
number of days in the year that elapsed prior to such termination and as if all
performance goals had been met, and (iii) such other benefits, if any, as may be
determined by Corporation.
4.3 Termination by Corporation for Cause. Corporation may terminate this
Agreement and the employment of Employee by service of written notice of
termination to Employee specifying the circumstances and an effective date for
such termination upon the earlier to occur of any of the following events: (i)
Employee willfully misappropriates the property of Corporation or commits any
other act of dishonesty which results in injury to Corporation or reasonably
could result in injury to Corporation; (ii) Employee engages in personal
misconduct which results in material injury to Corporation, or could reasonably
result in material injury to Corporation unless Employee in good faith
reasonably believed that his actions were in the best interest of Corporation,
(iii) Employee is convicted of a felony; or (iv) the Board of Directors had
determined in good faith that Employee has failed to diligently perform his
duties hereunder as specified by Corporation and in a manner consistent with
prudent business practice and such failure continues after Employee has been
given at least ten (10) days written notice of the failure. In the event this
Agreement is terminated for cause set forth in paragraphs (i) through (iv) above
by the Corporation prior to the conclusion of the term of this Agreement, the
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Corporation shall have no further obligation hereunder, except for its payment
of the compensation provided for in Section 3.1 of this Agreement for a period
of three (3) months following such termination, which compensation shall be
considered a debt of the Corporation and shall not be discharged by reason of
termination of Employee's employment.
4.4 Termination by Corporation for Other than Cause. In the event
Corporation terminates Employee's employment for any reason other than under
Section 4.3, Employee shall be entitled to a payment from Corporation in an
amount equal to the Termination Payment (as hereinafter defined). For purposes
of this Agreement, the term "Termination Payment" shall mean an amount equal to
the sum of (i) all base salary that would have been paid to Employee pursuant to
Section 3.1 during the balance of the term of employment provided for in Section
1.2 (but in no event less than 12 months of such base salary) (the "Salary
Portion"), and (ii) subject to the execution by Employee of a waiver and release
of all claims against Corporation, all incentive compensation that would have
been paid to Employee pursuant to Section 3.8as if all performance goals have
been met during the balance of the term provided for in Section 1.2 (but in no
event less than one (1) such annual incentive bonus) (the "Bonus Portion"). The
Termination Payment shall be paid (i) with respect to the Bonus Portion, in one
(1) lump sum cash payment within five (5) days after Employee has signed a
release and any applicable revocation period has expired and (ii) with respect
to the Salary Portion, in one (1) lump sum cash payment within five (5) days
after such termination of employment.
4.5 Termination Following Change of Control. In the event that a "Change
of Control" (as hereinafter defined) occurs and, and within one (1) year
following such Change of Control, Employee's employment is terminated by
Corporation for a reason other than as described in Section 4.3, or he
voluntarily terminates employment due to a substantial diminishment in his job
responsibilities or duties or a material breach by Corporation of any material
provision of this Agreement or any other agreement with Employee which remains
uncorrected for ten (10) days following written notice of such diminishment or
breach by Employee to Corporation, then, in lieu of any payments pursuant to
Sections 4.4 or 4.6 hereof, Employee shall be entitled to a Termination Payment
under terms and conditions applicable pursuant to Section 4.4, provided that the
reference therein to 12 months shall be deemed to be a reference to 24 months
and the reference to one such annual incentive bonus shall be deemed to be a
reference to two such annual incentive bonuses. A "Change of Control" shall
mean (i) any sale by Corporation of substantially all of its assets or, (ii) the
removal or failure to re-elect R.A. Krenzke as a member of the Board of
Directors for any reason other than resignation, voluntary removal, termination
by Corporation for cause, disability or death, provided the South Coast owners
have the right to a Board seat pursuant to the Acquisition Agreement and Plan of
Organization dated August 19, 1997 or (iii) the acquisition by any "person,"
including a "group" as determined in accordance with Section 13(d)(3) of the
Securities Exchange Act of 1934, of beneficial ownership, directly or
indirectly, of securities of Corporation representing 50% or more of the
combined voting power of Corporation's then outstanding securities; provided,
however, that no Change of Control shall be deemed to occur if beneficial
ownership in Corporation's then outstanding securities is acquired pursuant to
any reorganization of Corporation or recapitalization, spinoff or other
transaction if, after giving effect to such
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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 shareholders of the Corporation.
4.6 Termination by Employee for Good Reason. If Employee's employment
hereunder shall be terminated by Employee due to a substantial diminishment in
Employee's job responsibilities or duties or a material breach by Corporation of
any material provision of this Agreement or any other agreement with Employee
which remains uncorrected for ten (10) days following written notice of such
diminishment or breach by Employee to Corporation, then Employee shall be
entitled to a Termination Payment under terms and conditions applicable pursuant
to Section 4.4.
4.7 Voluntary Termination by Employee. Notwithstanding any provision
herein to the contrary, Employee shall have the right to terminate his
employment under this Agreement at any time and for any reason whatsoever. If
Employee's employment hereunder shall be terminated by Employee for any reason
whatsoever other than the reasons specified in Sections 4.1, 4.2, 4.5 or 4.6,
then, upon such termination, all compensation and all benefits to Employee
hereunder shall terminate contemporaneously with the termination of such
employment. However, in the event Corporation has not become subject to the
reporting requirements of the Securities Exchange Act of 1934 within one (1)
year of the effective date of this Agreement and Employee has remained an
employee of the Corporation for at least one (1) year prior to such termination,
Employee shall be entitled to receive an amount equal to twelve (12) months of
his annual base salary then in effect, which shall be paid in one lump sum
within five (5) days after such time of termination.
4.8 No Duty to Mitigate Losses. Employee shall have no duty to find new
employment following the termination of his employment under circumstances which
required Corporation to pay any amount to Employee pursuant to this Section 4.
Any salary or remuneration received by Employee from a third party for the
providing of personal services (whether by employment or by functioning as an
independent contractor) following the termination of his employment under
circumstances pursuant to which Sections 4.2, 4.4, 4.5, 4.6 or 6.7 apply shall
not reduce Corporation's obligation to make a payment to Employee (or the amount
of such payment) pursuant to the terms of any such Section.
4.9 Liquidated Damages. In light of the difficulties in estimating the
damages for an early termination of this Agreement, Corporation and Employee
hereby agree that the payments, if any, to be received by Employee pursuant to
Sections 4.1, 4.2, 4.4, 4.5, 4.6 or 6.7 shall be received by Employee as
liquidated damages.
4.10 Incentive and Deferred Compensation. This Agreement governs the
rights and obligations of Employee and Corporation with respect to Employee's
base salary, incentive compensation pursuant to Section 3.8 and certain
perquisites of employment. Employee's rights and obligations both during the
term of his employment and thereafter with respect to stock options, restricted
stock, incentive and deferred compensation (other than incentive compensation
payable pursuant to Section 3.8), life insurance policies insuring the life of
Employee, and other
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benefits under the plans and programs maintained by Corporation shall be
governed by the separate agreements, plans and other documents and instruments
governing such matters.
5. AGREEMENT RESTRICTING TRADE SECRETS AND COMPETITION.
5.1 Confidential Information and Trade Secrets. Employee acknowledges
that he will have access to and that there will be disclosed to him during the
course of this employment, information of a proprietary nature owned by
Corporation, which is of a confidential nature and all of which have great value
to Corporation and which is a substantial basis and foundation upon which
Corporation's business is predicated. Employee acknowledges that except for his
employment and the duties assigned to him which he will be fulfilling, that he
would not otherwise have access to the foregoing information. Employee agrees
that any and all confidential knowledge or information which may be obtained by
him in the course of his employment will be held inviolate by him and that he
will conceal the same from any and all other persons, including, but not limited
to, competitors of Corporation, and that he will not impart any such knowledge
acquired by him as an employee of Corporation to anyone whomsoever either during
this employment or after his employment by Corporation has terminated, except to
the extent (i) such disclosure is required by law, (ii) such information is
otherwise made public by Corporation (other than by Employee in violation
thereof), or (iii) such disclosure is made in the normal course of business and
is consistent with Corporation's interests.
Employee agrees that upon termination of his employment hereunder he will
immediately surrender and turn over to Corporation all books, records, forms,
data, electric logs, geological maps, scout cards, seismic tapes and all papers
and writings relating to the business of Corporation and other information which
reflects or reveals Corporation's confidential or trade secret information
protected by this Section, and all other property belonging to Corporation, it
being understood and agreed that the same are the sole property of Corporation
and that Employee will not make any copies thereof; provided, however, the
parties agree that Employee's personnel files and any logs, records, and maps
which were Employee's property prior to the Effective Date shall remain
Employee's property. For purposes of this Section 5, the term "Corporation"
shall include Corporation as herein defined and any of its subsidiaries,
affiliates or parent organizations.
5.2 Noncompetition Agreement. Except as provided in Section 2.1, for so
long as this Agreement is in effect and for a period of six (6) months after
termination of his employment, Employee will not, without Corporation's written
permission, directly or indirectly, own, manage, operate, control, be employed
by, participate in or be connected in any manner with the ownership, management,
operation, or control of any business which is in direct competition with
Corporation, specifically with respect to the geologic prospects or any planned
or completed acquisitions (of stock, equity or assets) in or through which
Corporation does explore, develop or produce oil and gas or has current plans to
explore, develop or produce oil and gas. Corporation shall within ten (10) days
of Employee's termination of employment with the Corporation provide Employee
with a complete list of any properties, prospects, acquisitions, data
acquisitions, corporate transactions or other financial or business arrangements
contemplated by the Corporation to which the preceding sentence applies.
Employee must approve in writing,
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<PAGE>
and no such approval can be reasonably withheld, to the listing provided by the
Corporation. Any disputes which cannot be settled will be handled as provided in
Section 6.10 of this Agreement. For so long as this Agreement is in effect and
for a period of six (6) months after termination of his employment, Employee
shall refrain from contacting or encouraging any third party to contact any
individual who is employed by Corporation or its affiliates for the purpose of
recruiting or placing that individual with any other employer.
5.3 Injunctive Relief. Employee specifically acknowledges and agrees that
the remedy at law for any breach of the provisions of Sections 5.1 or 5.2 will
be inadequate and that Corporation shall be entitled to temporary and permanent
injunctive relief without the necessity of proving actual damage.
5.4 Reformation. In the event that the provisions of this Section 5
should ever be deemed to exceed the time or geographic limitations permitted by
applicable law, then such provision shall be deemed reformed to the maximum time
or geographic limitations permitted by applicable law.
