<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1998
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
MICHAEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 1311 76-0510239
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or organization) Classification Code Number) Number)
13101 NORTHWEST FREEWAY
SUITE 320
HOUSTON, TEXAS 77040
(713) 895-0909
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
MR. GLENN D. HART
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
13101 NORTHWEST FREEWAY, SUITE 320
HOUSTON, TEXAS 77040
(713) 895-0909
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
----------------------
Copies to:
MARC H. FOLLADORI
HAYNES AND BOONE, L.L.P.
1000 LOUISIANA ST., SUITE 4300
HOUSTON, TEXAS 77002
----------------------
Approximate date of commencement of proposed sale of
the securities to the public: As soon as practicable
after the Registration Statement becomes effective
----------------------
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE(1) PRICE(1) REGISTRATION FEE(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11 1/2% Senior Notes due 2005... $135,000,000 100% $135,000,000 $39,825
============================================================================================================================
</TABLE>
(1) The registration fee has been computed pursuant to Rule 457(f)(2) under the
Securities Act of 1933, as amended, based on the stated principal amount of
each Old Note which may be received by the Registrant in the exchange
transaction in which the New Notes will be offered.
----------------------
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 8, 1998
PROSPECTUS
OFFER TO EXCHANGE
11 1/2% SENIOR NOTES DUE 2005, SERIES B
FOR ALL OUTSTANDING
11 1/2% SENIOR NOTES DUE 2005, SERIES A
OF
MICHAEL PETROLEUM CORPORATION
----------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
______, __________, 1998, UNLESS EXTENDED.
Michael Petroleum Corporation (the "Company") is offering upon the terms
and subject to the conditions set forth in this Prospectus and the accompanying
letter of transmittal (the "Letter of Transmittal") (which together constitute
the "Exchange Offer") to exchange $1,000 principal amount of its new 11 1/2%
Senior Notes due 2005, Series B (the "New Notes") for each $1,000 principal
amount of its outstanding 11 1/2% Senior Notes due 2005, Series A (the "Old
Notes") in the aggregate principal amount of $135,000,000. The form and terms
of the New Notes are identical to the form and terms of the Old Notes, except
that the Old Notes were offered and sold in reliance upon certain exemptions
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), while the offering and sale of the New Notes in exchange for the Old
Notes has been registered under the Securities Act, with the result that the
New Notes will not bear any legends restricting their transfer. The New Notes
will evidence the same debt as the Old Notes and will be issued pursuant to,
and entitled to the benefits of, the Indenture (as defined) governing the Old
Notes. The Exchange Offer is being made in order to satisfy certain
contractual obligations of the Company. See "The Exchange Offer" and
"Description of Notes." The New Notes and the Old Notes are sometimes
collectively referred to herein as the "Notes."
The New Notes will mature on April 1, 2005. The Notes will be redeemable
at the option of the Company, in whole or in part, at any time on or after
April 1, 2003, at the redemption prices set forth herein, plus accrued and
unpaid interest and Liquidated Damages (as defined), if any, to the redemption
date. The Company may also redeem at its option at any time prior to April 1,
2001, up to 30% of the aggregate principal amount of the Notes originally
issued at a redemption price of 111.5% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
redemption, with the proceeds of one or more Equity Offerings (as defined),
provided that at least 65% of the aggregate principal amount of the Notes
originally issued remains outstanding following each such redemption and each
such redemption occurs within 90 days after the date of the closing of each
such Equity Offering. Upon a Change of Control (as defined), the Company will
be required to offer to purchase all outstanding Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase. However, there can be no assurance that the
Company would have or be able to acquire sufficient funds to repurchase the
Notes in such an event. See "Description of Notes." The Notes will be
transferable, subject to compliance with applicable federal and state
securities laws.
The New Notes will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with all existing and future senior
indebtedness and other senior obligations of the Company, and senior in right
of payment to all future subordinated indebtedness of the Company. Borrowings
under the Credit Facility (as defined) will be secured by substantially all of
the oil and natural gas properties of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financing Arrangements." The maximum amount of borrowings under the Credit
Facility will be limited by the terms of the Notes. At December 31, 1997, after
giving pro forma effect to the Transactions (as defined) and to the sale of the
Old Notes and the application of the proceeds therefrom, the Company would have
had no outstanding senior indebtedness in addition to the Notes.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where the Old Notes were acquired by that broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired as
a result of market-making activities or other trading activities. See "The
Exchange Offer" and "Plan of Distribution."
i
<PAGE> 3
The Company will accept for exchange any and all validly tendered Old Notes
on or before 5:00 p.m., New York City time, on ______, __________, 1998, unless
extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any
time before 5:00 p.m., New York City time, on the Expiration Date, but after
that time are irrevocable. State Street Bank and Trust Company will be acting
as Exchange Agent in connection with the Exchange Offer. The Exchange Offer is
not conditioned on any minimum principal amount of Old Notes being tendered for
exchange, but is otherwise subject to certain customary conditions.
The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid, from
the date of issuance of the Old Notes at a rate per annum of 11 1/2%. Interest
on the New Notes will be payable semiannually on October 1 and April 1 of each
year commencing on the first such date following the date of issuance of the
New Notes. Old Notes that are accepted for exchange will cease to accrue
interest on and after the date on which interest on the New Notes begins to
accrue. Accrued and unpaid interest on the Old Notes that are tendered in
exchange for the New Notes will be payable on the first October 1 or April 1
following the date of issuance of the New Notes.
The Old Notes were issued and sold by the Company on April 2, 1998, to
Bear, Stearns & Co. Inc., Jefferies & Company, Inc. and Raymond James &
Associates, Inc. (the "Initial Purchasers") in transactions not registered
under the Securities Act in reliance on the exemption provided in Section 4(2)
of the Securities Act. The Initial Purchasers subsequently placed the Old
Notes with qualified institutional buyers in reliance on Rule 144A under the
Securities Act or outside the United States within the meaning of Regulation S
under the Securities Act, the purchasers of which agreed to comply with certain
transfer and other restrictions. Accordingly, the Old Notes may not be
reoffered, resold or otherwise transferred in the United States unless so
registered or unless an applicable exemption from the registration requirements
of the Securities Act is available. The New Notes are being offered hereunder
in order to satisfy the obligations of the Company under a Registration Rights
Agreement entered into between the Company and the Initial Purchasers (the
"Registration Rights Agreement"). See "The Exchange Offer."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission" or the "SEC") set forth in no-action letters
issued to third parties, the Company believes that New Notes issued pursuant to
this Exchange Offer may be offered for resale, resold and otherwise transferred
by a holder who is not an affiliate of the Company without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the New Notes in its ordinary course of business
and is not participating in and has no arrangement or understanding with any
person to participate in the distribution (within the meaning of the Securities
Act) of the New Notes. Persons wishing to exchange Old Notes in the Exchange
Offer must represent to the Company that these conditions have been met.
The Company does not intend to list the New Notes on any national
securities exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. The Initial
Purchasers have advised the Company that they intend to make a market in the
New Notes; however, they are not obligated to do so and any market-making may
be discontinued at any time without notice. Accordingly, no assurance can be
given that an active public or other market will develop for the New Notes or
as to the liquidity of or the trading market for the New Notes.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding. To the extent that any Old Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. Following consummation of the Exchange Offer, the holders
of Old Notes will continue to be subject to the existing restrictions on
transfer thereof.
The Company expects that the New Notes issued pursuant to this Exchange
Offer will be issued in the form of a Global New Note (as defined), which will
be deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global New Note representing the New Notes will be shown on,
and transfers thereof to qualified institutional buyers will be effected
through, records maintained by DTC and its participants. After the initial
issuance of the Global New Note, New Notes in certificated form will be issued
in exchange for the Global New Note on the terms set forth in the Indenture.
See "Description of Notes--Book Entry; Delivery and Form."
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE NEW NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 11.
----------------------
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.
----------------------
THE DATE OF THIS PROSPECTUS IS _____, 1998.
ii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CAUTIONARY STATEMENTS REGARDING
FORWARD-LOOKING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
THE EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SELECTED HISTORICAL AND PRO FORMA
FINANCIAL, OPERATING AND OIL AND
NATURAL GAS RESERVE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
DESCRIPTION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
CERTAIN UNITED STATES FEDERAL INCOME
TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
TRANSFER RESTRICTIONS ON OLD NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
GLOSSARY OF CERTAIN INDUSTRY TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
Until ____ __, 1998 (90 days after the date of this Prospectus), all
dealers offering transactions in the New Notes, whether or not participating in
the Exchange Offer, may be required to deliver a prospectus in connection
therewith. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
on as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the New Notes offered hereby.
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
the Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
THIS PROSPECTUS (THIS "PROSPECTUS") DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, ANY NOTE OFFERED HEREBY BY ANY PERSON IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY OR ITS SUBSIDIARIES OR THAT THE INFORMATION SET
FORTH HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER THE RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY
SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OF QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
iii
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information, financial statements, including
notes thereto, and other data appearing elsewhere in this Prospectus. Unless
the context indicates otherwise, references to "Michael" or the "Company" are
to Michael Petroleum Corporation. References to "MHI" are to Michael Holdings,
Inc., which directly owns all of the outstanding capital stock of the Company.
References to the "Notes" refer to both the Old Notes and the New Notes.
Unless otherwise indicated, all financial and quantitative information provided
in this Prospectus on a "pro forma" basis gives effect, on the date and for the
periods indicated, to the issuance of the Old Notes and the exchange of the Old
Notes for New Notes, the application of the net proceeds from the sale of the
Old Notes and the completion of the Transactions and the execution and delivery
of the Lobo Lease (as defined) as if such events had already occurred. Investors
should carefully consider the information set forth under "Risk Factors" herein.
Certain oil and natural gas terms used in this Prospectus are defined in the
"Glossary of Certain Industry Terms" appearing elsewhere in this Prospectus.
THE COMPANY
The Company is engaged in the acquisition, exploitation and development of
oil and natural gas properties, principally in the Lobo Trend of South Texas
(the "Lobo Trend"). The Company has significantly expanded its production and
reserve base in recent years through development drilling and exploitation
activities and by acquiring producing and undeveloped properties. On March 31
and April 2, 1998, the Company closed separate acquisitions of Lobo Trend
properties with Enron Oil and Gas Company ("Enron") (the "Enron Acquisition")
and Conoco Inc. ("Conoco") (the "Conoco Acquisition") (collectively, the
"Transactions"), pursuant to which the Company acquired interests in 170 gross
(98 net) wells covering approximately 46,900 gross acres and proved reserves of
96 Bcfe as of December 31, 1997. On April 20, 1998, the Company entered into
agreements with Mobil Producing Texas and New Mexico Inc. ("Mobil"), pursuant to
which the Company acquired leasehold interests in undeveloped acreage from Mobil
(the "Lobo Lease"), covering approximately 39,636 gross acres in the Lobo Trend,
adding 43 Bcfe of net proved undeveloped reserves as of December 31, 1997. The
interests in properties acquired included acreage that is geographically close
and geologically similar to the Company's other properties. The Company believes
that these acquired properties together with its previously existing properties
have substantial development drilling and exploitation potential. The Company
has initially identified approximately 160 drilling locations that are expected
to be drilled over the next several years. The Company used approximately $68.3
million of the net proceeds from the sale of the Old Notes in connection with
the closing of the Transactions, including the repayment of short-term
acquisition indebtedness incurred in connection with the closing of the Enron
Acquisition. At December 31, 1997, on a pro forma basis, the Company owned
interests in 280 gross (159 net) wells, approximately 95% of which were operated
by the Company, and had proved reserves totaling 191 Bcfe, with a PV-10 Value of
$203 million.
The Lobo Trend, which is located in Webb and Zapata counties in South
Texas, covers in excess of one million gross acres and contains multi-pay
reservoirs of oil and natural gas. Since 1991, Webb and Zapata counties
collectively have constituted one of the largest onshore natural gas producing
regions in the United States. Although over 3,500 wells have been drilled and
cumulative production from the Lobo Trend since its discovery in 1973 exceeds
6.3 trillion cubic feet of natural gas equivalents, the Lobo Trend is believed
to be only partially exploited, with existing wells producing from only
approximately 125,000 acres. The primary geologic target in the Lobo Trend is
the Lobo sand series of the lower Wilcox formation, which contains three
primary objectives. Two secondary objectives also exist, one above the three
Lobo sands and one below. The Company believes that the existence of these
multi-pay reservoirs reduces drilling risk and enhances the profitability of
invested capital.
The Company began its operations in 1983 and focused on developing
prospects in South Texas. Since the early 1990s, the Company has become an
increasingly active participant in lower risk development drilling in the Lobo
Trend, and in 1996 the Company acquired interests in approximately 21,000
developed and undeveloped gross acres in the Lobo Trend. The Company uses 3-D
seismic imaging and other advanced exploration technologies in the development
and exploitation of its properties. As of December 31, 1997, on a pro forma
basis, 3-D seismic data had been obtained over approximately 90% of the
Company's properties. Based upon the Company's interpretation of 3-D seismic
data and wells drilled in the area, the Company has initially identified, on a
pro forma basis, approximately 160 drilling locations on its properties, 90 of
which are in the Company's proved undeveloped reserve base. During 1998, the
Company intends to drill approximately 29 gross (25 net) wells and has
allocated approximately $23.3 million of its capital expenditure budget for
this purpose. All of the Company's drilling prospects for 1998, on a pro forma
basis, were identified through the use of 3-D seismic data.
The principal executive offices of the Company are located at 13101
Northwest Freeway, Suite 320, Houston, Texas 77040, and its telephone number is
(713) 895-0909.
-1-
<PAGE> 6
BUSINESS STRATEGY
Key elements of the Company's business strategy include the following:
CONTINUE EXPLOITATION AND DEVELOPMENT PROGRAM. The Company intends to
further develop and exploit its properties, including the interests in the
properties acquired in the Transactions and subject to the Lobo Lease, which,
in the aggregate, currently include approximately 160 identified drilling
locations. The Company's development and exploitation program is focused on
lower-risk development drilling opportunities that increase production levels
and proved reserves quantities while minimizing the level of drilling risk. The
Company's strategy in identifying prospective drilling locations is founded on
rigorous analysis of 3-D seismic data which the Company has acquired on over
90% of its acreage on a pro forma basis. All of the locations scheduled to be
drilled in 1998 were identified through the interpretation of 3-D seismic data.
TECHNICAL EXPERTISE. Members of the senior management team have
participated in the drilling of over 600 wells in South Texas which,
collectively, have produced over one trillion cubic feet of natural gas
equivalents. Each member of senior management has over 18 years of industry
experience, and two of the three members of senior management have worked
together for over ten years. The Company believes that its drilling success is
a direct result of the technical knowledge and experience of its geoscience
staff in effective interpretation of well log data and mapping of the
subsurface geology.
OPERATIONAL CONTROL. The Company seeks to operate the wells in which it
owns an interest whenever possible. The Company believes that control over
operations allows it to more effectively control the costs, scope and timing of
drilling and other field operations. Alternatively, when this is not possible,
the Company attempts to only own interests in wells where it has a high degree
of confidence in the operator and because of its percentage ownership can
assert substantial influence with the operator. At December 31, 1997, on a pro
forma basis, the Company owned interests in 280 gross (159 net) wells,
approximately 95% of which were operated by the Company.
PURSUE FOCUSED PROPERTY ACQUISITION PROGRAM. The Company seeks to acquire
producing properties and undeveloped acreage where it has identified
geologically complex multi-pay subsurface environments that are well suited to
the application of 3-D seismic technology. The Company believes that its
technical expertise and historical experience with such properties allows it to
identify opportunities for lower-risk development drilling and exploitation
activities. Given the Company's historic and current scope of operations in
South Texas and its belief that attractive acquisition opportunities will
continue to become available in this area, it will focus its acquisition
efforts primarily in the Lobo Trend and other areas in South Texas. The Company
generally approaches the owners of target properties and attempts to negotiate
terms privately, although the Company will examine and bid on properties being
offered to a broader group of buyers.
CAPITALIZE ON LOCAL RELATIONSHIPS. The Company's 15-year presence in South
Texas has resulted in numerous favorable relationships with local landowners
and their representatives. South Texas is characterized by large blocks of
privately held land which has been controlled by a small number of families for
generations. Lease blocks generally come in packages of between 5,000 and
50,000 acres. The Company believes that its favorable relationships with these
local landowners is a key advantage in its ability to access additional
undeveloped acreage acquisition opportunities. The Company intends to sustain
and expand these relationships in the area.
-2-
<PAGE> 7
THE NOTE OFFERING
The Old Notes . . . . . . . . The Old Notes were sold by the Company on
April 2, 1998, to the Initial Purchasers
pursuant to a Purchase Agreement. The
Initial Purchasers resold the Old Notes to
qualified institutional buyers pursuant to
Rule 144A under the Securities Act or outside
the United States within the meaning of
Regulation S under the Securities Act.
Registration Statement . . . The Registration Rights Agreement granted the
holders of the Old Notes certain exchange and
registration rights. The Exchange Offer is
intended to satisfy those exchange rights,
which terminate upon consummation of the
Exchange Offer. If applicable law or
applicable interpretations of the staff of
the Commission do not permit the Company to
effect the Exchange Offer, or under certain
other circumstances, the Company has agreed
to file a shelf registration covering resales
of Transfer Restricted Notes (as defined in
the Registration Rights Agreement).
THE EXCHANGE OFFER
The Exchange Offer applies to $135,000,000 aggregate principal amount of
the Old Notes. The form and terms of the New Notes are identical to the form
and terms of the Old Notes except that the Old Notes were offered and sold in
reliance upon certain exemptions from registration under the Securities Act,
while the offering and sale of the New Notes in exchange for the Old Notes has
been registered under the Securities Act, with the result that the New Notes
will not bear any legends restricting their transfer. See "Description of
Notes."
The Exchange Offer . . . . . $1,000 principal amount of New Notes for each
$1,000 principal amount of Old Notes. As of
the date hereof, Old Notes representing
$135,000,000 aggregate principal amount were
outstanding. The terms of the New Notes and
the Old Notes are substantially identical.
Based on an interpretation by the Commission's
staff set forth in no-action letters issued to
third parties unrelated to the Company, the
Company believes that, with the exceptions
discussed herein, New Notes issued pursuant to
the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and
otherwise transferred by any person receiving
the New Notes, whether or not that person is
the holder (other than any such holder or such
other person that is an "affiliate" of the
Company within the meaning of Rule 405 under
the Securities Act), without compliance with
the registration and prospectus delivery
provisions of the Securities Act, provided
that (i) the New Notes are acquired in the
ordinary course of business of that holder or
such other person, (ii) neither the holder nor
such other person is engaging in or intends to
engage in a distribution of the New Notes, and
(iii) neither the holder nor such other person
has an arrangement or understanding with any
person to participate in the distribution of
the New Notes. However, the Company has not
sought, and does not intend to seek, its own
no-action letter, and there can be no
assurance that the Commission's staff would
make a similar determination with respect to
the Exchange Offer. Each broker-dealer that
receives New Notes for its own account in
exchange for Old Notes, where those Old Notes
were acquired by the broker-dealer as a result
of its market-making activities or other
trading activities, must acknowledge that it
will deliver a prospectus in connection with
any resale of those New Notes. See "The
Exchange Offer-- Purpose and Effect" and "Plan
of Distribution."
Expiration Date . . . . . . The Exchange Offer will expire at 5:00 p.m.,
New York City time, ______, _____________,
1998, or such later date and time to which it
is extended.
Withdrawal Rights . . . . . . The tender of Old Notes pursuant to the
Exchange Offer may be withdrawn at any time
prior to 5:00 p.m., New York City time, on
the Expiration Date. Any Old Notes not
accepted for exchange for any reason will be
returned without expense to the tendering
holder thereof as promptly as practicable
after the expiration or termination of the
Exchange Offer.
-3-
<PAGE> 8
Interest on the New Notes
and Old Notes . . . . . . Interest on each New Note will accrue from
the date of issuance of the Old Note for
which the New Note is exchanged or from the
date of the last periodic payment of interest
on such Old Note, whichever is later. No
interest will be paid on Old Notes which are
exchanged for New Notes, and holders of such
Old Notes will be deemed to have waived the
right to receive interest accrued thereon to
the date of exchange.
Conditions to the Exchange
Offer . . . . . . . . The Exchange Offer is subject to certain
customary conditions, certain of which may be
waived by the Company. See "The Exchange
Offer -- Conditions."
Procedures for Tendering
Old Notes . . . . . . . . . Each holder of Old Notes wishing to accept
the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a copy
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver the Letter of Transmittal,
or the copy, together with the Old Notes and
any other required documentation, to the
Exchange Agent at the address set forth
herein. Persons holding Old Notes through
the DTC and wishing to accept the Exchange
Offer must do so pursuant to the DTC's
Automated Tender Offer Program, by which each
tendering Participant (as defined) will agree
to be bound by the Letter of Transmittal. By
executing or agreeing to be bound by the
Letter Transmittal, each holder will
represent to the Company that, among other
things, (i) any New Notes to be received by
it will be acquired in the ordinary course of
its business and (ii) it is not an
"affiliate," as defined in Rule 405 of the
Securities Act, of the Company, or if it is
an affiliate, it will comply with the
registration and prospectus delivery
requirements of the Securities Act to the
extent applicable. If the holder is not a
broker-dealer, it will be required to
represent that it is not engaged in, and does
not intend to engage in, the distribution of
the New Notes and has no arrangement with any
person to participate in the distribution of
the New Notes. If the holder is a
broker-dealer that will receive New Notes for
its own account in exchange for Old Notes
that were acquired as a result of
market-making activities or other trading
activities, it will be required to
acknowledge that it will deliver a prospectus
in connection with any resale of such New
Notes.
Pursuant to the Registration Rights
Agreement, the Company is required to file a
registration statement for a continuous
offering pursuant to Rule 415 under the
Securities Act in respect of the Old Notes if
existing Commission interpretations are
changed such that the New Notes received by
holders in the Exchange Offer are not or
would not be, upon receipt, transferable by
each such holder (other than an affiliate of
the Company) without restriction under the
Securities Act. See "The Exchange
Offer--Purpose and Effect."
Acceptance of Old Notes and
Delivery of New Notes . . . The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The
New Notes issued pursuant to the Exchange
Offer will be delivered promptly following
the Expiration Date. See "The Exchange
Offer-- Terms of the Exchange Offer."
Exchange Agent . . . . . . . State Street Bank and Trust Company is
serving as Exchange Agent in connection with
the Exchange Offer and is also serving as
Trustee under the Indenture.
Federal Income Tax
Considerations . . . . . . The exchange pursuant to the Exchange Offer
will not be a taxable event for federal
income tax purposes. See "Certain U.S.
Federal Income Tax Considerations."
Effect of Not Tendering . . . Old Notes that are eligible for exchange in
the Exchange Offer, but are not tendered or
are tendered but not accepted will, following
the completion of the
-4-
<PAGE> 9
Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof.
The Company will have no further obligation
to provide for the registration under the
Securities Act of such Old Notes.
Global Note . . . . . . . . . The New Notes will be issued in fully
registered form and are expected to initially
be represented by one Global Note, registered
in the name of DTC or its nominee and
deposited with DTC. Holders of beneficial
interests in the Global Note will not be
considered the owners or holders of any New
Notes under the Global Note or the Indenture
for any purpose. Holders of beneficial
interests in the Global Note may be unable to
transfer or pledge their interest in the
Global Notes if physical delivery is
required. Payments by the DTC's Participants
(as defined) and the DTC's Indirect
Participants (as defined) to the beneficial
owners of New Notes will be governed by
standing instructions and customary practice
and will be the responsibility of the DTC's
Participants or DTC's Indirect Participants
and not the Company or the Trustee. See
"Exchange Offer--Book Entry; Delivery and
Form."
TERMS OF THE NEW NOTES
Issuer . . . . . . . . . . . . . . . . . . . Michael Petroleum Corporation, a
wholly-owned subsidiary of
Michael Holdings, Inc.
Securities Offered . . . . . . . . . . . . $135,000,000 aggregate principal
amount of 11 1/2% Senior Notes
due 2005.
Maturity Date . . . . . . . . . . . . . . . April 1, 2005.
Interest Rate and Payment Dates . . . . . . The New Notes will bear interest
at a rate of 11 1/2% per annum,
payable semiannually in arrears
on October 1 and April 1 of each
year, commencing October 1, 1998.
Ranking . . . . . . . . . . . . . . . . . . The New Notes will be senior
unsecured obligations of the
Company ranking pari passu with
all existing and future Senior
Indebtedness (as defined) of
the Company, and senior in
right of payment to all future
Subordinated Indebtedness of the
Company (as defined). As of
December 31, 1997, on a pro forma
basis, the Company would not
have had any secured Indebtedness
(as defined). Subject to certain
limitations set forth in the
indenture under which the New
Notes will be issued (the
"Indenture"), the Company may
incur additional Senior
Indebtedness and other
Indebtedness. See "Description of
Notes--Ranking."
Subsidiary Guarantees . . . . . . . . . . . The Company does not have any
subsidiaries. The New Notes
will be guaranteed in the
future by all Restricted
Subsidiaries (as defined) in
accordance with the Indenture
(the "Subsidiary Guarantors"). See
"Description of
Notes--Guarantees."
-5-
<PAGE> 10
Optional Redemption . . . . . . . . . . . . The New Notes will be redeemable
at the option of the Company, in
whole or in part, at any time
on or after April 1, 2003 at
the redemption prices set
forth herein, plus accrued
and unpaid interest and
Liquidated Damages, if any,
to the date of redemption. In
addition, the Company may, at
its option, redeem prior to
April 1, 2001 up to 30% of
the aggregate principal amount of
the New Notes originally issued
at a redemption price of 111.5% of
the principal amount thereof,
plus accrued and unpaid interest
and Liquidated Damages, if any,
to the date of redemption, from
the net proceeds of one or more
Equity Offerings, provided that at
least 65% of the aggregate
principal amount of the New Notes
originally issued remains
outstanding following each such
redemption, and each such
redemption occurs within 90 days
after the date of the closing of
each such Equity Offering. See
"Description of Notes --Optional
Redemption."
Change of Control . . . . . . . . . . . . . Upon a Change of Control, the
Company will be required, subject
to certain conditions, to offer to
repurchase all outstanding New
Notes at 101% of the principal
amount thereof, plus accrued and
unpaid interest and Liquidated
Damages, if any, to the date of
purchase. See "Description
of Notes--Change of Control."
Certain Covenants . . . . . . . . . . . . . The Indenture contains certain
covenants that, among other
things, limit the ability of the
Company and the Restricted
Subsidiaries to incur additional
Indebtedness, pay dividends,
repurchase equity interests or
make other Restricted Payments (as
defined), create Liens (as
defined), enter into transactions
with Affiliates (as defined), sell
assets or enter into certain
mergers and consolidations. In the
event of certain asset
dispositions, the Company is
required under certain
circumstances to use the Excess
Proceeds (as defined) to offer to
repurchase the New Notes (and
other Senior Indebtedness for
which an offer to repurchase is
required to be concurrently made)
having an aggregate principal
amount equal to the Excess
Proceeds at a purchase price equal
to 100% of the principal amount of
the New Notes, together with
accrued and unpaid interest and
Liquidated Damages, if any, to the
date of repurchase (a "Net
Proceeds Offer"). See "Description
of Notes--Certain Covenants."
RISK FACTORS
Prospective purchasers of the New Notes should carefully consider the
matters set forth under "Risk Factors," as well as the other information,
financial statements and data included in this Prospectus, prior to making an
investment in the New Notes.
-6-
<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL,
OPERATING AND OIL AND NATURAL GAS RESERVE DATA
The following tables set forth summary financial data on an historical
basis for each of the years in the three-year period ended, and as of, December
31, 1997, and on a pro forma basis for the year ended, and as of, December 31,
1997. The historical financial data have been derived from the audited
Financial Statements of the Company. The pro forma financial, operating and oil
and natural gas reserve data are not necessarily indicative of the operating
results or financial position that would have been achieved had the
transactions to which they give pro forma effect been effective at the date or
during the period presented or of the results that may be obtained in the
future. This information should be read in conjunction with "Selected
Historical and Pro Forma Financial, Operating and Oil and Natural Gas Reserve
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Financial Statements of the Company and the Notes
thereto, the Statements of Revenues and Direct Operating Expenses and the Notes
thereto for the Enron Properties, the Conoco Properties and the Lobo
Properties, and the Company's Unaudited Pro Forma Financial Statements and the
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
PRO FORMA
1995 1996 1997 1997(1)
---- ---- ---- -------
(IN THOUSANDS, EXCEPT FOR RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and natural gas sales . . . . . . . . . . . . . . . . $ 2,109 $ 3,594 $ 9,139 $ 31,209
Gain on sale of oil and natural gas properties . . . . . 828 182 -- --
-- -- -- --
2,937 3,776 9,139 31,209
------- ------- -------- -------
Operating expenses:
Production costs . . . . . . . . . . . . . . . . . . . . 1,228 1,931 1,870 5,115
Depreciation, depletion and amortization . . . . . . . . 1,272 1,180 3,889 10,597
Exploration . . . . . . . . . . . . . . . . . . . . . . . 850 46 333 333
General and administrative . . . . . . . . . . . . . . . 763 424 980 980
------- ------- -------- -------
4,113 3,581 7,072 17,025
------- ------- -------- -------
Operating (loss) income . . . . . . . . . . . . . . . . . . (1,176) 195 2,067 14,184
Interest expense and other, net . . . . . . . . . . . . . . (1,017) (894) (2,063) (16,438)
(Loss) income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . (2,193) (699) 4 (2,254)
(Benefit) provision for income taxes (9). . . . . . . . . . (79) 1,780 11 (789)
Loss from continuing operations . . . . . . . . . . . . . . (2,114) (2,479) (7) (1,465)
------- ------- -------- -------
Discontinued operations . . . . . . . . . . . . . . . . . . 2,087 -- -- --
------- ------- -------- -------
Net loss . . . . . . . . . . . . . . . . . . . . $ (27) $(2,479) $ (7) $ (1,465)
======= ======= ======== ========
OTHER FINANCIAL DATA:
EBITDA(2) . . . . . . . . . . . . . . . . . . . . . . . . . $ 118 $ 1,239 $ 6,289 $ 25,114
Cash (used in) provided by operating activities . . . . . . (2,339) 848 3,466 --
Cash provided by (used in) investing activities . . . . . . 1,291 (14,753) (14,963) --
Cash provided by financing activities . . . . . . . . . . . 1,365 14,750 11,098 --
Ratio of earnings to fixed charges . . . . . . . . . . . . (3) (3) (3) (3)
Pro Forma Ratios:
Ratio of EBITDA to interest expense . . . . . . . . . . . 0.1x 1.4x 3.1x 1.5x
Ratio of total debt to EBITDA . . . . . . . . . . . . . . 58.4x 13.5x 4.4x 5.3x
</TABLE>
-7-
<PAGE> 12
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
ACTUAL PROFORMA(4)
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,255 $ 25,369
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . 28,011 117,311
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,617 147,490
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,941 132,636
Shareholder's deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,915) (3,619)
ACNTA(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,133 230,768
Ratio of ACNTA to total debt . . . . . . . . . . . . . . . . . . . . . . . . . 1.6x 1.7x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
PRO FORMA
1995 1996 1997 1997(4)
---- ---- ---- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
RESERVE DATA:(6)
Proved reserves:
Oil (MBbls) . . . . . . . . . . . . . . . . . . . . . . . . 2,260 239 265 5,445
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . . 5,909 49,246 51,165 158,698
Total proved reserves (Mmcfe) . . . . . . . . . . . . . . . 19,469 50,678 52,754 191,368
% Natural gas . . . . . . . . . . . . . . . . . . . . . . . 30.4% 97.2% 97.0% 82.9%
Proved developed reserves (Mmcfe) . . . . . . . . . . . . . 6,761 17,398 23,585 56,682
% Proved developed . . . . . . . . . . . . . . . . . . . . 34.7% 34.3% 44.7% 29.6%
Estimated future net cash flows before income taxes . . . . . $27,808 $94,199 $78,245 $318,132
PV-10 Value(7) . . . . . . . . . . . . . . . . . . . . . . . 18,511 60,727 51,487 203,204
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
PRO FORMA
1995 1996 1997 1997(1)
---- ---- ---- -------
<S> <C> <C> <C> <C>
OPERATING DATA:(6)
Production:
Oil (MBbls) . . . . . . . . . . . . . . . . . . . . . . . 79 37 21 209
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . 430 1,324 3,685 11,676
Natural gas equivalent (Mmcfe) . . . . . . . . . . . . . 904 1,546 3,811 12,930
Average sales prices:(8)
Oil, condensate and natural gas liquids (per Bbl) . . . . $17.65 $ 20.05 $ 18.95 $ 13.42
Natural gas (per Mcf) . . . . . . . . . . . . . . . . . . 1.67 2.15 2.33 2.42
Natural gas equivalent (per Mcfe) . . . . . . . . . . . . 2.33 2.32 2.35 2.41
Unit economics (per Mcfe):
Average sales price . . . . . . . . . . . . . . . . . . . $ 2.33 $ 2.32 $ 2.35 $ 2.41
Production expenses . . . . . . . . . . . . . . . . . . . (1.36) (1.25) (0.49) (0.40)
General and administrative expenses . . . . . . . . . . . (0.84) (0.27) (0.26) (0.08)
------ ------- ------- --------
Gross margin . . . . . . . . . . . . . . . . . . $ 0.13 $ 0.80 $ 1.60 $ 1.93
====== ======= ======= ========
</TABLE>
- ---------------
(1) Pro forma to reflect the sale of the Old Notes, the application of the
net proceeds therefrom, the exchange of the Old Notes for New Notes,
the Transactions and the Lobo Lease, as if such transactions had
occurred on January 1, 1997.
(2) EBITDA is defined as earnings (excluding gain on sale of oil and
natural gas properties) before interest expense, income taxes,
depreciation, depletion and amortization and exploration expense.
EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles ("GAAP"). EBITDA should not be
considered as an alternative to, or more meaningful than, net income
or cash flow as determined in accordance with GAAP or as an indicator
of a company's operating performance or liquidity. Certain items
excluded from EBITDA are significant components in understanding and
assessing a company's financial performance, such as a company's cost
of capital and tax structure, as well as historic costs of depreciable
assets, none of which are components of EBITDA. The Company's
computation of EBITDA may not be comparable to other similarly titled
measures of other companies. The Company believes that EBITDA is a
widely followed measure of operating performance and may also be used
by investors to measure the Company's ability to meet future debt
service requirements, if any. This
-8-
<PAGE> 13
information should be read in conjunction with the Statement of Cash
Flows contained in the Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus.
(3) Earnings were insufficient to cover fixed charges by $2,193,000,
$916,000 and $570,000 for the historical years ended December 31,
1995, December 31, 1996 and December 31, 1997, respectively, and
$2,828,000 for the pro forma year ended December 31, 1997. For
purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges. Fixed
charges consist of interest and related expenses and an estimated
portion of rentals representing interest costs.
(4) Pro forma to reflect the sale of the Old Notes, the application of the
net proceeds therefrom, the exchange of the Old Notes for New Notes,
the Transactions and the Lobo Lease, as if such transactions had
occurred on December 31, 1997.
(5) ACNTA means Adjusted Consolidated Net Tangible Assets as defined in
the Indenture. See "Description of Notes -- Certain Definitions."
(6) The reserve and present value data as of December 31, 1996 and 1997
(historical and pro forma) have been prepared by Huddleston & Co.,
Inc., independent petroleum engineers to the Company. The reserve and
present value data as of December 31, 1995 was prepared by Mohajir &
Associates, Inc., independent petroleum engineers to the Company. See
"Risk Factors -- Uncertainty of Estimates of Reserves and Future Net
Reserves," and "Supplemental Information about Oil and Natural Gas
Producing Activities (Unaudited)" following the Notes to the Financial
Statements of the Company.
(7) PV-10 Value represents the present value of estimated future net
revenues before income tax discounted at 10% using prices in effect at
the end of the respective periods presented and including the effects
of hedging activities. In accordance with applicable requirements of
the SEC, estimates of the Company's proved reserves and future net
revenues are made using oil and natural gas sales prices estimated to
be in effect as of the date of such reserve estimates and are held
constant throughout the life of the properties (except to the extent a
contract specifically provides for escalation). The average prices
used in calculating historical PV-10 Value as of December 31, 1997
were $15.91 per Bbl of oil and $2.42 per Mcf of natural gas, compared
to average prices used as of December 31, 1996 of $23.86 per Bbl of
oil and $2.76 per Mcf of natural gas. The average prices used in
calculating the pro forma PV-10 Value as of December 31, 1997 were
$13.71 per Bbl of oil and $2.46 per Mcf of natural gas.
(8) Reflects the actual realized prices received by the Company, including
the results of the Company's hedging activities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(9) Through June 30, 1996, the Company was taxed under the provisions of
"Subchapter S" of the Internal Revenue Code. Accordingly, no provision
for federal income taxes was recorded for periods ending prior to
June 30, 1996.
-9-
<PAGE> 14
CAUTIONARY STATEMENTS REGARDING
FORWARD-LOOKING INFORMATION
This Prospectus contains certain "forward-looking statements" (as that
term is defined in the Private Securities Litigation Reform Act of 1995) which
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. In addition, all statements other than statements of historical
facts included in this Prospectus, including, without limitation, statements
regarding the Company's business strategy, future governmental regulation, oil
and natural gas reserves, future drilling and development opportunities and
operations, future acquisitions, future production of oil and natural gas (and
the prices thereof and costs therefor), anticipated results of hedging
activities, future capital expenditures and future net cash flows, are
forward-looking statements and may contain information concerning financial
results, economic conditions, trends and known uncertainties. Such statements
reflect the Company's current views with respect to future events and financial
performance, and involve risks and uncertainties. Actual results could differ
materially from those projected in the forward-looking statements as a result
of these various risks and uncertainties, including, without limitation, (i)
factors discussed under "Risk Factors" such as natural gas price fluctuations
and markets, uncertainties of estimates of reserves and future net revenues,
competition in the oil and natural gas industry, operating risks, risks
associated with acquisitions, future need for and availability of capital, and
regulatory and environmental risks, (ii) adverse changes to the properties
acquired in the Transactions and the interests subject to the Lobo Lease or the
failure of the Company to achieve the anticipated benefits of the Transactions
and the interests subject to the Lobo Lease, (iii) adverse changes in the
market for the Company's oil and natural gas production and (iv) those
additional factors discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business and Properties" and
elsewhere in this Prospectus. Investors are cautioned not to place undue
reliance on these forward- looking statements, which speak only as of the date
hereof.
-10-
<PAGE> 15
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
relating to the Company and the Notes before making an investment in the Notes
offered hereby.
INCURRENCE OF SUBSTANTIAL INDEBTEDNESS
At December 31, 1997, on a pro forma basis, the Company would have had
$135.0 million of Indebtedness outstanding (including current maturities of
long-term Indebtedness) as compared to shareholders' deficit of $3.4 million.
See "Use of Proceeds" and "Capitalization." The Indenture limits the amounts of
borrowings under bank facilities, including the Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Notes--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness."
This level of Indebtedness may pose substantial risks to holders of Notes,
including, but not limited to, the following: (i) the Company's ability to
obtain additional financing in the future, whether for working capital, capital
expenditures, acquisitions or other purposes, may be impaired; (ii) a portion
of the Company's cash flow from operations is required to be dedicated to the
payment of interest on its debt, thereby reducing funds available to the
Company for other purposes; (iii) the Company may not generate sufficient cash
flow to pay the principal of and interest on the Notes; (iv) the Company's
flexibility in planning for or reacting to changes in market conditions may be
limited; and (v) the Company may be more vulnerable in the event of a downturn
in its business.
The ability of the Company to meet its debt service obligations, including
with respect to the Notes, will depend on the future operating performance and
financial results of the Company, which will be subject in part to factors
beyond the control of the Company. Further, if the Company is unsuccessful in
increasing its proved reserves, the future net revenues from existing proved
reserves may not be sufficient to pay the principal of and interest on the
Notes in accordance with their terms. There can be no assurance that the
Company will continue to generate earnings in the future sufficient to cover
its fixed charges. If the Company is unable to generate earnings in the future
sufficient to cover its fixed charges and is unable to borrow sufficient funds
to cover such charges, it may be required to refinance all or a portion of its
debt or to sell all or a portion of its assets. There can be no assurance that
a refinancing would be possible, nor can there be any assurance as to the
timing of any asset sales or the proceeds that the Company could realize
therefrom. In addition, the terms of the Credit Facility are expected to
restrict the Company's ability to sell assets and the Company's use of the
proceeds therefrom. See "--Restrictions Imposed by Lenders," "--Future Need for
and Availability of Capital" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financing Arrangements."
EFFECTIVE SUBORDINATION OF THE NOTES
The Notes are senior unsecured obligations of the Company and rank pari
passu with all existing and future Senior Indebtedness of the Company,
including any indebtedness to be incurred under the Credit Facility, and senior
in right of payment to all future Subordinated Indebtedness of the Company.
Holders of secured Indebtedness of the Company and its Subsidiaries, including
under the Credit Facility, will have claims with respect to assets constituting
collateral for such Indebtedness that are prior to the claims of the Holders of
the Notes. In the event of a default on the Notes, or a bankruptcy, liquidation
or reorganization of the Company and its Subsidiaries, such assets will be
available to satisfy obligations with respect to the indebtedness secured
thereby before any payment therefrom could be made on the Notes. Accordingly,
the Notes will be effectively subordinated to claims of secured creditors of
the Company and its Subsidiaries to the extent of such pledged collateral. As
of December 31, 1997, on a pro forma basis, the Company would have had no
secured Indebtedness and no other Indebtedness other than the Notes. There is
currently no Indebtedness of the Company which would constitute Subordinated
Indebtedness. See "Description of Notes--Ranking."
RESTRICTIONS IMPOSED BY LENDERS
The Indenture and the instruments governing the Credit Facility will impose
significant operating and financial restrictions on the Company. Such
restrictions will affect, and in many respects significantly limit or prohibit,
among other things, the ability of the Company to incur additional
indebtedness, make certain capital expenditures, pay dividends, repay or
repurchase indebtedness prior to its stated maturity or engage in mergers or
acquisitions. These restrictions could also limit the ability of the Company to
effect future financings, make needed capital expenditures, withstand a future
downturn in the Company's business or the economy in general, or otherwise
conduct necessary corporate activities. A failure by the Company to comply with
these restrictions could lead to a default under the terms of such indebtedness
and the Notes. In the event of default, the holders of such indebtedness could
elect to
-11-
<PAGE> 16
declare all of the funds borrowed pursuant thereto to be due and payable
together with accrued and unpaid interest. In such event, there can be no
assurance that the Company would be able to make such payments or borrow
sufficient funds from alternative sources to make any such payment. Even if
additional financing could be obtained, there can be no assurance that it would
be on terms that are favorable or acceptable to the Company. In addition, the
Company's indebtedness under the Credit Facility will be secured by a
substantial portion of the assets and properties of the Company. The pledge of
such collateral to the Company's secured lenders could impair the Company's
ability to obtain additional financing on favorable terms. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "--Financing Arrangements."
RISKS ASSOCIATED WITH INCREASE IN SCOPE OF OPERATIONS
The increased scope of operations of the Company resulting from the
Transactions and the Lobo Lease presents challenges to the Company due to the
additional time and resources required to manage these newly acquired properties
and interests. Neither the members of management nor the Board of Directors
individually have had experience in integrating acquisitions or lease
transactions of the size and scope of the Transactions and the Lobo Lease.
Accordingly, there can be no assurance that the process of absorbing and
integrating the interests in the properties acquired in the Transactions and
subject to the Lobo Lease can be effectively managed. In addition, the continued
growth and expansion of the Company will depend, among other factors, on the
ability to recruit and retain skilled and experienced management and technical
personnel. There can be no assurance that the Company will be successful in such
efforts.
The development of the Company's business and its participation in an
increasingly larger number of projects have required and will continue to
require substantial expenditures. The Company's future financial results will
depend primarily on its ability to economically locate and produce hydrocarbons
in commercial quantities and on the market prices of oil and natural gas. There
can be no assurance that the Company will achieve or sustain profitability or
positive cash flows from operating activities in the future. See "--Future Need
for and Availability of Capital," "Selected Historical and Pro Forma Financial,
Operating and Oil and Natural Gas Reserve Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business and Properties--Oil and Natural Gas Reserves."
FUTURE NEED FOR AND AVAILABILITY OF CAPITAL
Although the Company expects to have an initial borrowing capacity of up to
$30 million under the Credit Facility, the Company anticipates that it will
require additional financing to effect future property acquisitions and
continue its exploration and development programs. The Company or MHI may seek
funds through the sale of debt or equity securities, which could significantly
dilute the ownership of the Company's or MHI's existing shareholders. In
addition, if necessary (and permitted under the terms of the Indenture), the
Company or MHI may seek funds from project financing, strategic alliances or
other sources, all of which may dilute the interest of the Company in the
specific project financed. The Company's ability to access additional capital
is dependent upon, in part, the financial strength of the capital markets at
such time. There can be no assurance that such additional financing can be
obtained or, if so, obtained on terms acceptable to the Company.
Future cash flows and the availability of credit are subject to a number of
variables, such as the level of production from existing wells, prices of oil
and natural gas and the Company's success in locating and producing new
reserves. If revenues were to decrease as a result of lower oil and natural gas
prices, decreased production or otherwise, the Company could have limited
ability to replace its reserves or to maintain production at current levels,
resulting in a decrease in production and revenues over time. The Company has
budgeted approximately $24.9 million for capital expenditures in 1998,
exclusive of acquisitions. The Company expects to use cash flow from
operations, cash balances and borrowings under the Credit Facility to fund
these expenditures. If the Company's cash flow from operations and availability
under the Credit Facility are not sufficient to satisfy its capital expenditure
requirements, there can be no assurance that additional debt or equity
financing will be available. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
POSSIBLE LIMITATIONS ON ENFORCEABILITY OF SUBSIDIARY GUARANTEES
Pursuant to the provisions of the Indenture, the Company's obligations
under the Notes will be guaranteed on a senior unsecured basis by any future
Subsidiary Guarantors. The Company currently has no subsidiaries. The
obligations of any Subsidiary Guarantor under its Subsidiary Guarantee may be
subject to review under applicable fraudulent conveyance statutes in the event
of the bankruptcy or other financial difficulty of any such Subsidiary
Guarantor. Under such laws, if a court in a lawsuit by an unpaid creditor or
representative of creditors of any such person, such as a trustee in bankruptcy
of any such person as debtor in possession, were to find that at the time such
person incurred its obligations under its guarantee, it (i) received less than
fair consideration or reasonably equivalent
-12-
<PAGE> 17
value therefor, and (ii) either (a) was insolvent, (b) was rendered insolvent
by such guarantee, (c) was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital or (d) intended to
incur or believed that it would incur debts beyond its ability to pay such
debts as they matured, such court could void such obligations under its
guarantee and direct the return of any amounts paid with respect thereto.
Moreover, regardless of the factors identified in the foregoing clauses (i) and
(ii), a court could take such action if it found that the guarantee was entered
into with actual intent to hinder, delay or defraud creditors. The measure of
insolvency for purposes of the foregoing will vary depending on the law of the
jurisdiction being applied. Generally, however, an entity would be considered
insolvent if the sum of its debts (including contingent or unliquidated debts)
is greater than all of its property at a fair valuation or if the present fair
salable value of its assets is less than the amount that would be required to
pay its probable liability on its existing debts as they become absolute and
mature. There can be no assurance that, after providing for all prior claims,
if any, there would be sufficient assets to satisfy the claims of the holders
of the Notes relating to any voided portion of such Subsidiary Guarantees.
LIMITATIONS ON REPURCHASES OF NOTES UPON A CHANGE OF CONTROL AND CERTAIN OTHER
EVENTS
Upon the occurrence of a Change of Control, the Company will be required to
offer to repurchase all Notes then outstanding at a purchase price equal to
101% of the principal amount of the Notes, together with accrued and unpaid
interest and Liquidated Damages, if any, to the date of repurchase. In the
event of certain asset dispositions, the Company will be required under certain
circumstances to use the Excess Proceeds to offer to repurchase the Notes (and
other Senior Indebtedness for which an offer to repurchase is required to be
concurrently made) having an aggregate principal amount equal to the Excess
Proceeds at a purchase price equal to 100% of the principal amount of the
Notes, together with accrued and unpaid interest and Liquidated Damages, if
any, to the date of repurchase (a "Net Proceeds Offer"). If a Change of Control
were to occur, the Company may not have the financial resources to repay all of
the Notes and the other indebtedness that might become payable upon the
occurrence of such Change of Control.
The events that constitute a Change of Control or require a Net Proceeds
Offer under the Indenture may also be events of default under other
indebtedness of the Company (including the Credit Facility). Such events may
permit the lenders under such debt instruments to accelerate the debt and, if
the debt is not paid, to enforce security interests on, or commence litigation
that could ultimately result in a sale of, substantially all of the assets of
the Company, thereby limiting the Company's ability to raise cash to repurchase
the Notes and reducing the practical benefits of the offer to repurchase
provisions to the holders of the Notes. If the Company fails timely to make an
offer to repurchase or to consummate the repurchase of the Notes, such failure
will constitute an Event of Default under the Indenture. There can be no
assurance that the Company will have sufficient funds available at the time of
any Change of Control or Net Proceeds Offer to make any debt payment (including
repurchases of Notes) as described above. See "Description of Notes--Change of
Control" and "Description of Notes--Certain Covenants--Limitation on Sale of
Assets."
VOLATILITY OF NATURAL GAS AND OIL PRICES
The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for, natural gas and, to a lesser extent, the
price of oil. Historically, the prices of oil and natural gas have been
volatile and are likely to continue to be volatile in the future and are
dependent upon numerous factors such as weather, domestic and foreign political
and economic conditions, the overall level of international and domestic demand
for oil and natural gas, domestic and international regulatory developments,
domestic and international severance and excise taxes, competition from other
sources of energy and the availability of pipeline capacity. The Company is
affected more by fluctuations in natural gas prices than oil prices, because
the majority of its production is natural gas. The volatile nature of the
energy markets and the unpredictability of actions of OPEC members make it
impossible to predict future prices of natural gas and oil with any certainty.
Prices of natural gas and oil are subject to wide fluctuations in response to
relatively minor changes in circumstances, and there can be no assurance that
future prolonged decreases in such prices will not occur. All of these factors
are beyond the control of the Company. Any significant decline in natural gas
and oil prices would have a material adverse effect on the Company's results of
operations and financial condition, its ability to fund operations and capital
expenditures, the book value of its natural gas and oil properties and its
ability to meet its debt service requirements. Although the Company may enter
into hedging arrangements from time to time to reduce its exposure to price
risks in the sale of its natural gas and oil, substantially all of the
Company's production will remain subject to natural gas and oil price
fluctuations. See "--Risk of Hedging Activities."
DEPENDENCE ON DISTRIBUTION AND PROCESSING SYSTEMS
The marketability of the Company's natural gas and oil production depends
upon the availability and capacity of natural gas gathering systems, pipelines
and processing facilities which are not owned by the Company. The
-13-
<PAGE> 18
unavailability or lack of capacity thereof could result in the shut-in of
producing wells or the delay or discontinuance of development plans for
properties. Moreover, substantially all of the Company's properties rely on the
same gathering systems, transportation lines and processing plants. In
addition, federal and state regulation of oil and natural gas production and
transportation, general economic conditions and changes in supply and demand
could adversely affect the Company's ability to produce and market its natural
gas and oil on a profitable basis. Any significant change in the Company's
ability to market its production could have a material adverse effect on the
Company's financial condition and results of operations.
CONCENTRATION OF PRODUCING PROPERTIES
The Company's production of natural gas and oil is concentrated within an
approximate 120 square mile area in the Lobo Trend. Any impairment or material
reduction in the expected size of the reserves attributable to the Company's
wells, any material harm to the producing reservoirs from which these wells
produce or any significant governmental regulation with respect to any of these
wells, including curtailment of production or interruption of transportation of
production, could have a material adverse effect on the Company's financial
condition and results of operations.
RISK OF HEDGING ACTIVITIES
The Company's use of energy swap arrangements and forward sale arrangements
to reduce its sensitivity to oil and natural gas price volatility is subject to
a number of risks. If the Company's reserves are not produced at the rates
estimated by the Company due to inaccuracies in the reserve estimation process,
operational difficulties or regulatory limitations, or otherwise, the Company
would be required to satisfy its obligations under potentially unfavorable
terms. If the Company enters into financial instrument contracts for the
purpose of hedging prices and the estimated production volumes are less than
the amount covered by these contracts, the Company would be required to
mark-to-market these contracts and recognize any and all losses within the
determination period. Further, under financial instrument contracts the Company
may be at risk for basis differential, which is the difference in the quoted
financial price for contract settlement and the actual physical point of
delivery price. Substantial variations between the assumptions and estimates
used by the Company in its hedging activities and actual results experienced
could materially adversely affect the Company's financial condition and its
ability to manage risk associated with fluctuations in oil and natural gas
prices. Furthermore, the fixed price sales and hedging contracts limit the
benefits the Company will realize if actual prices rise above the contract
prices.
Although the Company's former hedging contracts in effect were terminated
at the closing of the sale of the Old Notes, the Company has since entered into
additional hedging contracts. Historically, 86% and 36% of the Company's
natural gas production was hedged in 1997 and 1996, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Hedging Activities."
DRILLING RISKS
The Company's revenues, operating results and future rate of growth will be
dependent upon the success of its drilling program, which will be funded in
part with the proceeds from the sale of the Old Notes. Oil and natural gas
drilling involves numerous risks, including the risk that no commercially
productive oil or natural gas reservoirs will be encountered. The timing and
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. Oil and
natural gas drilling remains a speculative activity notwithstanding the
Company's use of 3-D seismic data. 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 know whether hydrocarbons are in fact present in such
structures. In addition, the use of 3-D seismic data and other advanced
technologies requires greater predrilling expenditures than traditional
drilling strategies and the Company could incur losses as a result of such
expenditures. Furthermore, completion of a well does not assure a profit on the
investment or a recovery of any portion of drilling, completion or operating
costs.
-14-
<PAGE> 19
Unsuccessful drilling activities could 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 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, in many cases, the Company 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 leased or drilled (or drilled
within the scheduled or budgeted time frame) or that oil or natural gas will be
produced from any such prospects or any other prospects. In addition, prospects
may initially be identified through a number of methods, some of which do not
include interpretation of 3-D or other seismic data. Actual drilling and
results are likely to vary from such statistical results and such variance may
be material. Similarly, the Company's drilling schedule may vary from its
capital budget because of future uncertainties, including those described
above. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ABILITY AND NEED TO REPLACE RESERVES
The Company's future success depends upon its ability to find, develop or
acquire additional oil and natural gas reserves that are economically
recoverable. Unless the Company successfully replaces the reserves that it
produces through successful development, exploration or acquisition, the
Company's proved reserves will decline. Further, substantially all of the
Company's estimated proved reserves at December 31, 1997 were located in the
Lobo Trend, where wells are characterized by high initial production followed
by rapid initial decline rates and a relative flattening of production
thereafter. Additionally, approximately 49% of the PV-10 Value of the Company's
total estimated proved reserves at December 31, 1997 was attributable to
undeveloped reserves (63% on a pro forma basis). Recovery of such reserves will
require significant capital expenditures and successful drilling operations,
and there can be no certainty regarding the results of developing these
reserves. The Company's business strategy is to add reserves by pursuing an
active development drilling program on its properties (including the properties
acquired in the Transactions) and on additional properties that it may acquire
in the future. There can be no assurance that the Company will drill the number
of wells currently projected or that the production from these new wells will
be sufficient to replace production from existing wells during such period. To
the extent the Company is unsuccessful in replacing or expanding its estimated
proved reserves, the Company may be unable to pay the principal of and interest
on the Notes in accordance with their terms, or otherwise to satisfy certain of
its covenants contained in the Indenture. See "Description of Notes--Certain
Covenants."
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES
The proved developed and undeveloped oil and natural gas reserve data
presented in this Prospectus are estimates based on reserve reports prepared by
independent petroleum engineers, as well as internally generated reports by the
Company. The estimation of reserves requires substantial judgment on the part
of the petroleum engineers, resulting in imprecise determinations, particularly
with respect to new discoveries. Estimates of economically recoverable oil and
natural gas reserves and of future net revenues necessarily depend upon a
number of variable factors and assumptions, such as assumed production, which
is based in part on an assessment of 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
natural gas prices, future operating costs, severance and excise taxes, capital
expenditures and workover and remedial costs, all of which may in fact vary
considerably from actual results. Estimates of reserves and of future net
revenues prepared by different petroleum engineers may vary substantially,
depending, in part, on the assumptions made (including assumptions required by
the SEC), as to oil and natural gas prices, drilling, workover, remedial and
operating expenses, capital expenditures, severance and ad valorem taxes and
availability of funds, and may be subject to material adjustment. Estimates of
proved undeveloped reserve quantities, which comprise 55% of the Company's
reserves as of December 31, 1997 (71% on a pro forma basis), are, by their
nature, much less certain than proved developed reserves. The accuracy of any
reserve estimate depends on the quality of available data as well as
engineering and geological interpretation and judgment. Results of drilling,
testing and production or price changes subsequent to the date of the estimate
may result in changes to such estimates. Any significant variance in the
assumptions could materially affect estimates of economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom. The estimates of
future net revenues contained in this Prospectus reflect oil and natural gas
prices and production costs as of the date of estimation, without escalation,
except where changes in prices were fixed under existing contracts. There can
be no assurance that such prices will be realized, estimated production volumes
will be produced or proved undeveloped reserves will be developed during the
period specified in such reports. Either inaccuracies in estimates of proved
undeveloped reserves or the inability to fund development could result in
substantially reduced reserves. In addition, the timing of receipt of estimated
future net revenues from proved undeveloped reserves will be dependent upon the
timing and implementation of drilling and development activities estimated by
the Company for purposes of the reserve report. See "Business and
Properties--Oil and Natural Gas Reserves." The estimated reserves and future
net
-15-
<PAGE> 20
revenues may be subject to material downward or upward revision based upon
production history, results of future development, prevailing oil and natural
gas prices and other factors. A material decrease in estimated reserves or
future net revenues could have a material adverse effect on the Company's
financial condition and results of operations.
In addition, the PV-10 Value of the Company's proved oil and natural gas
reserves does not necessarily represent the current or fair market value of
such proved reserves, and the 10% discount rate required by the SEC may not
reflect current interest rates, the Company's cost of capital or any risks
associated with the development and production of the Company's proved oil and
natural gas reserves. In accordance with applicable SEC requirements, proved
reserves and the future net revenues from which PV-10 Value is derived are
estimated using prices and costs at the date of the estimate held constant
throughout the life of the properties (except to the extent a contract
specifically provides otherwise). The Company emphasizes with respect to such
estimates that the discounted future net cash flows should not be construed as
representative of the fair market value of the proved oil and natural gas
properties belonging to the Company, because discounted future net cash flows
are based upon projected cash flows that do not provide for changes in oil and
natural gas prices or for escalation of expenses and capital costs. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based. Actual results may differ materially
from the results estimated. Holders and prospective purchasers of the Notes are
cautioned not to place undue reliance on the reserve data included in this
Prospectus. The estimated future net revenues attributable to the Company's
proved oil and natural gas reserves, on a pro forma basis, are based on prices
in effect at December 31, 1997 ($2.46 per Mcf of natural gas and $13.71 per Bbl
of oil), which have decreased since December 31, 1997 and may be materially
different than actual future prices. See "Business and Properties--Oil and
Natural Gas Reserves."
SHORTAGES OF DRILLING RIGS, EQUIPMENT, SUPPLIES AND PERSONNEL
In the past, there have been periods where general shortages of drilling
rigs, equipment and supplies have occurred. 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 business, 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
drilling rigs in service. Shortages of qualified rig crews 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
natural 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 business, financial condition and results of
operations.
RISKS ASSOCIATED WITH ACQUISITIONS
The successful acquisition of producing properties requires an assessment
of recoverable reserves, future oil and natural gas prices, operating costs,
potential environmental and other liabilities and other factors. Such
assessments are necessarily inexact. In connection with its assessment of a
potential acquisition, the Company performs a review of the subject properties
that it believes to be generally consistent with industry practices, including
examination of contingencies associated with the properties. Such a review,
however, will not reveal all existing or potential problems nor will it permit
a buyer to become sufficiently familiar with the properties to fully assess the
deficiencies and capabilities of such properties. Inspections may not always be
performed on every well, and structural and environmental problems are not
necessarily observable even when an inspection is undertaken. Even when
problems are identified, the seller may be unwilling or unable to provide
effective contractual protection against all or part of such problems. There
can be no assurance that the Company will be able to identify attractive
acquisition opportunities, obtain financing for acquisitions on satisfactory
terms or successfully acquire identified targets. Furthermore, there can be no
assurance that competition for acquisition opportunities in these industries
will not escalate, thereby increasing the cost to the Company of making further
acquisitions or causing the Company to refrain from making further
acquisitions. In addition, there can be no assurance that any acquisition of
property interests by the Company will be successful and, if unsuccessful, that
such failure will not have a material adverse effect on the Company's future
results of operations and financial condition.
OPERATIONAL HAZARDS AND UNINSURED RISKS
Oil and natural gas drilling activities are subject to numerous risks, many
of which are beyond the Company's control, including the risk that no
commercially productive oil or natural 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
irregularities in
-16-
<PAGE> 21
formations, equipment failures or accidents, adverse weather conditions, title
problems and shortages or delays in the delivery of equipment. The Company's
future drilling activities may not be successful and, if unsuccessful, such
failure will have an adverse effect on future results of operations and
financial condition.
In addition, oil and natural gas operations involve hazards such as fire,
explosion, blowout, pipe failure, casing collapse, unusual or unexpected
formation pressures and environmental hazards such as oil spills, gas leaks,
ruptures and discharges of toxic gases, the occurrence of any one 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. Although
the Company maintains insurance against certain risks that it believes are
customarily insured against by companies in the industry of comparable size and
scope of operations, such insurance does not cover all of the risks and hazards
involved in oil and natural gas exploration, drilling and production because
insurance is unavailable at economic rates, there are limitations in the
Company's insurance policies or for other reasons. Even if coverage does exist,
it may not be sufficient to pay the full amount of liabilities incurred, and
there can be no assurance that such insurance will continue to be available on
terms acceptable to the Company. Any uninsured loss could have a material
adverse effect on the Company's financial condition and results of operations.
See "--Regulatory and Environmental Risks."
COMPETITION IN THE OIL AND NATURAL GAS INDUSTRY
The Company encounters competition from other oil and natural gas companies
in all areas of its operations, including the acquisition of exploratory
prospects and proven properties. Properties within the Lobo Trend are
characterized by large tracts (typically 5,000 to 50,000 acres) that have been
owned by the same families for generations. Securing leases or necessary
permits and approvals for 3-D seismic shoots depends heavily on developing and
maintaining favorable relationships with the surface owners. The Company's
competitors, particularly in the Lobo Trend, include major integrated oil and
natural gas companies and independent oil and natural gas companies,
individuals and drilling and income programs. Most of its competitors are
large, well-established companies with substantially larger operating staffs
and significantly greater capital resources than those of the Company and
which, in many instances, have been engaged in the oil and natural 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 natural gas properties and may
be able to define, evaluate, bid for and purchase a greater number of
properties and prospects than could the Company, given its limited financial
and human resources. There can be no assurance that the Company will be able to
secure the necessary financing or industry partners or evaluate and select
suitable properties and consummate transactions in this highly competitive
environment. See "Business and Properties--Competition."
PROPERTY IMPAIRMENT CHARGES
Effective January 1, 1996, the Company adopted 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," which requires
that long-lived assets held and used by an entity be reviewed for impairment
whenever events or changes indicate that the net book value of an asset may not
be recoverable. The net book value of an asset is reduced to fair value if the
sum of expected undiscounted future net cash flows from the use of the asset is
less than the net book value of the asset. Under SFAS No. 121 the Company
evaluates impairment of oil and natural gas properties on a field basis.
Applying SFAS No. 121, the Company recognized non-cash property impairment
charges of $238,000 in 1997 and $156,000 in 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations." Significant declines in oil or natural gas prices or downward
revisions of reserve estimates could adversely impact the Company's estimates
of future net revenues from its proved reserves and consequently could result
in future non-cash impairment charges against the Company's income.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the efforts and skills of key executives of
the Company, including Glenn D. Hart, Chairman of the Board and Chief Executive
Officer, Michael G. Farmar, President and Chief Operating Officer, and Jerry F.
Holditch, Vice President-Exploration. The loss of any of these officers or
other key personnel could have a material adverse effect on the Company.
Further, as the Company grows its asset base and scope of operations as a
result of the Transactions and other future acquisitions, its future
profitability will depend upon the Company's ability to attract and retain
additional qualified personnel. See "Management."
-17-
<PAGE> 22
CONTROL BY CERTAIN SHAREHOLDERS
The Company is a wholly-owned subsidiary of MHI, which in turn is
principally owned by the management of the Company and MHI. As of the date of
this Prospectus, four of the Company's directors, three of whom are also
executive officers of the Company, beneficially owned 702,050 shares of common
stock of MHI (the "Common Stock") representing, in the aggregate, approximately
91% of the outstanding Common Stock. Such owners, should they act together,
would have sufficient voting power to (i) elect the entire Boards of Directors
of the Company and MHI, (ii) exercise control over the business, policies and
affairs of the Company and MHI and (iii) in general, determine the outcome of
any corporate transaction or other matters submitted to the stockholders for
approval such as (a) any amendment to the Company's Articles of Incorporation,
(b) the authorization of additional shares of capital stock and (c) any merger,
consolidation or sale of all or substantially all of the assets of the Company
which could prevent or cause a change of control of the Company. See "Principal
Shareholders."
REGULATORY AND ENVIRONMENTAL RISKS
Oil and natural 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. From time to time, regulatory
agencies have imposed price controls and limitations on production in order to
conserve supplies of oil and natural gas. In addition, the production,
handling, storage, transportation and disposal of oil and natural gas,
byproducts thereof and other substances and materials produced or used in
connection with oil and natural gas operations are subject to regulation under
federal, state and local laws and regulations. See "Business and
Properties--Governmental Regulation."
The Company is subject to a variety of federal, state and local
governmental laws and regulations related to the storage, use, discharge and
disposal of toxic, volatile or otherwise hazardous materials. These regulations
subject the Company to increased operating costs and potential liability
associated with the use and disposal of hazardous materials. Although these
laws and regulations have not had a material adverse effect on the Company's
financial condition or results of operations, there can be no assurance that
the Company will not be required to make material expenditures in the future.
Moreover, the Company anticipates that such laws and regulations will become
increasingly stringent in the future, which could lead to material costs for
environmental compliance and remediation by the Company. See "Business and
Properties--Governmental Regulation."
Any failure by the Company to obtain required permits for, control the use
of, or adequately restrict the discharge of hazardous substances under present
or future regulations could subject the Company to substantial liability or
could cause its operations to be suspended. Such liability or suspension of
operations could have a material adverse effect on the Company's business,
financial condition and results of operations.
LACK OF PUBLIC MARKET
The Old Notes are designated for trading in the PORTAL market. There is no
established trading market for the New Notes. The Company does not currently
intend to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. Accordingly, there can be no
assurance as to the development of any market or the liquidity of any market
that may develop for the New Notes. If such a market were to exist, no
assurance can be given as to the trading prices of the New Notes, which will
depend on many factors, including, among other things, prevailing interest
rates, the Company's operating results and the market for similar securities.
The liquidity of, and trading market for, the New Notes may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of, and prospects for, the Company.
ADVERSE CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes were sold pursuant to an exemption from the registration
requirements of the Securities Act and their transfer is subject to certain
restrictions under the Securities Act. In general, Old Notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Holders of Old Notes who do not exchange
their Notes for New Notes pursuant to the Exchange Offer will continue to be
subject to such restrictions on transfer of the Old Notes. The Company
currently does not anticipate that it will register the Old Notes under the
Securities Act. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Notes could be adversely affected. See "The Exchange Offer -- Consequences
of Failure to Exchange."
-18-
<PAGE> 23
RISKS ASSOCIATED WITH EXCHANGE OFFER PROCEDURES
The New Notes will be issued in exchange for Old Notes only after timely
receipt by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore,
holders of Old Notes desiring to tender such Old Notes in exchange for New
Notes should allow sufficient time to ensure timely delivery. Neither the
Exchange Agent nor the Company is under any duty to give notification of
defects or irregularities with respect to tenders of Old Notes for exchange.
Old Notes that are not tendered or are tendered but not accepted will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes will be required to comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where the Old Notes were acquired by the
broker-dealer as a result of market-making or any other trading activities,
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution."
YEAR 2000 RISKS
Although the Company does not expect to incur significant expenditures to
address Year 2000 issues, there can be no assurance that this will be the case.
Additionally, the ability of third parties with whom the Company transacts
business to adequately address their Year 2000 issues is outside the Company's
control. There can be no assurance that the failure of the Company or such
third parties to adequately address their respective Year 2000 issues will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company on April 2, 1998, in a private
placement pursuant to an exemption from registration under the Securities Act.
In connection with that private placement, the Company entered into the
Registration Rights Agreement which requires that the Company file the
registration statement of which this Prospectus is a part (the "Registration
Statement") under the Securities Act with respect to the New Notes on or prior
to 45 days after the date of issuance of the Old Notes (the "Issue Date"). The
Registration Rights Agreement further requires that, upon the effectiveness of
the Registration Statement, the Company offer to the holders of the Old Notes
the opportunity to exchange their Old Notes for a like principal amount of New
Notes, which will be issued without a restrictive legend and may be reoffered
and resold by the holder without further registration under the Securities Act.
The Company has agreed to use its reasonable best efforts to cause the
Registration Statement to be declared effective within 120 days following the
Issue Date and to consummate the Exchange Offer within 30 days after the
Registration Statement is declared effective by the Commission. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement.