6. GENERAL.
6.1 Indemnity and Directors' & Officers' Liability Insurance Coverage.
Corporation agrees to indemnify and defend Employee, at Corporation's sole
expense, in any matters arising from Employee's performance of his duties as an
employee, officer or director of Corporation or any of Corporation's
subsidiaries or affiliates to the fullest extent permitted by law. The
Corporation will take reasonable steps to obtain Directors' and Officers'
liability insurance prior to becoming subject to the reporting requirements of
the Securities Exchange Act of 1934.
6.2 Headings. Section headings are included solely for convenience and
should not be used in the interpretation of this Agreement.
6.3 Severability. In the event any one or more of the provisions
contained in the Agreement shall, for any reason, be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not effect any other provisions of this Agreement, and this Agreement
shall be construed in all respects as if such invalid or unenforceable
provisions were omitted.
6.4 Notices. Any notice, demand and all other communications required or
permitted to be given under this Agreement shall be in writing and shall have
been deemed duly given when delivered or (unless otherwise specified herein)
three (3) business days after mailed by United States registered mail, return
receipt requested, postage prepaid, to the address set forth on the signature
page hereof, or to such other address as any party may have furnished to the
other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
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6.5 Waiver of Breach; Expenses. The waiver by Employee or Corporation of
a breach of any provision of this Agreement shall not operate or be construed as
a waiver of any subsequent breach. In any action brought by any party hereto
pursuant to Section 6.10 of the Agreement, the prevailing party shall be
entitled to collect such party's reasonable attorney's fees, court costs and
expenses in such action.
6.6 Binding Effect; Assignment. The respective rights and obligations of
Corporation and Employee under the Agreement shall inure to the benefit of and
shall be binding upon Corporation and the respective successors and assigns of
Corporation. This Agreement shall not be assignable by Employee. As used
herein, the term "successors and assigns" shall include any corporation or
corporations which acquire all or substantially all of the assets and businesses
of Corporation whether by purchase, merger, consolidation or otherwise. The
parties hereto presently contemplate that Corporation will enter into certain
transactions resulting in a reorganization of Corporation and in connection
therewith this Agreement shall automatically be assigned to the parent of
Corporation and all references herein to Corporation shall thereafter be deemed
to be references to such parent entity.
6.7 Certain Additional Payments by Company. Notwithstanding anything to
the contrary in this Agreement, in the event that any payment or distribution by
Corporation to or for the benefit of Employee, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment") would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended, or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest or penalties, are herein collectively referred to as the "Excise
Tax"), Corporation shall pay to Employee an additional payment (a "Gross-up
Payment") in an amount such that after payment by employee of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Employee retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. Corporation and Employee shall make an initial determination as to
whether a Gross-Up Payment is required and the amount of any such Gross-Up
Payment. Employee shall notify Corporation in writing of any claim by the
Internal Revenue Service which, if successful, would require Corporation to make
a Gross-Up Payment (or a Gross-Up Payment in excess of that, if any, initially
determined by Corporation and Employee) within ten (10) days of the receipt of
such claim. Corporation shall notify Employee in writing at least ten days
prior to the due date of any response required with respect to such claim if it
plans to contest the claim. If Corporation decides to contest such claim,
Employee shall cooperate fully with Corporation in such action; provided,
however, Corporation shall bear and pay directly or indirectly all costs and
expenses (including additional interest and penalties) incurred in connection
with such action and shall indemnify and hold Employee harmless, on an after-tax
basis, for any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of Corporation's action. If, as a result
of Corporation's action with respect to a claim, Employee receives a refund of
any amount paid by Corporation with respect to such claim, Employee shall
promptly pay such refund to Corporation. If Corporation fails to timely notify
Employee whether it will contest such claim or Corporation determines not to
contest such claim, then Corporation shall immediately pay to Employee the
portion of such claim, if any, which it has not previously paid to Employee.
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<PAGE>
6.8 Entire Agreement Counterparts. Except as provided in (i) the
benefits, plans, and programs, if any, referenced in Sections 3.4, 3.5, 3.7 and
3.8 hereof and (ii) any signed written agreements contemporaneously or hereafter
executed by Corporation and Employee, this Agreement contains the entire
agreement of the parties hereto, notwithstanding any oral representation of the
parties to the contrary. This Agreement supersedes as of the Effective Date all
agreements, oral or in writing, and other arrangements between the parties with
respect to all matters related to the subject matter hereof. This Agreement may
be executed in multiple counterparts, all of which shall constitute one
Agreement, but both parties must execute and deliver one signed counterpart
before this Agreement is effective.
6.9 Applicable Law. The execution, performance and enforcement of this
Agreement shall be governed by and construed in accordance with the internal
laws of the State of Texas without giving effect to its conflict of laws
provision.
6.10 Claims; Arbitration.
(a) All claims by Employee for compensation and benefits under this
Agreement shall be directed to and determined by the Board of Directors and
shall be in writing. Any denial by the Board of Directors of a claim for
benefits under this Agreement shall be delivered to Employee in writing and
shall set forth the specific reasons for the denial and specific provisions of
this Agreement relied upon. The Board of Directors shall afford a reasonable
opportunity to Employee for a review of a decision denying a claim and shall
further allow Employee to appeal to the Board of Directors a decision of the
Board of Directors within 60 days after notification by the Board of Directors
that Employee's claim has been denied.
(b) To the extent permitted by applicable law, any further dispute or
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration in Houston, Texas, in accordance with the rules of
the American Arbitration Association then in effect. The agreement set forth
herein to arbitrate shall be specifically enforceable under the prevailing
arbitration law.
(c) Notice of the demand for arbitration shall be filed in writing with the
other party to this Agreement and with the American Arbitration Association.
The demand for arbitration shall be made within a reasonable time after the
claim, dispute or other matter in question has arisen, and in no event shall it
be made after the date when institution of legal or equitable proceedings based
on such claim, dispute or other matter in question would be barred by the
applicable statute of limitations.
(d) The award rendered by the arbitrator shall be final and judgment may be
entered upon it in accordance with applicable law in any court having
jurisdiction thereof.
(e) Unless otherwise agreed in writing, Corporation shall continue to make
payments and provide benefits in accordance with this Agreement, and Employee
shall continue to perform his obligations hereunder during any arbitration
proceedings.
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<PAGE>
6.11 Survival. All covenants, representations and warranties of the
parties hereto will survive the termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
"Corporation" XPLOR Energy, Inc.
By: /s/ Steven W. Nance
_____________________________
Steven W. Nance
President & CEO
Address: 10200 Grogans Mill Road,
Suite 500
The Woodlands, Texas 77380
/s/ R. A. Krenzke
"Employee" __________________________________
R. A. Krenzke
Address: 2136 Dryden
Houston, Texas 77030
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<PAGE>
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
--------------------
(REVISED)
---------
This revised Agreement is entered into this 22nd day of July 1997, to
be effective on the date set forth below, by and between Araxas Energy
Corporation, an Oklahoma corporation ("Corporation"), and Stephen M. Clark
("Employee").
WITNESSETH:
-----------
WHEREAS, Corporation desires to employ Employee, and Employee desires
to accept such employment;
WHEREAS, Corporation and Employee desire to agree to the specific term
of such employment set forth in this Agreement;
NOW, THEREFORE, in consideration of the recitations stated above and
the mutual terms, covenants and conditions contained herein, Corporation and
Employee agree as follows:
1. EMPLOYMENT
1.1 Employment. The Corporation hereby employs Employee and
Employee hereby accepts such employment, as Vice President and Chief Financial
Officer, subject to the supervision and direction of the President and Board of
Directors.
1.2 Term of Employment. The term of employment shall commence
on May 5 , 1997, ("Effective Date"), and shall terminate on the third
anniversary of the Effective Date, unless further extended as hereinbelow
provided or sooner terminated as provided in Section 4 hereof. On the third
anniversary of the Effective Date, and on each following annual anniversary
thereafter, the term of Employee's employment shall be automatically extended on
the terms and condition then in effect for one (1) additional year unless, at
least ninety (90) days prior to any such anniversary date, either party shall
have delivered to the other, written notice that the term hereof shall not be
extended.
2. DUTIES
2.1 Full-time Employment. Unless otherwise authorized by
the Corporation, Employee shall devote substantially all of his time, attention
and skills to the performance of his duties as an employee of the Corporation.
During the term of this Agreement, Employee shall not render services for any
other than the Corporation unless otherwise authorized by the Corporation.
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<PAGE>
2.2 Employer-Employee Relationship. The relationship between
Corporation and Employee is that of an employer and employee. Corporation shall
have the right to instruct, control, review and, subject to the terms of this
Agreement, modify the nature as requested by Corporation and scope of services,
and manner in which Employee performs such services for Corporation.
3. COMPENSATION AND RELATED MATTERS. Subject to the terms and
conditions hereof, Employee shall receive the following salary and other
benefits as full consideration for the services to be rendered hereunder:
3.1 Regular Salary. A salary shall be paid to Employee for all
services rendered under this Agreement at the rate of $125,000 per year, payable
in equal semi-monthly installments of $5,208.33 as nearly as practicable to the
15th and the last day of each month in arrears. If Employee is employed for
less than the entire pay period, the salary shall be prorated in accordance with
the number of days during such pay period in which he is employed. Corporation
shall have the right to increase Employee's salary periodically under this
Agreement, but shall be under no obligation to do so.
3.2 Expenses. The Employee shall be reimbursed for all
reasonable and necessary business expenses incurred in the performance of
services hereunder, and are accounted for in accordance with the policies and
procedures established from time to time by the Corporation. Corporation will
reimburse Employee up to $4,000 of moving and/or temporary housing costs
associated with the move from Abilene to The Woodlands.
3.3 Vacation. Employee shall be entitled to three (3) weeks
paid vacation during each full 12-month period during the term hereof and such
other vacation time and paid holidays, if any, as shall from time to time be
determined by Corporation.
3.4 Employee Benefit Plans. Employee shall be included in all
of the employee benefit plans existing now or in the future providing pension,
thrift, profit sharing or similar benefits as are provided generally to officers
of Corporation, subject to the terms and conditions of all such plans.
3.5 Insurance. Corporation shall cover Employee under its group
medical and hospitalization plan, shall provide Employee term life insurance
coverage, and will cover Employee under other insurance plans maintained for its
officers generally.
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<PAGE>
3.6 Stock Option Plan. Employee shall receive an option to
acquire 3000 shares of the Corporation common stock (the "Option Shares") in
accordance with the terms set forth in the Araxas Energy Corporation Long-Term
Incentive Plan (currently being finalized). The Option exercise price shall be
$250.00 per share and the Option will vest in equal parts on the first, second
and third anniversary dates of an IPO or other transaction which results in the
Corporation becoming subject to the reporting requirements of the Securities
Exchange Act of 1934.
Employee waives and revokes any right to any option awards under the terms
of the Employment Agreement dated May 5, 1997.
The Option Shares are subject to future dilutive stock transactions
provided the dollar value net to Employee does not diminish. The unvested
Option Shares expire upon Employee's termination and vested options expire per
the terms of the Plan. In the event Corporation is acquired by a corporation
controlled by the current shareholders of Corporation ("Newco") employee's
option hereunder shall be assumed by Newco, and Newco's Common Stock shall be
substituted in accordance with the exchange ratio applicable to the then
outstanding shares of Corporation's Common Stock.
3.7 Incentive Bonus. Employee shall receive up to the equivalent
of an additional forty percent (40%) of salary as an annual bonus tied to
mutually agreed performance goals to be established no later than the end of the
first quarter of each calendar year by the President and/or Board of Directors,
which will provide for at least the following for the bonus attributable to
1997, payable in 1998; (i) financial reporting requirements, (ii) recruitment
and development of a strong accounting staff, (iii) obtaining bank financing to
pay off Stratum and, (iv) preparation for and participation in the "IPO" and
interaction with security analysts for positive coverage.
3.8 Indemnity and D&O Coverage. Corporation agrees to indemnify
and defend Employee, at Corporation's cost, in any matters (excepting gross
negligence by employee) arising from Employee's performance of his duties as an
employee, officer or director of Cooperation or any of Corporation's
subsidiaries or affiliates. Corporation agrees to endeavor to obtain Directors'
and Officers' liability insurance coverage prior to or in connection with
Corporation's IPO.
4. TERMINATION OF AGREEMENT This Agreement will continue in effect
until the expiration of the term stated in Section 1 hereof unless sooner
terminated as set forth below. If such termination occurs, Employee shall
continue to be subject to Section 5 hereof.
4.1 Death of Employee. If Employee shall die during the term of
this Agreement, this Agreement shall terminate and his spouse, if she is then
surviving or if not, his legal representative, shall be entitled to receive his
compensation as provided in Section 3.1 through the end of the month in which
death occurs and vested options.
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<PAGE>
4.2 Illness or Other Incapacity. If during the term of this
Agreement, Employee shall fail to perform his duties hereunder as a result of
illness or other incapacity and such illness or incapacity shall continue for a
period of more than three (3) months, Corporation shall have the right to
terminate this Agreement and the employment hereunder as of date to be specified
in a notice of termination, such date to be not less than thirty (30) days after
the mailing by certified mail of such notice. If Employee's illness or
incapacity shall have ended, and the Employee shall have assumed his duties
hereunder, prior to the date specified in the notice of termination, he shall be
entitled to resume his employment hereunder as if such notice had not been
given. If such termination occurs, Employee shall continue to be bound by the
covenants contained in Sections 5 and 6 hereof, but in all other regards, this
Agreement shall terminate as of such termination date, and Corporation shall pay
to Employee or his successor the amount of any accrued but unpaid compensation
under Section 3.1 hereof, and such other benefits, if any, as may be determined
by Corporation.
4.3 Termination by Corporation for Cause. Corporation may
terminate this Agreement and the employment of Employee by service of written
notice of termination to Employee specifying the circumstances and an effective
date for such termination upon the earlier to occur of any of the following
events: (i) the Employee willfully misappropriates the property of
Corporation or commits any other act of dishonesty which results in injury to
the Corporation or reasonably could result in injury to Corporation; (ii) the
Employee engages in personal misconduct which results in injury to the
Corporation, or could reasonably could result in injury to Corporation; (iii)
the Employee violates any law or regulation relating to the business of the
Corporation which results in injury to the Corporation or reasonably could
result in injury to the Corporation; (iv) Employee fails to diligently perform
his duties hereunder as specified by Corporation and in a manner consistent with
prudent business practice. In the event this Agreement is terminated for cause
set forth in paragraphs (i) through (iv) above, Corporation will have no
obligation to provide any further salary payments or other benefits to Employee,
including, but not limited to salary, overriding royalty interests under the
Plan and incentive compensation, for any period after the effective date of such
termination.
4.4 Termination by Corporation for Other than Cause. In the event
Corporation terminates for any reason other than under paragraph 4.3, Employee
shall be entitled to a payment of twelve month's current salary, payable within
thirty (30) days of termination, and to exercise any vested Option pursuant to
the terms of Corporation's Option plan (including the portion that would be
vested for the year in which termination occurs with vesting applied on a pro
rata daily basis assuming 365 days between vesting dates).
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<PAGE>
5. AGREEMENTS RESTRICTING TRADE SECRETS AND
COMPETITION
5.1 Confidential Information and Trade Secrets. Employee
acknowledges that he will have access to and that there will be disclosed to him
during the course of this employment, information of a proprietary nature owned
by Corporation, which is of a confidential nature and all of which have great
value to Corporation and which is a substantial basis and foundation upon which
Corporation's business is predicated. Employee acknowledges that except for his
employment and the duties assigned to him which he will be fulfilling, that he
would not otherwise have access to the foregoing information. Employee agrees
that any and all confidential knowledge or information which may be obtained by
him in the course of his employment will be held inviolate by him and that he
will conceal the same from any and all other persons, including, but not limited
to, competitors of Corporation, and that he will not impart any such knowledge
acquired by him as an employee of Corporation to anyone whomsoever either during
this employment or after his employment by Corporation has terminated, except to
the extent (i) such disclosure is required by law, (ii) such information is
otherwise made public by the Corporation, or (iii) such disclosure is made in
the normal course of business and is consistent with Corporation's interests.
Employee agrees that upon termination of his employment hereunder
he will immediately surrender and turn over to Corporation all books, records,
forms data, electric logs, geologic maps, scout cards, seismic tapes and all
papers and writing relating to the business of Corporation and other information
which reflects or reveals Corporation's confidential or trade secret information
protected by this Section, and all other property belonging to Corporation, it
being understood and agreed that the same are the sole property of Corporation
and that Employee will not make any copies thereof; provided, however, the
parties agree that the Employee's personnel files and any logs, records, and
maps which were Employee's property prior to the Effective Date shall remain
Employee's property. For purposes of this Section 5, the term "Corporation"
shall include Corporation as heretofore defined and any of its subsidiaries,
affiliates or parent organizations.
5.2 Noncompetition Agreement. For so long as this Agreement is
in effect and for a period of six (6) months after termination of this
Agreement, Employee will not, without Corporation's written permission, directly
or indirectly, own, manage, operate, control, be employed by, participate in or
be connected in any manner with the ownership, management, operation, or control
of any business which is in direct competition with the Corporation,
specifically in the geologic trends which Corporation explores, develops or
produces oil and gas.
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<PAGE>
5.3 Injunctive Relief. Employee specifically acknowledges and
agrees that the remedy at law for any breach of the provisions of Sections 5.1
or 5.2 will be inadequate and that Corporation shall be entitled to temporary
and permanent injunctive relief without the necessity of proving actual damage.
5.4 Reformation. In the event that the provisions of this
Section 5 should ever be deemed to exceed the time or geographic limitations
permitted by applicable law, then such provisions shall be deemed reformed to
the maximum time or geographic limitations permitted by applicable law.
6. GENERAL
6.1 Headings. Section headings are included solely for
convenience and should not be used in the interpretation of this Agreement.
6.2 Severability. In the event any one or more of the
provisions contained in the Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not effect any other provisions of this Agreement, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
6.3 Notices. Any notice, demand and all other communications
required or permitted to be given under this Agreement shall be in writing and
shall have been deemed duly given when delivered or (unless otherwise specified
herein) three (3) business days after mailed by United States registered mail,
return receipt requested, postage prepaid, to the address set forth on the
signature page hereof, or to such other address as any part may have furnished
to the other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
6.4 Waiver of Breach; Expenses. The waiver by Employee or
Corporation of a breach of any provision of the Agreement shall not operate or
be construed as a waiver of any subsequent breach. In any action brought by any
party hereto, the prevailing party shall be entitled to collect such party's
reasonable attorney's fees, court costs and expenses in such action.
6.5 Binding Effect. The respective rights and obligations of
Corporation and Employee under the Agreement shall inure to the benefit of and
shall be binding upon Corporation and the respective successors and assigns of
Corporation. This Agreement shall not be assignable by Employee. As used herein,
the term "Successors and assigns" shall include any corporation or corporations
which acquire all or substantially all of the assets and businesses of
Corporation whether by purchase, merger, consolidation or otherwise.
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<PAGE>
6.6 Entire Agreement Counterparts. This Agreement contains the
entire agreement of the parties hereto, notwithstanding any oral representation
of the parties to the contrary. This Agreement supersedes as of the Effective
Date all agreements, oral or in writing, and other arrangements between the
parties with respect to all matters related to the subject matter hereof. This
Agreement may be executed in multiple counterparts, all of which shall
constitute one Agreement, but both parties must execute and deliver one signed
counterpart before this Agreement is effective.
6.7 Applicable Law. The execution, performance and enforcement
of this agreement shall be governed by and construed in accordance with the
internal laws of the State of Texas without giving effect to its conflict of
laws provisions.
6.8 Survival. All covenants, representations and warranties of
the parties hereto will survive the termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
"CORPORATION" ARAXAS ENERGY CORPORATION
By: /s/ S. W. NANCE
________________________________
S. W. Nance
President
Address: 10200 Grogans Mill Road, Suite 500
The Woodlands, Texas 77380
"EMPLOYEE" /s/ STEPHEN M. CLARK
________________________________
Stephen M. Clark
Address: 175 W. Grey Wing Circle
The Woodlands, TX 77382
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EXHIBIT 10.21
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into this 24th day
of September, 1997, to be effective on the date set forth below, by and between
XPLOR Energy, Inc., a Delaware corporation ("Corporation"), and Philip V. Duggan
("Employee").
WITNESSETH:
WHEREAS, Corporation desires to employ Employee, and Employee desires to
accept such employment;
WHEREAS, Corporation and Employee desire to agree to the specific terms of
such employment set forth in this Agreement.
NOW, THEREFORE, in consideration of the recitations stated above and the
mutual terms, covenants and conditions contained herein, Corporation and
Employee agree as follows:
1. EMPLOYMENT
1.1 Employment. Corporation hereby employs Employee and Employee hereby
accepts such employment, as Director-Technology Development, subject to the
supervision and direction of Corporation's President, other Officers of the
Corporation as applicable and its Board of Directors.
1.2 Term of Employment. The term of employment provided for in this
Agreement shall commence on September 24th, 1997 ("Effective Date"), shall
remain in full force and effect for a period of three years thereafter and shall
terminate on the third anniversary of the Effective Date, unless terminated
sooner as provided in Section 4 hereof. Beginning on the second anniversary of
the Effective Date, and on the last day of each succeeding month following the
second anniversary ("Monthly Renewal Date"), the term of Employee's employment
shall be automatically extended on the terms and condition then in effect for
one (1) additional month such that there shall always be at least one (1) year
remaining on the term of this agreement at all times, unless, at least fifteen
(15) days prior to the second anniversary of the Effective Date or any such
Monthly Renewal Date, either party shall have delivered to the other, written
notice that the term hereof shall not be extended.