In order to participate in the Exchange Offer, a holder must represent to
the Company, among other things, that (i) any New Notes to be received by it
will be acquired in the ordinary course of its business, (ii) if the holder is
not a broker-dealer, that it is not engaged in, and does not intend to engage
in, the distribution of the New Notes and it has no arrangement with any person
to participate in the distribution of the New Notes and (iii) it is not an
"affiliate" (as defined in Rule 405 under the Securities Act) of the Company,
or if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer should acknowledge that it acquired the Old Notes for its own
account as the result of market making activities or other trading activities.
Any holder who is unable to make the appropriate representations to the Company
will not be permitted to tender the Old Notes in the Exchange Offer and will be
required to comply with the registration and prospectus delivery requirements
of the Securities Act (or an appropriate exemption therefrom) in connection
with any sale or transfer of the Old Notes.
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third parties unrelated to the Company, the Company believes
that, with the exceptions discussed herein, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any person receiving the New Notes, whether or not
that person is the holder (other than any such holder or such other person that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that (i) the New Notes are
acquired in the ordinary course of business of that holder or such other
person, (ii) neither the holder nor such other person is engaging in or intends
to engage in a distribution (within the meaning of the Securities Act) of the
New
-19-
<PAGE> 24
Notes, and (iii) neither the holder nor such other person has an arrangement or
understanding with any person to participate in the distribution of the New
Notes. See "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes are designated for trading in the PORTAL market. To the
extent Old Notes are tendered and accepted in the Exchange Offer, the principal
amount of outstanding Old Notes will decrease with a resulting decrease in the
liquidity in the market therefor. Following the consummation of the Exchange
Offer, holders of Old Notes who were eligible to participate in the Exchange
Offer but who did not tender their Old Notes will not be entitled to certain
rights under the Registration Rights Agreement, and such Old Notes will
continue to be subject to certain restrictions on transfer. In general, the
Old Notes may not be offered or sold, unless registered under the Securities
Act and applicable state securities laws, except pursuant to an exemption from,
or in a transaction not subject to, the Securities Act and applicable state
securities laws. The Company does not intend to register the Old Notes under
the Securities Act and, after consummation of the Exchange Offer, will not be
obligated to do so.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. As soon as practicable after the Expiration Date, the
Company will issue $1,000 principal amount of New Notes in exchange for each
$1,000 principal amount of outstanding Old Notes accepted in the Exchange
Offer. Holders may tender some or all of their Old Notes pursuant to the
Exchange Offer. However, Old Notes may be tendered only in integral multiples
of $1,000 in principal amount.
The form and terms of the New Notes are identical to the form and terms of
the Old Notes except that the Old Notes were offered and sold in reliance upon
certain exemptions from registration under the Securities Act, while the
offering and sale of the New Notes in exchange for the Old Notes have been
registered under the Securities Act, with the result that the New Notes will
not bear any legends restricting their transfer. Also, holders of the New Notes
will not be entitled to certain rights under the Registration Rights Agreement.
The New Notes will evidence the same debt as the Old Notes and will be issued
pursuant to, and entitled to the benefits of, the Indenture.
As of the date of this Prospectus, $135,000,000 aggregate principal amount
of the Old Notes was outstanding and registered in the name of Cede & Co., as
nominee for the DTC. The Company has fixed the close of business on _______,
1998, as the record date for the Exchange Offer for purposes of determining the
persons to whom this Prospectus, together with the Letter of Transmittal, will
initially be sent. Holders of Old Notes do not have any appraisal or
dissenters' rights under the Texas Business Corporation Act or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and
the rules and regulations of the Commission promulgated thereunder, including
Rule 14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company. If any tendered
Old Notes are not accepted for exchange because of an invalid tender, the
occurrence of certain other events set forth herein or otherwise, the
certificates for such unaccepted Old Notes will be returned, without expense,
to the tendering holder thereof as promptly as practicable after the Expiration
Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes, in connection with the Exchange Offer. See "The
Exchange Offer--Solicitation of Tenders; Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
____, _____________, 1998, unless the Company, in its sole discretion, extends
the Exchange Offer, in which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is extended. In order to
extend the Exchange Offer, the Company will notify the Exchange Agent of any
extension by oral or written notice prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date. The
Company reserves the right, in its sole discretion, (i) to delay accepting any
Old Notes, to extend the Exchange Offer or, if any of the conditions set forth
under "The Exchange Offer--Conditions" shall not have been satisfied, to
terminate the Exchange Offer, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, or (ii) to amend the
-20-
<PAGE> 25
terms of the Exchange Offer in any manner. If the Exchange Offer is amended in
a manner determined by the Company to constitute a material change, the Company
will promptly disclose such amendment in a manner reasonably calculated to
inform the holders of the Old Notes of such amendment. Without limiting the
manner in which the Company may choose to make public announcements of any
delay in acceptance, extension, termination or amendment of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from April 2, 1998, the date of issuance
of the Old Notes that are tendered for exchange of the New Notes (or the most
recent interest payment date to which interest on such Old Notes has been
paid). Accordingly, holders of Old Notes accepted for exchange will not
receive interest that is accrued but unpaid on the Old Notes at the time of
tender, but such interest will be payable on the first interest payment date
after the consummation of the Exchange Offer. Holders of Old Notes accepted
for exchange in the Exchange Offer will be deemed to have waived the right to
receive interest accrued but unpaid thereon as of the date of exchange.
Interest on the New Notes will be payable semi-annually on April 1 and October
1 of each year, commencing October 1, 1998.
PROCEDURES FOR TENDERING
Only a registered holder of Old Notes may tender the Old Notes in the
Exchange Offer. Except as set forth under "The Exchange Offer--Book Entry
Transfer," to tender in the Exchange Offer a holder must complete, sign and
date the Letter of Transmittal, or a copy thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver the Letter of Transmittal or copy to the Exchange Agent for receipt
prior to 5:00 p.m. on the Expiration Date. In addition, either (i) certificates
for such Old Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if that procedure is available,
into the Exchange Agent's account at DTC (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date, or (iii) the
holder must comply with the guaranteed delivery procedures described below. To
be tendered effectively, the Old Notes, Letter of Transmittal and other
required documents must be received by the Exchange Agent at the address set
forth under "The Exchange Offer --Exchange Agent" prior to 5:00 p.m. on the
Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date
will constitute an agreement between that holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M. ON THE
EXPIRATION DATE AND PROPER INSURANCE SHOULD BE OBTAINED. NO LETTER OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the
beneficial owner wishes to tender on its own behalf, such owner must, prior to
completing and executing the Letter of Transmittal and delivering the owner's
Old Notes, either make appropriate arrangements to register ownership of the
Old Notes in the beneficial owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box titled "Special Registration Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. If signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be guaranteed, the
guarantee must be by any eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New
-21-
<PAGE> 26
York Stock Exchange Medallion Signature Program or the Stock Exchange Medallion
Program (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as that registered holder's name appears on the Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal unless waived by the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that the Company
determines are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding after the
Expiration Date or, as set forth under "The Exchange Offer--Conditions," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder, (ii) if it is not a
broker-dealer, neither the holder nor any such other person is engaging in or
intends to engage in a distribution of such New Notes nor has an arrangement or
understanding with any person to participate in the distribution of such New
Notes, and (iii) neither the holder nor any such other person is an "affiliate"
(as defined under Rule 405 of the Securities Act) of the Company. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities (other than Old Notes
acquired directly from the Company), may participate in the Exchange Offer but
may be deemed an "underwriter" under the Securities Act and, therefore, must
acknowledge in the Letter of Transmittal that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that, by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. See "Plan of Distribution."
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the Letter of Transmittal), and all other required
documents. If any tendered Old Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged
Old Notes will be returned without expense to the tendering holder thereof (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described below, such non-exchanged Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration of the Exchange Offer.
-22-
<PAGE> 27
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility system may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or copy thereof, with
any required signature guarantees and any other required documents, must, in
any case other than as set forth in the following paragraph, be transmitted to
and received by the Exchange Agent at the address set forth under "The Exchange
Offer--Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
The DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through the DTC. To accept the Exchange Offer
through ATOP, participants in the DTC must send electronic instructions to the
DTC through the DTC's communication system in lieu of sending a signed, hard
copy Letter of Transmittal. The DTC is obligated to communicate those
electronic instructions to the Exchange Agent. To tender Old Notes through
ATOP, the electronic instructions sent to the DTC and transmitted by the DTC to
the Exchange Agent must contain the character by which the participant
acknowledges its receipt of and agrees to be bound by the Letter of
Transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent received from such Eligible Institution a properly completed and
duly executed Letter of Transmittal (or a facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Old Notes and the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within three NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery. Upon request to the Exchange
Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to
tender their Old Notes according to the guaranteed delivery procedures set
forth above.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal of a tender of Old Notes to be effective, a written or
(for DTC participants only) electronic ATOP transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior to
5:00 p.m., New York City time, on the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender, and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. All questions as
to the validity, form and eligibility (including time of receipt) of such
notices will be determined by the Company, in its sole discretion, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by
-23-
<PAGE> 28
following one of the procedures described under "The Exchange Offer--Procedures
for Tendering" at any time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance
of such Old Notes, if (i) the Exchange Offer shall violate applicable law or
any applicable interpretation of the staff of the Commission, (ii) any action
or proceeding is instituted or threatened in any court or by any governmental
agency that might materially impair the ability of the Company to proceed with
the Exchange Offer or any material adverse development has occurred in any
existing action or proceeding with respect to the Company, or (iii) any
governmental approval has not been obtained, which approval the Company shall
deem necessary for the consummation of the Exchange Offer. If the Company
determines in its sole discretion that any of the conditions are not satisfied,
the Company may (i) refuse to accept any Old Notes and return all tendered Old
Notes to the tendering holders (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described above, such
Old Notes will be credited to an account maintained with such Book-Entry
Transfer Facility), (ii) extend the Exchange Offer and retain all Old Notes
tendered prior to the expiration of the Exchange Offer, subject, however, to the
rights of holders to withdraw such Old Notes (see "--Withdrawal Rights") or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Old Notes which have not been withdrawn. If such
waiver constitutes a material change to the Exchange Offer, the Company will
promptly disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered holders, if the
Exchange Offer would otherwise expire during such five-to-ten-business-day
period.
EXCHANGE AGENT
All executed Letters of Transmittal should be directed to the Exchange
Agent. State Street Bank and Trust Company has been appointed as Exchange
Agent for the Exchange Offer. Questions, requests for assistance and requests
for additional copies of this Prospectus or of the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail:
State Street Bank and Trust Company
Corporate Trust Administration
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
By Overnight Courier:
State Street Bank and Trust Company
Corporate Trust Administration
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
By Hand:
State Street Bank and Trust Company
Corporate Trust Administration
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
By Facsimile:
State Street Bank and Trust Company
Corporate Trust Administration
(860) 244-1889
Confirm by Telephone: (860) 244-1820
-24-
<PAGE> 29
SOLICITATIONS OF TENDERS; FEES AND EXPENSES
The expenses of soliciting acceptances to the Exchange Offer will be borne
by the Company. The principal solicitation is being made by mail; however,
additional solicitations may be made in person or by telephone by officers and
employees of the Company. The Company has not retained any dealer-manager or
similar agent in connection with the Exchange Offer and will not make any
payments to brokers, dealers or others soliciting acceptances of the Exchange
Offer. The Company, however, will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. Other cash expenses to be
incurred in connection with the Exchange Offer and to be paid by the Company
include registration, accounting and legal fees and printing costs, among
others.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the New Notes.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who
instruct the Company to register New Notes in the name of, or request that Old
Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
USE OF PROCEEDS
There will be no cash proceeds to the Company from the Exchange Offer.
The net proceeds to the Company from the sale of the Old Notes (after
deduction of discount, fees and other expenses associated with such sale) were
approximately $127.8 million. Approximately $45.8 million of the net proceeds
were used to repay short-term acquisition indebtedness incurred by the Company
to pay the cash portion of the purchase price of the Enron Acquisition. This
short-term indebtedness was repaid on April 2, 1998 and bore interest at the
rate of 8% per annum. (The cash portion of the purchase price for the Enron
Acquisition as provided in the purchase and sale agreement was $48.5 million,
but was reduced to $45.8 million as a result of certain closing adjustments,
including amounts of net production accrued to the seller's account since
January 1, 1998, the effective date of the Enron Acquisition.) Approximately
$22.5 million of the net proceeds were used to fund the Conoco Acquisition (the
purchase price of the Conoco Acquisition as provided in the purchase and sale
agreement was $23.3 million, but was reduced to $22.5 million as a result of
similar closing adjustments). Approximately $39.0 million of the net proceeds
were used to (i) repay indebtedness under a credit facility with Triassic Energy
Partners, L.P. (the "T.E.P. Financing") incurred in connection with the
acquisition by the Company in August 1996 of interests in approximately 21,000
developed and undeveloped acres in the Lobo Trend (the "Lobo Properties") for
approximately $15.3 million net to the Company (the "1996 Lobo Acquisition") and
(ii) acquire a Net Profits Interest from an affiliate of Triassic Energy
Partners, L.P. Interest on the borrowings under the T.E.P. Financing accrued at
a weighted average stated interest rate of approximately 12.8% per annum as of
March 27, 1998. On April 20, 1998, the Company entered into the Lobo Lease with
Mobil effective as of January 1, 1998 covering Mobil's interest in 39,636 acres
in the Lobo Trend. Partial consideration for the Lobo Lease is in the form of
future deliveries of 4 Bcf of gas, commencing May 1, 1998 and terminating
December 31, 1998. On April 23, 1998, the Company entered into a contract to
secure delivery of this volume of gas for consideration of $9.98 million. The
remainder of the net proceeds from the sale of the Old Notes will be used for
general corporate purposes, including development, drilling and exploitation
activities and property acquisitions. Although the Company is continually
evaluating and pursuing potential property acquisitions, the Company has no
material commitments, contracts, understandings or arrangements at the present
time with respect to any particular acquisition. The allocation of the Company's
net proceeds from the sale of the Old Notes, together with other available
capital, for general corporate purposes, including development, drilling and
exploitation activities and future property acquisitions, is discretionary and
will depend upon future events that cannot be predicted, including the actual
results and costs of future development and exploration drilling and other
activities, the availability and cost of oil and natural gas properties meeting
the Company's acquisition criteria and other matters beyond the control of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Until the net proceeds from the sale of the Old Notes are utilized for
purposes described above, they will be invested in interest-bearing bank
accounts, U.S. government securities, other investment grade debt securities
and other short-term, interest-bearing investments.
-25-
<PAGE> 30
CAPITALIZATION
The following table sets forth the Company's capitalization as of December
31, 1997 on an historical basis and on a pro forma basis. This information
should be read in conjunction with the Financial Statements of the Company and
the Notes thereto, the Unaudited Pro Forma Financial Statements of the Company
and the Notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------
ACTUAL PRO FORMA(1)
------ ------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 8,056 $ --
======= ========
Long-term debt
T.E.P. Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,885 $ --
Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Senior Notes due 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 132,636
------- --------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 19,885 132,636
------- --------
Shareholders' deficit:
Preferred stock, $0.10 par value; 50,000,000 shares authorized;
no shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
-- --
Common stock, $0.10 par value; 100,000,000 shares authorized;
10,000 shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 610 610
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,526) (4,230)
------- --------
Total shareholder's deficit . . . . . . . . . . . . . . . . . . . . . (1,915) (3,619)
------- --------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . $17,970 $129,017
======= ========
</TABLE>
- -------------------
(1) Pro forma to reflect the sale of the Old Notes, the application of the net
proceeds therefrom, the exchange of the Old Notes for New Notes, the
Transactions and the Lobo Lease, as if such transactions had occurred on
December 31, 1997.
-26-
<PAGE> 31
SELECTED HISTORICAL AND PRO FORMA FINANCIAL, OPERATING
AND OIL AND NATURAL GAS RESERVE INFORMATION
The following tables set forth selected financial data on an historical
basis for and as of the end of each of the years in the five-year period ended
December 31, 1997, and on a pro forma basis for and as of the end of the year
ended December 31, 1997. The historical financial data have been derived from
the audited Financial Statements of the Company. The pro forma financial,
operating and oil and natural gas reserve data are not necessarily indicative
of the operating results or financial position that would have been achieved
had the transactions to which they give pro forma effect been effective at the
date or during the period presented or of the results that may be obtained in
the future. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's Financial Statements and the Notes thereto, the Statement of Revenues
and Direct Operating Expenses and the Notes thereto for the Enron Properties,
the Conoco Properties and the Lobo Properties and the Company's Unaudited Pro
Forma Financial Statements and the Notes thereto included elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997(1)
---- ---- ---- ---- ---- -------
(IN THOUSANDS, EXCEPT FOR RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and natural gas sales... $ 4,604 $ 3,429 $ 2,109 $ 3,594 $ 9,139 $31,209
Gain on sale of oil and
natural gas properties... 2,979 163 828 182 -- --
-------- -------- -------- -------- ------- -------
7,583 3,592 2,937 3,776 9,139 31,209
-------- -------- -------- -------- ------- -------
Operating expenses:
Production costs ........... 1,703 1,542 1,228 1,931 1,870 5,115
Depreciation, depletion and
amortization............. 1,261 1,308 1,272 1,180 3,889 10,597
Exploration................. 148 690 850 46 333 333
General and administrative.. 750 735 763 424 980 980
-------- -------- -------- -------- ------ -------
3,862 4,275 4,113 3,581 7,072 17,025
-------- -------- -------- -------- ------- -------
Operating income (loss)........ 3,721 (683) (1,176) 195 2,067 14,184
Interest expense and other,
net.......................... (890) (249) (1,017) (894) (2,063) (16,438)
Income (loss) from continuing
operations before income
taxes........................ 2,831 (932) (2,193) (699) 4 (2,254)
Provision (benefit) for
income taxes (9)............. 49 (79) (79) 1,780 11 (789)
-------- -------- -------- -------- ------- -------
Income (loss) from continuing
operations................... 2,782 (853) (2,114) (2,479) (7) (1,465)
-------- -------- -------- -------- ------- -------
Discontinued operations........ (30) (719) 2,087 -- -- --
-------- -------- -------- -------- ------- -------
Net income (loss).... $ 2,752 $ (1,572) $ (27) $ (2,479) $ (7) $(1,465)
======== ======== ======== ======== ======== =======
OTHER FINANCIAL DATA:
EBITDA(2)...................... $ 2,151 $ 1,152 $ 118 $ 1,239 $ 6,289 $25,114
Cash provided by (used in)
operating activities......... 208 (835) (2,339) 848 3,466 --
Cash provided by (used in)
investing activities......... 726 (3,245) 1,291 (14,753) (14,963) --
Cash (used in) provided by
financing activities......... (2,629) 3,248 1,365 14,750 11,098 --
Ratio of earnings to fixed
charges ..................... 3.0x (3) (3) (3) (3) (3)
======== ======== ======== ======== ======== =======
Pro Forma Ratios:
Ratio of EBITDA to
interest expense .......... 2.4x 4.6x 0.1x 1.4x 3.1x 1.5x
Ratio of total debt to
EBITDA .................... 1.6x 5.9x 58.4x 13.5x 4.4x 5.3x
</TABLE>
-27-
<PAGE> 32
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997(4)
---- ---- ---- ---- ---- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets . . . . . . . . . . . . $ 2,615 $ 1,611 $1,241 $ 4,375 $ 5,255 $ 25,369
Oil and gas properties, net . . . . . . 7,834 9,176 7,890 16,208 28,011 117,311
Total assets . . . . . . . . . . . . . 11,365 11,461 9,145 21,001 33,617 147,490
Total debt . . . . . . . . . . . . . . 3,514 6,812 6,893 16,686 27,941 132,636
Shareholder's equity
(deficit) . . . . . . . . . . . . . . 2,683 1,111 423 (1,908) (1,915) (3,619)
ACNTA(5) . . . . . . . . . . . . . . . . . . . . . . . . . . 19,426 59,532 44,133 230,768
Ratio of ACNTA to total debt . . . . . . . . . . . . . . . . 2.8x 3.6x 1.6x 1.7x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
PRO FORMA
1995 1996 1997 1997(4)
---- ---- ---- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
RESERVE DATA:(6)
Proved reserves:
Oil (MBbls) . . . . . . . . . . . . . . . . . . . . . . . 2,260 239 265 5,445
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . 5,909 49,246 51,165 158,698
Total proved reserves (Mmcfe) . . . . . . . . . . . . . . 19,469 50,678 52,754 191,368
% Natural gas . . . . . . . . . . . . . . . . . . . . . . 30.4% 97.2% 97.0% 82.9%
Proved developed reserves (Mmcfe) . . . . . . . . . . . . 6,761 17,398 23,585 56,682
% Proved developed . . . . . . . . . . . . . . . . . . . 34.7% 34.3% 44.7% 29.6%
Estimated future net cash flows before income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $27,808 $94,199 $78,245 $ 318,132
PV-10 Value(7) . . . . . . . . . . . . . . . . . . . . . . 18,511 60,727 51,487 203,204
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
PRO FORMA
1995 1996 1997 1997(1)
---- ---- ---- -------
<S> <C> <C> <C> <C>
OPERATING DATA:(6)
Production:
Oil (MBbls) . . . . . . . . . . . . . . . . . . . . . . . 79 37 21 209
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . 430 1,324 3,685 11,676
Natural gas equivalent (Mmcfe) . . . . . . . . . . . . . 904 1,546 3,811 12,930
Average sales prices:(8)
Oil, condensate and natural gas liquids (per
Bbl) . . . . . . . . . . . . . . . . . . . . . . . . . $17.65 $ 20.05 $18.95 $ 13.42
Natural gas (per Mcf) . . . . . . . . . . . . . . . . . . 1.67 2.15 2.33 2.42
Natural gas equivalent (per Mcfe) . . . . . . . . . . . . 2.33 2.32 2.35 2.41
Unit economics (per Mcfe):
Average sales price . . . . . . . . . . . . . . . . . . . $ 2.33 $ 2.32 $ 2.35 $ 2.41
Production expenses . . . . . . . . . . . . . . . . . . . (1.36) (1.25) (0.49) (0.40)
General and administrative expenses . . . . . . . . . . . (0.84) (0.27) (0.26) (0.08)
------ ------- ------ --------
Gross margin . . . . . . . . . . . . . . . . . . $ 0.13 $ 0.80 $ 1.60 $ 1.93
====== ======= ====== ========
</TABLE>
- ------------
(1) Pro forma to reflect the sale of the Old Notes, the application of the net
proceeds therefrom, the exchange of the Old Notes for New Notes, the
Transactions and the Lobo Lease, as if such transactions had occurred on
January 1, 1997.
(2) EBITDA is defined as earnings (excluding gain on sale of oil and natural
gas properties) before interest expense, income taxes, depreciation,
depletion and amortization and exploration expense. EBITDA is not a measure
of cash flow as determined by GAAP. EBITDA should not be considered as an
alternative to, or more meaningful than, net income or cash flow as
determined in accordance with GAAP or as an indicator of a company's
operating performance or liquidity. Certain items excluded from EBITDA are
significant components in understanding and assessing a company's financial
performance, such as a company's cost of capital and tax structure, as well
as historic costs of depreciable assets, none of which are components of
EBITDA. The Company's computation of EBITDA may not be comparable to other
similarly titled measures of other companies. The Company believes that
EBITDA is a widely followed measure of operating performance and may also
be used by investors to measure the Company's ability to meet future debt
service requirements, if any. This
-28-
<PAGE> 33
information should be read in conjunction with the Statement of Cash Flows
contained in the Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus.
(3) Earnings were insufficient to cover fixed charges by $1,150,000,
$2,193,000, $916,000 and $570,000 for the historical years ended December
31, 1994, 1995, 1996 and 1997, respectively, and $2,828,000 for the
pro forma year ended December 31, 1997. For purposes of computing the
ratio of earnings to fixed charges, earnings consist of earnings before
income taxes plus fixed charges. Fixed charges consist of interest and
related expenses and an estimated portion of rentals representing interest
costs.
(4) Pro forma to reflect the sale of the Old Notes, the application of the net
proceeds therefrom, the exchange of the Old Notes for New Notes, the
Transactions and the Lobo Lease, as if such transactions had occurred on
December 31, 1997.
(5) ACNTA means Adjusted Consolidated Net Tangible Assets as defined in the
Indenture. See "Description of Notes -- Certain Definitions."
(6) The reserve and present value data as of December 31, 1996 and 1997
(historical and pro forma) have been prepared by Huddleston & Co., Inc.,
independent petroleum engineers to the Company. The reserve and present
value data as of December 31, 1995 was prepared by Mohajir & Associates,
Inc., independent petroleum engineers to the Company. See "Risk Factors --
Uncertainty of Estimates of Reserves and Future Net Reserves," and
"Supplemental Information about Oil and Natural Gas Producing Activities
(Unaudited)" following the Notes to the Financial Statements of the
Company.
(7) PV-10 Value represents the present value of estimated future net revenues
before income tax discounted at 10% using prices in effect at the end of
the respective periods presented and including the effects of hedging
activities. In accordance with applicable requirements of the SEC,
estimates of the Company's proved reserves and future net revenues are made
using oil and natural gas sales prices estimated to be in effect as of the
date of such reserve estimates and are held constant throughout the life of
the properties (except to the extent a contract specifically provides for
escalation). The average prices used in calculating historical PV-10 Value
as of December 31, 1997 were $15.91 per Bbl of oil and $2.42 per Mcf of
natural gas, compared to average prices used as of December 31, 1996 of
$23.86 per Bbl of oil and $2.76 per Mcf of natural gas. The average prices
used in calculating the pro forma PV-10 Value as of December 31, 1997 were
$13.71 per Bbl of oil and $2.46 per Mcf of natural gas.
(8) Reflects the actual realized prices received by the Company, including the
results of the Company's hedging activities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(9) Through June 30, 1996, the Company was taxed under the provisions of
"Subchapter S" of the Internal Revenue Code. Accordingly, no provision
for federal income taxes was recorded for periods ending prior to
June 30, 1996.
-29-
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical and Pro Forma Financial, Operating and Oil and Natural Gas
Reserve Information," the Financial Statements of the Company and the Notes
thereto and the Unaudited Pro Forma Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus.
GENERAL
The Company is an independent energy company engaged in the acquisition,
exploitation and development of oil and natural gas properties, principally in
the Lobo Trend of South Texas. The Company began operations in 1983 and, since
its inception, has demonstrated growth in reserves and production as a result
of acquisitions and successful drilling and development of its oil and natural
gas properties. In August 1996, the Company acquired interests in approximately
21,000 developed and undeveloped acres in the Lobo Trend for approximately
$15.3 million. In 1997, the Company participated in the drilling of 19 natural
gas wells, completing 15 capable of commercial production (a success rate of
79%). In March and April 1998, the Company completed the Transactions. See
"Business and Properties--The Transactions."
The Company will continue to utilize its technical staff and technological
advances to seek to increase its oil and natural gas reserves, production and
cash flow from operations through a development program coupled with strategic
property acquisitions. The Company has in-house exploration expertise using 3-D
seismic technology to identify new drilling opportunities as well as for the
development of acquired properties.
Through the periods presented, the Company's results of operations reflect
two tax structures (S corporations and C corporations) which have influenced,
among other things, the historical levels of its owners' compensation.
Effective July 1, 1996, the Company changed its tax filing status from an S
corporation to a C corporation. Due to this change, the Company recognized a
one-time charge of approximately $2.0 million to reflect deferred income taxes
payable as of June 30, 1996.
The Company utilizes the "successful efforts" method of accounting for its
oil and natural gas activities as described in Note 1 of Notes to Financial
Statements of the Company.
RESULTS OF OPERATIONS
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT DATA)
<S> <C> <C> <C>
Production volumes
Oil and condensate (MBbls) . . . . . . . . . . . . . . . . . . . . . 79 37 21
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . . . . . . . 430 1,324 3,685
Average sales prices
Oil and condensate (per Bbl) . . . . . . . . . . . . . . . . . . . . $ 17.65 $ 20.05 $ 18.95
Natural gas (per Mcf) . . . . . . . . . . . . . . . . . . . . . . . . 1.67 2.15 2.33
Operating revenues
Oil and condensate . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,394 $ 742 $ 565
Natural gas(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 715 2,852 8,574
------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,109 $ 3,594 $ 9,139
======= ======= =======
</TABLE>
- -------------
(1) Net of losses on hedging activities in 1996 and 1997.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Oil and natural gas revenues for the year ended December 31, 1997 increased
153% to $9.1 million compared to $3.6 million for 1996. Production volumes for
natural gas during the year ended December 31, 1997 increased 178% to 3,685
Mmcf from 1,324 Mmcf for 1996. Average gas prices increased 8.3% to $2.33 per
Mcf for 1997 from $2.15 per Mcf for 1996. During April 1998, average
natural gas prices were $2.20 per Mmbtu. The increase in
-30-
<PAGE> 35
natural gas production was due to the 1996 Lobo Acquisition and the Company's
workover and drilling program with respect to the properties acquired and
existing properties.
Oil and natural gas production costs for the year ended December 31, 1997
decreased 3% to $1.87 million from $1.93 million for 1996 primarily due to the
sale of the Company's Hull Field oil properties in August 1996 that
historically had incurred much higher lease operating costs than the Company's
average Lobo Trend natural gas wells. Accordingly, production costs per
equivalent unit decreased to $0.49 per Mcfe for 1997 from $1.25 per Mcfe for
1996. The per unit cost decreased as a result of increased production of
natural gas, which has lower per unit operating costs, and the Company's
disposition in August 1996 of oil producing properties having higher operating
costs.
Depreciation, depletion and amortization ("DD&A") expense for the year
ended December 31, 1997 increased 225% to $3.9 million from $1.2 million for
the same period in 1996. This increase was due to the increased production
during 1997.
Exploration expense increased from $46,000 in 1996 to $333,000 in 1997, due
primarily to the expiration of the terms of certain leases that had not been
developed.
General and administrative expense for the year ended December 31, 1997
increased 131% to $980,000 from $424,000 for 1996, primarily as a result of
increases in the number of employees and related benefits, plus increased legal
and professional fees.
Interest expense, net of capitalized interest, for the year ended December
31, 1997 increased 127% to $2.1 million from $924,000 for 1996. This increase
in interest expense was due to increased debt levels in the second half of 1996
and in 1997 resulting from funds borrowed to acquire and develop the Lobo Trend
properties.
The net loss for the year ended December 31, 1997 decreased to $7,000 from
a net loss of $2.5 million for 1996, as a result of the factors described above
and the $2.0 million income tax charge related to the Company's conversion from
an S corporation to a C corporation in 1996.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Oil and natural gas revenues for 1996 increased 72% to $3.6 million from
$2.1 million for 1995. Production volumes for natural gas for 1996 increased
208% to 1,324 Mmcf from 430 Mmcf for 1995. Average natural gas prices increased
29% to $2.15 per Mcf for 1996 from $1.67 per Mcf for 1995. The increase in oil
and natural gas production was due to the 1996 Lobo Acquisition and the
Company's subsequent workover and recompletion program with respect to the
properties acquired.
Oil and natural gas production costs for 1996 increased 58% to $1.9 million
from $1.2 million for 1995. Oil and natural gas production costs increased due
to increased production resulting from the 1996 Lobo Acquisition and the
workover and recompletion program with respect to the properties acquired.
Production costs per equivalent unit for 1996 decreased to $1.25 per Mcfe from
$1.36 per Mcfe in 1995. The per unit cost decreased as a result of increased
production of natural gas, which has lower per unit operating costs than oil
producing properties.
DD&A expense for 1996 decreased to $1.2 million from $1.3 million for 1995,
primarily as a result of the disposition in July 1996 of oil producing
properties having a high DD&A rate, which offset increased DD&A expense related
to the Lobo Trend properties.
Exploration expense decreased from $850,000 in 1995 to $46,000 in 1996 due
to the Company's focus on development drilling in the Lobo Trend properties.
General and administrative expense for 1996 decreased 44% to $424,000 from
$763,000 for 1995 due primarily to staff and salary reductions which occurred
in late 1995.
Interest expense, net of capitalized interest, for 1996 decreased 15% to
$924,000 from $1,084,000 for 1995. This decrease was primarily due to increased
capitalized interest in 1996 related to development activity on the Lobo Trend
properties.
The provision for income taxes in 1996 of $1.8 million was composed
primarily of the $2.0 million income tax charge related to the Company's
conversion from an S corporation to a C corporation in 1996.
-31-
<PAGE> 36
The net loss for 1996 increased to $2.5 million from a loss of $27,000 for
1995 primarily as a result of the factors discussed above and as a result of
the decrease in the gain on sale of oil and natural gas properties from 1995 to
1996 and implementation of SFAS 109 upon the Company's conversion from an S
corporation to a C corporation in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows (used in) provided by operating activities from the Company's
operations were ($2.3) million, $848,000 and $3.5 million for the years ended
December 31, 1995, 1996 and 1997, respectively. The increases in 1996 and 1997
were primarily attributable to increased production resulting from the 1996
Lobo Acquisition.
Cash flows provided by (used in) investing activities by the Company were
$1.3 million, $(14.8) million and ($15.0) million in 1995, 1996 and 1997,
respectively. Property additions through acquisition, exploration and
development activities were the primary reasons for the use of funds in
investing activities. Partially offsetting these uses of funds were proceeds
from sales of oil and natural gas properties and discontinued operations in
1996 and 1995. Cash flows used in investing activities by the Company for 1997
and 1996 resulted primarily from the acquisition and development of the Lobo
Trend properties.
Cash flows provided by the Company's financing activities were $1.4
million, $14.8 million and $11.1 million in 1995, 1996 and 1997, respectively.
In 1996 and 1997, the positive cash flows from financing activities resulted
from the funding under the T.E.P. Financing.
The Company's primary sources of liquidity have historically been provided
from funds generated by operations and from borrowings, including under the
T.E.P. Financing. In April 1998, the Company completed the sale of $135.0
million original principal amount of Old Notes. Approximately $28.0 million of
the net proceeds from the sale of the Old Notes was used to repay the
indebtedness outstanding under the T.E.P. Financing. See "Use of Proceeds."
During May 1998, the Company expects to enter into the Credit Facility, as
described below under "--Financing Arrangements."
The Company's revenues, profitability, future growth and ability to borrow
funds and obtain additional capital, and the carrying value of its properties,
are substantially dependent on prevailing prices of oil and natural gas. It is
impossible to predict future oil and natural gas price movements with
certainty. Declines in prices received for oil and natural gas would have an
adverse effect on the Company's financial condition, liquidity, ability to
finance capital expenditures and results of operations. Lower prices would also
impact the amount of reserves that can be produced economically by the Company.
The Company has experienced and expects to continue to experience
substantial working capital requirements primarily due to the Company's
development program. While the Company believes that the net proceeds from the
sale of the Old Notes, cash flows from operations and borrowings under the
Credit Facility should allow the Company to implement its present development
drilling strategy, additional financing may be required in the future to fund
the Company's further growth through acquisitions of additional properties. In
the event such capital resources are not available to the Company, its property
acquisitions would be curtailed. See "Risk Factors--Future Need for and
Availability of Capital."
FINANCING ARRANGEMENTS
In August 1996, the Company entered into the T.E.P. Financing, which
provided for an aggregate term loan amount of $42.2 million, of which a maximum
of $16.3 million was available for oil and natural gas property acquisitions
and $25.9 million was available for development drilling, subject in each case
to borrowing base limitations. The Company used approximately $28.0 million of
the net proceeds from the sale of the Old Notes to repay all of the outstanding
indebtedness under the T.E.P. Financing.