2. DUTIES
2.1 Full-time Employment. Unless otherwise authorized by Corporation,
Employee shall devote substantially all of his business time, attention and
skills to the performance of his duties as Director-Technology Development of
Corporation. During the term of this Agreement, Employee shall not render
services for any other person or entity than Corporation unless otherwise
authorized by Corporation; provided, however, that upon the approval of
Corporation, Employee may serve as a director of other corporations or entities
that
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engage in other activities to the extent that they do not inhibit the
performance of Employee's duties hereunder, or conflict with the business of the
Corporation, its subsidiaries, or affiliates The voluntary performance by
Employee of any duties assigned to him which are not of the type provided for
herein shall not constitute a waiver of his rights hereunder or an abrogation,
abandonment or termination by him of this Agreement.
Employee shall not be restricted from engaging in a business or from
investing his assets in a manner which is non-competitive with Corporation and
its affiliates or subsidiaries and which will not require any significant
services on his part in the operation of the affairs of the companies in which
such investments are made or from engaging in charitable or voluntary activities
to the extent that the total amount of time expended on such business,
investing, charitable or voluntary activities is reasonable, is consistent with
Employee's duties hereunder, and does not conflict with Employee's ability or
time necessary to perform his duties hereunder.
2.2 Employer-Employee Relationship. The relationship between Corporation
and Employee is that of an employer and employee. Corporation shall have the
right to instruct, control, review and, subject to the terms of this Agreement,
modify the nature as requested by Corporation and scope of services, and manner
in which Employee performs such services for Corporation.
3. COMPENSATION AND RELATED MATTERS. Subject to the terms and conditions
hereof, Employee shall receive the following salary and other benefits as full
consideration for the services to be rendered hereunder.
3.1 Regular Salary. Until such time as the Corporation becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, Employee
shall be paid a salary for all services rendered under this Agreement at the
rate of $165,000 per year, payable in Accordance with the general payroll
practices of the Corporation in effect from time to time. In the event
Corporation becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, Employee's salary shall be changed to $145,000 per year.
In either case, the Employee's salary shall be reviewed annually, and may be
increased, but not decreased, from the salary then in effect or the salary
prescribed by this Section 3.1, in Corporation's discretion, as determined by
the Compensation Committee of the Board of Directors.
3.2 Expenses. The Employee shall be reimbursed for all reasonable and
necessary business expenses incurred in the performance of service hereunder,
and accounted for in accordance with the policies and procedures established
from time to time by Corporation. In addition, Employee shall receive an
automobile allowance of $500 per month payable in accordance with the general
payroll practices of the Corporation in effect from time to time.
3.3 Vacation. Employee shall be entitled to four (4) weeks paid vacation
during each full 12-month period during the term hereof; provided, however that
in taking such vacation Employee shall give and exercise reasonable
consideration to and for the needs and interests of Corporation. Employee shall
also be entitled to such other vacation time and paid holidays, if any, as shall
from time to time be determined by Corporation.
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3.4 Employee Benefit Plans. Employee shall be included in all of the
employee benefit plans existing now or in the future providing pension, thrift,
profit sharing, bonus or similar benefits as they are provided generally to
employees of the Corporation, subject to the terms and conditions of all such
plans. In addition, Employee shall be eligible to participate in all executive
compensation programs or other perquisites available to other officers of
Corporation, subject to the terms and conditions of such programs.
3.5 Insurance and Welfare Benefit Plans. Corporation shall cover Employee
under its group dental, medical and hospitalization plans, shall provide
Employee term life insurance coverage, and will cover Employee under other
insurance and employee welfare benefit plans maintained for its officers
generally. Corporation shall also use its best efforts to evaluate and provide
disability insurance coverage and life insurance coverage which are payable to
the beneficiary of employee's choice.
3.6 Place of Performance. The headquarters for the performance of
Employee's duties shall be located in The Woodlands, Texas, and/or other office
locations of the Corporation within the metropolitan Houston area, but from time
to time Employee shall be required to travel to other locations in the proper
conduct of his responsibilities under this Agreement. As it is Corporation's
intention to expand the business of Corporation on a national scale, Corporation
may require Employee to spend a reasonable amount of time traveling, as his
duties and the business of Corporation and its affiliates or subsidiaries may
require.
3.7 Stock Option Awards, Other Awards. The Board of Directors or its
Compensation Committee, as the case may be, shall consider Employee for the
grant of options to purchase common stock or other awards, as Employee's
performance dictates, no less frequent than annually during the term of this
Agreement under any plan of the Corporation which provides for such stock
options or other awards. Unless modified by the Board of the Directors any
awards granted to Employee pursuant to any other such plans adopted by the
Corporation (the "Incentive Plans") shall be immediately vested in full and
exercisable upon the occurrence of any of the following: (i) any Change of
Control (as defined herein); (ii) termination of Employee by the Corporation
without just cause (as defined herein); (iii) any substantial or material
diminishment in Employee's reporting responsibilities as designated in this
Agreement; (iv) Employee's death; or (v) at the termination of this agreement
due to Employee's disability as defined in Section 4.2 of this agreement. Any
agreement for an award under the Incentive Plans granted to Employee shall
reflect the provisions of this Section 3.7.
3.8 Incentive Bonus. Beginning in 1998, Employee shall be eligible to
receive a bonus of up to 40% of annual base salary as an annual incentive bonus
subject to the achievement of certain performance goals established by the Board
of Directors as discussed below. The bonus for 1998 shall be paid no later than
the end of January, 1999. The bonus shall be based on attainment of performance
goals to be established no later than the end of the first quarter of each
calendar year, subject to approval of those performance goals by the Board of
Directors, which will provide for at least the following: (i) financial
targets; (ii) operating targets, and (iii) exploration success targets.
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4. TERMINATION OF AGREEMENT. This Agreement will continue in effect until
the expiration of the term stated in Section 1 hereof unless sooner terminated
as set forth below. If such termination occurs, Employee shall continue to be
subject to Section 5 hereof.
4.1 Death of Employee. If Employee shall terminate employment due to
death during the term of this Agreement, this Agreement shall terminate and his
spouse, if she is then surviving or if not, his legal representative, shall be
entitled to receive in one lump sum a pro rata share of incentive compensation
under Section 3.8 based on the number of days in the year that elapsed prior to
death and as if all performance goals had been met.
4.2 Illness or Other Incapacity. If during the term of this Agreement,
Employee shall fail to perform his duties hereunder as a result of illness or
other incapacity and such illness or incapacity shall continue for a period of
more than three (3) months, Corporation shall have the right to terminate this
Agreement and the employment hereunder as of date to be specified in a notice of
termination, such date to be not less than thirty (30) days after the mailing by
certified mail of such notice. If Employee's illness or incapacity shall have
ended, and the Employee shall have assumed his duties hereunder, prior to the
date specified in the notice of termination, he shall be entitled to resume his
employment hereunder as if such notice had not been given. If such termination
occurs, Employee shall continue to be bound by the covenants contained in
Section 5 hereof, but in all other regards, this Agreement shall terminate as of
such termination date, and Corporation shall pay to Employee or his legal
representative (i) compensation provided for in Section 3.1 of this Agreement
for the remaining term of this Agreement, but in no event less than one year, if
the Corporation has not provided disability insurance pursuant to Section 3.5
(ii) a pro rata share of incentive compensation under Section 3.8 based on the
number of days in the year that elapsed prior to such termination and as if all
performance goals had been met, and (iii) such other benefits, if any, as may be
determined by Corporation.
4.3 Termination by Corporation for Cause. Corporation may terminate this
Agreement and the employment of Employee by service of written notice of
termination to Employee specifying the circumstances and an effective date for
such termination upon the earlier to occur of any of the following events: (i)
Employee willfully misappropriates the property of Corporation or commits any
other act of dishonesty which results in injury to Corporation or reasonably
could result in injury to Corporation; (ii) Employee engages in personal
misconduct which results in material injury to Corporation, or could reasonably
result in material injury to Corporation unless Employee in good faith
reasonably believed that his actions were in the best interest of Corporation,
(iii) Employee is convicted of a felony; or (iv) the Board of Directors had
determined in good faith that Employee has failed to diligently perform his
duties hereunder as specified by Corporation and in a manner consistent with
prudent business practice and such failure continues after Employee has been
given at least ten (10) days written notice of the failure. In the event this
Agreement is terminated for cause set forth in paragraphs (i) through (iv) above
by the Corporation prior to the conclusion of the term of this Agreement, the
Corporation shall have no further obligation hereunder, except for its payment
of the compensation provided for in Section 3.1 of this Agreement for a period
of three (3) months
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following such termination, which compensation shall be considered a debt of the
Corporation and shall not be discharged by reason of termination of Employee's
employment.
4.4 Termination by Corporation for Other than Cause. In the event
Corporation terminates Employee's employment for any reason other than under
Section 4.3, Employee shall be entitled to a payment from Corporation in an
amount equal to the Termination Payment (as hereinafter defined). For purposes
of this Agreement, the term "Termination Payment" shall mean an amount equal to
the sum of (i) all base salary that would have been paid to Employee pursuant to
Section 3.1 during the balance of the term of employment provided for in Section
1.2 (but in no event less than twelve (12) months of such base salary) (the
"Salary Portion"), and (ii) subject to the execution by Employee of a waiver and
release of all claims against Corporation, all incentive compensation that would
have been paid to Employee pursuant to Section 3.8 as if all performance goals
had been met during the balance of the term provided for in Section 1.2 (but in
no event less than one (1) such annual incentive bonus) (the "Bonus Portion").
The Termination Payment shall be paid (i) with respect to the Bonus Portion, in
one (1) lump sum cash payment within five (5) days after Employee has signed a
release and any applicable revocation period has expired and (ii) with respect
to the Salary Portion, in one (1) lump sum cash payment within five (5) days
after such termination of employment.