Under the T.E.P. Financing, principal was due and payable based upon a
percentage of the Company's gross revenues less operating expenses and
allowable general and administrative expenses. At December 31, 1997, the
Company had borrowed and repaid approximately $2.9 million under the T.E.P.
Financing, and $28.4 million in borrowings were outstanding. Indebtedness under
the T.E.P. Financing bore interest at various rates, depending upon total
utilization of the facility and other factors. At March 27, 1998, a portion of
the outstanding indebtedness under the T.E.P. Financing bore interest at the
prime rate of Citibank, N.A. (the "Prime Rate") (which was 8.5%) plus 3%, a
portion bore interest at the Prime Rate plus 7% and a portion bore interest at
the lender's choice of the Prime Rate plus 4% or LIBOR (as defined) plus 6
1/2%. As of March 27, 1998, the weighted average stated interest rate of
outstanding indebtedness under the T.E.P. Financing was 12.8%. The Company's
obligations under the T.E.P. Financing were secured by all of the oil and
natural gas properties of the Company, as well as the stock of the
-32-
<PAGE> 37
Company. The T.E.P. Financing contained financial covenants, the most
restrictive of which pertained to the payment of dividends, distributions to
shareholders and the Company's working capital ratio. The T.E.P. Financing also
contained administrative covenants.
In addition, in August 1996 the Company granted Cambrian Capital Partners,
L.P., an affiliate of the T.E.P. Financing lender ("Cambrian"), a 30% Net
Profits Interest (as defined in the Net Profits Interest Conveyance dated
August 12, 1996), net to the Company's interest, in all of the Company's
properties, including those acquired in the 1996 Lobo Acquisition; however, no
net profits payments were to be made to Cambrian under the terms of the Net
Profits Interest until the earlier to occur of the payment in full of the
T.E.P. Financing or August 12, 2001. After Cambrian received cash proceeds of
$10.0 million under the Net Profits Interest Conveyance, the Net Profits
Interest was to be reduced from 30% to 15%. As part of the T.E.P. Financing,
the Company also granted to Cambrian a warrant to purchase up to 5% of the
Company's common stock until August 12, 2001. The value assigned to the Net
Profits Interest and warrant was recorded as a discount to the loan proceeds.
The Company used approximately $11.0 million of the net proceeds from the sale
of the Old Notes to acquire the Net Profits Interest. See "Use of Proceeds."
Subject to the restrictions and covenants of the Indenture, the Company
expects to enter into a new reducing revolving credit facility (the "Credit
Facility") with a syndicate of lenders, including Christiania Bank og
KreditKasse ("Christiania"), which will provide for loans in an outstanding
principal amount not to exceed $50.0 million at any one time, subject to a
borrowing base to be determined semi-annually by the administrative agent (the
initial borrowing base is $30.0 million), and the issuance of letters of credit
in an outstanding face amount not to exceed $6.0 million at any one time with
the face amount of all outstanding letters of credit reducing, pro tanto, the
availability of loans under the Credit Facility. Under the Credit Facility, the
principal balance outstanding will be due and payable on the fourth anniversary
of its closing date, and each letter of credit shall be reimbursable by the
Company when drawn, or if not then otherwise reimbursed, paid pursuant to a
loan under the Credit Facility. Commencing on the first anniversary date of the
closing date of the Credit Facility, and continuing until its stated maturity,
the maximum amount available for borrowings and letters of credit will not only
be adjusted (increased or decreased, as applicable) by the semi-annual
borrowing base determination, but also (i) decreased by quarterly mandatory
reductions in the borrowing base and (ii) adjusted for sales of collateral
having an aggregate value exceeding the lesser of $4.0 million per year or 5%
of total proved reserve values.
The interest rate for each borrowing under the Credit Facility will be
calculated at either (i) the ABR rate (as described below) or (ii) the
Eurodollar Rate (as described below) plus 1.75%, at the election of the
Company. Interest on the borrowings under the Credit Facility will be due (i)
with respect to loans bearing interest at the ABR rate, quarterly in arrears,
and (ii) with respect to loans bearing interest at the Eurodollar Rate, on the
last day of each relevant interest period and, in the case of any interest
period longer than three months, on a quarterly basis. The Company's
obligations under the Credit Facility will be secured by substantially all of
the oil and natural gas assets of the Company, including accounts receivable
and material contracts, equipment and gathering systems. The proceeds of the
Credit Facility may be used to finance working capital needs and for general
corporate purposes of the Company in the ordinary course of its business.
Under the Credit Facility, "ABR" means the highest of (i) the interest rate
announced publicly by Christiania as its prime rate in effect in its principal
office in New York, (ii) the secondary market rate for three-month certificates
of deposit (adjusted for statutory reserve requirements) plus 1% and (iii) the
federal funds effective rate from time to time plus 0.5%. "Eurodollar Rate"
means the rate (adjusted for statutory reserve requirements of eurocurrency
liabilities) at which eurodollar deposits for one, two, three or six (or, if
available and acceptable to the Credit Facility lenders, nine or twelve) months
(as selected by the Company) are offered to Christiania in the Interbank
eurodollar market.
The foregoing description of the Credit Facility is based upon a commitment
letter dated March 23, 1998 executed by Christiania and the Company. Initial
funding under the Credit Facility is subject to the negotiation, execution and
delivery of definitive loan documents on or before May 31, 1998, as well as
certain additional conditions, including the sale of the Old Notes, the
repayment of the T.E.P. Financing debt and the closing of the Transactions.
There can be no assurance that the Company will enter into any definitive loan
documents containing the terms described, or at all.
-33-
<PAGE> 38
CAPITAL EXPENDITURES AND OUTLOOK
The following table sets forth the Company's capital expenditures for the
three years ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Property acquisition:
Unproved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30 $ 2,929 $ 355
Proved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 9,554 2,425
Exploration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 -- --
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632 2,757 12,074
Interest capitalized . . . . . . . . . . . . . . . . . . . . . . . . . -- 217 574
------- ------- -------
Total costs incurred . . . . . . . . . . . . . . . . . . . . $ 849 $15,457 $15,428
======= ======= =======
</TABLE>
The Company has budgeted capital expenditures of approximately $24.0
million for 1998. Substantially all of the capital expenditures will be used to
fund drilling activities, property acquisitions and 3-D seismic surveys in the
Company's project areas. The Company intends to drill approximately 29 gross
(25 net) wells in 1998. The actual amounts of capital expenditures and number
of wells drilled may differ significantly from such estimates. See "Business
and Properties -- The Transactions."
HEDGING ACTIVITIES
In an effort to achieve more predictable cash flows and earnings and reduce
the effects of the volatility of the price of oil and natural gas on the
Company's operations, the Company has hedged in the past, and in the future
expects to hedge oil and natural gas prices through the use of swap contracts.
While the use of these hedging arrangements limits the downside risk of adverse
price movements, it also limits future gains from favorable movements. The
Company accounts for these transactions as hedging activities and, accordingly,
gains and losses are included in oil and natural gas revenues in the periods in
which the related production occurs. The Company does not engage in hedging
arrangements in which the production amounts are in excess of the Company's
actual production.
Although the Company's former hedging contracts in effect were terminated
at the closing of the sale of the Old Notes, the Company has entered into
additional hedging contracts. On April 7, 1998, the Company entered into a
costless collar contract with a third party which provides for a floor price of
$2.25 per Mmbtu and a ceiling price of $2.99 per Mmbtu. The collar hedges a
monthly volume of 450,000 Mmbtu from May 1, 1998 through April 30, 1999. Any
gas revenues over $2.99 per Mmbtu will be paid by the Company to the third
party. Conversely, the third party agreed to pay the Company all revenues
equal to the difference between $2.25 per Mmbtu and any price below $2.25 per
Mmbtu; any gas revenues under $2.25 per Mmbtu will be paid to the Company. In
addition, on April 7, 1998 in a separate transaction with a different third
party, the Company purchased put options with a strike price of $2.25 per Mmbtu
for approximately $230,000. The put options hedge a volume of 150,000 Mmbtu per
month from May 1, 1998 to April 30, 1999. All prices are relative to a Houston
Ship Channel Index.
The annual average oil and natural gas prices received by the Company have
fluctuated significantly over the past three years. The Company's weighted
average natural gas price received per Mcf (including the effects of hedging
transactions) was $1.67, $2.15 and $2.33 during the years ended December 31,
1995, 1996 and 1997, respectively. Hedging transactions resulted in a $0.24 and
$0.32 reduction in the Company's weighted average natural gas price received
per Mcf in 1996 and 1997, respectively.
The following table sets forth the increase (decrease) in the Company's
natural gas and oil revenues as a result of hedging transactions and the
effects of hedging transactions on price per Mcf during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Decrease in natural gas revenue (in thousands) . . . . . . . . . . . . $ -- $ (313) (1,159)
Effect of hedging transactions on average gas sales price
(per Mcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ (0.24) $ (0.32)
</TABLE>
-34-
<PAGE> 39
NATURAL GAS BALANCING
The Company incurs certain natural gas production volume imbalances in the
ordinary course of business and utilizes the sale method to account for such
imbalances. Under this method, income is recorded based on the Company's net
revenue interest in production taken for delivery. Management does not believe
that the Company had any material imbalances as of December 31, 1996 or 1997.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by changes
in oil and natural gas prices. If the price of oil and natural gas increases
(decreases), there could be a corresponding increase (decrease) in the
operating cost that the Company is required to bear for operations, as well as
an increase (decrease) in revenues. Inflation has had only a minimal effect on
the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income, which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general- purpose financial
statements. It requires (a) classification of items of other comprehensive
income by their nature in a financial statement and (b) display of the
accumulated balance of other comprehensive income separate from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. The Company does not expect the adoption of SFAS No. 130 to
have a material effect on the Company's financial position, results of
operations or cash flows.
In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, but retains the requirement to report information
regarding major customers. The Company plans to adopt SFAS No. 131 for the year
ended December 31, 1998 and, because the Company operated in only one segment,
does not expect the adoption thereof to have a material effect on the Company's
financial statement disclosures.
In March 1998, the FASB also issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, which is effective for fiscal
years beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. It
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefits obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when SFAS No. 87, Employers' Accounting for Pensions, and
No. 88, Employers' Accounting for Settlements and Curtailments of Deferred
Benefit Pension Plans and for Termination Benefits, were issued. Because the
Company does not currently have pension or other postretirement benefits,
management does not expect the adoption of SFAS No. 132 to have a material
affect on the Company's financial statement disclosures.
-35-
<PAGE> 40
BUSINESS AND PROPERTIES
OVERVIEW
The Company is engaged in the acquisition, exploitation and development of
oil and natural gas properties, principally in the Lobo Trend. The Company has
significantly expanded its production and reserve base in recent years through
development drilling and exploitation activities and by acquiring producing and
undeveloped properties. On March 31 and April 2, 1998, the Company closed the
Transactions, pursuant to which the Company acquired interests in 170 gross (98
net) wells covering approximately 46,900 gross acres and proved reserves of 96
Bcfe as of December 31, 1997. On April 20, 1998, the Company entered into the
Lobo Lease, pursuant to which the Company acquired leashold interests in
undeveloped acreage covering approximately 39,636 gross acres in the Lobo
Trend, adding 43 Bcfe of net proved undeveloped reserves as of December 31,
1997. The interests in properties acquired included acreage that is
geographically close and geologically similar to the Company's other properties.
The Company believes that these acquired properties together with its previously
existing properties have substantial development drilling and exploitation
potential. The Company has initially identified approximately 160 drilling
locations that are expected to be drilled over the next several years. The
Company used approximately $68.3 million of the net proceeds from the sale of
the Old Notes in connection with the closing of the Transactions, including the
repayment of short-term acquisition indebtedness incurred in connection with the
closing of the Enron Acquisition. At December 31, 1997, on a pro forma basis,
the Company owned interests in 280 gross (159 net) wells, approximately 95% of
which were operated by the Company, and had proved reserves totaling 191 Bcfe,
with a PV-10 Value of $203 million.
The Lobo Trend, which is located in Webb and Zapata counties in South
Texas, covers in excess of one million gross acres and contains multi-pay
reservoirs of oil and natural gas. Since 1991, Webb and Zapata counties
collectively have constituted one of the largest onshore natural gas producing
regions in the United States. Although over 3,500 wells have been drilled and
cumulative production from the Lobo Trend since its discovery in 1973 exceeds
6.3 trillion cubic feet of natural gas equivalents, the Lobo Trend is believed
to be only partially exploited, with existing wells producing from only
approximately 125,000 acres. The primary geologic target in the Lobo Trend is
the Lobo sand series of the lower Wilcox formation, which contains three
primary objectives. Two secondary objectives also exist, one above the three
Lobo sands and one below. The Company believes that the existence of these
multi-pay reservoirs reduces drilling risk and enhances the profitability of
invested capital.
The Company began its operations in 1983 and focused on developing
prospects in South Texas. Since the early 1990s, the Company has become an
increasingly active participant in lower risk development drilling in the Lobo
Trend, and in 1996 the Company acquired interests in approximately 21,000
developed and undeveloped acres in the Lobo Trend. The Company uses 3-D seismic
imaging and other advanced exploration technologies in the development and
exploitation of its properties. As of December 31, 1997, on a pro forma basis,
3-D seismic data had been obtained over approximately 90% of the Company's
properties. Based upon the Company's interpretation of 3-D seismic data and
wells drilled in the area, the Company has initially identified, on a pro forma
basis, approximately 160 drilling locations on its properties, 90 of which are
in the Company's proved undeveloped reserve base. During 1998, the Company
intends to drill approximately 29 gross (25 net) wells and has allocated
approximately $23.3 million of its capital expenditure budget for this purpose.
All of the Company's drilling prospects for 1998, on a pro forma basis, were
identified through the use of 3-D seismic data.
The principal executive offices of the Company are located at 13101
Northwest Freeway, Suite 320, Houston, Texas 77040, and its telephone number is
(713) 895-0909.
-36-
<PAGE> 41
BUSINESS STRATEGY
Key elements of the Company's business strategy include the following:
CONTINUE EXPLOITATION AND DEVELOPMENT PROGRAM. The Company intends to
further develop and exploit its properties, including the interests in the
properties acquired in the Transactions and subject to the Lobo Lease, which,
in the aggregate, currently include approximately 160 identified drilling
locations. The Company's development and exploitation program is focused on
lower-risk development drilling opportunities that increase production levels
and proved reserves quantities while minimizing the level of drilling risk. The
Company's strategy in identifying prospective drilling locations is founded on
rigorous analysis of 3-D seismic data which the Company has acquired on over
90% of its acreage on a pro forma basis. All of the locations scheduled to be
drilled in 1998 were identified through the interpretation of 3-D seismic data.
TECHNICAL EXPERTISE. Members of the senior management team have
participated in the drilling of over 600 wells in South Texas which,
collectively, have produced over one trillion cubic feet of natural gas
equivalents. Each member of senior management has over 18 years of industry
experience, and two of the three members of senior management have worked
together for over ten years. The Company believes that its drilling success is
a direct result of the technical knowledge and experience of its geoscience
staff in effective interpretation of well log data and mapping of the
subsurface geology.
OPERATIONAL CONTROL. The Company seeks to operate the wells in which it
owns an interest whenever possible. The Company believes that control over
operations allows it to more effectively control the costs, scope and timing of
drilling and other field operations. Alternatively, when this is not possible,
the Company attempts to only own interests in wells where it has a high degree
of confidence in the operator and because of its percentage ownership can
assert substantial influence with the operator. At December 31, 1997, on a pro
forma basis, the Company owned interests in 280 gross (159 net) wells,
approximately 95% of which were operated by the Company.
PURSUE FOCUSED PROPERTY ACQUISITION PROGRAM. The Company seeks to acquire
producing properties and undeveloped acreage where it has identified
geologically complex multi-pay subsurface environments that are well suited to
the application of 3-D seismic technology. The Company believes that its
technical expertise and historical experience with such properties allows it to
identify opportunities for lower-risk development drilling and exploitation
activities. Given the Company's historic and current scope of operations in
South Texas and its belief that attractive acquisition opportunities will
continue to become available in this area, it will focus its acquisition
efforts primarily in the Lobo Trend and other areas in South Texas. The Company
generally approaches the owners of target properties and attempts to negotiate
terms privately, although the Company will examine and bid on properties being
offered to a broader group of buyers.
CAPITALIZE ON LOCAL RELATIONSHIPS. The Company's 15-year presence in South
Texas has resulted in numerous favorable relationships with local landowners
and their representatives. South Texas is characterized by large blocks of
privately held land which has been controlled by a small number of families for
generations. Lease blocks generally come in packages of between 5,000 and
50,000 acres. The Company believes that its favorable relationships with these
local landowners is a key advantage in its ability to access additional
undeveloped acreage acquisition opportunities. The Company intends to sustain
and expand these relationships in the area.
HISTORY OF THE COMPANY
The Company began operations in 1983, focused on the development of
drilling prospects in South Texas, including prospects in the Lobo Trend. The
Company typically served as operator and retained a small working interest in
its prospects financing its net drilling costs through the sale of a majority
of a prospect's working interests to an industry participant. After the
development of a property, the Company typically sold its interest and
reinvested the capital in new prospects.
To expand its operations, the Company entered into its first credit
facility in 1991. This financing allowed the Company to make several
acquisitions in South Texas outside of the Lobo Trend. All of these acquired
properties were developed and sold within four years. From 1992 to 1996, the
Company continued to acquire and dispose of properties in the Lobo Trend and
other areas of South Texas. This credit facility was retired in 1996.
In 1995, the Company completed the sale of its non-Lobo Trend oil and
natural gas properties. In August 1996, the Company completed the 1996 Lobo
Acquisition, expanding its scope of operations in the Lobo Trend and increasing
its proved reserve base. The 1996 Lobo Acquisition resulted in a multi-year
inventory of drilling opportunities and also provided the Company with
increased working interests in its existing properties. The Company refinanced
existing indebtedness and funded the 1996 Lobo Acquisition with the proceeds
from the T.E.P.
-37-
<PAGE> 42
Financing. In March and April 1998, the Company repaid the indebtedness under
the T.E.P. Financing and completed the Transactions.
THE TRANSACTIONS
To implement the Company's business strategy, the Company completed the
Transactions concurrently with or prior to the closing of the sale of the Old
Notes. The interests acquired in the Transactions have added properties having
approximately 108 initially identified development locations. In addition, the
Transactions are expected to add approximately 96 Bcfe of estimated net proved
reserves, as of December 31, 1997. The Company believes that it has
opportunities to improve production from these properties through additional
development, drilling, reconfiguration of operations and reduction of operating
and administrative costs.
ENRON ACQUISITION. On February 5, 1998, the Company entered into a Purchase
and Sale Agreement with Enron. The Enron Acquisition was consummated on March
31, 1998. Pursuant to the Purchase and Sale Agreement, Enron conveyed to the
Company (i) interests in certain oil and natural gas leases covering
approximately 7,500 gross acres in Hidalgo County and Zapata County, Texas,
(ii) certain interests in leases covering approximately 37,500 gross acres
located in Webb County, Texas (the "Ranch Lands") covering the interval from
the surface of the ground down to 100 feet below the stratigraphic equivalent
of the base of the Lobo 6 sand, (iii) all of Enron's interests in and to a
2.67% non- participating term royalty interest in and to the Ranch Lands
limited in depth to the interval covered by the lease granted on the Ranch
Lands and terminating simultaneously with that portion of the lease granted on
the Ranch Lands and (iv) all seismic data owned by Enron covering the
properties described in (i) and (ii) above.
The purchase price set forth in the Purchase and Sale Agreement for the
Enron Acquisition was $48.5 million, subject to closing and post-closing
adjustments, and the conveyance by the Company to Enron of all of the Company's
interests in certain oil and natural gas properties in Webb County, Texas. The
actual dollar portion of the purchase price paid at closing was $45.8 million,
reflecting closing adjustments, including net production accruing to Enron's
account since January 1, 1998; this amount is subject to further post-closing
adjustments. The dollar portion of the purchase price was paid in the form of
a promissory note issued by the Company in the original principal amount of
$45.8 million (which amount reflected the closing adjustments) and bore
interest at the rate of 8% per annum. This promissory note matured on April 2,
1998, the closing date of the sale of the Old Notes and the Conoco Acquisition,
and the Company used a portion of the net proceeds from the sale of the Old
Notes to repay this short-term acquisition indebtedness. See "Use of Proceeds."
In addition, the Company granted to Enron a non-exclusive license to use the
seismic data it conveyed to the Company.
Pursuant to the Purchase and Sale Agreement, the Company acquired the
properties on an "as is" basis. The Purchase and Sale Agreement also provided
for limited environmental indemnities. In general, Enron must indemnify the
Company for environmental conditions exceeding $50,000, provided that the
Company notifies Enron of such condition within 180 days following the closing.
The Company must indemnify Enron for all other environmental liabilities
incurred by Enron, including claims arising in whole or in part from the sole
or concurrent negligence or gross negligence of Enron.
CONOCO ACQUISITION. On February 20, 1998, the Company entered into a
Purchase and Sale Agreement with Conoco. The Conoco Acquisition was
consummated on April 2, 1998. Pursuant to the Purchase and Sale Agreement,
Conoco conveyed to the Company a leasehold interest in all of Conoco's
interests in approximately 39,000 gross acres located in Webb County, Texas
covering the interval from the surface of the ground down to 100 feet below the
stratigraphic equivalent of the base of the Lobo 6 sand. As consideration for
the rights and property conveyed by Conoco as described above, the Company paid
at closing $22.5 million, which reflected certain closing adjustment provisions
similar to those provided for in the Enron Acquisition Purchase and Sale
Agreement. The Company used a portion of the net proceeds from the sale of the
Old Notes to pay the purchase price of the Conoco Acquisition. See "Use of
Proceeds."
Pursuant to the Purchase and Sale Agreement, the Company acquired the
properties on an "as is" basis. The Purchase and Sale Agreement also provided
for limited environmental indemnities. In general, Conoco must indemnify the
Company for any environmental condition exceeding $50,000 of which the Company
became aware after the closing, provided that the Company notifies Conoco of
such condition within 180 days following the closing. The Company must
indemnify Conoco for all other environmental liabilities incurred by Conoco,
including claims arising in whole or in part from the sole or concurrent
negligence, gross negligence or strict liability of Conoco.
-38-
<PAGE> 43
LOBO LEASE TRANSACTION
By agreement dated April 20, 1998, the Company acquired from Mobil certain
leasehold interests in undeveloped acreage in the Lobo Trend in Webb County,
Texas (the "Lobo Lease"). Under this agreement, Mobil assigned to the Company
its interests in two existing leases and granted by lease interests in
additional undeveloped acreage pursuant to an oil and gas lease having a
primary term of seven years. The lease, which has an effective date of January
1, 1998, covers 39,636 gross acres and covers the interval from the surface of
the ground down to 100 feet below the stratigraphic equivalent of the base of
the Lobo 6 Sand. Excluded from the lease grant are existing productive wells
and certain drilling units on the subject properties. The lease contains
provisions obligating the Company to indemnify Mobil for certain liabilities
incurred by Mobil as a result of the Company's operations on the Lobo Lease
properties, including liabilities for violations of environmental laws.
The Company and Mobil also agreed that effective May 1, 1998, Michael would
be appointed operator with respect to the properties covered by the Lobo Lease
pursuant to a joint operating agreement between them. In order to ensure an
orderly transition of the operator's duties, the Company and Mobil entered into
a transition services agreement, whereby Mobil would continue certain
accounting, administrative and regulatory operations with respect to Lobo Lease
production and operations through August 31, 1998; for these services, the
Company agreed to pay Mobil $25,000.
As part of the consideration for the Lobo Lease and related matters, the
Company agreed to make future deliveries to Mobil of 4.0 Bcf of natural gas. On
April 23, 1998, the Company entered into a contract to secure delivery of this
volume of natural gas from a third party for consideration of $9.98 million.
The interests acquired under the Lobo Lease are estimated to contain net
proved undeveloped reserves of 43 Bcfe of natural gas as of December 31, 1997.
The Lobo Lease transaction increases to 100% the Company's working interest in
an estimated 93 development locations that have been identified to date. The
Company believes that it has opportunities to improve production and cash flows
from the properties subject to the Lobo lease through additional drilling.
PRINCIPAL OIL AND NATURAL GAS PROPERTIES
The Company owns interests in developed and undeveloped properties in South
Texas, primarily in the Lobo Trend and undeveloped acreage in South Texas. At
December 31, 1997, on a pro forma basis, the Company held 78,361 gross (66,093
net) acres in the Lobo Trend area. On a pro forma basis, the Company had drilled
wells on approximately 26% of its total net acreage, as of December 31, 1997.
The Company's Lobo Trend properties represented substantially all of its
reserves and PV-10 Value, as of December 31, 1997, on a pro forma basis. The
Company owns working interests ranging from 10% to 100% in its Lobo Trend
properties and is the operator of over 95% of the wells in which it has an
interest.
The Lobo Trend in Webb and Zapata Counties in South Texas is one of the
largest natural gas producing regions in the United States and, at December 31,
1997, approximately 22 drilling rigs were active in the Lobo Trend for over
nine oil and natural gas companies. The primary geologic target in the Lobo
Trend is the Lobo sand series of the Lower Wilcox formation, which contains
multiple pay sands over an extensive interval that can be as large as 800 feet
in some areas of the Lobo Trend. The primary objectives in the Lobo Trend are
the Lobo 1 and Lobo 6 sands. Other pay sands exist at shallower and deeper
horizons in certain areas of the trend. Extensive faulting has trapped
hydrocarbons in the Lobo Trend producing horizons and has created a complex
geological environment. Until recently, 2-D seismic and subsurface well control
were the primary means for developing the field. The introduction of 3-D
seismic to the area in the early 1990s has improved drilling success rates, and
the Company has similarly experienced an overall increase in its drilling
success rates in the Lobo Trend as technology has evolved.
The Company designates as "proved undeveloped" only those potentially
productive locations that are immediately adjacent to a producing well in the
same fault block. All other potential locations are considered "probable
undeveloped" due to the complex geology of the Lobo Trend. Since 1982, the
Company's success rate has not varied significantly among drilling locations
designated as proved or probable. The Company believes the existence of
multiple pay sands reduces the potential drilling risk in the area.
The Company's Lobo Trend production is from reservoirs at depths between
6,000 to 14,000 feet. Most of the production horizons are of low permeability
and must be fracture stimulated to improve rates of production. As a result, a
typical well has a high initial production rate which declines rapidly and is
followed by a long period of production at a lower rate with a gradual decline.
-39-
<PAGE> 44
OIL AND NATURAL GAS RESERVES
The following table sets forth estimated net proved natural gas and oil and
condensate reserves of the Company and the present value of estimated future
net cash flows related to such reserves as of December 31, 1996, December 31,
1997, and on a pro forma basis as of December 31, 1997. The reserve data and
present values presented have been estimated by Huddleston. For further
information concerning the present value of future net revenue from these
proved reserves, see Note 15 of Notes to Financial Statements of the Company.
See also "Risk Factors--Uncertainty of Estimates of Reserves and Future Net
Revenues."
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
PRO FORMA
1996 1997 1997(2)
---- ---- ---------
<S> <C> <C> <C>
Estimated proved reserves:
Oil and condensate (MBbls) . . . . . . . . . . . . . . . . . . . . 239 265 5,445
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . . . . . . 49,246 51,165 158,698
Natural gas equivalents (Mmcfe) . . . . . . . . . . . . . . . . . . 50,678 52,754 191,368
Proved developed reserves as a percentage of proved reserves . . . . 34% 45% 29.6%
PV-10 Value (dollars in thousands)(1) . . . . . . . . . . . . . . . . $60,727 $51,487 $203,204
</TABLE>
- -------------
(1) PV-10 Value represents the present value of estimated future net revenues
before income tax discounted at 10% using prices in effect at the end of
the respective periods presented and including the effects of hedging
activities. In accordance with applicable requirements of the SEC,
estimates of the Company's proved reserves and future net revenues are made
using oil and natural gas sales prices estimated to be in effect as of the
date of such reserve estimates and are held constant throughout the life of
the properties (except to the extent a contract specifically provides for
escalation). The average prices used in calculating historical PV-10 Value
as of December 31, 1997 were $15.91 per Bbl of oil and $2.42 per Mcf of
natural gas, compared to average prices used as of December 31, 1996 of
$23.86 per Bbl of oil and $2.76 per Mcf of natural gas. The average prices
used in calculating the pro forma PV-10 Value as of December 31, 1997 were
$13.71 per Bbl of oil and $2.46 per Mcf of natural gas.
(2) Pro forma to reflect the sale of the Old Notes, the application of the net
proceeds therefrom, the exchange of the Old Notes for New Notes, the
Transactions and the Lobo Lease, as if such transactions had occurred on
December 31, 1997.
There are numerous uncertainties inherent in estimating quantities of
proved oil and natural 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
represents estimates only. Reserve engineering is a subjective process of
estimating underground accumulations of oil and natural gas that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates made by different engineers
often vary. 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 natural 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. See
"Risk Factors--Uncertainties of Estimates of Reserves and Future Net Revenues."
No estimates of proved reserves comparable to those included herein have
been included in reports to any federal agency.
Production, Prices and Expenses
The following table presents certain information with respect to oil and
natural gas production, prices and expenses attributable to oil and natural gas
property interests owned by the Company for the years ended December 31, 1995,
1996 and 1997 and on a pro forma basis for the year ended December 31, 1997.
-40-
<PAGE> 45
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
PRO FORMA
1995 1996 1997 1997(1)
---- ---- ---- ---------
<S> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls) . . . . . . . . . . . . . . . 79 37 21 209
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . 430 1,324 3,685 11,676
Total (Mmcfe) . . . . . . . . . . . . . . . . . . 904 1,546 3,811 12,930
AVERAGE REALIZED PRICES:
Oil, condensate and natural gas liquids (per Bbl) . . . . $ 17.65 $ 20.05 $ 18.95 $ 13.42
Natural gas (per Mcf) . . . . . . . . . . . . . . . . . . 1.67 2.15 2.33 2.42
Natural gas equivalents (per Mcfe) . . . . . . . . . . . 2.33 2.32(2) 2.35(2) 2.41(2)
EXPENSES (PER MCFE):
Production costs . . . . . . . . . . . . . . . . . . . . 1.36 1.25 0.49 0.40
Depreciation, depletion and amortization . . . . . . . . 1.41 0.76 1.02 0.82
General and administrative, net . . . . . . . . . . . . . 0.84 0.27 0.26 0.08
</TABLE>
- -------------
(1) Pro forma to reflect the sale of the Old Notes, the application of the net
proceeds therefrom, the exchange of the Old Notes for New Notes, the
Transactions and the Lobo Lease, as if such transactions had occurred on
January 1, 1997.
(2) Includes effects of hedging transactions.
Productive Wells
The following table sets forth the number of productive wells in which the
Company owned an interest as of December 31, 1997 on a historical and pro forma
basis:
<TABLE>
<CAPTION>
ACTUAL ACTUAL PRO FORMA PRO FORMA
GROSS WELLS NET WELLS GROSS WELLS NET WELLS
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- --
Natural gas . . . . . . . . . . . . . . . . . . . . . . . . 76 42 280 159
-- -- --- ---
Total . . . . . . . . . . . . . . . . . . . . . . 76 42 280 159
== == === ===
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including natural gas wells awaiting pipeline connection and oil
wells awaiting connection to production facilities. Wells that are completed in
more than one producing horizon are counted as one well.
Acreage
The following table sets forth the Company's developed and undeveloped
gross and net leasehold acreage as of December 31, 1997 and on a pro forma
basis as of December 31, 1997.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL PRO FORMA
--------- ----------- ----- ---------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lobo Trend. . 20,676 11,554 8,206 5,516 28,882 17,070 74,516 62,248
Other . . . . 640 640 -- -- 640 640 3,845 3,845
--- --- -- -- --- --- ----- -----
Total . . . . 21,316 12,194 8,206 5,516 29,522 17,710 78,361 66,093
====== ====== ===== ===== ====== ====== ====== ======
</TABLE>
Undeveloped acreage includes leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and natural gas, regardless of whether or not such acreage
contains proved reserves. A gross acre is an acre in which an interest is
owned. A net acre is deemed to exist when the sum of fractional ownership
interests in gross acres equals one. The number of net acres is the sum of the
fractional interests owned in gross acres expressed as whole numbers and
fractions thereof.
-41-
<PAGE> 46
Drilling Activities
The table below sets forth the drilling activity of the Company on its
properties for the years ended December 31, 1995, 1996 and 1997 on a historical
basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Development wells:
Productive . . . . . . . . . . . . . 2 0.9 2 1.2 15 9.2
Non-productive . . . . . . . . . . . -- -- -- -- 4 2.5
---- ---- ---- ---- ---- ----
Total . . . . . . . . . . . . 2 0.9 2 1.2 19 11.7
==== ==== ==== ==== ==== ====
Exploratory wells:
Productive . . . . . . . . . . . . . -- -- -- -- -- --
Non-productive . . . . . . . . . . . -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total . . . . . . . . . . . . -- -- -- -- -- --
Total development and
exploratory . . . . . 2 0.9 2 1.2 19 11.7
==== ==== ==== ==== ==== ====
</TABLE>
From January 1, 1998 through March 31, 1998, the Company participated in
drilling activities on 2 gross (1.33 net) wells. Of the 2 gross (1.33 net)
wells, 2 gross (1.33 net) wells are being completed, or have been completed as
commercial producers, no wells were dry holes and 1 gross (0.7 net) well was
being drilled. As of May 8, 1998, this well is being completed as a
commercial producer.
Oil and Natural Gas Marketing and Transportation
The revenues generated by the Company's operations are highly dependent
upon the prices of and demand for oil and natural gas. The price received by
the Company for its oil and natural gas production depends on numerous factors
beyond the Company's control. Historically, the markets for oil and natural gas
have been volatile and are likely to continue to be volatile in the future.
Prices for oil and natural gas are subject to wide fluctuation in response to
relatively minor changes in the supply and demand for oil and natural gas,
market uncertainty and a variety of additional factors. 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 actions of the Organization of
Petroleum Exporting Countries, the foreign supply of oil and natural gas and
overall economic conditions. It is impossible to predict future oil and natural
gas price movements with any certainty. Declines in oil and natural gas prices
may adversely affect the Company's financial condition, liquidity and results
of operations. See "Risk Factors--Volatility of Natural Gas and Oil Prices" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company currently markets all of its natural gas through Upstream
Energy Services, L.L.C. ("Upstream") pursuant to a Natural Gas Sales Agreement
dated as of April 1, 1996 (the "Sales Agreement"). The Company and the
predecessor to Upstream had similar marketing arrangements from 1991 to April
1996. Under the Sales Agreement, the Company has agreed to sell, and Upstream
has agreed to market all of the natural gas produced from properties owned or
operated by the Company at the price realized by Upstream from the sale of such
natural gas production less (i) the costs incurred by Upstream in the
transportation, treating and handling of the gas prior to resale and (ii) $0.03
per Mmbtu sold, as measured at the point of delivery. The Sales Agreement is
effective for a two-year period and is renewable quarterly thereafter, subject
to either party giving 60 days written notice of termination. The Company and
Upstream are currently renegotiating the terms of the Sales Agreement and
expect to renew it on terms more favorable to the Company. Until August 1997,
the Company's Chief Executive Officer owned an aggregate of approximately 20%
of the capital stock of Upstream. See "Certain Transactions."
In conjunction with the 1996 Lobo Acquisition, Conoco (as the successor in
interest to the seller) and the Company entered into a Gas Exchange Agreement
whereby such parties agreed that the Company would deliver to Conoco all of the
natural gas produced from the leases acquired in the 1996 Lobo Acquisition at
the point(s) at which such gas enters the transmission pipelines owned by Lobo
Pipeline Company ("Lobo Pipeline") (the "delivery point") in exchange for
natural gas in the same quantity and quality delivered by Conoco at the Agua
Dulce hub near Corpus Christi, Texas. The parties' obligations under the Gas
Exchange Agreement are subject to the natural gas delivered and the pipeline
meeting certain specifications. The title to the Company gas vests in Conoco at
the delivery point, except to the extent such amount exceeds the amount of
redelivered gas at the redelivery point, in which case the Company retains
title and ownership of such excess, which is then transported by Lobo Pipeline
pursuant to an Interruptible Gas Transportation Agreement. The consideration
received by Lobo Pipeline is $0.17 per Mcf for compression, transportation and
dehydration.
-42-
<PAGE> 47
COMPETITION
The oil and natural gas industry is highly competitive, and the Company
encounters competition from other oil and natural gas companies in all areas of
its operations, including the acquisition of seismic, lease options,
exploratory prospects and proven properties. The Company's competitors in the
Lobo Trend area include major integrated oil and natural gas companies,
including Chevron Corporation, Conoco, Mobil Corporation, Enron Corp. and Sonat
Exploration Company, and numerous independent oil and natural gas companies,
individuals and drilling and income programs. Many of the Company's
competitors, including those with whom it competes in the Lobo Trend, are
large, well-established companies with substantially larger operating staffs
and significantly greater capital resources than those of the Company and
which, in many instances, have been engaged in the oil and natural 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 natural gas properties and may
be able to define, evaluate, bid for and purchase a greater number of
properties and prospects than could the Company, given its limited financial
and human resources. 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 natural gas companies.
The Company's ability to acquire additional properties in the future will
be dependent upon its ability to evaluate and select suitable properties and to
consummate transactions in this highly competitive market. The Company believes
that the technological expertise and experience of its management in exploiting
the Lobo Trend, as well as the Company's relationships with landowners in the
area, generally enable it to compete effectively in the Lobo Trend. However,
the business of developing or acquiring reserves is capital intensive,
especially in the Lobo Trend area where the land blocks typically range between
5,000 and 50,000 acres. The Company will require additional financing or
participation of industry partners to effect future acquisitions in this area.
Such additional financing may take the form of equity securities, debt
securities or some combination thereof, and there can be no assurance that such
financing will be available on terms that are acceptable to the Company.
Failure to secure such financing or to locate industry partners would adversely
affect the Company's ability to compete with these other companies for lease
acreage as it may become available. In addition, to the extent that the Company
engages in oil and natural gas exploration and production activities on
properties in geographic areas other than the Lobo Trend area, the Company may
be subject to additional competitive disadvantages due to its lack of
experience in and familiarity with prospect characteristics of those areas.
GOVERNMENTAL REGULATION
General. Various aspects of the Company's oil and natural gas operations
are subject to extensive and continually changing regulation, as legislation
affecting the oil and natural gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, both federal and
state, are authorized by statute to issue, and have issued, rules and
regulations binding upon the oil and natural gas industry and its individual
members. The Federal Energy Regulatory Commission (the "FERC") regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy
Act of 1978 (the "NGPA"). In the past, the federal government has regulated the
prices at which oil and natural gas could be sold. While sales by producers of
natural gas and all sales of crude oil, condensate and natural gas liquids can
currently be made at uncontrolled market prices, Congress could reenact price
controls in the future. Deregulation of wellhead sales in the natural gas
industry began with the enactment of the NGPA in 1978. In 1989, Congress
enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The
Decontrol Act removed all remaining NGA and NGPA price and nonprice controls
affecting wellhead sales of natural gas effective January 1, 1993.
Regulation of Sales and Transportation of Natural Gas. The Company's sales
of natural 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 natural gas industry. As
a result of initiatives like FERC Order No. 636, issued in April 1992, the
interstate natural gas transportation and marketing system has been
substantially restructured to remove various barriers and practices that
historically limited nonpipeline natural 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 firm and
interruptible transportation service on an open access basis that is equal for
all natural gas suppliers. In many instances, the results of Order No. 636 and
related initiatives have been to substantially reduce or eliminate the
interstate pipelines' traditional role as wholesalers of natural gas in favor
of providing only storage and transportation services. While the United States
Court of Appeals upheld most of Order No. 636 last year, certain related FERC
orders, including the individual pipeline restructuring proceedings, are still
subject to judicial review and may be reversed or remanded in whole or in part.
While the outcome of these proceedings cannot be predicted with certainty, the
Company does not believe
-43-
<PAGE> 48
that it will be affected materially differently than its competitors.
The FERC has also 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. Both the policy statement and
individual pipeline negotiated rate authorizations are currently subject to
appeal before the U.S. Court of Appeals for the D.C. Circuit. In February 1997,
the FERC announced a broad inquiry into issues facing the natural gas industry
to assist the FERC in establishing regulatory goals and priorities in the
post-Order No. 636 environment. In October 1997, the United States Court of
Appeals for the Fifth Circuit vacated a FERC decision and remanded it to the
agency with directions to reconsider the criteria FERC used to distinguish
nonjurisdictional gathering from jurisdictional transportation on offshore
pipeline systems.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, the FERC, state commissions and the
courts. The natural 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 natural 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.
Environmental. Extensive federal, state and local laws regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment affect the Company's oil and natural gas
operations. Numerous governmental departments issue rules and regulations to
implement and enforce such laws, which are often difficult and costly to comply
with and which carry substantial civil and even criminal penalties for failure
to comply. Some laws, rules and regulations relating to protection of the
environment may, in certain circumstances, impose strict liability for
environmental contamination, rendering a person or entity liable for
environmental damages and cleanup costs without regard to negligence or fault
on the part of such person or entity. Other laws, rules and regulations may
restrict the rate of oil and natural gas production below the rate that would
otherwise exist or even prohibit exploration and production activities in
sensitive areas. In addition, state laws often require various forms of
remedial action to prevent pollution, such as closure of inactive pits and
plugging of abandoned wells. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and consequently affects the
Company's profitability. The Company believes that it is in substantial
compliance with current applicable environmental laws and regulations and that
continued compliance with existing requirements will not have a material
adverse impact on the Company's operations. However, environmental laws and
regulations have been subject to frequent changes over the years, and the
imposition of more stringent requirements could have a material adverse effect
upon the capital expenditures or competitive position of the Company.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes liability, without regard to fault or the legality of the
original act, on certain classes of persons that are considered to be
responsible for the release of a "hazardous substance" into the environment.
These persons include the current or former owner or operator of the disposal
site or sites where the release occurred and companies that disposed or
arranged for the disposal of hazardous substances at the disposal site. Under
CERCLA such persons may be subject to joint and several liability for the costs
of investigating and cleaning up hazardous substances that have been released
into the environment, for damages to natural resources and for the costs of
certain health studies. Comparable state statutes also impose liability on the
owner or operator of a property for remediation of environmental contamination
existing on such property. In addition, companies that incur liability
frequently confront third party claims because it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by hazardous substances or other
pollutants released into the environment from a polluted site.
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that have been used for the exploration and production of
oil and natural gas and for other uses associated with the oil and gas
industry. Although the Company has followed operating and disposal practices
that it considered appropriate under applicable laws and regulations,
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 other locations
where such wastes were taken for disposal. In addition, the Company owns or
leases properties that have been operated by third parties in the past. The
Company could incur liability under CERCLA or comparable state statutes for
contamination caused by wastes it generated or for contamination existing on
properties it owns or leases, even if the contamination was caused by the waste
disposal practices of the prior owners or operators of the properties.
-44-
<PAGE> 49
The Federal Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act of 1976 ("RCRA"), regulates the generation,
transportation, storage, treatment and disposal of hazardous wastes and can
require cleanup of hazardous waste disposal sites. RCRA currently excludes
drilling fluids, produced waters and other wastes associated with the
exploration, development or production of oil and natural gas from regulation
as "hazardous waste." A similar exemption is contained in many of the state
counterparts to RCRA. Disposal of such nonhazardous oil and natural gas
exploration, development and production wastes usually is regulated by state
law. Other wastes handled at exploration and production sites or used in the
course of providing well services may not fall within this exclusion. Moreover,
stricter standards for waste handling and disposal may be imposed on the oil
and gas industry in the future. From time to time legislation has been proposed
in Congress that would revoke or alter the current exclusion of exploration,
development and production wastes from the RCRA definition of "hazardous
wastes" thereby potentially subjecting such wastes to more stringent handling
and disposal requirements. If such legislation were enacted, or if changes to
applicable state regulations required the wastes to be managed as hazardous
wastes, it could have a significant impact on the operating costs of the
Company, as well as the oil and gas industry in general.
The Company's operations are also subject to the Clean Air Act (the "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
operations of the Company. The Company may be required to incur certain capital
expenditures in the next several years for air pollution control equipment in
connection with obtaining and maintaining operating permits and approvals for
air emissions. However, the Company believes its operations will not be
materially adversely affected by any such requirements, and the requirements
are not expected to be any more burdensome to the Company than to other
similarly situated companies involved in oil and natural gas exploration and
production activities or well servicing activities.
The Federal Water Pollution Control Act of 1972 (the "FWPCA") imposes
restrictions and strict controls regarding the discharge of wastes, including
produced waters and other oil and natural gas wastes, into navigable waters.
These controls have become more stringent over the years, and it is probable
that additional restrictions will be imposed in the future. Permits must be
obtained to discharge pollutants into state and federal waters. The FWPCA
provides for civil, criminal and administrative penalties for unauthorized
discharges of oil and other hazardous substances and imposes substantial
potential liability for the costs of removal or remediation. State laws
governing discharges to water also provide varying civil, criminal and
administrative penalties and impose liabilities in the case of a discharge of
petroleum or its derivatives, or other hazardous substances, into state waters.
In addition, the Environmental Protection Agency has promulgated regulations
that require many oil and natural gas production sites, as well as other
facilities, to obtain permits to discharge storm water runoff. The Company
believes that compliance with existing requirements under the FWPCA and
comparable state statutes will not have a material adverse effect on the
Company's financial condition or results of operations.
The Company maintains insurance against "sudden and accidental" occurrences
which may cover some, but not all, of the environmental risks described above.
Most significantly, the insurance maintained by the Company may not cover the
risks described above that are not attributable to a single, abrupt event.
Further, there can be no assurance that such insurance will continue to be
available to cover all such costs or that such insurance will be available at
premium levels that justify its purchase. The occurrence of a significant event
not fully insured or indemnified against could have a material adverse effect
on the Company's financial condition and results of operations.
Regulation of Oil and Natural Gas Exploration and Production. Exploration
and production operations of the Company are subject to various types of
regulation at the federal, state and local levels. Such regulations include
requiring permits and drilling bonds for the drilling of wells, regulating the
location of wells, the method of drilling and casing wells, and the surface use
and restoration of properties upon which wells are drilled. Many states also
have statutes or regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and gas properties, the
establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. Some state
statutes limit the rate at which oil and gas can be produced from the Company's
properties. See "Risk Factors--Regulatory and Environmental Risks" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Hedging Activities."
ABANDONMENT COSTS
The Company is responsible for payment of plugging and abandonment costs on
oil and natural gas properties pro rata to its working interest. Historically,
the ultimate aggregate salvage value of lease and well equipment located on the
Company's properties has exceeded the costs of abandoning such properties.
There can be no assurance, however, that such historical trend will continue or
that the Company will be successful in avoiding additional expenses in
connection with the abandonment of any of its properties. In addition,
abandonment costs and their
-45-
<PAGE> 50
timing may vary due to many factors including actual production results,
inflation rates and changes in environmental laws and regulations.
OPERATING HAZARDS AND INSURANCE
The oil and natural gas business involves a variety of operating risks,
including the risk of fire, explosion, blowout, pipe failure, casing collapse,
unusual or unexpected formation pressures 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 operating risks described above.
The Company's insurance does not cover business interruption or protect against
loss of revenues. 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 economic rates. The occurrence of a significant event against
which it is not fully insured or indemnified could have a material adverse
effect on the Company's financial condition or results of 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
natural 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. Many of the Company's oil and
natural gas properties are held in the form of mineral leases. The Company's
indebtedness under the T.E.P. Financing was, and indebtedness to be incurred
under the Credit Facility is expected to be, secured by substantially all of
the Company's oil and natural gas properties.
As is customary in the oil and natural gas industry, a preliminary
investigation of title is made at the time of acquisition of undeveloped
properties. Title investigations, including a title opinion of local counsel,
are generally completed, however, before commencement of drilling operations or
the acquisition of producing properties. The Company believes that its methods
of investigating title to, and acquiring, its oil and natural gas properties
are consistent with practices customary in the industry and that it has
generally satisfactory title to the leases covering its proved reserves.
EMPLOYEES
At March 31, 1998, the Company employed 15 full-time employees (of which
three were engineers) and four independent contractors, including one geologist
and three gaugers. The Company believes that its relationships with its
employees are satisfactory. None of the Company's employees are covered by a
collective bargaining agreement. From time to time, the Company utilizes the
services of independent consultants and contractors to perform various
professional services, particularly in the areas of construction, design, well
site surveillance, permitting and environmental assessment.
LEGAL PROCEEDINGS
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of business, but is not currently a party to
litigation that it believes would have a material adverse effect on the
financial condition or results of operations of the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company. A summary of the background
and experience of each of these individuals is set forth following the table.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
Glenn D. Hart . . . . . . . . . . . . . . . . 41 Chairman of the Board and Chief Executive Officer
Michael G. Farmar . . . . . . . . . . . . . . 40 President, Chief Operating Officer and Director
Jerry F. Holditch . . . . . . . . . . . . . . 40 Vice President-Exploration and Director
</TABLE>
-46-
<PAGE> 51
<TABLE>
<S> <C> <C>
Robert L. Swanson . . . . . . . . . . . . . . 40 Vice President-Finance
Scott R. Sampsell . . . . . . . . . . . . . . 41 Vice President, Controller, Treasurer and Secretary
Jim R. Smith . . . . . . . . . . . . . . . . 58 Director
Jack I. Tompkins . . . . . . . . . . . . . . 52 Director
Bryant H. Patton . . . . . . . . . . . . . . 39 Director
</TABLE>
Glenn D. Hart served as President of the Company from its inception in 1982
until August 1996, when he was elected to his current position as Chairman of
the Board and Chief Executive Officer. From 1980 to 1983, Mr. Hart was an
engineering manager with Sanchez-O'Brien Oil & Gas Corporation, an independent
exploration and production company in South Texas. From 1978 to 1980, he held
several engineering positions with Tenneco Oil Company's Gulf Coast District.
Mr. Hart has a B.S. in petroleum engineering from Texas A&M University.
Michael G. Farmar has served as President and Director of the Company since
August 1996 and was elected Chief Operating Officer in January 1997. From
January 1995 to August 1996, Mr. Farmar served as a financial advisor to small
independent oil companies. In 1988, Mr. Farmar joined Odyssey Petroleum
Company, where, as General Manager, he was responsible for operational and
financial functions of the company until it was sold in 1994. As an analyst for
Maxus Exploration Company from 1986 until 1988, Mr. Farmar worked on mergers,
acquisitions and divestitures. From 1984 to 1986, Mr. Farmar served in Diamond
Shamrock Exploration Company's strategic planning group. Mr. Farmar began his
career with Chevron U.S.A. in 1980 and held drilling and production engineering
positions through 1983. Mr. Farmar holds a B.S. in petroleum engineering from
the University of Southern California and an MBA from Southern Methodist
University.
Jerry F. Holditch joined the Company in 1987 and has served as Vice
President of Exploration and as Director since that time. From 1982 until 1987,
Mr. Holditch served as a developmental geologist with TransTexas Gas
Corporation and its predecessors, where he was involved in numerous drilling
activities in the Lobo Trend area. From 1980 until 1982, Mr. Holditch was
employed as a Gulf Coast geologist with Gulf Oil Corporation. Mr. Holditch
holds a B.S. in geology from Texas A&M University.
Robert L. Swanson joined the Company in September 1997 and has served as
Vice President of Finance since that time. From 1994 until joining the
Company, Mr. Swanson served as controller, chief financial officer and
treasurer of Southwest Ice Enterprises, L.C., a Texas limited liability company
and the owner and operator of a professional hockey team in Houston, Texas.
Prior to joining Southwest Ice Enterprises, L.C., Mr. Swanson was employed as a
public accountant from 1985 to 1994 with two Houston-area accounting firms and
one San Antonio-area accounting firm. Mr. Swanson is a certified public
accountant and is a member of the American Institute of Certified Public
Accountants and the Texas Society of Certified Public Accountants.
Scott R. Sampsell, 41, has served as the Company's Controller and Treasurer
since 1992 and was appointed to the additional positions of Vice President and
Secretary in April 1998. From 1982 to 1992, Mr. Sampsell worked in various
accounting supervisory roles with Union Texas Petroleum Corporation, an
independent exploration and production company, including Manager of Financial
and Operational Accounting for one of its subsidiaries. From 1977 until 1982,
Mr. Sampsell worked with Supron Energy Corporation, an independent exploration
and production company, where he began as staff accountant and advanced to
Assistant Treasurer.
Jim R. Smith has served as a Director of the Company since November 1996.
Since 1964, Mr. Smith has managed a privately-owned real estate development
company headquartered in Houston, Texas, which he founded. Mr. Smith is also a
private investor and holds positions with several non-profit organizations,
including Chairman of the Board of Directors of Goodwill Industries of Houston.
Jack I. Tompkins has served as a Director of the Company since July 1997.
Mr. Tompkins is a managing director of Raintree Equity Advisors, L.L.C. and is
Chairman of the Board of Automotive Realty Trust of America. From 1988 until
October 1996, Mr. Tompkins served as Senior Vice President, Chief Information,
Administrative and Accounting Officer at Enron Corporation. He also served as a
member of Enron Corporation's Management Committee from 1989 through 1996. Mr.
Tompkins began his career with Arthur Young & Co., serving three years before
joining Arthur Andersen, L.L.P., where he was elected to the partnership in
1981 and was in charge of the Mergers and Acquisitions Program for the Houston
office. Mr. Tompkins also serves as chairman of the board of Boys and Girls
Country of Houston, Inc., and formerly served on the board of directors of Bank
of America Texas, the Private Sector Council and Junior Achievement of
Southeast Texas, Inc.
Bryant H. Patton has served as a Director of the Company since July 1997.
Mr. Patton is the Vice President of Associated Energy Managers ("AEM"), an
institutional investment management firm specializing in private investments in
the energy industry. AEM has invested for its clients over $300 million with 23
different independent oil and gas companies through three investment
partnerships. Mr. Patton's industry experience spans 20 years
-47-
<PAGE> 52
including ten years as an equity owner in a fully integrated, family-owned, oil
and gas producing company consisting at one time of seven entities and 350
employees.
INDEMNITY AGREEMENTS
MHI has entered into Indemnity Agreements with each of the directors of MHI
(who also serve as the directors of the Company), pursuant to which MHI has
agreed to indemnify each director to the fullest extent permitted under the
Texas Business Corporation Act. In addition, pursuant to the Agreement, MHI
shall advance reasonable expenses incurred by each director under certain
circumstances in any proceeding in which each director was, is or is threatened
to be named a defendant.
KEY EMPLOYEES
Sarah M. Ruddock, 38, joined the Company in 1994 as a landman and was
appointed Land Manager in 1995. From 1992 to 1994, she served as Director of
Supply for Natural Gas Resources, Inc., an independent natural gas marketing
company. Ms. Ruddock began her career in the oil and gas industry with Gulf
Oil Corporation, which was later acquired by Chevron U.S.A. in 1986. During her
tenure with Gulf/Chevron, Ms. Ruddock served as a natural gas trader in
Chevron's natural gas marketing group from 1988 until 1992 and as a U.S. Gulf
Coast Landman from 1981 to 1988.
Douglas R. Fogle, 42, has served as Engineering Manager of the Company
since 1994 after joining the Company in 1992 as a Production Engineer. From
1986 to 1991, Mr. Fogle worked as an insurance agent. From 1984 to 1986, Mr.
Fogle worked with Langham Energy, an independent exploration and production
company, as Senior Petroleum Engineer. Mr. Fogle worked from 1978 through 1984
with Champlin Petroleum (which was subsequently acquired by Union Pacific
Resources Company), an independent exploration and production company, first as
a Drilling and Completion Engineer and then, starting in 1983, as Staff
Production Engineer. Mr. Fogle has a B.S. in petroleum engineering from Texas
A&M University.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid or accrued by the Company to or on behalf of the Company's
executive officers for the fiscal year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
ALL OTHER
PRINCIPAL POSITIONS SALARY BONUS COMPENSATION
------------------- ------ ----- ------------
<S> <C> <C> <C>
GLENN D. HART . . . . . . . . . . . . . . . . . . . . . $144,000 $ 6,000 $ 11,303
Chairman of the Board and Chief Executive Officer
MICHAEL G. FARMAR . . . . . . . . . . . . . . . . . . . 84,000 3,500 0
President and Chief Operating Officer
JERRY F. HOLDITCH . . . . . . . . . . . . . . . . . . . 60,000 2,500 104,946(2)
Vice President-Exploration
ROBERT L. SWANSON(1) . . . . . . . . . . . . . . . . . 19,375 2,583 0
Vice President-Finance
SCOTT R. SAMPSELL . . . . . . . . . . . . . . . . . . . 69,450 3,050 0
Vice President, Controller, Secretary and Treasurer
</TABLE>
- -------------
(1) Mr. Swanson joined the Company on September 8, 1997.
(2) Represents amounts paid or accrued to Mr. Holditch during 1997 pursuant to
certain overriding royalty interests granted to him. See "--Overriding
Royalty Interests."
STOCK OPTION AND OTHER EMPLOYEE COMPENSATION PLANS
During 1996, contractual stock options were granted by MHI to certain
officers and directors of the Company to purchase up to 238,750 shares of
Common Stock, each at an exercise price of $0.10 per share. These stock options
were terminated in August 1997.
MHI has adopted the Michael Holdings, Inc. 1998 Stock Option Plan (the
"Option Plan") pursuant to which incentive stock options as defined in the
Internal Revenue Code of 1986, as amended ("ISOs"), and non-qualified
-48-
<PAGE> 53
stock options ("NQOs") will be available for grant to key employees and
directors of MHI and the Company. The Option Plan is administered by the
Compensation Committee of the Board of Directors of MHI. A maximum of 194,000
shares, subject to adjustment for certain events of dilution, is available for
grant under the Option Plan. The Option Plan provides that the Option Agreement
applicable to the grant of options may provide that unmatured installments of
outstanding options will accelerate and become fully vested upon a "change of
control" of MHI (as defined in the Option Plan).
No options have yet been granted under the Option Plan. Grants to employees
and directors will be granted under the Option Plan at an exercise price equal
to not less than the fair market value per share on the date of grant. All such
options will have terms of not more than ten years and be exercisable in
cumulative annual installments of 33.33% of the total number of shares subject
to the option grants, beginning on the first anniversary of the date of grant.
The Option Plan provides that the plan may be amended or modified by the
Board of Directors of MHI without the approval of the shareholders of MHI,
except for any amendment which would increase the total number of shares
reserved for issuance under the Option Plan or amendments which require
shareholder approval pursuant to applicable legal requirements or securities
exchange rules.
OVERRIDING ROYALTY INTERESTS
The Company has had in place for a number of years an arrangement, and by
written agreement dated July 24, 1997 the Company formalized such arrangement,
pursuant to which it has granted to Jerry Holditch, Vice President--Exploration
and a director of the Company, a 1.5% of 8/8ths overriding royalty interest in
all leases acquired either directly or indirectly by the Company or its
affiliates in Webb County or Zapata County, Texas. For 1995, 1996 and 1997, Mr.
Holditch received from the Company $24,187, $32,638 and $104,946, respectively,
under the overriding royalty interests. The overriding royalty interests will
not apply to any producing properties acquired by the Company except for
deepenings or sidetracks of existing wells and all new wells drilled on
acquired producing properties. According to the terms of the agreement
establishing the overriding royalty interests, the Company's obligation to
assign overriding royalty interests to Mr. Holditch expires upon the death of
Mr. Holditch or upon his termination, resignation or retirement from the
Company; however, any overriding royalty interests assigned prior to such an
event shall be unaffected by the occurrence of that event. The agreement also
restricts Mr. Holditch's ability to compete with the Company in the Lobo Trend
for a period of three years following any resignation or retirement of Mr.
Holditch from the Company. If, following Mr. Holditch's retirement or
resignation, the Company becomes financially incapable of drilling or
completing wells on locations previously identified or selected by Mr.
Holditch, the Company shall provide written authorization to Mr. Holditch to
waive the three-year non-competition provision so that Mr. Holditch may pursue
the development of such location prospects. The Company does not anticipate
entering into any similar arrangements with any of its officers or directors in
the foreseeable future.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, effective April 1,
1998, with Glenn D. Hart, Michael G. Farmar and Jerry F. Holditch, pursuant to
which Mr. Hart will serve as Chief Executive Officer of the Company, Mr. Farmar
will serve as President of the Company and Mr. Holditch will serve as Vice
President-Exploration. Each employment agreement is for a term of two years and
is automatically renewed for a period of two years from and after the first day
of each calendar quarter, commencing July 1, 1998, unless either party gives
written notice at least 30 days prior to the end of the applicable period. The
employment agreements provide for an annual base salary ($270,000 for Mr. Hart,
$180,000 for Mr. Farmar and $100,000 for Mr. Holditch), which amount may be
increased subject to periodic reviews. In addition, Messrs. Hart, Farmar and
Holditch are eligible to receive an annual incentive bonus in an amount to be
determined by the Board of Directors, but in no event will such bonus amount be
less than 50% nor more than 100% of the employee's annual base salary. The
employment agreements of Messrs. Hart and Farmar further provide that the
employee shall be granted options under the Option Plan upon terms and
conditions and in an amount to be determined by the Compensation Committee. If
during the term of the agreement the employee's employment with the Company is
terminated without "cause" (as defined therein) or due to his resignation for
"good reason" (as defined therein), the Company will be obligated to pay the
employee payments in an amount equal to his base salary for the remaining term
of the agreement plus his accrued but unpaid bonus as of the date of
termination. The obligations of the Company under the employment agreements are
guaranteed by MHI.
Robert L. Swanson's employment arrangements with the Company provide that
he is entitled to an annual base salary plus any year-end bonus provided to the
Company staff. The Company increased his base salary from $62,000 to $80,000
per year effective April 1, 1998. In addition, Mr. Swanson is to be provided
stock options under the Option Plan upon terms and conditions and in an amount
to be determined by the Compensation Committee.
-49-
<PAGE> 54
COMPENSATION OF DIRECTORS
Non-employee directors of the Company are eligible to receive grants of
nonqualified stock options to purchase shares of Common Stock pursuant to the
Option Plan. Based on their relative length of service as directors, Messrs.
Tompkins and Patton are expected to receive options to purchase 7,750 shares of
Common Stock, and Mr. Smith is expected to receive an option to purchase 15,500
shares of Common Stock, at exercise prices equal to the fair market value of
the Common Stock on the date of grant.
In addition, the Company's non-employee directors receive $2,000 plus
out-of-pocket expenses for each meeting of the Board of Directors that they
attend.
BOARD COMMITTEES
Pursuant to the Company's Bylaws, the Board of Directors has established
standing Audit and Compensation Committees. The Audit Committee recommends to
the Board the selection and discharge of the Company's independent auditors,
reviews the professional services performed by the auditors, the plan and
results of the auditing engagement and the amount of fees charged for audit
services performed by the auditors and evaluates the Company's system of
internal accounting controls. The Compensation Committee recommends to the
Board the compensation to be paid to the Company's directors, executive
officers and key employees and administers the compensation plans for the
Company's executive officers and directors. The members of the Audit Committee
are Messrs. Farmar, Smith and Tompkins. The members of the Compensation
Committee are Messrs. Smith, Tompkins and Patton.
CERTAIN TRANSACTIONS
The Company currently markets all of its natural gas through Upstream
Energy Services, L.L.C. ("Upstream") pursuant to a Natural Gas Sales Agreement
dated as of April 1, 1996. The Company and the predecessor to Upstream had
similar marketing arrangements prior to April 1996. During 1995, 1996 and 1997,
the Company paid Upstream or its predecessor marketing fees of $57,137,
$105,726 and $219,529, respectively, under these arrangements. Until August
1997, Glenn D. Hart, the Company's Chairman and Chief Executive Officer, owned
20% of the equity securities of Upstream and its predecessor. In such capacity,
Mr. Hart received dividends of $150,716, $26,875 and $6,000 in 1995, 1996 and
1997, respectively. Additionally, Upstream executed a promissory note in an
aggregate principal amount of $20,000 payable to Mr. Hart in connection with
the purchase by Upstream of Mr. Hart's interest. Interest on the indebtedness
accrues at a rate of 8.25% per annum. Neither Mr. Hart nor the Company or any
other officer or director of the Company currently owns any interest in
Upstream.
The Company has granted to Jerry F. Holditch, Vice President-Exploration
and a director of the Company, a 1.5% of 8/8ths overriding royalty interest in
all leases acquired either directly or indirectly by the Company or its
affiliates in Webb County and Zapata County, Texas. See "Management--Overriding
Royalty Interests."
On June 10, 1997, Glenn D. Hart, Chairman of the Board and Chief Executive
Officer of the Company, entered into an agreement with the Company pursuant to
which Mr. Hart granted the Company an option to purchase an undivided
two-thirds working interest, which Mr. Hart owns in his individual capacity, in
a leasehold interest. The leasehold interest expires on May 30, 2000 and covers
approximately 750 acres in Webb County, Texas. The exercise price of the option
is $87,500. In addition, pursuant to the agreement, if the purchase option is
exercised, Mr. Hart will be entitled to reserve a 1% overriding royalty
interest. As additional consideration for the option, pursuant to the agreement
the Company has agreed to pay to Mr. Hart for so long as the purchase option
remains unexercised (i) on a monthly basis, an amount equal to one-twelfth of
the sum of the prime interest rate as published by Comerica Bank from time to
time plus 2%, multiplied by $87,500, and (ii) all rental payments due during
the primary term of the lease.
Concurrently with the closing of the sale of the Old Notes, the Company
acquired, for a purchase price of $11.0 million, the Net Profits Interest from
Cambrian, at which time Cambrian received a warrant to acquire 38,671 shares of
Common Stock at an exercise price of $8.00 per share. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financing Arrangements" and "Description of Capital
Stock--Warrants."
From May to July of 1995, the Company made loans to Mr. Hart, Chairman of
the Board and Chief Executive Officer of the Company, in an aggregate principal
amount of $314,700. Mr. Hart used the proceeds for unrelated investments.
Interest on the indebtedness accrued at a rate of 5% per annum. Mr. Hart repaid
$302,055 of such indebtedness to the Company in December 1995 and repaid the
balance, together with interest, in May 1997. The maximum amount of such loans
outstanding during 1995, 1996 and 1997 was $314,700, $20,034 and $20,242,
respectively.
-50-
<PAGE> 55
In September 1995, the Company distributed a 7.5% equity interest in two
non energy-related limited liability companies to the shareholders of the
Company. See Note 7 of Notes to Financial Statements of the Company.
During the year ended December 31, 1995, the Company distributed its
overriding royalty interests in certain oil and natural gas properties to the
shareholders of the Company. The distribution was recorded at the book value of
$60,000. See Note 8 of Notes to Financial Statements of the Company.
Bryant Patton, a director of MHI and the Company, is a vice president of
Associated Energy Managers, which facilitated a loan in 1991 from Endowment
Energy Partners, L.P. to the Company in the original principal amount of
approximately $7.0 million. The loan was paid in full in 1996 with the proceeds
of the T.E.P. Financing.
Although the Company has no present intention to do so, it may in the
future enter into other transactions and agreements incidental to its business
with its directors, officers and principal shareholders. The Company intends
any such transactions and agreements to be on terms no less favorable to the
Company than could be obtained from unaffiliated parties on an arms' length
basis.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of March 31, 1998, (i) the number of
shares owned by each person known by the Company to own beneficially Common
Stock of MHI, (ii) the number of shares owned beneficially by each director and
(iii) the number of shares owned beneficially by all executive officers and
directors as a group. MHI owns of record all of the issued and outstanding
shares of common stock of the Company.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY PERCENTAGE OF
NAME OF PERSON OR GROUP OWNED(1) OWNERSHIP
----------------------- -------- ---------
<S> <C> <C>
DIRECTORS
Glenn D. Hart . . . . . . . . . . . . . . . . . . . . . . . . . . 301,900 39.0%
Michael G. Farmar . . . . . . . . . . . . . . . . . . . . . . . . 255,000 33.0%
Jerry F. Holditch . . . . . . . . . . . . . . . . . . . . . . . . 64,500 8.3%
Jim R. Smith . . . . . . . . . . . . . . . . . . . . . . . . . . 80,650 10.4%
Jack I. Tompkins . . . . . . . . . . . . . . . . . . . . . . . . -- --
Bryant H. Patton . . . . . . . . . . . . . . . . . . . . . . . . -- --
All executive officers and directors, as a group (seven
persons) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702,050 90.7%
OTHER SHAREHOLDERS
Scott R. Sampsell . . . . . . . . . . . . . . . . . . . . . . . . 24,200 3.1%
Douglas R. Fogle . . . . . . . . . . . . . . . . . . . . . . . . 34,275 4.4%
Stanley T. Polak . . . . . . . . . . . . . . . . . . . . . . . . 12,900 1.7%
Cambrian Capital Partners L.P.(2) . . . . . . . . . . . . . . . . 38,671 4.8%
</TABLE>
- -------------
(1) Except as otherwise noted, the named shareholder has sole voting,
investment and dispositive power.
(2) Represents shares that may be acquired on the exercise of a warrant at an
exercise price of $8.00 per share. See "Description of Capital Stock --
Warrants."
-51-
<PAGE> 56
DESCRIPTION OF NOTES
The Old Notes were, and the New Notes will be, issued pursuant to the
Indenture dated April 2, 1998 (the "Indenture"), between the Company and State
Street Bank and Trust Company, as trustee (the "Trustee"). The terms of the New
Notes are identical in all material respects to the Old Notes, except that the
New Notes have been registered under the Securities Act and, therefore, will
not bear legends restricting their transfer. Upon the issuance of the New
Notes, the Indenture will be subject to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The New Notes are subject to the
Indenture, and Holders of the Old Notes and New Notes are referred to the
Indenture and the Trust Indenture Act. The following summary of the material
provisions of the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein
of certain terms used below. Copies of the Indenture are made available to
prospective investors as set forth under the caption "--Additional
Information." The definitions of certain terms used in the following summary
are set forth below under the caption "--Certain Definitions."