4.5 Termination Following Change of Control. In the event that a "Change
of Control" (as hereinafter defined) occurs and, within one (1) year following
such Change of Control, Employee's employment is terminated by Corporation for a
reason other than as described in Section 4.3, or he voluntarily terminates
employment due to a substantial diminishment in his job responsibilities or
duties or a material breach by Corporation of any material provision of this
Agreement or any other agreement with Employee which remains uncorrected for ten
(10) days following written notice of such diminishment or breach by Employee to
Corporation, then, in lieu of any payments pursuant to Sections 4.4 or 4.6
hereof, Employee shall be entitled to a Termination Payment under terms and
conditions applicable pursuant to Section 4.4, provided that the reference
therein to 12 months shall be deemed to be a reference to 24 months and the
reference to one such annual incentive bonus shall be deemed to be a reference
to two such annual incentive bonuses. A "Change of Control" shall mean (i) any
sale by Corporation of substantially all of its assets or, (ii) the removal or
failure to re-elect R.A. Krenzke as a member of the Board of Directors for any
reason other than resignation, voluntary removal, termination by Corporation for
cause, disability or death, provided the South Coast owners have the right to a
Board seat pursuant to the Acquisition Agreement and Plan of Organization dated
August 19, 1997 or (iii) the acquisition by any "person," including a "group" as
determined in accordance with Section 13(d)(3) of the Securities Exchange Act of
1934, of beneficial ownership, directly or indirectly, of securities of
Corporation representing 50% or more of the combined voting power of
Corporation's then outstanding securities; provided, however, that no Change of
Control shall be deemed to occur if beneficial ownership in Corporation's then
outstanding securities is acquired pursuant to any reorganization of Corporation
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
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ultimate parent entity corporation are beneficially owned in the aggregate,
directly or indirectly through one or more intermediaries, by the former
shareholders of the Corporation.
4.6 Termination by Employee for Good Reason. If Employee's employment
hereunder shall be terminated by Employee due to a substantial diminishment in
Employee's job responsibilities or duties or a material breach by Corporation of
any material provision of this Agreement or any other agreement with Employee
which remains uncorrected for en (10) days following written notice of such
diminishment or breach by Employee to Corporation, then Employee shall be
entitled to a Termination Payment under terms and conditions applicable pursuant
to Section 4.4.
4.7 Voluntary Termination by Employee. Notwithstanding any provision
herein to the contrary, Employee shall have the right to terminate his
employment under this Agreement at any time and for any reason whatsoever. If
Employee's employment hereunder shall be terminated by Employee for any reason
whatsoever other than the reasons specified in Sections 4.1, 4.2, 4.5 or 4.6,
then, upon such termination, all compensation and all benefits to Employee
hereunder shall terminate contemporaneously with the termination of such
employment. However, in the event Corporation has not become subject to the
reporting requirements of the Securities Exchange Act of 1934 within one (1)
year of the effective date of this Agreement and Employee has remained an
employee of the Corporation for at least one (1) year prior to such termination,
Employee shall be entitled to receive an amount equal to twelve (12) months of
his annual base salary then in effect, which shall be paid in one lump sum
within five (5) days after such time of termination.
4.8 No Duty to Mitigate Losses. Employee shall have no duty to find new
employment following the termination of his employment under circumstances which
required Corporation to pay any amount to Employee pursuant to this Section 4.
Any salary or remuneration received by Employee from a third party for the
providing of personal services (whether by employment or by functioning as an
independent contractor) following the termination of his employment under
circumstances pursuant to which Sections 4.2, 4.4, 4.5, 4.6 or 6.7 apply shall
not reduce Corporation's obligation to make a payment to Employee (or the amount
of such payment) pursuant to the terms of any such Section.
4.9 Liquidated Damages. In light of the difficulties in estimating the
damages for an early termination of this Agreement, Corporation and Employee
hereby agree that the payments, if any, to be received by Employee pursuant to
Sections 4.1, 4.2, 4.4, 4.5, 4.6 or 6.7 shall be received by Employee as
liquidated damages.
4.10 Incentive and Deferred Compensation. This Agreement governs the
rights and obligations of Employee and Corporation with respect to Employee's
base salary, incentive compensation pursuant to Section 3.8 and certain
perquisites of employment. Employee's rights and obligations both during the
term of his employment and thereafter with respect to stock options, restricted
stock, incentive and deferred compensation (other than incentive compensation
payable pursuant to Section 3.8), life insurance policies insuring the life of
Employee, and other
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benefits under the plans and programs maintained by Corporation shall be
governed by the separate agreements, plans and other documents and instruments
governing such matters.
5. AGREEMENT RESTRICTING TRADE SECRETS AND COMPETITION.
5.1 Confidential Information and Trade Secrets. Employee acknowledges
that he will have access to and that there will be disclosed to him during the
course of this employment, information of a proprietary nature owned by
Corporation, which is of a confidential nature and all of which have great value
to Corporation and which is a substantial basis and foundation upon which
Corporation's business is predicated. Employee acknowledges that except for his
employment and the duties assigned to him which he will be fulfilling, that he
would not otherwise have access to the foregoing information. Employee agrees
that any and all confidential knowledge or information which may be obtained by
him in the course of his employment will be held inviolate by him and that he
will conceal the same from any and all other persons, including, but not limited
to, competitors of Corporation, and that he will not impart any such knowledge
acquired by him as an employee of Corporation to anyone whomsoever either during
this employment or after his employment by Corporation has terminated, except to
the extent (i) such disclosure is required by law, (ii) such information is
otherwise made public by Corporation (other than by Employee in violation
thereof), or (iii) such disclosure is made in the normal course of business and
is consistent with Corporation's interests.
Employee agrees that upon termination of his employment hereunder he will
immediately surrender and turn over to Corporation all books, records, forms,
data, electric logs, geological maps, scout cards, seismic tapes and all papers
and writings relating to the business of Corporation and other information which
reflects or reveals Corporation's confidential or trade secret information
protected by this Section, and all other property belonging to Corporation, it
being understood and agreed that the same are the sole property of Corporation
and that Employee will not make any copies thereof; provided, however, the
parties agree that Employee's personnel files and any logs, records, and maps
which were Employee's property prior to the Effective Date shall remain
Employee's property. For purposes of this Section 5, the term "Corporation"
shall include Corporation as herein defined and any of its subsidiaries,
affiliates or parent organizations.
5.2 Noncompetition Agreement. Except as provided in Section 2.1, for so
long as this Agreement is in effect and for a period of six (6) months after
termination of his employment, Employee will not, without Corporation's written
permission, directly or indirectly, own, manage, operate, control, be employed
by, participate in or be connected in any manner with the ownership, management,
operation, or control of any business which is in direct competition with
Corporation, specifically with respect to the geologic prospects or any planned
or completed acquisitions (of stock, equity or assets) in or through which
Corporation does explore, develop or produce oil and gas or has current plans to
explore, develop or produce oil and gas. Corporation shall within ten (10) days
of Employee's termination of employment with the Corporation provide Employee
with a complete list of any properties, prospects, acquisitions, data
acquisitions, corporate transactions or other financial or business arrangements
contemplated by the Corporation to which the preceding sentence applies.
Employee must approve in writing,
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and no such approval can be reasonably withheld, to the listing provided by the
Corporation. Any disputes which cannot be settled will be handled as provided in
Section 6.10 of this Agreement. For so long as this Agreement is in effect and
for a period of six (6) months after termination of his employment, Employee
shall refrain from contacting or encouraging any third party to contact any
individual who is employed by Corporation or its affiliates for the purpose of
recruiting or placing that individual with any other employer.
5.3 Injunctive Relief. Employee specifically acknowledges and agrees that
the remedy at law for any breach of the provisions of Sections 5.1 or 5.2 will
be inadequate and that Corporation shall be entitled to temporary and permanent
injunctive relief without the necessity of proving actual damage.
5.4 Reformation. In the event that the provisions of this Section 5
should ever be deemed to exceed the time or geographic limitations permitted by
applicable law, then such provision shall be deemed reformed to the maximum time
or geographic limitations permitted by applicable law.
6. GENERAL.
6.1 Indemnity and Directors' & Officers' Liability Insurance Coverage.
Corporation agrees to indemnify and defend Employee, at Corporation's sole
expense, in any matters arising from Employee's performance of his duties as an
employee, officer or director of Corporation or any of Corporation's
subsidiaries or affiliates to the fullest extent permitted by law. The
Corporation will take reasonable steps to obtain Directors' and Officers'
liability insurance prior to becoming subject to the reporting requirements of
the Securities Exchange Act of 1934.
6.2 Headings. Section headings are included solely for convenience and
should not be used in the interpretation of this Agreement.
6.3 Severability. In the event any one or more of the provisions
contained in the Agreement shall, for any reason, be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not effect any other provisions of this Agreement, and this Agreement
shall be construed in all respects as if such invalid or unenforceable
provisions were omitted.
6.4 Notices. Any notice, demand and all other communications required or
permitted to be given under this Agreement shall be in writing and shall have
been deemed duly given when delivered or (unless otherwise specified herein)
three (3) business days after mailed by United States registered mail, return
receipt requested, postage prepaid, to the address set forth on the signature
page hereof, or to such other address as any party may have furnished to the
other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
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6.5 Waiver of Breach; Expenses. The waiver by Employee or Corporation of
a breach of any provision of this Agreement shall not operate or be construed as
a waiver of any subsequent breach. In any action brought by any party hereto
pursuant to Section 6.10 of the Agreement, the prevailing party shall be
entitled to collect such party's reasonable attorney's fees, court costs and
expenses in such action.
6.6 Binding Effect; Assignment. The respective rights and obligations of
Corporation and Employee under the Agreement shall inure to the benefit of and
shall be binding upon Corporation and the respective successors and assigns of
Corporation. This Agreement shall not be assignable by Employee. As used
herein, the term "successors and assigns" shall include any corporation or
corporations which acquire all or substantially all of the assets and businesses
of Corporation whether by purchase, merger, consolidation or otherwise. The
parties hereto presently contemplate that Corporation will enter into certain
transactions resulting in a reorganization of Corporation and in connection
therewith this Agreement shall automatically be assigned to the parent of
Corporation and all references herein to Corporation shall thereafter be deemed
to be references to such parent entity.
6.7 Certain Additional Payments by Company. Notwithstanding anything to
the contrary in this Agreement, in the event that any payment or distribution by
Corporation to or for the benefit of Employee, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment") would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended, or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest or penalties, are herein collectively referred to as the "Excise
Tax"), Corporation shall pay to Employee an additional payment (a "Gross-up
Payment") in an amount such that after payment by employee of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Employee retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. Corporation and Employee shall make an initial determination as to
whether a Gross-Up Payment is required and the amount of any such Gross-Up
Payment. Employee shall notify Corporation in writing of any claim by the
Internal Revenue Service which, if successful, would require Corporation to make
a Gross-Up Payment (or a Gross-Up Payment in excess of that, if any, initially
determined by Corporation and Employee) within ten (10) days of the receipt of
such claim. Corporation shall notify Employee in writing at least ten days
prior to the due date of any response required with respect to such claim if it
plans to contest the claim. If Corporation decides to contest such claim,
Employee shall cooperate fully with Corporation in such action; provided,
however, Corporation shall bear and pay directly or indirectly all costs and
expenses (including additional interest and penalties) incurred in connection
with such action and shall indemnify and hold Employee harmless, on an after-tax
basis, for any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of Corporation's action. If, as a result
of Corporation's action with respect to a claim, Employee receives a refund of
any amount paid by Corporation with respect to such claim, Employee shall
promptly pay such refund to Corporation. If Corporation fails to timely notify
Employee whether it will contest such claim or Corporation determines not to
contest such claim, then Corporation shall immediately pay to Employee the
portion of such claim, if any, which it has not previously paid to Employee.
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6.8 Entire Agreement Counterparts. Except as provided in (i) the
benefits, plans, and programs, if any, referenced in Sections 3.4, 3.5, 3.7 and
3.8 hereof and (ii) any signed written agreements contemporaneously or hereafter
executed by Corporation and Employee, this Agreement contains the entire
agreement of the parties hereto, notwithstanding any oral representation of the
parties to the contrary. This Agreement supersedes as of the Effective Date all
agreements, oral or in writing, and other arrangements between the parties with
respect to all matters related to the subject matter hereof. This Agreement may
be executed in multiple counterparts, all of which shall constitute one
Agreement, but both parties must execute and deliver one signed counterpart
before this Agreement is effective.
6.9 Applicable Law. The execution, performance and enforcement of this
Agreement shall be governed by and construed in accordance with the internal
laws of the State of Texas without giving effect to its conflict of laws
provision.
6.10 Claims; Arbitration.
(a) All claims by Employee for compensation and benefits under this
Agreement shall be directed to and determined by the Board of Directors and
shall be in writing. Any denial by the Board of Directors of a claim for
benefits under this Agreement shall be delivered to Employee in writing and
shall set forth the specific reasons for the denial and specific provisions of
this Agreement relied upon. The Board of Directors shall afford a reasonable
opportunity to Employee for a review of a decision denying a claim and shall
further allow Employee to appeal to the Board of Directors a decision of the
Board of Directors within 60 days after notification by the Board of Directors
that Employee's claim has been denied.
(b) To the extent permitted by applicable law, any further dispute or
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration in Houston, Texas, in accordance with the rules of
the American Arbitration Association then in effect. The agreement set forth
herein to arbitrate shall be specifically enforceable under the prevailing
arbitration law.
(c) Notice of the demand for arbitration shall be filed in writing with the
other party to this Agreement and with the American Arbitration Association.
The demand for arbitration shall be made within a reasonable time after the
claim, dispute or other matter in question has arisen, and in no event shall it
be made after the date when institution of legal or equitable proceedings based
on such claim, dispute or other matter in question would be barred by the
applicable statute of limitations.
(d) The award rendered by the arbitrator shall be final and judgment may be
entered upon it in accordance with applicable law in any court having
jurisdiction thereof.
(e) Unless otherwise agreed in writing, Corporation shall continue to make
payments and provide benefits in accordance with this Agreement, and Employee
shall continue to perform his obligations hereunder during any arbitration
proceedings.
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6.11 Survival. All covenants, representations and warranties of the
parties hereto will survive the termination of this Agreement
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
"Corporation" XPLOR Energy, Inc.
By: /s/ Steven W. Nance
_____________________________
Steven W. Nance
President & CEO
Address:
10200 Grogans Mill Road, Suite 500
The Woodlands, Texas 77380
/s/ Philip V. Duggan
"Employee" _________________________________
Philip V. Duggan
Address:
8329 Winningham
Houston, Texas 77055
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EXHIBIT 10.22
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into this 24th day
of September, 1997, to be effective on the date set forth below, by and between
XPLOR Energy, Inc., a Delaware corporation ("Corporation"), and Craig S. Davis
("Employee").
WITNESSETH:
WHEREAS, Corporation desires to employ Employee, and Employee desires to
accept such employment;
WHEREAS, Corporation and Employee desire to agree to the specific terms of
such employment set forth in this Agreement.
NOW, THEREFORE, in consideration of the recitations stated above and the
mutual terms, covenants and conditions contained herein, Corporation and
Employee agree as follows:
1. EMPLOYMENT
1.1 Employment. Corporation hereby employs Employee and Employee
hereby accepts such employment, as Vice President, Geophysics, subject to the
supervision and direction of Corporation's President, other Officers of the
Corporation as applicable and its Board of Directors.
1.2 Term of Employment. The term of employment provided for in this
Agreement shall commence on September 24, 1997("Effective Date"), shall
remain in full force and effect for a period of three years thereafter and shall
terminate on the third anniversary of the Effective Date, unless terminated
sooner as provided in Section 4 hereof. Beginning on the second anniversary of
the Effective Date, and on the last day of each succeeding month following the
second anniversary ("Monthly Renewal Date"), the term of Employee's employment
shall be automatically extended on the terms and condition then in effect for
one (1) additional month such that there shall always be at least one (1) year
remaining on the term of this agreement at all times, unless, at least fifteen
(15) days prior to the second anniversary of the Effective Date or any such
Monthly Renewal Date, either party shall have delivered to the other, written
notice that the term hereof shall not be extended.
2. DUTIES
2.1 Full-time Employment. Unless otherwise authorized by
Corporation, Employee shall devote substantially all of his business time,
attention and skills to the performance of his duties as Vice President,
Geophysics of Corporation. During the term of this Agreement, Employee shall
not render services for any other person or entity than Corporation unless
otherwise authorized by Corporation; provided, however, that upon the approval
of Corporation, Employee may serve as a director of other corporations or
entities that engage in other activities to the extent that they do not inhibit
the performance of Employee's duties
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hereunder, or conflict with the business of the Corporation, its subsidiaries,
or affiliates. The voluntary performance by Employee of any duties assigned to
him which are not of the type provided for herein shall not constitute a waiver
of his rights hereunder or an abrogation, abandonment or termination by him of
this Agreement.
Employee shall not be restricted from engaging in a business or from
investing his assets in a manner which is non-competitive with Corporation and
its affiliates or subsidiaries and which will not require any significant
services on his part in the operation of the affairs of the companies in which
such investments are made or from engaging in charitable or voluntary activities
to the extent that the total amount of time expended on such business,
investing, charitable or voluntary activities is reasonable, is consistent with
Employee's duties hereunder, and does not conflict with Employee's ability or
time necessary to perform his duties hereunder.
2.2 Employer-Employee Relationship. The relationship between
Corporation and Employee is that of an employer and employee. Corporation shall
have the right to instruct, control, review and, subject to the terms of this
Agreement, modify the nature as requested by Corporation and scope of services,
and manner in which Employee performs such services for Corporation.
3. COMPENSATION AND RELATED MATTERS. Subject to the terms and conditions
hereof, Employee shall receive the following salary and other benefits as full
consideration for the services to be rendered hereunder.
3.1 Regular Salary. Until such time as the Corporation becomes
subject to the reporting requirements of the Securities Exchange Act of 1934,
Employee shall be paid a salary for all services rendered under this Agreement
at the annual rate of $165,000 per year, payable in accordance with the general
payroll practices of the Corporation in effect from time to time. In the event
Corporation becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, Employee's annual salary shall be changed to $155,000 per
year. In either case, the Employee's salary shall be reviewed annually, and may
be increased, but not decreased, from the salary then in effect or the salary
prescribed by this Section 3.1, in Corporation's discretion, as determined by
the Compensation Committee of the Board of Directors.
3.2 Expenses. The Employee shall be reimbursed for all reasonable
and necessary business expenses incurred in the performance of service
hereunder, and accounted for in accordance with the policies and procedures
established from time to time by Corporation. In addition, Employee shall
receive an automobile allowance of $500 per month payable in accordance with the
general payroll practices of the Corporation in effect from time to time.
3.3 Vacation. Employee shall be entitled to four (4) weeks paid
vacation during each full 12-month period during the term hereof; provided,
however that in taking such vacation Employee shall give and exercise reasonable
consideration to and for the needs and interests of Corporation. Employee shall
also be entitled to such other vacation time and paid holidays, if any, as shall
from time to time be determined by Corporation.
-2-
<PAGE>
3.4 Employee Benefit Plans. Employee shall be included in all of the
employee benefit plans existing now or in the future providing pension, thrift,
profit sharing, bonus or similar benefits as they are provided generally to
officers of the Corporation, subject to the terms and conditions of all such
plans. In addition, Employee shall be eligible to participate in all executive
compensation programs or other perquisites available to other officers of
Corporation, subject to the terms and conditions of such programs.
3.5 Insurance and Welfare Benefit Plans. Corporation shall cover
Employee under its group dental, medical and hospitalization plans, shall
provide Employee term life insurance coverage, and will cover Employee under
other insurance and employee welfare benefit plans maintained for its officers
generally. Corporation shall also use its best efforts to evaluate and provide
disability insurance coverage and life insurance coverage which are payable to
the beneficiary of employee's choice.
3.6 Place of Performance. The headquarters for the performance of
Employee's duties shall be located in The Woodlands, Texas, and/or other office
locations of the Corporation within the metropolitan Houston area, but from time
to time Employee shall be required to travel to other locations in the proper
conduct of his responsibilities under this Agreement. As it is Corporation's
intention to expand the business of Corporation on a national scale, Corporation
may require Employee to spend a reasonable amount of time traveling, as his
duties and the business of Corporation and its affiliates or subsidiaries may
require.
3.7 Stock Option Awards, Other Awards. The Board of Directors or its
Compensation Committee, as the case may be, shall consider Employee for the
grant of options to purchase common stock or other awards, as Employee's
performance dictates, no less frequent than annually during the term of this
Agreement under any plan of the Corporation which provides for such stock
options or other awards. Unless modified by the Board of the Directors any
awards granted to Employee pursuant to any other such plans adopted by the
Corporation (the "Incentive Plans") shall be immediately vested in full and
exercisable upon the occurrence of any of the following: (i) any Change of
Control (as defined herein); (ii) termination of Employee by the Corporation
without just cause (as defined herein); (iii) any substantial or material
diminishment in Employee's reporting responsibilities as designated in this
Agreement; (iv) Employee's death; or (v) at the termination of this agreement
due to Employee's disability as defined in Section 4.2 of this agreement. Any
agreement for an award under the Incentive Plans granted to Employee shall
reflect the provisions of this Section 3.7.
3.8 Incentive Bonus. Beginning in 1998, Employee shall be eligible
to receive a bonus of up to 40% of annual base salary as an annual incentive
bonus subject to the achievement of certain performance goals established by the
Board of Directors as discussed below. The bonus for 1998 shall be paid no later
than the end of January, 1999. The bonus shall be based on attainment of
performance goals to be established no later than the end of the first quarter
of each calendar year, subject to approval of those performance goals by the
Board of Directors, which will provide for at least the following: (i)
financial targets; (ii) operating targets, and (iii) exploration success
targets.