GENERAL
The aggregate principal amount of the Old Notes is, and the New Notes will
be, limited to $135.0 million. Each New Note will mature on April 1, 2005 and
will bear interest at an annual rate of 11 1/2% per annum from the most recent
date to which interest has been paid or, if no interest has been paid, from the
date of original issuance, payable semiannually in arrears on April 1 and
October 1 of each year, commencing October 1, 1998, to the Person in whose name
the New Note is registered at the close of business on March 15 or September 15
preceding such interest payment date. Interest will be computed on the basis
of a 360-day year of twelve 30-day months. Liquidated Damages also will be
payable on the New Notes if the Company fails to satisfy certain requirements
set forth in the Registration Rights Agreement. Principal of, and premium, if
any, interest and Liquidated Damages, if any, on the New Notes will be payable
at the office or agency maintained for such purpose within New York City, New
York, or at the option of the Company, payment of interest and Liquidated
Damages, if any, may be made by check mailed to the Holders of the New Notes at
their respective addresses set forth in the register of Holders of the New
Notes; provided that all payments of principal, premium, interest and
Liquidated Damages, if any, with respect to the New Notes, the Holders of which
have given wire transfer instructions to the Company, will be required to be
made by wire transfer of immediately available funds to the accounts specified
by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York City will be the office of the Trustee
maintained for such purpose. The New Notes will be issued in denominations of
$1,000 and integral multiples thereof.
Under certain circumstances, the Company will be able to designate its
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not
be subject to most of the restrictive covenants set forth in the Indenture. As
of the date of the Indenture, the Company had no Subsidiaries.
RANKING
The Old Notes are, and the New Notes will be, general senior unsecured
obligations of the Company. The Old Notes rank, and the New Notes will rank,
pari passu with all existing and future Senior Indebtedness of the Company and
senior in right of payment to all future Subordinated Indebtedness of the
Company. Holders of secured Indebtedness of the Company and its Subsidiaries,
including under the Credit Facility, have and will have claims with respect to
assets constituting collateral for such Indebtedness that are prior to the
claims of the Holders of the New Notes. To the extent of such pledged
collateral, such Indebtedness will have priority over the New Notes. As of
December 31, 1997, on a pro forma basis after giving effect to the sale of the
Old Notes, the application of the net proceeds therefrom, the exchange of the
Old Notes for New Notes and the Transactions, the Company would have had no
secured Indebtedness and no Indebtedness other than the Notes. There is
currently no Indebtedness of the Company which would constitute Subordinated
Indebtedness.
GUARANTEES
The Old Notes are, and the New Notes will be, jointly and severally
unconditionally guaranteed by each of the Company's future Restricted
Subsidiaries. As of the date of the Indenture, the Company had no Subsidiaries.
The Indenture provides that each Person that is or becomes a Restricted
Subsidiary on or after the Issue Date will jointly and severally guarantee the
payment of the Note Obligations in the manner described herein. Each Guarantor
will guarantee to each Holder and the Trustee, the full and prompt performance
of the Note Obligations of the Company, including the payment of principal of
(premium, if any, on) and interest and Liquidated Damages, if any, on the Notes
pursuant to its Guarantee. The Obligations of each Guarantor under its
Guarantee will be general senior unsecured obligations of such Guarantor, which
will rank pari passu with all existing and future Senior Indebtedness of such
Guarantor and senior in right of payment to all future Subordinated
Indebtedness of such Guarantor.
-52-
<PAGE> 57
The Obligations of each Guarantor under its Guarantee are limited to the
amount as will, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections from
or payments made by or on behalf of any other Restricted Subsidiaries that
become Guarantors in respect of the Obligations of such other Restricted
Subsidiary under its Guarantee or pursuant to its contribution Obligations
under the Indenture, result in the Obligations of the Guarantor under its
Guarantee not constituting a fraudulent conveyance or fraudulent transfer under
federal, state or foreign law. In the event of additional guarantors, a
Guarantor that makes a payment or distribution under a Guarantee shall be
entitled to a contribution from each other Restricted Subsidiary that has
become a Guarantor in a pro rata amount based on the Adjusted Net Assets of the
Guarantor.
The Indenture provides that, subject to the following paragraph, no
Guarantor (including any existing or future Restricted Subsidiary that becomes
an additional Guarantor) may consolidate with or merge with or into (whether or
not such Guarantor is the surviving Person) another Person (whether or not
affiliated with such Guarantor) unless (i) the Person formed by or surviving
any such consolidation or merger (if other than such Guarantor) is a
corporation organized and existing under the laws of the United States of
America, any state thereof, or the District of Columbia and expressly assumes
all the obligations of such Guarantor pursuant to a supplemental indenture, in
a form reasonably satisfactory to the Trustee, under the Notes, the Indenture
and the Registration Rights Agreement, (ii) immediately before and after giving
effect to such transaction, no Default or Event of Default exists, (iii) the
Guarantor or the Person formed by or surviving any such consolidation or merger
on a pro forma basis will have Consolidated Net Worth (immediately after the
transaction) equal to or greater than the Consolidated Net Worth of such
Guarantor immediately preceding the transaction and (iv) the Company will, at
the time of such transaction after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable Reference Period,
be permitted to incur at least $1.00 of additional Indebtedness as described in
the first paragraph under "--Certain Covenants--Limitation on Incurrence of
Additional Indebtedness"; provided that the merger of any Guarantor with or
into the Company or another Guarantor under circumstances where the Company or
such Guarantor, as applicable, is the surviving Person shall not be subject to
the foregoing provisions.
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
Capital Stock of any Guarantor, then the Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the Capital Stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all or substantially
all of the assets of such Guarantor) will be released and relieved of any
obligations under its Guarantee; provided that the Net Cash Proceeds of such
sale or other disposition are applied in accordance with the provisions of the
Indenture described under "--Certain Covenants --Limitation on Sale of Assets."
OPTIONAL REDEMPTION
The Old Notes are not, and the New Notes will not be, redeemable at the
Company's option prior to April 1, 2003. Thereafter, the Old Notes are, and
the New Notes will be, subject to redemption at any time at the option of the
Company, in whole or part, upon not less than 30 nor more than 60 days' notice,
at the redemption prices (expressed as percentages of the principal amount of
the Notes) set forth below, plus, in each case, accrued and unpaid interest and
Liquidated Damages, if any, thereon to the applicable redemption date, if
redeemed during the 12-month period beginning on April 1 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.750%
2004 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
Notwithstanding the foregoing, prior to April 1, 2001, the Company may
redeem up to 30% of the aggregate principal amount of the Notes originally
issued at a redemption price of 111.5% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
of redemption, with all or a portion of the aggregate net proceeds received by
the Company from one or more Equity Offerings, provided that (i) at least 65%
of the aggregate principal amount of the Notes originally issued remains
outstanding immediately after the occurrence of each such redemption and (ii)
each such redemption shall occur within 90 days after the date of the closing
of each such Equity Offering.
-53-
<PAGE> 58
SELECTION AND NOTICE
If less than all of the New Notes are to be redeemed at any time, selection
of New Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the New Notes are listed, or if the New Notes are not so listed, on a pro rata
basis, by lot or by any other method that the Trustee considers fair and
appropriate; provided that no New Notes with a principal amount of $1,000 or
less will be redeemed in part. Notice of redemption will be mailed by first
class mail at least 30 but not more than 60 days before the date fixed for
redemption to each Holder of New Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any New Note is to be
redeemed in part only, the notice of redemption that relates to such New Note
will state the portion of the principal amount thereof to be redeemed. A new
New Note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original New
Note. New Notes called for redemption become due on the date fixed for
redemption. On and after the date fixed for the redemption date, interest and
Liquidated Damages, if any, cease to accrue on New Notes or portions called for
redemption.
MANDATORY REDEMPTION
Except as set forth below under the captions "--Change of Control," and
"--Certain Covenants--Limitation on Sale of Assets," the Company is not
required to make mandatory redemption or sinking fund payments with respect to
the Old Notes, nor will it be required to do so with respect to the New Notes.
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of any Change of Control,
the Company will offer (a "Change of Control Offer") to repurchase all
outstanding Notes at a purchase price equal to 101% of the aggregate principal
amount of the Notes, plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the date fixed for repurchase (the "Change of Control
Payment"). Within 10 business days following a Change of Control, the Company
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offer to repurchase Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Change of Control Offer will be deemed to have
commenced upon mailing of a notice pursuant to the Indenture and will terminate
20 business days after its commencement, unless a longer offering period is
required by law. Promptly after the termination of the Change of Control Offer,
the Company will repurchase and mail or deliver payment for all Notes tendered
in response to the Change of Control Offer.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (ii) deposit with the paying agent an amount equal
to the Change of Control Payment in respect of all Notes or portions thereof so
tendered and (iii) deliver to the Trustee the Notes so accepted together with
an officers' certificate stating the aggregate principal amount of the Notes or
portions thereof being purchased by the Company. The paying agent will promptly
mail to each Holder of the Notes so accepted payment in an amount equal to the
repurchase price for such Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Note equal
in principal amount to any unpurchased portion of the Notes surrendered, if
any; provided, that each such Note will be in a principal amount of $1,000 or
an integral multiple thereof.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require the Company
to repurchase or redeem the Notes in the event of a takeover, recapitalization
or similar transaction.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease or transfer, in one or a series of related transactions, of all or
substantially all of MHI's assets or the Company's assets, in either case, to
any Person or group (as such term is used in Section 13(d)(3) of the Exchange
Act); (ii) the adoption of a plan relating to the liquidation or dissolution of
MHI or the Company; (iii) the acquisition, directly or indirectly, by any
Person or group (as such term is used in Section 13(d)(3) of the Exchange Act)
of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of
more than 50% of the aggregate voting power of the Voting Stock of MHI or the
Company (for the purposes of this definition, such other Person shall be deemed
to beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if such other Person is the beneficial owner (as defined
above), directly or indirectly, of more than 35% of the voting power of the
Voting Stock of such parent corporation); or (iv) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of MHI or the Company (together with any new directors
whose election by such
-54-
<PAGE> 59
Board of Directors or whose nomination for election by the shareholders of MHI
or the Company, as the case may be, was approved by a vote of 66 2/3% of the
directors of MHI or the Company, as the case may be, then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of MHI or the Company, as the
case may be, then in office.
The Company will comply with Section 14 of the Exchange Act and the
provisions of Regulation 14E and any other tender offer rules under the
Exchange Act and any other federal and state securities laws, rules and
regulations which may then be applicable to any Change of Control Offer.
Certain terms of the Credit Facility [are expected to] prohibit, and future
Bank Credit Facilities or other agreements relating to Senior Indebtedness of
the Company to which the Company becomes a party may prohibit, the Company from
purchasing any Notes following a Change of Control and provide that certain
change of control events with respect to the Company would constitute a default
thereunder. In the event a Change of Control occurs at a time when the Company
is prohibited from purchasing any Notes, the Company could seek the consent of
such lenders to the purchase of any Notes or could attempt to refinance the
indebtedness that contains such prohibition. If the Company does not obtain
such a consent or repay such indebtedness, the Company will remain prohibited
from purchasing any Notes. The Company's failure to offer to purchase the
Notes, or to purchase tendered Notes, following a Change of Control would
constitute an Event of Default under the Indenture which, in turn, is [expected
to] constitute a default under the Credit Facility.
The Company will not be required to make a Change of Control Offer
following a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control Offer
made by the Company and purchases all Notes validly tendered and not withdrawn
under such Change of Control.
CERTAIN COVENANTS
Limitation on Incurrence of Additional Indebtedness. The Indenture provides
that the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, issue, incur, assume, guarantee,
become liable, contingently or otherwise, with respect to or otherwise become
responsible for the payment of (collectively, "incur") any Indebtedness (other
than Permitted Indebtedness); provided, however, that if no Default or Event of
Default shall have occurred and be continuing at the time or as a consequence
of the incurrence of such Indebtedness, the Company or its Restricted
Subsidiaries may incur Indebtedness if, on a pro forma basis, after giving
effect to such incurrence and the application of the proceeds therefrom, both
of the following tests shall have been satisfied: (i) the Consolidated Interest
Coverage Ratio for the last four fiscal quarter Reference Period immediately
preceding the incurrence of such Indebtedness is at least (a) 2.25-to-1.0 with
respect to any date of incurrence of additional Indebtedness occurring on or
before the first anniversary date of the Issue Date, (b) 2.50-to-1.0 with
respect to any date of incurrence of additional Indebtedness occurring after
the first anniversary date of the Issue Date and on or before October 1, 2000,
or (c) 2.75-to-1.0 with respect to any date of incurrence of additional
Indebtedness occurring after October 1, 2000 and (ii) Adjusted Consolidated Net
Tangible Assets would have been equal to or greater than 150% of Indebtedness
of the Company and its Restricted Subsidiaries.
Notwithstanding the foregoing, if no Default or Event of Default shall have
occurred and be continuing at the time or as a consequence of the incurrence of
such Indebtedness, the Company and its Restricted Subsidiaries may incur
Permitted Indebtedness.
Any Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary (whether by merger, consolidation, acquisition or
otherwise) shall be deemed to be incurred by such Restricted Subsidiary at the
time it becomes a Restricted Subsidiary.
The Indenture provides that, notwithstanding the preceding paragraphs of
this covenant, no Restricted Subsidiary that is not already a Guarantor shall,
directly or indirectly, incur Indebtedness on its behalf or Indebtedness with
respect to any Indebtedness of the Company or any other Restricted Subsidiary
unless such Restricted Subsidiary, the Company and the Trustee execute and
deliver a supplemental indenture to evidence such Restricted Subsidiary's
Guarantee of the Notes and such Restricted Subsidiary and the Company execute
and deliver or cause to be executed and delivered such other instruments and
actions required in connection therewith as provided in the Indenture.
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly
or indirectly, make any Restricted Payment, unless:
-55-
<PAGE> 60
(i) no Default or Event of Default shall have occurred and be continuing at
the time of or immediately after giving effect to such Restricted Payment;
(ii) at the time of and immediately after giving pro forma effect to such
Restricted Payment as if it had been made at the beginning of the applicable
four-quarter period, the Company would have been permitted to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant
to the first paragraph of the covenant captioned "--Limitation on Incurrence of
Additional Indebtedness"; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date does
not exceed the sum of
(A) 50% of the Consolidated Net Income of the Company and its
Restricted Subsidiaries (or in the event such Consolidated Net Income shall
be a deficit, minus 100% of such deficit) during the period (treated as one
accounting period) subsequent to March 31, 1998 and ending on the last day
of the fiscal quarter for which financial information is available
immediately preceding the date of such Restricted Payment (less the
aggregate amount of dividends described in clause (i) of the following full
paragraph that are either (x) paid after the last day of the fiscal quarter
for which financial information is available immediately preceding the date
of such Restricted Payment or (y) declared but not yet paid as of such
date);
(B) the aggregate Net Cash Proceeds received by the Company during
such period from any Person other than a Subsidiary of the Company as a
result of the issuance or sale of Capital Stock of the Company (other than
any Disqualified Stock), other than in connection with the conversion of
Indebtedness or Disqualified Stock;
(C) the aggregate Net Cash Proceeds received by the Company during
such period from any Person other than a Subsidiary of the Company as a
result of the issuance or sale of any Indebtedness or Disqualified Stock to
the extent that, at the time the determination is made, such Indebtedness
or Disqualified Stock, as the case may be, has been converted into or
exchanged for Capital Stock of the Company (other than Disqualified Stock);
(D) (i) in case any Unrestricted Subsidiary has been redesignated a
Restricted Subsidiary, an amount equal to the lesser of (x) the book value
(determined in accordance with GAAP) at the date of such redesignation of
the aggregate Investments made by the Company and its Restricted
Subsidiaries in such Unrestricted Subsidiary and (y) the fair market value
of such Investments in such Unrestricted Subsidiary at the time of such
redesignation, as determined in good faith by the Company's Board of
Directors, including a majority of the Company's Disinterested Directors,
whose determination shall be conclusive and evidenced by a resolution of
such Board (less, in the case of each of clauses (x) and (y), the amount of
original Investment (based upon book value determined in accordance with
GAAP at the time of such Investment) made by the Company or any Restricted
Subsidiary pursuant to clause (x) of the definition of "Permitted Business
Investment" minus the aggregate cash dividends paid by such Unrestricted
Subsidiary to the Company or any other Restricted Subsidiary since the date
of such original Investment, provided that the result of the foregoing
shall not be less than zero); or (ii) in case any Restricted Subsidiary has
been redesignated an Unrestricted Subsidiary, minus the greater of (x) the
book value (determined in accordance with GAAP) at the date of
redesignation of the aggregate Investments made by the Company and its
Restricted Subsidiaries and (y) the fair market value of such Investments
in such Restricted Subsidiary at the time of such redesignation, as
determined in good faith by the Company's Board of Directors, including a
majority of the Company's Disinterested Directors, whose determination
shall be conclusive and evidenced by a resolution of such Board; and
(E) the amount of any writedowns or writeoffs, other negative
revaluations and other negative extraordinary charges not otherwise
reflected in Consolidated Net Income of the Company during such period.
Notwithstanding the foregoing, the above limitations will not prevent (i)
the payment of any dividend within 60 days after the date of declaration
thereof, if at such date of declaration, such payment complied with the
provisions of the Indenture; (ii) any dividend on shares of Capital Stock of
the Company or any Restricted Subsidiary payable solely in shares of Capital
Stock (other than Disqualified Stock); (iii) any dividend or other distribution
payable from a Subsidiary of the Company to the Company or any Wholly Owned
Restricted Subsidiary; (iv) the repurchase, redemption or other acquisition or
retirement of any shares of any class of Capital Stock of the Company or any
Restricted Subsidiary, in exchange for, or out of the aggregate Net Cash
Proceeds of a substantially concurrent issue and sale (other than to a
Restricted Subsidiary) of shares of Capital Stock of the Company (other than
Disqualified Stock), provided that the Net Cash Proceeds expended or utilized
for such repurchase, redemption or other acquisition or retirement shall not be
included in subclause (B) of clause (iii) of the preceding full paragraph; and
(v) the repurchase, redemption or other acquisition or retirement for value of
Capital Stock of MHI held by a departing or deceased shareholder of Capital
Stock of MHI pursuant to MHI's shareholders' agreement, provided that the funds
or value expended or incurred, or committed to be expended or incurred, in each
fiscal year of the Company does
-56-
<PAGE> 61
not exceed in the aggregate $500,000 and no Default or Event of Default shall
have occurred and be continuing immediately after any such repurchase,
redemption or acquisition or retirement.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined in
good faith by the Board of Directors of the Company, whose resolution in
respect thereto shall be delivered to the Trustee (which shall certify that
such valuation has been approved by a majority of the Disinterested Directors).
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Limitation on Restricted Payments" were computed.
Limitation on Sale of Assets. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
make any Asset Sale unless:
(i) the Company (or its Restricted Subsidiary, as the case may be) receives
consideration at the time of such sale or other disposition at least equal to
the fair market value thereof (as determined in good faith by the Company,
which determination, with respect to Asset Sales or series of related Asset
Sales with proceeds valued at greater than $5.0 million, shall be evidenced by
a resolution duly adopted by the Company's Board of Directors, including a
majority of the Company's Disinterested Directors);
(ii) at least 75% of the proceeds from such Asset Sale consist of cash or
U.S. dollar denominated Cash Equivalents; and
(iii) the Net Cash Proceeds received by the Company (or its Restricted
Subsidiary, as the case may be) from such Asset Sale are applied in accordance
with the following two paragraphs.
The Company may apply such Net Cash Proceeds, within 365 days after receipt
of Net Cash Proceeds from any Asset Sale, to: (a) the repayment of Indebtedness
of the Company under a Bank Credit Facility or other Senior Indebtedness of the
Company or Senior Indebtedness of a Guarantor, that results in a permanent
reduction in any revolving credit or other commitment relating thereto or the
maximum principal amount that may be borrowed thereunder in an amount equal to
the principal amount so repaid; (b) make an Investment in assets used in the
Oil and Gas Business in replacement of the assets that were the subject of the
Asset Sale giving rise to such Net Cash Proceeds; or (c) develop by drilling,
completing and producing reserves from the oil and gas properties of the
Company and the Restricted Subsidiaries.
If, at the end of the 365-day period, the Net Cash Proceeds of any Asset
Sale less the aggregate amount applied by the Company during such period as
described in clauses (a), (b) and (c) in the immediately preceding paragraph,
together with any Net Cash Proceeds in excess of amounts similarly applied by
the Company from any prior Asset Sale after the date of receipt of such Net
Cash Proceeds (such aggregate constituting "Excess Proceeds"), exceeds $5.0
million, then the Company will be obligated to make an offer (the "Net Proceeds
Offer") to repurchase the Notes (and any other Senior Indebtedness in respect
of which such an offer to repurchase also is required to be made concurrently
with the Net Proceeds Offer) having an aggregate principal amount equal to the
Excess Proceeds (such purchase to be made on a pro rata basis if the amount
available for such repurchase is less than the principal amount of the Notes
and other Senior Indebtedness tendered in such Net Proceeds Offer) at a
repurchase price of 100% of the principal amount thereof plus accrued interest
and Liquidated Damages, if any, to the date of repurchase. To the extent that
the aggregate principal amount of Notes tendered pursuant to a Net Proceeds
Offer and of such other Senior Indebtedness is less than the amount that the
Company is required to repurchase, then the Company may use any remaining
Excess Proceeds for its and its Restricted Subsidiaries' general corporate
purposes. Upon the completion of the Net Proceeds Offer, the amount of Excess
Proceeds will be reset to zero.
Any Net Proceeds Offer will be conducted in substantially the same manner
as a Change of Control Offer. The Company will comply with Section 14 of the
Exchange Act and the provisions of Regulation 14E and any other tender offer
rules under the Exchange Act and any other federal and state securities laws,
rules and regulations which may then be applicable to any Net Proceeds Offer.
During the period between any Asset Sale and the application of the Net
Cash Proceeds therefrom in accordance with this covenant, all Net Cash Proceeds
shall be either (i) maintained in a segregated account and shall be invested in
Permitted Financial Investments or (ii) applied to temporarily reduce
borrowings under any revolving credit facility constituting Senior Indebtedness
of the Company or Senior Indebtedness of a Guarantor.
-57-
<PAGE> 62
Notwithstanding the foregoing, the Company will not and will not permit any
Restricted Subsidiary to, directly or indirectly, make any Asset Sale of any of
the Capital Stock of a Restricted Subsidiary except pursuant to an Asset Sale
of all of the Capital Stock of such Restricted Subsidiary.
Limitation on Liens Securing Indebtedness. The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Liens
(other than Permitted Liens) upon any of their respective properties to secure
(i) any Indebtedness or trade payable of the Company, unless the Notes are
equally and ratably secured or (ii) any Indebtedness or trade payable of any
Guarantor, unless the Guarantees are equally and ratably secured; provided,
that if such Indebtedness is expressly subordinated to the Notes or the
Guarantees, the Lien securing such Indebtedness will be subordinated and junior
to any Lien securing the Notes or the Guarantees, with the same relative
priority as such Subordinated Indebtedness of the Company or Subordinated
Indebtedness of a Guarantor will have with respect to the Notes or the
Guarantees, as the case may be.
Limitation on Mergers and Consolidations. The Indenture provides that the
Company will not consolidate with or merge with any Person or convey, transfer
or lease all or substantially all of its assets to any Person, unless: (i) the
Company survives such merger or the Person formed by such consolidation or into
which the Company is merged or that acquires by conveyance or transfer, or
which leases, all or substantially all of the assets of the Company is a
corporation organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia and expressly assumes,
by supplemental indenture, the due and punctual payment of the principal of,
premium, if any, and interest and Liquidated Damages, if any, on all the Notes
and the performance of every other covenant and obligation of the Company under
the Indenture; (ii) immediately before and after giving effect to such
transaction, no Default or Event of Default exists; (iii) immediately after
giving effect to such transaction on a pro forma basis, the Consolidated Net
Worth of the Company (or the surviving or transferee entity) is equal to or
greater than the Consolidated Net Worth of the Company immediately before such
transaction; and (iv) immediately after giving effect to such transaction on a
pro forma basis as if such transaction had occurred at the beginning of the
applicable four- quarter period, the Company (or the surviving or transferee
entity) would be permitted to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the first paragraph of the
covenant captioned "--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness." Upon any such consolidation, merger, lease, conveyance or
transfer in accordance with the foregoing, the successor Person formed by such
consolidation or into which the Company is merged or to which such lease,
conveyance or transfer is made shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture with the
same effect as if such successor had been named as the Company herein, and
thereafter the predecessor Company will, except in the case of a lease or a
transfer pursuant to a Production Payment, be relieved of all further
obligations and covenants under the Indenture and the Notes.
Limitation on Sale/Leaseback Transactions. The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into any Sale/Leaseback Transaction unless (i)
the Company or such Restricted Subsidiary, as the case may be, could have (a)
incurred Indebtedness in an amount equal to the Attributable Indebtedness
relating to such Sale/Leaseback Transaction pursuant to the first paragraph of
the covenant captioned "--Limitation on Incurrence of Additional Indebtedness"
and (b) incurred a Lien to secure such Indebtedness, without being required to
equally and ratably secure the Notes pursuant to the covenant described under
the caption "--Limitation on Liens Securing Indebtedness", and (ii) the Company
or such Restricted Subsidiary receives gross proceeds from such Sale/Leaseback
Transaction at least equal to the fair market value thereof (as determined in
good faith by the Company's Board of Directors, whose determination in good
faith, evidenced by a resolution of such Board, shall be conclusive) and the
transfer of assets in such Sale/Leaseback Transaction is permitted by, and the
proceeds of such transaction are applied in compliance with, the covenant
described above under the caption "--Limitation on Sale of Assets".
Limitation on Payment Restrictions Affecting Subsidiaries. The Indenture
provides that the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions on
its Capital Stock or on any other interest or participation in the Company or a
Restricted Subsidiary; (ii) pay any indebtedness owed to the Company or a
Restricted Subsidiary of the Company; (iii) make loans or advances to the
Company or a Restricted Subsidiary of the Company; or (iv) transfer any of its
properties or assets to the Company or a Restricted Subsidiary of the Company
(each, a "Payment Restriction"), except for (a) encumbrances or restrictions
under a Bank Credit Facility; provided, that no encumbrance or restriction
shall limit the ability of any Restricted Subsidiary to transfer cash to the
Company except upon the occurrence of an event of default under the Bank Credit
Facility; (b) consensual encumbrances or consensual restrictions binding upon
any Person at the time such Person becomes a Restricted Subsidiary of the
Company (unless the agreement creating such consensual encumbrances or
consensual restrictions was entered into in connection with, or in
contemplation of, such entity becoming a Restricted Subsidiary); (c) consensual
encumbrances
-58-
<PAGE> 63
or consensual restrictions under any agreement that refinances or replaces any
agreement described in clauses (a) and (b) above, provided that the terms and
conditions of any such restrictions are, in the aggregate, no less favorable to
the Holders of the Notes than those under the agreement so refinanced or
replaced; and (d) customary non-assignment provisions in leases, purchase money
financings and any encumbrance or restriction due to applicable law.
Limitation on Issuances and Sales of Restricted Subsidiary Stock. The
Indenture provides that the Company (i) will not permit any Restricted
Subsidiary, directly or indirectly, to issue any Disqualified Stock or
Preferred Stock (other than to the Company or a Restricted Subsidiary) and (ii)
will not permit any Person (other than (y) the Company and/or one or more
Restricted Subsidiaries or (z) MHI, indirectly through its direct ownership of
the Capital Stock of the Company), directly or indirectly, to own any Capital
Stock of any Restricted Subsidiary; provided, however, that this covenant shall
not prohibit (a) the issuance or sale of all, but not less than all, of the
issued and outstanding Capital Stock of any Restricted Subsidiary owned by the
Company or any of its Restricted Subsidiaries in compliance with the other
provisions of the Indenture, (b) the issuance or sale of (A) not more than 5%
in the aggregate of the issued and outstanding Capital Stock of any Restricted
Subsidiary (calculated on a fully diluted basis) by the Company or any
Restricted Subsidiary or (B) more than 5% of the issued and outstanding Capital
Stock of any Restricted Subsidiary if immediately following such issuance and
sale (calculated on a fully diluted basis) the Company and all Subsidiaries
will collectively own 95% or more of the Consolidated Total Assets of the
Company, and in the case of either (A) or (B), immediately following such
issuance and sale, the Company or one or more Restricted Subsidiaries will
collectively hold the voting power to elect a majority of the directors of the
Restricted Subsidiary and such power is not subject to dilution or limitation
by the terms of such Capital Stock, by agreement, by passage of time or the
occurrence of any future event or (c) the ownership by directors of directors'
qualifying shares or the ownership by foreign governments or foreign nationals
of Capital Stock of any Restricted Subsidiary, to the extent mandated by
applicable law, and in each case, so long as such Restricted Subsidiary
constitutes a Wholly Owned Restricted Subsidiary.
Limitation on Transactions with Affiliates. The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into any transaction or series of transactions
(including, without limitation, the sale, purchase, transfer, lease or other
disposition of any assets or properties or the rendering of any services or the
entry into any contract, agreement or arrangement (whether in writing or
otherwise)) with any Affiliate or beneficial owner (as defined in Rules 13d-3
and 13d-5 under the Exchange Act) of 10% or more of the Company's common stock
(other than with a Wholly Owned Restricted Subsidiary of the Company) (an
"Affiliate Transaction"), on terms that are less favorable to the Company or
such Restricted Subsidiary, as the case may be, than would be available on an
arm's-length basis in a comparable transaction with an unrelated Person. In
addition, the Company will not, and will not permit any Restricted Subsidiary
of the Company to, directly or indirectly, enter into an Affiliate Transaction,
or any series of related Affiliate Transactions having a value of (i) more than
$1.0 million, unless a majority of the Board of Directors of the Company
(including a majority of the Company's Disinterested Directors) determines in
good faith, as evidenced by a resolution of such Board, that such Affiliate
Transaction or series of related Affiliate Transactions is fair to the Company
and in compliance with the first sentence of this covenant; or (ii) more than
$10.0 million, unless the Company receives a written opinion from a nationally
recognized investment banking firm that such transaction or series of
transactions is fair to the Company from a financial point of view.
Limitation on Line of Business. The Indenture provides that the Company and
the Subsidiaries will be operated in a manner such that their business
activities will be the Oil and Gas Business or an Investment in a business or
Person engaged in the Oil and Gas Business, which Investment was not made in
violation of any provision of the Indenture.
SEC Reports. The Indenture provides that notwithstanding that the Company
may not be required to remain subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act, the Company will file with the SEC (if the SEC
will so accept) and provide the Trustee and Holders with annual reports and
such information, documents and other reports specified in Sections 13 and
15(d) of the Exchange Act.
Future Designation of Restricted and Unrestricted Subsidiaries. The
foregoing covenants (including calculation of financial ratios and the
determination of limitations on the incurrence of Indebtedness and Liens) may
be affected by the designation by the Company of any of its Subsidiaries as an
Unrestricted Subsidiary. Generally, a Restricted Subsidiary includes any
Subsidiary of the Company, whether existing on or after the date of the
Indenture, unless the Subsidiary of the Company is designated as an
Unrestricted Subsidiary pursuant to the terms of the Indenture. The definition
of "Unrestricted Subsidiary" set forth under the caption "--Certain
Definitions" describes the circumstances under which a future Subsidiary of the
Company may be designated as an Unrestricted Subsidiary by the Board of
Directors of the Company.
-59-
<PAGE> 64
CERTAIN DEFINITIONS
The following is a summary of certain defined terms to be used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms and for the definitions of capitalized terms used herein and not
defined below.
"Adjusted Consolidated Net Tangible Assets" or "ACNTA" means (without
duplication), as of the date of determination, (a) the sum of (i) discounted
future net revenue from proved oil and gas reserves of the Company and its
Restricted Subsidiaries calculated in accordance with SEC guidelines before any
state or federal income taxes, as estimated by independent petroleum engineers
in a reserve report prepared as of the end of the Company's most recently
completed fiscal year, as increased by, as of the date of determination, the
discounted future net revenue of (A) estimated proved oil and gas reserves of
the Company and its Restricted Subsidiaries attributable to any acquisition
consummated since the effective date of such initial or year-end reserve
reports and (B) estimated oil and gas reserves of the Company and its
Restricted Subsidiaries attributable to extensions, discoveries and other
additions and upward revisions of estimates of proved oil and gas reserves due
to exploration, development or exploitation, production or other activities
conducted or otherwise occurring since the effective date of such initial or
year-end reserve reports which, in the case of sub-clauses (A) and (B) above,
would, in accordance with standard industry practice, result in such increases,
in each case calculated in accordance with SEC guidelines (utilizing the prices
utilized in such initial or year-end reserve reports), and decreased by, as of
the date of determination, the discounted future net revenue of (C) estimated
proved oil and gas reserves of the Company and its Restricted Subsidiaries
produced or disposed of since the effective date of such initial or year-end
reserve reports and (D) reductions in the estimated oil and gas reserves of the
Company and its Restricted Subsidiaries since the effective date of such
initial or year-end reserve reports attributable to downward revisions of
estimates of proved oil and gas reserves due to exploration, development or
exploitation, production or other activities conducted or otherwise occurring
since the effective date of such initial or year-end reserve reports which
would, in accordance with standard industry practice, result in such revisions,
in each case calculated in accordance with SEC guidelines (utilizing the prices
utilized in such initial or year-end reserve reports); provided that, in the
case of each of the determinations made pursuant to sub-clauses (A) through (D)
above, such increases and decreases shall be as estimated by the Company's
engineers, except that if as a result of such acquisitions, dispositions,
discoveries, extensions or revisions, there is a Material Change and in
connection with the incurrence of Indebtedness under the covenant captioned
"--Certain Covenants --Limitation on Incurrence of Additional Indebtedness,"
all or any part of an increase in discounted future net revenue resulting from
the matters described in sub-clauses (A) and (B) above are needed to permit the
incurrence of such Indebtedness, then the discounted future net revenue
utilized for purposes of this clause (a)(i) shall be confirmed in writing by
independent petroleum engineers provided that, in the event that the
determinations made pursuant to sub-clauses (C) and (D) above, when taken
alone, would not cause a Material Change, then such written confirmation need
only cover the incremental additions to discounted future net revenues
resulting from the determinations made pursuant to sub-clauses (A) and (B)
above to the extent needed to permit the incurrence of such Indebtedness, (ii)
the capitalized costs that are attributable to oil and gas properties of the
Company and its Restricted Subsidiaries to which no proved oil and gas reserves
are attributed, based on the Company's books and records as of a date no
earlier than the date of the Company's latest annual or quarterly financial
statements, (iii) the Net Working Capital on a date no earlier than the date of
the Company's latest annual or quarterly financial statements and (iv) the
greater of (I) the net book value on a date no earlier than the date of the
Company's latest annual or quarterly financial statements and (II) the
appraised value, as estimated by independent appraisers, of other tangible
assets (including Investments in unconsolidated Subsidiaries of the Company) of
the Company and its Restricted Subsidiaries, as of a date no earlier than the
date of the Company's latest audited financial statements, minus (b) the sum of
(i) minority interests, (ii) any non-current portion of gas balancing
liabilities of the Company and its Restricted Subsidiaries reflected in the
Company's latest annual or quarterly financial statements, (iii) the discounted
future net revenue, calculated in accordance with SEC guidelines (utilizing the
prices utilized in the Company's initial or year-end reserve reports),
attributable to reserves which are required to be delivered to third parties to
fully satisfy the obligations of the Company and its Restricted Subsidiaries
with respect to Volumetric Production Payments on the schedules specified with
respect thereto, (iv) the discounted future net revenue, calculated in
accordance with SEC guidelines, attributable to reserves subject to
Dollar-Denominated Production Payments which, based on the estimates of
production included in determining the discounted future net revenue specified
in clause (a)(i) above (utilizing the same prices utilized in the Company's
initial or year-end reserve reports), would be necessary to fully satisfy the
payment obligations of the Company and its Restricted Subsidiaries with respect
to Dollar-Denominated Production Payments on the schedules specified with
respect thereto and (v) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the same prices utilized in the
Company's initial or year-end reserve reports), attributable to reserves
subject to participation interests, overriding royalty interests or other
interests of third parties, pursuant to participation, partnership, vendor
financing or other agreements then in effect, or which otherwise are required
to be delivered to third parties. If the Company changes its method of
accounting from the successful efforts method to the full cost method or a
similar method of accounting, Adjusted Consolidated Net
-60-
<PAGE> 65
Tangible Assets will continue to be calculated as if the Company was still
using the successful efforts method of accounting.
Discounted future net revenue attributable to reserves subject to
Production Payments or other third party interests are excluded from the
definition of Adjusted Consolidated Net Tangible Assets to the extent
indicated, thereby limiting the amount of Indebtedness that may be incurred
pursuant to the test set forth in clause (ii) of the first paragraph of the
covenant captioned "--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness." However, certain estimated volumes of reserves in excess of the
delivery requirements under such Production Payments or with respect to
commitments to third party interests that are available for sale by the Company
are included in the definition of Adjusted Consolidated Net Tangible Assets,
thereby increasing the amount of Indebtedness that may be incurred under such
test.
"Adjusted Net Assets" of a Guarantor at any date shall mean the lesser of
(i) the amount by which the fair value of the property of such Guarantor
exceeds the total amount of liabilities, including, without limitation,
contingent liabilities (after giving effect to all other fixed and contingent
liabilities incurred or assumed on such date), but excluding liabilities under
the Guarantee of such Guarantor at such date and (ii) the amount by which the
present fair saleable value of the assets of such Guarantor at such date
exceeds the amount that will be required to pay the probable liability of such
Guarantor on its debts (after giving effect to all other fixed and contingent
liabilities incurred or assumed on such date and after giving effect to any
collection from any Subsidiary of such Guarantor in respect of the obligations
of such Subsidiary under the Guarantee), excluding debt in respect of the
Guarantee, as they become absolute and matured.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person directly or indirectly,
whether through the ownership of Voting Stock, by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing; provided that a corporation shall not be deemed an Affiliate of the
Company solely by reason of having a single common director with the Company
who constitutes less than a majority of the directors of either the Company and
the other corporation.
"Asset Sale" means any sale, issue, lease, transfer, exchange or other
disposition having a fair market value of $1.0 million or more (or series of
sales, leases, transfers, exchanges or dispositions during any fiscal year
having an aggregate fair market value of such amount) of shares of Capital
Stock of a Restricted Subsidiary (other than directors' Qualifying Shares), or
of property or assets (including the creation of Dollar-Denominated Production
Payments and Volumetric Production Payments, other than Dollar-Denominated
Production Payments and Volumetric Production Payments created or sold in
connection with the financing of, and within 30 days after, the acquisition of
the properties subject thereto) or any interests therein (each referred to for
purposes of this definition as a disposition) by the Company or any of its
Restricted Subsidiaries, including any disposition by means of a merger,
consolidation or similar transaction (other than (a) by the Company to a Wholly
Owned Restricted Subsidiary or by a Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary, (b) a sale of oil, gas or other hydrocarbons or other
mineral products in the ordinary course of business of the Company's oil and
gas production operations, (c) any abandonment, farm-in, farm-out, lease and
sub-lease of developed and/or undeveloped properties made or entered into in
the ordinary course of business (but excluding (i) any sale of a net profits or
overriding royalty interest, in each case conveyed from or burdening proved
developed or proved undeveloped reserves and (ii) any sale of hydrocarbons or
other mineral products as a result of the creation of Dollar-Denominated
Production Payments or Volumetric Production Payments, other than
Dollar-Denominated Production Payments and Volumetric Production Payments
created or sold in connection with the financing of, and within 30 days after,
the acquisition of the properties subject thereto), (d) the disposition of all
or substantially all of the assets of the Company in compliance with the
covenants captioned "--Certain Covenants --Limitation on Mergers and
Consolidations" and " --Certain Covenants--Limitation on Sale/Leaseback
Transactions," (e) the issuance by the Company of shares of its Capital Stock,
(f) any trade or exchange by the Company or any Restricted Subsidiary of oil
and gas properties for other oil and gas properties owned or held by another
Person provided that (i) the fair market value of the properties traded or
exchanged by the Company or such Restricted Subsidiary (including any cash or
Cash Equivalents, not to exceed 15% of such fair market value, to be delivered
by the Company or such Restricted Subsidiary) is reasonably equivalent to the
fair market value of the properties (together with any cash or Cash
Equivalents, not to exceed 15% of such fair market value) to be received by the
Company or such Restricted Subsidiary as determined in good faith by the Board
of Directors of the Company, which determination shall be certified by a
resolution of the Board of Directors delivered to the Trustee if such fair
market value is in excess of $5.0 million, provided that if such resolution
indicates that such fair market value is in excess of $10.0 million such
resolution shall be accompanied by a written appraisal by a nationally
recognized investment banking firm or appraisal firm, in each case specializing
or having a specialty in oil and gas properties, and (ii) such exchange is
approved by a majority of Disinterested Directors of the Company, and (g) the
sale, transfer or other disposition in the ordinary course of business of oil
and
-61-
<PAGE> 66
natural gas properties, or interests therein, provided that such properties
either (i) do not have proved reserves attributed to them or (ii) were
purchased for the purpose of offering such properties for resale or
participations by other Persons).
"Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the present value of the total net amount
of rent required to be paid by such Person under the lease during the primary
term thereof, without giving effect to any renewals at the option of the
lessee, discounted from the respective due dates thereof to such date at the
rate of interest per annum implicit in the terms of the lease. As used in the
preceding sentence, the net amount of rent under any lease for any such period
shall mean the sum of rental and other payments required to be paid with
respect to such period by the lessee thereunder excluding any amounts required
to be paid by such lessee on account of maintenance and repairs, insurance,
taxes, assessments, water rates or similar charges. In the case of any lease
which is terminable by the lessee upon payment of a penalty, such net amount of
rent shall also include the amount of such penalty, but no rent shall be
considered as required to be paid under such lease subsequent to the first date
upon which it may be so terminated.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the product of (x) the
number of years from such date to the date of each successive scheduled
principal payment of such Indebtedness multiplied by (y) the amount of such
principal payment by (ii) the sum of all such principal payments.
"Bank Credit Facility" means a revolving credit, term credit and/or letter
of credit facility, the proceeds of which are used for working capital and
other general corporate purposes to be entered into by one or more of the
Company and/or its Restricted Subsidiaries and certain financial institutions,
as amended, extended or refinanced from time to time. The Credit Facility will
constitute a Bank Credit Facility.
"Board of Directors" means, with respect to any Person, the board of
directors of such Person or any committee of the board of directors of such
Person duly authorized to act on behalf of the board of directors of such
Person, or if not a board of directors or such authorized committee, a
comparable governing body of such Person or any committee of such governing
body duly authorized to act on behalf of such governing body.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of
corporate stock, partnership interests or limited liability company membership
interests and any and all warrants, options and rights with respect thereto
(whether or not currently exercisable), including each class of common stock
and preferred stock or interests of such Person.
"Capitalized Lease Obligations" of any Person means the obligations of such
Person to pay rent or other amounts under a lease of property, real or
personal, that is required to be capitalized for financial reporting purposes
in accordance with GAAP, and the amount of such obligations shall be the
capitalized amount thereof determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity
of 90 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided
that the full faith and credit of the United States of America is pledged in
support thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of 90 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500,000,000; (iii) commercial
paper with a maturity of 90 days or less issued by a corporation that is not an
Affiliate of the Company and is organized under the laws of any state of the
United States or the District of Columbia and rated at least A-1 by Standard &
Poor's Ratings Services at least P-1 by Moody's Investors Service, Inc.; (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any
commercial bank meeting the specifications of clause (ii) above; and (v)
overnight bank deposits and bankers' acceptances at any commercial bank meeting
the qualifications specified in clause (ii) above.
"Consolidated Interest Coverage Ratio" means, for any Reference Period, the
ratio on a pro forma basis of (a) the sum of (i) Consolidated Net Income, (ii)
Consolidated Interest Expense, (iii) Consolidated Tax Expense, (iv) exploration
expense, (v) ceiling limitation writedowns under SEC guidelines, (vi)
depreciation and depletion of the Company and its Restricted Subsidiaries, as
determined in accordance with GAAP on a consolidated basis plus (vii)
amortization of the Company and its Restricted Subsidiaries including, without
limitation, amortization of capitalized debt issuance costs, as determined in
accordance with GAAP on a consolidated basis, in each case as determined for
the Reference Period to (b) Consolidated Interest Expense for such Reference
Period; provided, that, in calculating each of the items set forth in the
foregoing, (1) acquisitions which occurred during the Reference Period
-62-
<PAGE> 67
or subsequent to the Reference Period and on or prior to the date of the
transaction giving rise to the need to calculate the Consolidated Interest
Coverage Ratio (the "Transaction Date") shall be assumed to have occurred on
the first day of the Reference Period, (2) the incurrence of any Indebtedness
(including the issuance of the Notes) or issuance of any Disqualified Stock
during the Reference Period or subsequent to the Reference Period and on or
prior to the Transaction Date shall be assumed to have occurred on the first
day of such Reference Period, (3) any Indebtedness that had been outstanding
during the Reference Period that has been repaid on or prior to the Transaction
Date shall be assumed to have been repaid as of the first day of such Reference
Period, (4) the Consolidated Interest Expense attributable to interest on any
Indebtedness or dividends on any Disqualified Stock bearing a floating interest
(or dividend) rate shall be computed on a pro forma basis as if the rate in
effect on the Transaction Date was the average rate in effect during the entire
Reference Period and (5) in determining the amount of Indebtedness pursuant to
the covenant captioned "--Certain Covenants--Limitation on Incurrence of
Additional Indebtedness," the incurrence of Indebtedness or issuance of
Disqualified Stock giving rise to the need to calculate the Consolidated
Interest Coverage Ratio and, to the extent the net proceeds from the incurrence
or issuance thereof are used to retire Indebtedness, the application of the
proceeds therefrom shall be assumed to have occurred on the first day of the
Reference Period.
"Consolidated Interest Expense" means, with respect to the Company and its
Restricted Subsidiaries, for the Reference Period, the aggregate amount
(without duplication) of (a) interest expensed in accordance with GAAP
(including, in accordance with the following sentence, interest attributable to
Capitalized Lease Obligations, but excluding interest attributable to
Dollar-Denominated Production Payments and amortization of deferred debt
expense) during such period in respect of all Indebtedness of the Company and
its Restricted Subsidiaries (including (i) amortization of original issue
discount on any Indebtedness (other than with respect to the Notes), (ii) the
interest portion of all deferred payment obligations, calculated in accordance
with GAAP and (iii) all commissions, discounts and other fees and charges owed
with respect to bankers' acceptance financings and currency and interest rate
swap arrangements, in each case to the extent attributable to such period), and
(b) dividend requirements of the Company and its Restricted Subsidiaries with
respect to any Preferred Stock or Disqualified Stock dividends (whether in cash
or otherwise (except dividends paid solely in shares of Capital Stock other
than Disqualified Stock)) paid (other than to the Company or any of its
Restricted Subsidiaries), declared, accrued or accumulated during such period,
divided by one minus the applicable actual combined federal, state, local and
foreign income tax rate of the Company and its Subsidiaries (expressed as a
decimal), on a consolidated basis, for the Reference Period preceding the date
of the transaction giving rise to the need to calculate Consolidated Interest
Expense, in each case to the extent attributable to such period and excluding
items eliminated in consolidation. For purposes of this definition, (y)
interest on a Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by the Company to be the rate of interest
implicit in such Capitalized Lease Obligation in accordance with GAAP and (z)
interest expense attributable to any Indebtedness represented by the guarantee
by the Company or a Restricted Subsidiary of the Company of an obligation of
another Person (other than the Company or any other Restricted Subsidiary)
shall be deemed to be the interest expense attributable to the Indebtedness
guaranteed.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided, however, that there shall not be included in such Consolidated Net
Income: (a) any net income of any Person if such Person is not the Company or a
consolidated Restricted Subsidiary, except that (i) subject to the limitations
contained in clause (d) below, the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash or Cash Equivalents actually distributed by
such Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in clause
(c) below) and (ii) the Company's equity in a net loss of any such Person
(other than an Unrestricted Subsidiary) for such period shall be included in
determining such Consolidated Net Income; (b) any net income (or loss) of any
Person acquired by the Company or a Subsidiary of the Company in a pooling of
interests transaction for any period prior to the date of such acquisition; (c)
the net income of any Restricted Subsidiary to the extent that the payment of
dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to the Company, is prohibited; (d) any gain (but not
loss) realized upon the sale or other disposition of any property, plant or
equipment of the Company or any Restricted Subsidiary (including pursuant to
any Sale/Leaseback Transaction) which is not sold or otherwise disposed of in
the ordinary course of business and any gain (but not loss) realized upon the
sale or other disposition of any Capital Stock of any Person; (e) any gain (but
not loss) from currency exchange transactions not in the ordinary course of
business consistent with past practice; (f) the cumulative effect of a change
in accounting principles; (g) any writedowns of noncurrent assets; and (h) any
gain (but not loss) attributable to extraordinary items.
"Consolidated Net Worth" means, with respect to the Company and its
Restricted Subsidiaries, as at any date of determination, the sum of Capital
Stock (other than Disqualified Stock) and additional paid-in capital plus
retained earnings (or minus accumulated deficit) minus all intangible assets,
including, without limitation, organization costs,
-63-
<PAGE> 68
patents, trademarks, copyrights, franchises, research and development costs,
and any amount reflected in treasury stock, of the Company and its Restricted
Subsidiaries determined on a consolidated basis in accordance with GAAP.
"Consolidated Tax Expense" means, for any period, the provisions for
federal, state, local and foreign income taxes (including state franchise taxes
accounted for as income taxes in accordance with GAAP) of the Company and its
Restricted Subsidiaries for such period as determined on a consolidated basis
in accordance with GAAP.
"Credit Facility" means the credit agreement [to be entered into] between
the Company and Christiania Bank og KreditKasse, as administrative agent, and
the lenders from time to time parties thereto, as amended and in effect from
time to time.
"Disinterested Director" means, with respect to (i) an Affiliate
Transaction or series of related Affiliate Transactions, (ii) any valuation of
the aggregate Investments of the Company and the Restricted Subsidiaries in an
Unrestricted Subsidiary at the time that it is redesignated a Restricted
Subsidiary, (iii) any valuation of the aggregate Investments of the Company and
the Restricted Subsidiaries in a Restricted Subsidiary at the time it is
redesignated an Unrestricted Subsidiary, (iv) any valuation of any asset(s)
(other than cash) or securities proposed to be transferred or issued by the
Company or any Restricted Subsidiary, as the case may be, pursuant to a
Restricted Payment, or (v) any valuation or determination required in
connection with consideration received in an Asset Sale or the transfer or
exchange of oil and gas properties for oil and gas properties purported to be
excluded from an Asset Sale, a member of the Board of Directors of the Company
who has no financial interest, and whose employer has no direct or indirect
financial interest, in such Affiliate Transaction or series of related
Affiliate Transactions or such transaction giving rise to any such valuation.
"Disqualified Stock" means any Capital Stock of the Company or any
Restricted Subsidiary of the Company which, by its terms (or by the terms of
any security into which it is convertible or for which it is exchangeable), or
upon the happening of any event or with the passage of time, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the Maturity Date or which is exchangeable or convertible into debt
securities of the Company or any Restricted Subsidiary of the Company, except
to the extent that such exchange or conversion rights cannot be exercised prior
to the Maturity Date.
"Dollar-Denominated Production Payments" mean production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Equity Offering" means any underwritten public offering of common stock of
the Company pursuant to a registration statement filed pursuant to the
Securities Act or any private placement of Capital Stock (other than
Disqualified Stock) of the Company (other than to any Person who, prior to such
private placement, was a Subsidiary of the Company or any other Person
controlled by the Company) which offering or placement is consummated after the
Issue Date.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC thereunder.
"GAAP" means generally accepted accounting principles as in effect in the
United States of America as of the Issue Date.
"Guarantee" means any Guarantee issued pursuant to Article X of the
Indenture.
"Guarantor" means (i) each of the Subsidiaries that becomes a guarantor of
the Notes in compliance with the provisions of Article X of the Indenture and
(ii) each of the Persons that executes a supplemental indenture in which such
Person agrees to be bound by the terms of the Indenture, in each case until
such time, if any, such guarantor is released from its Guarantee pursuant to
Section 10.4 of the Indenture.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Indebtedness" means, without duplication, with respect to any Person, (a)
all obligations of such Person (i) in respect of borrowed money (whether or not
the recourse of the lender is to the whole of the assets of such Person or only
to a portion thereof), (ii) evidenced by bonds, notes, debentures or similar
instruments, (iii) representing the balance deferred and unpaid of the purchase
price of any property or services (other than accounts payable or other
obligations arising in the ordinary course of business), (iv) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks, (v)
for the payment of money relating to a Capitalized Lease Obligation, or (vi)
evidenced by a letter of credit or a reimbursement obligation of such Person
with respect to any letter of credit; (b)
-64-
<PAGE> 69
all net obligations of such Person under hedging arrangements including
interest rate swap obligations, commodity swap obligations and foreign currency
hedges, except to the extent such net obligations are taken into account in the
determination of future net revenues from proved oil and gas reserves for
purposes of the calculation of Adjusted Consolidated Net Tangible Assets; (c)
all liabilities of others of the kind described in the preceding clauses (a) or
(b) that such Person has guaranteed or that are otherwise its legal liability
(including, with respect to any Production Payment, any warranties or
guaranties of production or payment by such Person with respect to such
Production Payment but excluding other contractual obligations of such Person
with respect to such Production Payment); (d) Indebtedness (as otherwise
defined in this definition) of another Person secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person, the
amount of such obligations being deemed to be the lesser of (1) the full amount
of such obligations so secured and (2) the fair market value of such asset, as
determined in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a resolution of such Board; (e) with
respect to such Person, the liquidation preference or any mandatory redemption
payment obligations in respect of Disqualified Stock; (f) the aggregate
preference in respect of amounts payable on the issued and outstanding shares
of Preferred Stock of any of the Company's Restricted Subsidiaries in the event
of any voluntary or involuntary liquidation, dissolution or winding up
(excluding any such preference attributable to such shares of Preferred Stock
that are owned by such Person or any of its Restricted Subsidiaries; provided,
that if such Person is the Company, such exclusion shall be for such preference
attributable to such shares of Preferred Stock that are owned by the Company or
any of its Restricted Subsidiaries); and (g) any and all deferrals, renewals,
extensions, refinancings and refundings (whether direct or indirect) of, or
amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (a), (b), (c), (d), (e), (f) or this
clause (g), whether or not between or among the same parties. Subject to clause
(c) of the preceding sentence, neither Dollar-Denominated Production Payments
nor Volumetric Production Payments shall be deemed to be Indebtedness.
"Investment" of any Person means (i) all investments by such Person in any
other Person (including its Affiliates) in the form of direct or indirect
loans, advances or capital contributions, (ii) all direct or indirect
guarantees of, or Liens created or permitted to secure, Indebtedness or other
obligations of any other Person by such Person, (iii) all direct or indirect
purchases or other acquisitions for consideration by such Person of assets,
Indebtedness, Capital Stock or other securities of any other Person and (iv)
all other items that directly or indirectly would be classified as investments
(including, without limitation, purchases of assets outside the ordinary course
of business) or advances on a balance sheet of such Person prepared in
accordance with GAAP. For purposes of the definition of "Unrestricted
Subsidiary," the definition of "Restricted Payment" and the covenant described
under the caption "--Certain Covenants--Limitation on Restricted Payments,"(a)
an "Investment" in an Unrestricted Subsidiary shall be deemed to include and be
valued at the fair market value of the net assets of any Subsidiary of the
Company at the time that such Subsidiary is designated an Unrestricted
Subsidiary and (b) any Investment in, or any property transferred to or from,
an Unrestricted Subsidiary shall be valued at its fair market value at the time
of transfer, in each case, as determined in good faith by the Board of
Directors of the Company.
"Issue Date" means the date on which the Notes are originally issued under
the Indenture.
"Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or
equivalent statute or statutes) of any jurisdiction).
"Liquidated Damages" shall have the meaning given such term in Section 6 of
the Registration Rights Agreement.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than either (i) 10% from the end
of the immediately preceding fiscal quarter in the estimated discounted future
net revenue from proved oil and gas reserves of the Company and its Restricted
Subsidiaries, or (ii) 20% from the end of the immediately preceding year in the
estimated discounted future net revenue from proved oil and gas reserves of the
Company and its Restricted Subsidiaries, in each case calculated in accordance
with clause (a)(i) of the definition of Adjusted Consolidated Net Tangible
Assets; provided, however, that the following will be excluded from the
calculation of Material Change: (a) any acquisitions of oil and gas reserves
made after the end of the immediately preceding year for which the discounted
future net revenues have been estimated by independent petroleum engineers
since the end of the preceding year and on which a report or reports exist and
(b) any disposition of properties existing at the beginning of the current
quarter or current year, as the case may be, for purposes of clause (i) or
clause (ii) above, that have been disposed of as provided in the covenant
captioned "--Certain Covenants--Limitation on Sale of Assets."
-65-
<PAGE> 70
"Maturity Date" means April 1, 2005.
"Net Cash Proceeds" means (a) with respect to any Asset Sale or
Sale/Leaseback Transaction of any Person, an amount equal to aggregate cash
proceeds received (including any cash proceeds received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, and excluding any other consideration until such
time as such consideration is converted into cash) therefrom, in each case net
of all legal, title and recording tax expenses, commissions and other fees and
expenses incurred, and all federal, state or local taxes required to be accrued
as a liability as a consequence of such Asset Sale or Sale/Leaseback
Transaction, and in each case net of all Indebtedness which is secured by such
assets, in accordance with the terms of any Lien upon or with respect to such
assets, or which must, by its terms or in order to obtain a necessary consent
to such Asset Sale or Sale/Leaseback Transaction or by applicable law, be
repaid out of the proceeds from such Asset Sale or Sale/Leaseback Transaction
and which is actually so repaid and (b) in the case of any sale by the Company
of securities pursuant to subclauses (B) or (C) of clause (iii) of the initial
paragraph of the covenant caption "--Certain Covenants--Limitation on
Restricted Payments," the amount of aggregate net cash proceeds received by the
Company, after payment of expenses, commissions, discounts and any other
transaction costs incurred in connection therewith.
"Net Working Capital" means (i) all current assets of the Company and its
Restricted Subsidiaries, minus (ii) all current liabilities of the Company and
its Restricted Subsidiaries (including the current portion of gas balancing
liabilities), except current liabilities included in Indebtedness.
"Non-Recourse Indebtedness" means Indebtedness (i) as to which neither the
Company nor any Restricted Subsidiary (a) provides credit support of any kind,
including any undertaking, agreement or instrument which would constitute
Indebtedness, (b) is directly or indirectly liable for such Indebtedness (by
virtue of any Lien on any stock or asset of the Company or any Restricted
Subsidiary or by virtue of the Company or such Restricted Subsidiary being the
primary obligor or guarantor of, or otherwise liable in respect on, such
Indebtedness) or (c) constitutes a lender, (ii) no default with respect to
which (including any rights which the holders thereof may have to take
enforcement action against such Person) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or its
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity, and (iii) as to which each lender thereof has been notified and has
agreed, in writing, that it will not have any recourse, directly or indirectly,
to the stock or assets of the Company or any Restricted Subsidiary.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Oil and Gas Business" means the business of the exploration for, and
exploitation, development, production, processing (but not refining),
marketing, storage and transportation of, hydrocarbons, and other related
energy and natural resources businesses (including oil and gas services
businesses related to the foregoing).
"Oil and Gas Securities" means the Voting Stock of a Person primarily
engaged in the Oil and Gas Business, provided that if such Voting Stock is not
registered under Section 12 of the Exchange Act, simultaneously with the
acquisition thereof by the Company or any Restricted Subsidiary, as applicable,
the issuer of such Voting Stock shall become a Wholly Owned Restricted
Subsidiary.
"Permitted Business Investments" means (i) Investments in assets used in
the Oil and Gas Business; (ii) the entry into operating agreements, joint
ventures, processing agreements, farmout agreements, development agreements,
area of mutual interest agreements, contracts for the sale, transportation or
exchange of oil and natural gas, unitization agreements, pooling arrangements,
joint bidding agreements, service contracts, partnership agreements (whether
general or limited) or other similar or customary agreements, transactions,
properties, interests or arrangements, and Investments and expenditures in
connection therewith or pursuant thereto, in each case made or entered into in
the ordinary course of the Oil and Gas Business, excluding solely for purposes
of this clause (ii), however, Investments in corporations; (iii) the
acquisition of working interests, royalty interests or mineral leases relating
to oil and gas properties; (iv) Investments by the Company or any Wholly Owned
Restricted Subsidiary in any Person which is, or which will become,
contemporaneously with the making of such Investment, a Wholly Owned Restricted
Subsidiary and which is engaged in the Oil and Gas Business; (v) Investments in
the Company by any Wholly Owned Restricted Subsidiary; (vi) Investments
permitted under the covenant captioned "--Certain Covenants--Limitation on
Sales of Assets"; (vii) Investments in any Person, other than an Unrestricted
Subsidiary, the consideration for which consists of Capital Stock (other than
Disqualified Stock); (viii) Investments constituting obligations under hedging
arrangements described in clause (vii) of the definition of "Permitted
Indebtedness;" and (ix) Investments in Unrestricted Subsidiaries the assets of
which consist of assets used in the Oil and Gas Business (other than cash and
Cash Equivalents) received by the Company from any Person other than a
Subsidiary of the
-66-
<PAGE> 71
Company solely as a result of the issuance of Capital Stock of the Company
(other than Disqualified Stock) in exchange therefor.
"Permitted Company Refinancing Indebtedness" means Indebtedness of the
Company, the net proceeds of which are used to renew, extend, refinance, refund
or repurchase outstanding Indebtedness of the Company, provided that (i) if the
Indebtedness (including the Notes) being renewed, extended, refinanced,
refunded or repurchased is pari passu with or subordinated in right of payment
to the Notes, then such Indebtedness is pari passu or subordinated in right of
payment to, as the case may be, the Notes at least to the same extent as the
Indebtedness being renewed, extended, refinanced, refunded or repurchased, (ii)
such Indebtedness is scheduled to mature no earlier than the Indebtedness being
renewed, extended, refinanced, refunded or repurchased, and (iii) such
Indebtedness has an Average Life at the time such Indebtedness is incurred that
is equal to or greater than the Average Life of the Indebtedness being renewed,
extended, refinanced, refunded or repurchased; provided, further, that such
Indebtedness (to the extent that such Indebtedness constitutes Permitted Company
Refinancing Indebtedness) is in an aggregate principal amount (or, if such
Indebtedness is issued at a price less than the principal amount thereof, the
aggregate amount of gross proceeds therefrom is) not in excess of the aggregate
principal amount then outstanding of the Indebtedness being renewed, extended,
refinanced, refunded or repurchased (or if the Indebtedness being renewed,
extended, refinanced, refunded or repurchased was issued at a price less than
the principal amount thereof, then not in excess of the amount of liability in
respect thereof determined in accordance with GAAP).
"Permitted Financial Investments" means money market mutual or similar
funds having assets in excess of $500,000,000, and the following kinds of
instruments if, on the date of purchase or other acquisition of any such
instrument by the Company or any Subsidiary of the Company, the remaining term
to maturity is not more than one year: (i) readily marketable obligations
issued or unconditionally guaranteed as to principal of and interest on by the
United States of America or by any agency or authority controlled or supervised
by and acting as an instrumentality of the United States of America; (ii)
repurchase obligations for instruments of the type described in clause (i) for
which delivery of the instrument is made against payment; (iii) obligations
(including, but not limited to, demand or time deposits, bankers' acceptances
and certificates of deposit) issued by a depository institution or trust
company incorporated or doing business under the laws of the United States of
America, any state thereof or the District of Columbia or a branch or
subsidiary of any such depository institution or trust company operating
outside the United States, provided, that such depository institution or trust
company has, at the time of the Company's or such Subsidiary's investment
therein or contractual commitment providing for such investment, capital
surplus or undivided profits (as of the date of such institution's most
recently published financial statements) in excess of $500,000,000; and (iv)
commercial paper issued by any corporation, if such commercial paper has, at
the time of the Company's or any of its Subsidiary's investment therein or
contractual commitment providing for such investment, credit ratings of A-1 (or
higher) by Standard & Poor's Ratings Services and P-1 (or higher) by Moody's
Investors Services, Inc.
"Permitted Indebtedness" means (i) Indebtedness of the Company and its
Restricted Subsidiaries outstanding as of the Issue Date; (ii) Indebtedness of
the Company and its Restricted Subsidiaries under a Bank Credit Facility as the
same may be amended, refinanced or replaced, in a principal amount outstanding
at any time not to exceed a principal amount equal to the greater of (a) $35.0
million and (b) 15% of Adjusted Consolidated Net Tangible Assets, in each
instance, plus related accrued interest and costs, less any Net Cash Proceeds
applied pursuant to the covenant captioned "--Certain Covenants--Limitation on
Sale of Assets" to repay or prepay such Indebtedness that results in a
permanent reduction in any revolving credit or other commitment relating
thereto or the maximum amount that may be borrowed thereunder, provided that
the aggregate amount of applied Net Cash Proceeds shall not permanently reduce
the amount of Permitted Indebtedness under this clause (ii) below $10.0 million
principal amount plus related accrued interest and costs; (iii) other
Indebtedness of the Company and its Restricted Subsidiaries in a principal
amount not to exceed $5.0 million at any one time outstanding; (iv)
Indebtedness of the Company to any Wholly Owned Restricted Subsidiary of the
Company and Indebtedness of any Restricted Subsidiary of the Company to the
Company or another Wholly Owned Restricted Subsidiary; (v) Permitted Company
Refinancing Indebtedness; (vi) Permitted Subsidiary Refinancing Indebtedness;
(vii) obligations under non-speculative hedging arrangements that the Company
and its Subsidiaries enter into in the ordinary course of business for the
purpose of protecting their production against fluctuations in oil and natural
gas prices; (viii) Indebtedness under the Notes; and (ix) Indebtedness of a
Subsidiary of the Company pursuant to its Guarantee of the Notes pursuant to
Article X of the Indenture.
"Permitted Investments" means Permitted Business Investments and Permitted
Financial Investments.
"Permitted Liens" means (i) Liens outstanding as of the Issue Date; (ii)
Liens now or hereafter securing a Bank Credit Facility; provided, however, such
Liens are limited to securing Indebtedness in an amount not in excess of that
permitted to be incurred in accordance with clause (ii) of the definition of
Permitted Indebtedness; (iii) Liens now or hereafter securing any interest rate
hedging obligations so long as the related Indebtedness (a) constitutes Senior
Indebtedness or (b) is, or is permitted to be under this Indenture, secured by
a Lien on the same property
-67-
<PAGE> 72
securing such interest rate obligations; (iv) Liens now or hereafter securing
any interest rate hedging obligations so long as the related Indebtedness (a)
constitutes the Notes (or any Permitted Company Refinancing Indebtedness in
respect thereof) or (b) is, or is permitted to be under this Indenture, secured
by a Lien on the same property securing such interest rate hedging obligations;
(v) Liens securing Indebtedness, the proceeds of which are used to refinance
secured Indebtedness of the Company or its Restricted Subsidiaries; provided,
that such Liens extend to or cover only the property or assets currently
securing the Indebtedness being refinanced; (vi) Liens for taxes, assessments
and governmental charges not yet delinquent or being contested in good faith
and for which adequate reserves have been established to the extent required by
GAAP; (vii) mechanics', workmen's, materialmen's, operators' or similar Liens
arising in the ordinary course of business; (viii) Liens in connection with
workers' compensation, unemployment insurance or other social security, old age
pension or public liability obligations; (ix) Liens, deposits or pledges to
secure the performance of bids, tenders, contracts (other than contracts for
the payment of money), leases, public or statutory obligations, surety, stay,
appeal indemnity, performance or other similar bonds, or other similar
obligations arising in the ordinary course of business; (x) survey exceptions,
encumbrances, easements or reservations of, or rights of others for, rights of
way, zoning or other restrictions as to the use of real properties, and minor
defects in title which, in the case of any of the foregoing, were not incurred
or created to secure the payment of borrowed money or the deferred purchase
price of property or services, and in the aggregate do not materially adversely
affect the value of such properties or materially impair use for the purposes
of which such properties are held by the Company or any Restricted
Subsidiaries; (xi) Liens on, or related to, properties to secure all or part of
the costs incurred in the ordinary course of business of exploration, drilling,
development or operation thereof; (xii) Liens on pipeline or pipeline
facilities which arise out of operation of law; (xiii) judgment and attachment
Liens not giving rise to an Event of Default or Liens created by or existing
from any litigation or legal proceeding that are currently being contested in
good faith by appropriate proceedings and for which adequate reserves have been
made; (xiv) (a) Liens upon any property of any Person existing at the time of
acquisition thereof by the Company or a Restricted Subsidiary, (b) Liens upon
any property of a Person existing at the time such Person is merged or
consolidated with the Company or any Restricted Subsidiary or existing at the
time of the sale or transfer of any such property of such Person to the Company
or any Restricted Subsidiary, or (c) Liens upon any property of a Person
existing at the time such Person becomes a Restricted Subsidiary; provided,
that in each case such Lien has not been created in contemplation of such sale,
merger, consolidation, transfer or acquisition, and provided that in each such
case no such Lien shall extend to or cover any property of the Company or any
Restricted Subsidiary other than the property being acquired and improvements
thereon; (xv) Liens on deposits to secure public or statutory obligations or in
lieu of surety or appeal bonds entered into in the ordinary course of business;
(xvi) Liens in favor of collecting or payor banks having a right of setoff,
revocation, refund or chargeback with respect to money or instruments of the
Company or any Subsidiary of the Company on deposit with or in possession of
such bank; (xvii) purchase money security interests granted in connection with
the acquisition of assets in the ordinary course of business and consistent
with past practices, provided, that (A) such Liens attach only to the property
so acquired with the purchase money indebtedness secured thereby and (B) such
Liens secure only Indebtedness that is not in excess of 100% of the purchase
price of such assets; (xviii) Liens reserved in oil and gas mineral leases for
bonus or rental payments and for compliance with the terms of such leases;
(xix) Liens arising under partnership agreements, oil and gas leases, farm-out
agreements, division orders, contracts for the sale, purchase, exchange,
transportation or processing (but not refining) of oil, gas or other
hydrocarbons, unitization and pooling declarations and agreements, development
agreements, operating agreements, area of mutual interest agreements, and other
similar agreements which are customary in the Oil and Gas Business; (xx) Liens
securing obligations under non- speculative hedging arrangements that the
Company enters into in the ordinary course of business for the purpose of
protecting its production against fluctuations in oil and natural gas prices;
and (xxi) Liens to secure Dollar- Denominated Production Payments and
Volumetric Production Payments.