-3-
<PAGE>
4. TERMINATION OF AGREEMENT. This Agreement will continue in effect
until the expiration of the term stated in Section 1 hereof unless sooner
terminated as set forth below. If such termination occurs, Employee shall
continue to be subject to Section 5 hereof.
4.1 Death of Employee. If Employee shall terminate employment due to
death during the term of this Agreement, this Agreement shall terminate and his
spouse, if she is then surviving or if not, his legal representative, shall be
entitled to receive in one lump sum a pro rata share of incentive compensation
under Section 3.8 based on the number of days in the year that elapsed prior to
death and as if all performance goals had been met.
4.2 Illness or Other Incapacity. If during the term of this
Agreement, Employee shall fail to perform his duties hereunder as a result of
illness or other incapacity and such illness or incapacity shall continue for a
period of more than three (3) months, Corporation shall have the right to
terminate this Agreement and the employment hereunder as of date to be specified
in a notice of termination, such date to be not less than thirty (30) days after
the mailing by certified mail of such notice. If Employee's illness or
incapacity shall have ended, and the Employee shall have assumed his duties
hereunder, prior to the date specified in the notice of termination, he shall be
entitled to resume his employment hereunder as if such notice had not been
given. If such termination occurs, Employee shall continue to be bound by the
covenants contained in Section 5 hereof, but in all other regards, this
Agreement shall terminate as of such termination date, and Corporation shall pay
to Employee or his legal representative (i) compensation provided for in Section
3.1 of this Agreement for the remaining term of this Agreement, but in no event
less than one year, if the Corporation has not provided disability insurance
pursuant to Section 3.5 (ii) a pro rata share of incentive compensation under
Section 3.8 based on the number of days in the year that elapsed prior to such
termination and as if all performance goals had been met, and (iii) such other
benefits, if any, as may be determined by Corporation.
4.3 Termination by Corporation for Cause. Corporation may terminate
this Agreement and the employment of Employee by service of written notice of
termination to Employee specifying the circumstances and an effective date for
such termination upon the earlier to occur of any of the following events: (i)
Employee willfully misappropriates the property of Corporation or commits any
other act of dishonesty which results in injury to Corporation or reasonably
could result in injury to Corporation; (ii) Employee engages in personal
misconduct which results in material injury to Corporation, or could reasonably
result in material injury to Corporation unless Employee in good faith
reasonably believed that his actions were in the best interest of Corporation,
(iii) Employee is convicted of a felony; or (iv) the Board of Directors had
determined in good faith that Employee has failed to diligently perform his
duties hereunder as specified by Corporation and in a manner consistent with
prudent business practice and such failure continues after Employee has been
given at least ten (10) days written notice of the failure. In the event this
Agreement is terminated for cause set forth in paragraphs (i) through (iv) above
by the Corporation prior to the conclusion of the term of this Agreement, the
Corporation shall have no further obligation hereunder, except for its payment
of the compensation provided for in Section 3.1 of this Agreement for a period
of three (3) months
-4-
<PAGE>
following such termination, which compensation shall be considered a debt of the
Corporation and shall not be discharged by reason of termination of Employee's
employment.
4.4 Termination by Corporation for Other than Cause. In the event
Corporation terminates Employee's employment for any reason other than under
Section 4.3, Employee shall be entitled to a payment from Corporation in an
amount equal to the Termination Payment (as hereinafter defined). For purposes
of this Agreement, the term "Termination Payment" shall mean an amount equal to
the sum of (i) all base salary that would have been paid to Employee pursuant to
Section 3.1 during the balance of the term of employment provided for in Section
1.2 (but in no event less than twelve (12) months of such base salary) (the
"Salary Portion"), and (ii) subject to the execution by Employee of a waiver and
release of all claims against Corporation, all incentive compensation that would
have been paid to Employee pursuant to Section 3.8 as if all performance goals
had been met during the balance of the term provided for in Section 1.2 (but in
no event less than one such annual incentive bonus) (the "Bonus Portion"). The
Termination Payment shall be paid (i) with respect to the Bonus Portion, in one
(1) lump sum cash payment within five (5) days after Employee has signed a
release and any applicable revocation period has expired and (ii) with respect
to the Salary Portion, in one (1) lump sum cash payment within five (5) days
after such termination of employment.
4.5 Termination Following Change of Control. In the event that a
"Change of Control" (as hereinafter defined) occurs and, within one (1) year
following such Change of Control, Employee's employment is terminated by
Corporation for a reason other than as described in Section 4.3, or he
voluntarily terminates employment due to a substantial diminishment in his job
responsibilities or duties or a material breach by Corporation of any material
provision of this Agreement or any other agreement with Employee which remains
uncorrected for ten (10) days following written notice of such diminishment or
breach by Employee to Corporation, then, in lieu of any payments pursuant to
Sections 4.4 or 4.6 hereof, Employee shall be entitled to a Termination Payment
under terms and conditions applicable pursuant to Section 4.4, provided that the
reference therein to 12 months shall be deemed to be a reference to 24 months
and the reference to one such annual incentive bonus shall be deemed to be a
reference to two such annual incentive bonuses. A "Change of Control" shall
mean (i) any sale by Corporation of substantially all of its assets or, (ii) the
removal or failure to re-elect R.A. Krenzke as a member of the Board of
Directors for any reason other than resignation, voluntary removal, termination
by Corporation for cause, disability or death, provided the South Coast owners
have the right to a Board seat pursuant to the Acquisition Agreement and Plan of
Organization dated August 19, 1997 or (iii) the acquisition by any "person,"
including a "group" as determined in accordance with Section 13(d)(3) of the
Securities Exchange Act of 1934, of beneficial ownership, directly or
indirectly, of securities of Corporation representing 50% or more of the
combined voting power of Corporation's then outstanding securities; provided,
however, that no Change of Control shall be deemed to occur if beneficial
ownership in Corporation's then outstanding securities is acquired pursuant to
any reorganization of Corporation 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 shareholders of the
Corporation.
-5-
<PAGE>
4.6 Termination by Employee for Good Reason. If Employee's
employment hereunder shall be terminated by Employee due to a substantial
diminishment in Employee's job responsibilities or duties or a material breach
by Corporation of any material provision of this Agreement or any other
agreement with Employee which remains uncorrected for ten (10) days following
written notice of such diminishment or breach by Employee to Corporation, then
Employee shall be entitled to a Termination Payment under terms and conditions
applicable pursuant to Section 4.4.
4.7 Voluntary Termination by Employee. Notwithstanding any provision
herein to the contrary, Employee shall have the right to terminate his
employment under this Agreement at any time and for any reason whatsoever. If
Employee's employment hereunder shall be terminated by Employee for any reason
whatsoever other than the reasons specified in Sections 4.1, 4.2, 4.5 or 4.6,
then, upon such termination, all compensation and all benefits to Employee
hereunder shall terminate contemporaneously with the termination of such
employment. However, in the event Corporation has not become subject to the
reporting requirements of the Securities Exchange Act of 1934 within one (1)
year of the effective date of this Agreement and Employee has remained an
employee of the Corporation for at least one (1) year prior to such termination,
Employee shall be entitled to receive an amount equal to twelve (12) months of
his annual base salary then in effect, which shall be paid in one lump sum
within five (5) days after such time of termination.
4.8 No Duty to Mitigate Losses. Employee shall have no duty to find
new employment following the termination of his employment under circumstances
which required Corporation to pay any amount to Employee pursuant to this
Section 4. Any salary or remuneration received by Employee from a third party
for the providing of personal services (whether by employment or by functioning
as an independent contractor) following the termination of his employment under
circumstances pursuant to which Sections 4.2, 4.4, 4.5, 4.6 or 6.7 apply shall
not reduce Corporation's obligation to make a payment to Employee (or the amount
of such payment) pursuant to the terms of any such Section.
4.9 Liquidated Damages. In light of the difficulties in estimating
the damages for an early termination of this Agreement, Corporation and Employee
hereby agree that the payments, if any, to be received by Employee pursuant to
Sections 4.1, 4.2, 4.4, 4.5, 4.6 or 6.7 shall be received by Employee as
liquidated damages.
4.10 Incentive and Deferred Compensation. This Agreement governs the
rights and obligations of Employee and Corporation with respect to Employee's
base salary, incentive compensation pursuant to Section 3.8 and certain
perquisites of employment. Employee's rights and obligations both during the
term of his employment and thereafter with respect to stock options, restricted
stock, incentive and deferred compensation (other than incentive compensation
payable pursuant to Section 3.8), life insurance policies insuring the life of
Employee, and other benefits under the plans and programs maintained by
Corporation shall be governed by the separate agreements, plans and other
documents and instruments governing such matters.
-6-
<PAGE>
5. AGREEMENT RESTRICTING TRADE SECRETS AND COMPETITION.
5.1 Confidential Information and Trade Secrets. Employee
acknowledges that he will have access to and that there will be disclosed to him
during the course of this employment, information of a proprietary nature owned
by Corporation, which is of a confidential nature and all of which have great
value to Corporation and which is a substantial basis and foundation upon which
Corporation's business is predicated. Employee acknowledges that except for his
employment and the duties assigned to him which he will be fulfilling, that he
would not otherwise have access to the foregoing information. Employee agrees
that any and all confidential knowledge or information which may be obtained by
him in the course of his employment will be held inviolate by him and that he
will conceal the same from any and all other persons, including, but not limited
to, competitors of Corporation, and that he will not impart any such knowledge
acquired by him as an employee of Corporation to anyone whomsoever either during
this employment or after his employment by Corporation has terminated, except to
the extent (i) such disclosure is required by law, (ii) such information is
otherwise made public by Corporation (other than by Employee in violation
thereof), or (iii) such disclosure is made in the normal course of business and
is consistent with Corporation's interests.
Employee agrees that upon termination of his employment hereunder he will
immediately surrender and turn over to Corporation all books, records, forms,
data, electric logs, geological maps, scout cards, seismic tapes and all papers
and writings relating to the business of Corporation and other information which
reflects or reveals Corporation's confidential or trade secret information
protected by this Section, and all other property belonging to Corporation, it
being understood and agreed that the same are the sole property of Corporation
and that Employee will not make any copies thereof; provided, however, the
parties agree that Employee's personnel files and any logs, records, and maps
which were Employee's property prior to the Effective Date shall remain
Employee's property. For purposes of this Section 5, the term "Corporation"
shall include Corporation as herein defined and any of its subsidiaries,
affiliates or parent organizations.
5.2 Noncompetition Agreement. Except as provided in Section 2.1, for
so long as this Agreement is in effect and for a period of six (6) months after
termination of his employment, Employee will not, without Corporation's written
permission, directly or indirectly, own, manage, operate, control, be employed
by, participate in or be connected in any manner with the ownership, management,
operation, or control of any business which is in direct competition with
Corporation, specifically with respect to the geologic prospects or any planned
or completed acquisitions (of stock, equity or assets) in or through which
Corporation does explore, develop or produce oil and gas or has current plans to
explore, develop or produce oil and gas. Corporation shall within ten (10) days
of Employee's termination of employment with the Corporation provide Employee
with a complete list of any properties, prospects, acquisitions, data
acquisitions, corporate transactions or other financial or business arrangements
contemplated by the Corporation to which the preceding sentence applies.
Employee must approve in writing, and no such approval can be reasonably
withheld, to the listing provided by the Corporation. Any disputes which cannot
be settled will be handled as provided in Section 6.10 of this Agreement. For so
long as this Agreement is in effect and for a period of six (6) months after
-7-
<PAGE>
termination of his employment, Employee shall refrain from contacting or
encouraging any third party to contact any individual who is employed by
Corporation or its affiliates for the purpose of recruiting or placing that
individual with any other employer.
5.3 Injunctive Relief. Employee specifically acknowledges and agrees
that the remedy at law for any breach of the provisions of Sections 5.1 or 5.2
will be inadequate and that Corporation shall be entitled to temporary and
permanent injunctive relief without the necessity of proving actual damage.
5.4 Reformation. In the event that the provisions of this Section 5
should ever be deemed to exceed the time or geographic limitations permitted by
applicable law, then such provision shall be deemed reformed to the maximum time
or geographic limitations permitted by applicable law.
6. GENERAL.
6.1 Indemnity and Directors' & Officers' Liability Insurance
Coverage. Corporation agrees to indemnify and defend Employee, at Corporation's
sole expense, in any matters arising from Employee's performance of his duties
as an employee, officer or director of Corporation or any of Corporation's
subsidiaries or affiliates to the fullest extent permitted by law. The
Corporation will take reasonable steps to obtain Directors' and Officers'
liability insurance prior to becoming subject to the reporting requirements of
the Securities Exchange Act of 1934.
6.2 Headings. Section headings are included solely for convenience
and should not be used in the interpretation of this Agreement.
6.3 Severability. In the event any one or more of the provisions
contained in the Agreement shall, for any reason, be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not effect any other provisions of this Agreement, and this Agreement
shall be construed in all respects as if such invalid or unenforceable
provisions were omitted.
6.4 Notices. Any notice, demand and all other communications
required or permitted to be given under this Agreement shall be in writing and
shall have been deemed duly given when delivered or (unless otherwise specified
herein) three (3) business days after mailed by United States registered mail,
return receipt requested, postage prepaid, to the address set forth on the
signature page hereof, or to such other address as any party may have furnished
to the other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
6.5 Waiver of Breach; Expenses. The waiver by Employee or
Corporation of a breach of any provision of this Agreement shall not operate or
be construed as a waiver of any subsequent breach. In any action brought by any
party hereto pursuant to Section 6.10 of the
-8-
<PAGE>
Agreement, the prevailing party shall be entitled to collect such party's
reasonable attorney's fees, court costs and expenses in such action.
6.6 Binding Effect; Assignment. The respective rights and
obligations of Corporation and Employee under the Agreement shall inure to the
benefit of and shall be binding upon Corporation and the respective successors
and assigns of Corporation. This Agreement shall not be assignable by Employee.
As used herein, the term "successors and assigns" shall include any corporation
or corporations which acquire all or substantially all of the assets and
businesses of Corporation whether by purchase, merger, consolidation or
otherwise. The parties hereto presently contemplate that Corporation will enter
into certain transactions resulting in a reorganization of Corporation and in
connection therewith this Agreement shall automatically be assigned to the
parent of Corporation and all references herein to Corporation shall thereafter
be deemed to be references to such parent entity.
6.7 Certain Additional Payments by Company. Notwithstanding anything
to the contrary in this Agreement, in the event that any payment or distribution
by Corporation to or for the benefit of Employee, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment") would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended, or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest or penalties, are herein collectively referred to as the "Excise
Tax"), Corporation shall pay to Employee an additional payment (a "Gross-up
Payment") in an amount such that after payment by employee of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Employee retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. Corporation and Employee shall make an initial determination as to
whether a Gross-Up Payment is required and the amount of any such Gross-Up
Payment. Employee shall notify Corporation in writing of any claim by the
Internal Revenue Service which, if successful, would require Corporation to make
a Gross-Up Payment (or a Gross-Up Payment in excess of that, if any, initially
determined by Corporation and Employee) within ten (10) days of the receipt of
such claim. Corporation shall notify Employee in writing at least ten days prior
to the due date of any response required with respect to such claim if it plans
to contest the claim. If Corporation decides to contest such claim, Employee
shall cooperate fully with Corporation in such action; provided, however,
Corporation shall bear and pay directly or indirectly all costs and expenses
(including additional interest and penalties) incurred in connection with such
action and shall indemnify and hold Employee harmless, on an after-tax basis,
for any Excise Tax or income tax, including interest and penalties with respect
thereto, imposed as a result of Corporation's action. If, as a result of
Corporation's action with respect to a claim, Employee receives a refund of any
amount paid by Corporation with respect to such claim, Employee shall promptly
pay such refund to Corporation. If Corporation fails to timely notify Employee
whether it will contest such claim or Corporation determines not to contest such
claim, then Corporation shall immediately pay to Employee the portion of such
claim, if any, which it has not previously paid to Employee.
6.8 Entire Agreement Counterparts. Except as provided in (i) the
benefits, plans, and programs, if any, referenced in Sections 3.4, 3.5, 3.7 and
3.8 hereof and (ii) any
-9-
<PAGE>
signed written agreements contemporaneously or hereafter executed by Corporation
and Employee, this Agreement contains the entire agreement of the parties
hereto, notwithstanding any oral representation of the parties to the contrary.
This Agreement supersedes as of the Effective Date all agreements, oral or in
writing, and other arrangements between the parties with respect to all matters
related to the subject matter hereof. This Agreement may be executed in multiple
counterparts, all of which shall constitute one Agreement, but both parties must
execute and deliver one signed counterpart before this Agreement is effective.
6.9 Applicable Law. The execution, performance and enforcement of
this Agreement shall be governed by and construed in accordance with the
internal laws of the State of Texas without giving effect to its conflict of
laws provision.
6.10 Claims; Arbitration.
(a) All claims by Employee for compensation and benefits under this
Agreement shall be directed to and determined by the Board of Directors and
shall be in writing. Any denial by the Board of Directors of a claim for
benefits under this Agreement shall be delivered to Employee in writing and
shall set forth the specific reasons for the denial and specific provisions of
this Agreement relied upon. The Board of Directors shall afford a reasonable
opportunity to Employee for a review of a decision denying a claim and shall
further allow Employee to appeal to the Board of Directors a decision of the
Board of Directors within 60 days after notification by the Board of Directors
that Employee's claim has been denied.
(b) To the extent permitted by applicable law, any further dispute or
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration in Houston, Texas, in accordance with the rules of
the American Arbitration Association then in effect. The agreement set forth
herein to arbitrate shall be specifically enforceable under the prevailing
arbitration law.
(c) Notice of the demand for arbitration shall be filed in writing
with the other party to this Agreement and with the American Arbitration
Association. The demand for arbitration shall be made within a reasonable time
after the claim, dispute or other matter in question has arisen, and in no event
shall it be made after the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter in question would be
barred by the applicable statute of limitations.
(d) The award rendered by the arbitrator shall be final and judgment
may be entered upon it in accordance with applicable law in any court having
jurisdiction thereof.
(e) Unless otherwise agreed in writing, Corporation shall continue to
make payments and provide benefits in accordance with this Agreement, and
Employee shall continue to perform his obligations hereunder during any
arbitration proceedings.
-10-
<PAGE>
6.11 Survival. All covenants, representations and warranties of the
parties hereto will survive the termination of this Agreement
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
"Corporation" XPLOR Energy, Inc.
By: /s/ Steven W. Nance
_____________________________
Steven W. Nance
President & CEO
Address:
10200 Grogans Mill Road, Suite 500
The Woodlands, Texas 77380
/s/ Craig S. Davis
"Employee" ______________________________
Craig S. Davis
Address:
426 Wycliffe
Houston, Texas 77079
-11-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF XPLOR ENERGY, INC.
<TABLE>
<CAPTION>
----------------------
STATE OF INCORPORATION
NAME OR ORGANIZATION
- ---- ----------------------
<S> <C>
Araxas Energy Corporation Oklahoma
South Coast Exploration Company Texas
Interactive Exploration Solutions, Inc. (doing business
as "INEXS") Texas
SOCO Exploration, L.P. Texas
Araxas Exploration, Inc. Oklahoma
Araxas SPV-I, Inc. Oklahoma
</TABLE>
<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 Araxas Energy Corporation 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
October 13, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated October 2, 1997, relating to the
statements of revenues and direct operating expenses of Main Pass 35, XPLOR
Energy, Inc., The Woodlands, Texas, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Grand Rapids, Michigan
October 13, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the use of our report dated October 13, 1997, of the
estimates of net proved oil and natural gas reserves of XPLOR Energy, Inc. and
their present values, as of September 30, 1997, in this Form S-1 Registration
Statement and the prospectus incorporated therein, and all references to our
firm therein.
NETHERLAND, SEWELL & ASSOCIATES,
INC.
By:/s/ Danny D. Simmons
Danny D. Simmons
Senior Vice President
Houston, Texas
October 13, 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 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 917,619 579,386
<SECURITIES> 2,624,119 0
<RECEIVABLES> 3,213,284 3,408,526
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,784,538 4,203,372
<PP&E> 26,214,017 30,747,906
<DEPRECIATION> 2,524,542 3,815,028
<TOTAL-ASSETS> 32,831,932 33,630,624
<CURRENT-LIABILITIES> 6,178,605 6,932,899
<BONDS> 20,845,893 22,285,770
0 0
0 0
<COMMON> 1,186 1,186
<OTHER-SE> 5,806,248 4,410,769
<TOTAL-LIABILITY-AND-EQUITY> 32,831,932 33,630,624
<SALES> 6,043,259 4,449,618
<TOTAL-REVENUES> 7,787,923 6,030,425
<CGS> 2,169,279 1,549,575
<TOTAL-COSTS> 7,578,325 5,528,303
<OTHER-EXPENSES> 2,709,417 1,897,601
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,499,819) (1,395,479)
<INCOME-TAX> (35,957) 0
<INCOME-CONTINUING> (2,463,862) (1,395,479)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,463,862) (1,395,479)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (23.05) (11.76)
</TABLE>