"Permitted Subsidiary Refinancing Indebtedness" means Indebtedness of any
Restricted Subsidiary, the net proceeds of which are used to renew, extend,
refinance, refund or repurchase outstanding Indebtedness of such Restricted
Subsidiary, provided that (i) if the Indebtedness (including any Guarantee)
being renewed, extended, refinanced, refunded or repurchased is pari passu with
or subordinated in right of payment to the Guarantee, then such Indebtedness is
pari passu with or subordinated in right of payment to, as the case may be, the
Guarantee at least to the same extent as the Indebtedness being renewed,
extended, refinanced, refunded or repurchased, (ii) such Indebtedness is
scheduled to mature no earlier than the Indebtedness being renewed, extended,
refinanced, refunded or repurchased, and (iii) such Indebtedness has an Average
Life at the time such Indebtedness is incurred that is equal to or greater than
the Average Life of the Indebtedness being renewed, extended, refinanced,
refunded or repurchased, provided, further, that such Indebtedness (to the
extent that such Indebtedness constitutes Permitted Subsidiary Refinancing
Indebtedness) is in an aggregate principal amount (or, if such Indebtedness is
issued at a price less than the principal amount thereof, the aggregate amount
of gross proceeds therefrom is) not in excess of the aggregate principal amount
then outstanding of the Indebtedness being renewed, extended, refinanced,
refunded or repurchased (or if the Indebtedness being renewed, extended,
refinanced, refunded or repurchased was issued at a price less than the
principal amount thereof, then not in excess of the amount of liability in
respect thereof determined in accordance with GAAP).
-68-
<PAGE> 73
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, trust, estate, unincorporated organization or
government or any agency or political subdivision thereof.
"Preferred Stock" as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated), which is preferred
as to the payment of dividends, or upon any voluntary or involuntary
liquidation or dissolution of such corporation, over shares of Capital Stock of
any other class of such corporation.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Reference Period" means, with respect to any Person, the four full
consecutive fiscal quarters ended with the last full fiscal quarter for which
financial information is available immediately preceding any date upon which
any determination is to be made pursuant to the terms of the Notes or the
Indenture.
"Restricted Payment" means, with respect to any Person, any of the
following: (i) the declaration or payment of any dividend or the making of any
other payment or distribution in respect or on account of such Person's Capital
Stock (other than (a) dividends or distributions payable solely in Capital
Stock (other than Disqualified Stock) and (b) in the case of Restricted
Subsidiaries of the Company, dividends or distributions payable to the Company
or to a Restricted Subsidiary of the Company); (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock, or any option,
warrant, or other right to acquire shares of Capital Stock, of the Company or
any of its Restricted Subsidiaries (but excluding (a) any cashless exercise of
warrants or options or (b) payments in respect of cash elections or phantom
stock or similar awards under any director or employee benefit plan or
arrangement provided such payment is recorded as a compensation expense under
GAAP); (iii) the making of any payment (principal or otherwise) on or with
respect to, or the purchase, defeasance, repurchase, redemption or other
acquisition or retirement for value, prior to any scheduled maturity, scheduled
repayment or scheduled sinking fund payment, of any Indebtedness which is
subordinated in right of payment to the Notes or Guarantees, as the case may
be; and (iv) the making by such Person of any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however,
that (i) immediately after giving effect to such designation, the Company could
incur at least $1.00 in additional Indebtedness pursuant to the first paragraph
of the covenant captioned "--Certain Covenant --Limitation on Incurrence of
Additional Indebtedness," (ii) such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of any outstanding
Indebtedness of such Unrestricted Subsidiary, and such Indebtedness is
permitted under the covenant described under the caption "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness," calculated on
a pro forma basis as if such designation had occurred at the beginning of the
four-quarter Reference Period, and (iii) no Default or Event of Default would
be in existence following such designation.
"Sale/Leaseback Transaction" means with respect to the Company or any of
its Restricted Subsidiaries, any arrangement with any Person providing for the
leasing by the Company or any of its Restricted Subsidiaries of any principal
property, acquired or placed into service more than 180 days prior to such
arrangement, whereby such property has been or is to be sold or transferred by
the Company or any of its Restricted Subsidiaries to such Person.
"Senior Indebtedness" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter incurred), unless such Indebtedness
is contractually subordinate or junior in right of payment of principal,
premium and interest to the Notes.
"Senior Indebtedness of a Guarantor" means any Indebtedness of such
Guarantor (whether outstanding on the Issue Date or thereafter incurred),
unless such Indebtedness is contractually subordinate or junior in right of
payment of principal, premium and interest to the Guarantees.
"Subordinated Indebtedness of a Guarantor" means any Indebtedness of such
Guarantor (whether outstanding on the date hereof or hereafter incurred) which
is contractually subordinate or junior in right of payment of principal,
premium and interest to the Guarantees.
"Subordinated Indebtedness of the Company" means any Indebtedness of the
Company (whether outstanding on the date hereof or hereafter incurred) which is
contractually subordinate or junior in right of payment of principal, premium
and interest to the Notes.
"Subsidiary" of any Person means (i) a corporation a majority of whose
Voting Stock is at the time, directly or indirectly, owned by such Person, by
one or more subsidiaries of such Person or by such Person and one or more
-69-
<PAGE> 74
subsidiaries of such Person, (ii) a partnership in which such Person or a
subsidiary of such Person is, at the date of determination, a general or
limited partner of such partnership, but only if such Person is, or one or more
of its subsidiaries or such Person and one or more of its subsidiaries are,
entitled to receive more than 50 percent of the assets of such partnership upon
its dissolution, or (iii) any other Person (other than a corporation or
partnership) in which such Person, directly or indirectly, at the date of
determination thereof, has (x) at least a majority ownership interest or (y)
the power to elect or direct the election of a majority of the directors or
other governing body of such Person.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that is
designated as an Unrestricted Subsidiary by the Board of Directors of the
Company pursuant to a board resolution in accordance with the requirements of
the following sentence (and so long as such Subsidiary continues to meet such
requirements) and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board
of Directors of the Company may designate any Subsidiary of the Company
(including a newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary, by a resolution of the Board of Directors of the Company as
evidenced by written notice thereof and the filing and officers' certificate
referred to in the next following sentence delivered to the Trustee, only if at
the time of and after giving effect to such designation, (a) the Company could
incur at least $1.00 of additional Indebtedness pursuant to the first paragraph
of the covenant captioned "--Certain Covenants--Limitation on Incurrence of
Additional Indebtedness," (b) the Company could make an additional Restricted
Payment of at least $1.00 pursuant to the first paragraph of the covenant
captioned "--Certain Covenants--Limitation on Restricted Payments," (c) such
Subsidiary does not own or hold any Capital Stock of, or any Lien on any
property of, the Company or any Restricted Subsidiary, (d) such Subsidiary is
not liable, directly or indirectly, with respect to any Indebtedness other than
Non-Recourse Indebtedness, (e) such Subsidiary is not a party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary unless such agreement, contract, arrangement or understanding does
not violate the terms of the Indenture described under the caption "--Certain
Covenants--Limitation on Transactions with Affiliates," and (f) such Subsidiary
is a Person with respect to which neither the Company nor any Restricted
Subsidiary has any direct or indirect obligation (1) to subscribe for
additional Capital Stock or (2) to maintain or preserve such Subsidiary's
financial condition or to cause such Subsidiary to achieve any specified levels
of operating results, in each case, except to the extent otherwise permitted by
the Indenture. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing requirements and
was permitted by the covenant described above under the caption "--Certain
Covenants--Limitation on Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture, and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"--Certain Covenants --Limitation on Incurrence of Additional Indebtedness,"
the Company shall be in default of such covenant).
"U.S. Government Securities" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case
under clauses (i) or (ii) are not callable or redeemable at the option of the
issuer thereof.
"U.S. Legal Tender" means such coin or currency of the United States as at
the time of payment shall be legal tender for the payment of public and private
debts.
"Volumetric Production Payments" mean production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or only so long as no senior class of stock has voting
power by reason of contingency) to vote in the election of members of the Board
of Directors or other governing body of such Person.
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary 95% or
more of the Capital Stock of which is owned by the Company or another Wholly
Owned Restricted Subsidiary, other than (i) directors' qualifying shares, if
applicable, and (ii) shares required by applicable law of a foreign
jurisdiction to be partially owned by the government of such jurisdiction or
Person of such or another foreign jurisdiction in order for such Subsidiary to
transact business in such jurisdiction, if such Subsidiary is organized in a
foreign jurisdiction, in each case, so long as the Company or such other Wholly
Owned Restricted Subsidiary controls the management and business of such
Restricted Subsidiary and derives the economic benefits of ownership of such
Restricted Subsidiary to substantially
-70-
<PAGE> 75
the same extent as if such Restricted Subsidiary were wholly owned by the
Company or such other Wholly Owned Restricted Subsidiary.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of principal of or premium, if any, on the Notes
when due and payable at maturity, upon repurchase pursuant to a Change of
Control Offer or a Net Proceeds Offer, upon acceleration or otherwise; or
(ii) default for 30 days in payment of any interest on, or Liquidated
Damages with respect to, the Notes; or
(iii) default by the Company or any Guarantor in the deposit of any
optional redemption payment; or
(iv) default by the Company or any Guarantor in the performance of the
covenants discussed under the captions "--Change of Control," "--Certain
Covenants--Limitation on Sale of Assets" and "--Certain Covenants--Limitation
on Mergers and Consolidations;" or
(v) default by the Company or any Restricted Subsidiary in the performance
of any other covenant or agreement in the Indenture (other than those described
in clauses (i) through (iv) above) which shall not have been remedied within 30
days after written notice by the Trustee or by the Holders of at least 25% in
principal amount of the Notes then outstanding; or
(vi) default on any other Indebtedness (other than Non-Recourse
Indebtedness) of the Company or any Subsidiary of the Company (other than an
Unrestricted Subsidiary) if either (a) such default results in the acceleration
of the maturity of any such Indebtedness having a principal amount of
$5,000,000 or more individually or, taken together with the principal amount of
any other such Indebtedness in default or the maturity of which has been so
accelerated, in the aggregate, or (b) such default results from the failure to
pay when due principal of, or premium, if any, or interest on, any such
Indebtedness, after giving effect to any applicable grace period (a "Payment
Default"), having a principal amount of $5,000,000 or more individually or,
taken together with the principal amount of any other Indebtedness under which
there has been a Payment Default, in the aggregate; or
(vii) the commencement of proceedings, or the taking of any enforcement
action (including by way of set-off), by any holder (or its designee or assign)
of at least $5.0 million in aggregate principal amount of Indebtedness
(including any amounts owed pursuant to a judgment or order) of the Company or
any Subsidiary of the Company (other than an Unrestricted Subsidiary, provided
that neither the Company nor any Restricted Subsidiary is liable, directly or
indirectly, for such Indebtedness), after a default under such Indebtedness, to
retain in satisfaction of such Indebtedness or to collect or seize, dispose of
or apply in satisfaction of such Indebtedness, property or assets of the
Company or its Restricted Subsidiaries having a fair market value in excess of
$5.0 million individually or in the aggregate; provided that if any such
proceedings or actions are terminated or rescinded, or such Indebtedness is
repaid or settled, in each case, other than as a result of the enforcement of
any right or process pursuant to any such proceeding or action, such Event of
Default under the Indenture and any consequential acceleration of the Notes
shall be automatically rescinded, so long as (a) such rescission does not
conflict with any judgment or decree and (b) the holder of such Indebtedness
shall not have applied any such property or assets in satisfaction of such
Indebtedness; or
(viii) the entry by a court of one or more judgments or orders for the
payment in cash or other assets of $5.0 million or more individually or in the
aggregate (net of applicable insurance coverage acknowledged in writing by the
insurance carrier) having been rendered against the Company or any Subsidiary
of the Company (other than an Unrestricted Subsidiary; provided that neither
the Company nor any Restricted Subsidiary is liable, directly or indirectly,
for such judgment or order) and such judgment or order shall continue
unsatisfied and unstayed for a period of 60 days; or
(ix) the occurrence of certain events giving rise to ERISA liability; or
(x) the failure of a Guarantee by a Guarantor to be in full force and
effect (other than a release of a Guarantee in accordance with the Indenture),
or the denial or disaffirmance by such entity thereof; or
(xi) certain events involving bankruptcy, insolvency or reorganization of
the Company or any Subsidiary of the Company (other than an Unrestricted
Subsidiary).
-71-
<PAGE> 76
The Indenture provides that the Trustee may withhold notice to the Holders
of the Notes of any default (except in payment of principal of, or premium, if
any, or interest or Liquidated Damages on the Notes) if the Trustee considers
it in the interest of the Holders of the Notes to do so.
The Indenture provides that if an Event of Default occurs and is continuing
with respect to the Indenture, the Trustee or the Holders of not less than 25%
in principal amount of the Notes outstanding may declare the principal of and
premium, if any, and accrued but unpaid interest and Liquidated Damages (if
any) on all Notes to be due and payable. Upon such a declaration, such
principal, premium, if any, interest and Liquidated Damages (if any) will be
due and payable immediately. Notwithstanding the foregoing, if an Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
of the Company or any Subsidiary of the Company occurs and is continuing, the
principal of, and premium, if any, and accrued but unpaid interest and
Liquidated Damages (if any) on all the Notes will become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holders of the Notes. The amount due and payable on the acceleration of
any Note will be equal to 100% of the principal amount of such Note, plus
accrued interest and Liquidated Damages (if any) to the date of payment. Under
certain circumstances, the Holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
The Indenture provides that no Holder of a Note may pursue any remedy under
the Indenture unless (i) the Trustee shall have received written notice of a
continuing Event of Default, (ii) the Trustee shall have received a request
from Holders of at least 25% in principal amount of the Notes to pursue such
remedy, (iii) the Trustee shall have been offered indemnity reasonably
satisfactory to it, (iv) the Trustee shall have failed to act for a period of
60 days after receipt of such notice, request and offer of indemnity and (v) no
direction inconsistent with such written request has been given to the Trustee
during such 60-day period by the Holders of a majority in principal amount of
the Notes; provided, however, such provision does not affect the right of a
Holder of a Note to sue for enforcement of any overdue payment thereon.
The Holders of a majority in principal amount of the Notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee under the
Indenture, subject to certain limitations specified in the Indenture. The
Indenture will require the annual filing by the Company with the Trustee of a
written statement as to compliance with the covenants contained in the
Indenture.
MODIFICATION AND WAIVER
The Indenture provides that modifications and amendments to the Indenture
or the Notes may be made by the Company, the Guarantors and the Trustee with
the consent of the Holders of a majority in principal amount of the Notes then
outstanding; provided that no such modification or amendment may, without the
consent of the Holder of each Note then outstanding affected thereby, (i)
reduce the percentage of principal amount of Notes whose Holders must consent
to an amendment, supplement or waiver; (ii) reduce the rate or change the time
for payment of interest, including defaulted interest, or Liquidated Damages on
any Note; (iii) reduce the principal amount of any Note or change the Maturity
Date of the Notes; (iv) reduce the redemption price, including premium, if any,
payable upon redemption of any Note or change the time at which any Note may or
shall be redeemed; (v) reduce the repurchase price, including premium, if any,
payable upon the repurchase of any Note or change the time at which any Note
may or shall be repurchased; (vi) make any Note payable in money other than
that stated in the Note; (vii) impair the right to institute suit for the
enforcement of any payment of principal of, or premium, if any, or interest or
Liquidated Damages on any Note; (viii) make any change in the percentage of
principal amount of Notes necessary to waive compliance with certain provisions
of the Indenture; or (ix) waive a continuing Default or Event of Default in the
payment of principal of, premium, if any, or interest or Liquidated Damages on
the Notes. The Indenture provides that modifications and amendments of the
Indenture may be made by the Company, the Guarantors and the Trustee without
the consent of any Holders of Notes in certain limited circumstances, including
(a) to cure any ambiguity, omission, defect or inconsistency, (b) to provide
for the assumption of the Obligations of the Company or any Guarantor under the
Indenture upon the merger, consolidation or sale or other disposition of all or
substantially all of the assets of the Company or such Guarantor, (c) to
reflect the release of any Guarantor from its Guarantee, or the addition of any
Subsidiary of the Company as a Guarantor, in the manner provided in the
Indenture, (d) to comply with any requirement of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act of
1939 or (e) to make any change that would provide any additional benefit to the
Holders or that does not adversely affect the rights of any Holder of Notes in
any material respect.
The Indenture provides that neither the Company nor any of its Subsidiaries
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fees or otherwise, to any Holder of any Notes for
or as an inducement to any consent, waiver or amendment of any terms or
provisions of the Notes or the Indenture unless such consideration is offered
to be paid or agreed to be paid to all Holders of the Notes which so consent,
waive or agree to amend in the time period set forth in any solicitation
documents relating to such consent.
-72-
<PAGE> 77
The Indenture provides that the Holders of a majority in aggregate
principal amount of the Notes then outstanding may waive any past default under
the Indenture, except a default in the payment of principal, premium, if any,
or interest or Liquidated Damages.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
Obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company will be deemed to
have paid and discharged the entire Indebtedness represented by the outstanding
Notes, except for (i) the rights of Holders of such Notes to receive payments
in respect of the principal of, premium, if any, and interest and Liquidated
Damages (if any) on such Notes when such payments are due, (ii) the Company's
obligations with respect to such Notes concerning the issuance of temporary
Notes, transfers and exchanges of Notes, replacement of mutilated, destroyed,
lost or stolen Notes, the maintenance of an office or agency where Notes may be
surrendered for transfer or exchange or presented for payment, and duties of
paying agents, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance"), and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment events) described under "--Events of Default" will no
longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee or other qualifying
Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S.
Legal Tender, U.S. Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest and Liquidated Damages (if any) on the outstanding Notes on the
Maturity Date or on the applicable redemption date, as the case may be, of such
principal or installment of principal, premium, if any, or interest or
Liquidated Damages (if any); (ii) in the case of Legal Defeasance, the Company
must deliver to the Trustee an opinion of counsel reasonably acceptable to the
Trustee confirming that (A) the Company has received from or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of
the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel reasonably acceptable to the Trustee to the effect that the Holders of
the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred,
(iv) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day (or a subsequent date if a longer comparable period is then applicable)
after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under any
other material agreement or instrument to which the company is a party or by
which the Company is bound; (vi) the Company shall have delivered to the
Trustee an officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (vii) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel
each stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
GOVERNING LAW
The Indenture provides that it, the Guarantees and the Notes will be
governed by, and construed in accordance with, the laws of the State of New
York, but without giving effect to principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
State Street Bank and Trust Company is the Trustee under the Indenture. Its
address is 225 Asylum Street, 23rd Floor, Hartford, Connecticut 06103. The
Company has also appointed the Trustee as the initial Registrar, Transfer Agent
and Paying Agent under the Indenture.
-73-
<PAGE> 78
The Trustee is permitted to become an owner or pledgee of Notes and may
otherwise deal with the Company or its Subsidiaries or any of their Affiliates
with the same rights it would have if it were not Trustee. If, however, the
Trustee acquires any conflicting interest (as defined in the Trust Indenture
Act), it must eliminate such conflict or resign.
The Indenture provides that in case an Event of Default shall occur (and be
continuing), the Trustee will be required to use the degree of care and skill
of a prudent person in the conduct of such person's own affairs. The Trustee
will be under no obligation to exercise any of its powers under the Indenture
at the request of any of the Holders of the Notes, unless such Holders have
offered the Trustee indemnity reasonably satisfactory to it.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Michael Petroleum Corporation, 13101 Northwest
Freeway, Suite 320, Houston, Texas 77040, Attention: Robert L. Swanson.
NO PERSONAL LIABILITY OF DIRECTORS, ADVISORS, MANAGERS, OFFICERS, EMPLOYEES,
INCORPORATORS, MEMBERS AND SHAREHOLDERS
No director, advisor, manager, officer, employee, incorporator, member or
shareholder of the Company or any Guarantor, as such, shall have any liability
for any obligations of the Company or any Guarantor under the Notes, the
Guarantees, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws, and it is the
view of the SEC that such a waiver is against public policy.
BOOK-ENTRY, DELIVERY AND FORM
The Old Notes were offered and sold (a) to Qualified Institutional Buyers
in reliance on the exemption from the registration requirements of the
Securities Act provided by Rule 144A ("Rule 144A Notes") and (b) outside the
United States in reliance on Regulation S under the Securities Act ("Regulation
S Notes"). Except as set forth below, Notes will be issued in registered,
global form without interest coupons in minimum denominations of $1,000 and
integral multiples of $1,000 in excess thereof.
Rule 144A Notes are represented by one Note in registered, global form
without interest coupons (the "Rule 144A Global Note"). The Rule 144A Global
Note was deposited upon issuance with the Trustee as custodian for DTC, in New
York, New York, and registered in the name of DTC or its nominee, in each case
for credit to an account of a direct or indirect participant in DTC as
described below.
Regulation S Notes initially are represented by one temporary Note in
registered, global form without interest coupons (the "Regulation S Temporary
Global Note"). The Regulation S Temporary Global Note was deposited on behalf
of the subscribers thereof with a custodian for DTC. The Regulation S Temporary
Global Note was registered in the name of a nominee of DTC for credit to the
subscribers' respective accounts at the Euroclear and Cedel Bank. Beneficial
interests in the Regulation S Temporary Global Note may be held only through
Euroclear or Cedel Bank.
After the occurrence of (i) the expiration of a 40-day restricted period,
as defined under Regulation S (the "Restricted Period"), or (ii) the exchange
of a beneficial interest in the Regulation S Global Notes for a beneficial
interest in a global note representing New Notes upon consummation of the
Exchange Offer and upon delivery of certification that the beneficial owners
thereof are not U.S. persons (as defined in Rule 902(o) under the Securities
Act) or that such beneficial owners purchased such Notes in a transaction that
did not require registration under the Securities Act and are in the process of
obtaining a beneficial interest in the Rule 144A Global Note in exchange for
their beneficial interest in the Regulation S Temporary Global Note, a
beneficial interest in the Regulation S Temporary Global Note may be exchanged
for an interest in one or more permanent Notes in registered, global form
without interest coupons (collectively, the "Regulation S Permanent Global
Notes" and, together with the Regulation S Temporary Global Notes, the
"Regulation S Global Note") (the Regulation S Global Note and the 144A Global
Note collectively, the "Global Notes") which is expected to be deposited with
the Trustee as custodian for, and registered in the name of, a nominee of DTC.
Investors may hold beneficial interests in the Regulation S Permanent Global
Note through organizations other than Euroclear and Cedel Bank that are
Participants in DTC's system. Euroclear and Cedel Bank will hold interests in
the Regulation S Global Note on behalf of their Participants through customers'
securities accounts in their respective names on the books of their respective
depositaries, which are Morgan Guaranty Trust Company of New York, Brussels
office, as operator of Euroclear, and Citibank, N.A., as operator of Cedel
Bank. In turn, each of Euroclear and Cedel Bank will hold such interests in the
Regulation S Global Note in customers' securities accounts in its name on the
books of DTC.
-74-
<PAGE> 79
The Notes that are issued as described below under the caption "--
Certificated Notes" will be issued in the form of registered definitive
certificates (the "Certificated Notes"). Such Certificated Securities may,
unless the Global Notes have previously been exchanged for Certificated Notes,
be exchanged for an interest in a Global Note representing the principal amount
of Notes being transferred.
DTC is a limited-purpose trust company that was created to hold securities
for its participating organizations (collectively, the "Participants" or "DTC's
Participants") and to facilitate the clearance and settlement of transactions
in such securities between Participants through electronic book-entry changes
in accounts of its Participants. DTC's Participants include securities brokers
and dealers (including the Initial Purchaser), banks and trust companies,
clearing corporations and certain other organizations. Access to DTC's system
is also available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants" or "DTC's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through DTC's
Participants or DTC's Indirect Participants.
The Company expects that, pursuant to procedures established by DTC, (i)
upon deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Initial Purchaser with portions of the principal amount of
the Global Notes and (ii) ownership of the Notes evidenced by the Global Notes
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to the interests of DTC's
Participants), DTC's Participants and DTC's Indirect Participants. Prospective
purchasers are advised that the laws of some states require that certain
persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer Notes evidenced by the Global Notes will
be limited to such extent.
Beneficial interests in one Global Note may be transferred to a person who
takes delivery in the form of a beneficial interest in another Global Note only
upon receipt by the Trustee of a written certification (in the form provided in
the Indenture) to the effect that such transfer is being made in accordance
with the Indenture and with the Securities Act and any applicable securities
laws of any state of the United States or any other jurisdiction. Any
beneficial interest in one of the Global Notes that is transferred to a person
who takes delivery in the form of a beneficial interest in another Global Note
will, upon transfer, cease to be a beneficial interest in such Global Note and
become a beneficial interest in the other Global Note and accordingly, will
thereafter be subject to all transfer restrictions, if any, and other
procedures applicable to beneficial interests in such other Global Note for as
long as it remains such a beneficial interest.
So long as the Global Note holder is the registered owner of any Notes, the
Global Note holder will be considered the sole holder under the Indenture of
any Notes evidenced by the Global Notes. Beneficial owners of Notes evidenced
by the Global Notes will not be considered the owners or holders thereof under
the Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of DTC or for maintaining, supervising or reviewing any
records of DTC relating to the Notes.
Payments in respect of the principal of and premium, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note holder on the applicable record date will be payable by the Trustee to or
at the direction of the Global Note holder in its capacity as the registered
holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the persons in whose names Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Notes. The Company believes, however, that it is currently the policy
of DTC to immediately credit the accounts of the relevant Participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of DTC.
Payments by DTC's Participants and DTC's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of DTC's Participants or
DTC's Indirect Participants.
ADDITIONAL INFORMATION CONCERNING EUROCLEAR AND CEDEL BANK
Euroclear and Cedel Bank hold securities for participating organizations
and facilitate the clearance and settlement of securities transactions between
their respective participants through electronic book-entry changes in accounts
of such participants. Euroclear and Cedel Bank provide to their participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Euroclear and Cedel Bank interface with domestic securities
markets. Euroclear and Cedel Bank participants are financial institutions such
as underwriters, securities brokers and dealers, banks, trust companies and
-75-
<PAGE> 80
certain other organizations. Indirect access to Euroclear and Cedel Bank is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodian relationship with a Euroclear or
Cedel Bank participant, either directly or indirectly.
When beneficial interests are to be transferred from the account of a
Participant (other than Morgan Guaranty Trust Company of New York and Citibank,
N.A., as depositaries for Euroclear and Cedel Bank, respectively) to the
account of a Euroclear participant or a Cedel Bank participant, the purchaser
must send instructions to Euroclear or Cedel Bank through a participant at
least one business day prior to settlement. Euroclear or Cedel Bank, as the
case may be, will instruct Morgan Guaranty Trust Company of New York or
Citibank, N.A. to receive the beneficial interests against payment. Payment
will include interest and, if any, Liquidated Damages attributable to the
beneficial interest from and including the last payment date to and excluding
the settlement date, on the basis of a calendar year consisting of twelve
30-day calendar months. For transactions settling on the 31st day of the month,
payment will include interest and, if any, Liquidated Damages accrued to and
excluding the first day of the following month. Payment will then be made by
Morgan Guaranty Trust Company of New York or Citibank, N.A., as the case may
be, to the Participant's account against delivery of the beneficial interests.
After settlement has been completed, the beneficial interests will be credited
to the respective clearing systems and by the clearing system, in accordance
with its usual procedures, to the Euroclear participants' or Cedel Bank
participants' account. Credit for the beneficial interests will appear on the
next business day (European time) and the cash debit will be back-valued to,
and interest attributable to the beneficial interests will accrue from, the
value date (which would be the preceding business day when settlement occurs in
New York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Euroclear or Cedel Bank cash debit will instead be valued as
of the actual settlement date.
Euroclear participants and Cedel Bank participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Euroclear or Cedel Bank. Under
this approach, such participants may take on credit exposure to Euroclear or
Cedel Bank until the beneficial interests are credited to their accounts one
day later. Finally, day traders that use Euroclear or Cedel Bank and that
purchase beneficial interests from Participants for credit to Euroclear
participants or Cedel Bank participants should note that their trades would
automatically fall on the sale side unless affirmative action were taken to
avoid these potential problems.
Due to time zone differences in their favor, Euroclear participants and
Cedel Bank participants may employ their customary procedures for transactions
in which beneficial interests are to be transferred by the respective clearing
system, through Morgan Guaranty Trust Company of New York or Citibank, N.A., to
another Participant. The seller must send instructions to Euroclear or Cedel
Bank through a participant at least one business day prior to settlement. In
these cases, Euroclear or Cedel Bank will instruct Morgan Guaranty Trust
Company of New York or Citibank, N.A., as the case may be, to credit the
beneficial interests to the Participant's account against payment. Payment will
include interest and, if any, Liquidated Damages attributable to the beneficial
interest from and including the last payment date to and excluding the
settlement date, on the basis of a calendar year consisting of twelve 30-day
calendar months. For transactions settling on the 31st day of the month,
payment will include interest and Liquidated Damages, if any, accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the Euroclear participant or Cedel Bank participant
the following business day, and receipt of the cash proceeds in the Euroclear
or Cedel Bank participant's account will be back-valued to the value date
(which would be the preceding business day, when settlement occurs in New
York). If the Euroclear participant or Cedel Bank participant has a line of
credit with its representative clearing system and elects to draw on such line
of credit in anticipation of receipt of the sale proceeds in its account, the
back-valuation may substantially reduce or offset any overdraft charges
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., if trade fails), receipt of the cash proceeds in the
Euroclear or Cedel Bank participant's account would instead be valued as of the
actual settlement date.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in a
Global Note may, upon request to the Trustee, exchange such beneficial interest
for Notes in the form of Certificated Securities. Upon any such issuance, the
Trustee is required to register such Certificated Securities in the name of,
and cause the same to be delivered to, such person or persons (or the nominee
of any thereof). [All such certificated Notes would be subject to the legend
requirements described herein under the caption "Notice to Investors."] In
addition, if (i) the Company notifies the Trustee in writing that DTC is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes
in the form of Certificated Securities under the Indenture, then, upon
surrender by the Global Note Holder of the Global Notes, Notes in such form
will be issued to each person that the Global Note Holder and DTC identify as
being the beneficial owner of the related Notes.
-76-
<PAGE> 81
Neither the Company nor the Trustee, nor any agent for either of them, will
be liable for any delay by the Global Note Holder or DTC in identifying the
beneficial owners of Notes, and the Company and the Trustee, and each agent of
any of them, may conclusively rely on, and will be protected in relying on,
instructions from the Global Note Holder or DTC for all purposes.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax
considerations relating to the exchange of the Old Notes for New Notes and the
ownership and disposition of the New Notes. This discussion is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations,
Internal Revenue Service ("IRS") rulings and administrative pronouncements and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations. This discussion does not
purport to deal with all aspects of federal income taxation that may be
relevant to a particular investor's decision to purchase the Notes, and it is
not intended to be wholly applicable to all categories of investors, some of
which, such as dealers in securities, banks, insurance companies and tax-exempt
organizations, may be subject to special rules. In addition, this discussion is
limited to persons that will hold the Notes as a "capital asset" within the
meaning of section 1221 of the Code. EACH HOLDER OF OLD NOTES SHOULD CONSULT
ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING OLD
NOTES FOR NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN LAWS.
EXCHANGE OFFER
The exchange of the New Notes for the Old Notes pursuant to the Exchange
Offer should not constitute a material modification of the terms of the Notes
and, therefore, such exchange should not constitute an exchange for U.S.
federal income tax purposes. Accordingly, such exchange should have no U.S.
federal income tax consequences to U.S. holders of the Notes and the holding
period of the New Notes will include the holding period of the Old Notes. The
adjusted tax basis of the New Notes will be the same as that of the Notes
immediately before the exchange.
STATED INTEREST AND ORIGINAL ISSUE DISCOUNT
The stated interest on the Notes will be includable in the income of a
holder as ordinary income for United States federal income tax purposes at the
time it is received or accrued in accordance with the holder's method of tax
accounting. Failure of the Company to consummate the Exchange Offer or to file
or cause to be declared effective the Shelf Registration Statement will cause
Liquidated Damages calculated as additional interest to accrue on the Notes in
the manner described therein. According to U.S. Treasury regulations, the
possibility of a change in the interest rate will not affect the amount of
interest income recognized by a holder (or the timing of such recognition) if
the likelihood of the change, as of the date the Notes are issued, is remote.
The Company believes that the likelihood of a change in the interest rate on
the Notes is remote and does not intend to treat the possibility of a change in
the interest rate as affecting the yield to maturity of any Note.
The Notes will be considered to be issued with original issue discount
("OID") if, and to the extent, the stated redemption price at maturity of the
Notes (which, for these purposes, will be its stated principal amount) exceeds
the issue price of the Notes. The amount of OID is, however, considered de
minimis and deemed to be zero if such excess is less than 1/4 of 1% of the
stated redemption price at maturity multiplied by the number of complete years
to maturity. It is anticipated that the Notes will be issued with OID in
excess of the de minimis threshold.
Assuming the Notes have been issued with OID, a holder (regardless of its
method of accounting) will be required to include in income the sum of the
daily portions of OID with respect to such Note for each day during the taxable
year or portion of a taxable year in which such holder holds the Note (such
sum, "Accrued OID"), with the result that a holder will be required to include
amounts in income without any current corresponding receipt of cash. The daily
portion is determined by allocating to each day of any accrual period within a
taxable year a pro rata portion of an amount equal to the adjusted issue price
of the Note at the beginning of the accrual period multiplied by the yield to
maturity of the Note. The adjusted issue price of a Note at the beginning of
any accrual period is the issue price of the Note increased by the Accrued OID
for all prior accrual periods (less all payments made on the Notes other than
payments of stated interest on the Notes). The Company will annually furnish to
record holders of the Notes and to the IRS information with respect to any OID
accruing during the calendar year as may be required by applicable regulations.
-77-
<PAGE> 82
RULES AFFECTING HIGH YIELD DEBT INSTRUMENTS
Sections 163(e)(5) and (i) of the Code affect the treatment of interest on
applicable high yield debt obligations maturing more than five years from the
date of issuance ("AHYDOs"). The rules are complex and ambiguous in many
respects, and their full potential application to the Notes cannot be
anticipated with precision.
The Notes will constitute AHYDOs if (i) the Notes have "significant
original issue discount" within the meaning of the Code and (ii) the yield to
maturity of the Notes is equal to or greater than the sum of the relevant
applicable federal rate (the "AFR") for the month in which the Notes are
issued, plus five percentage points. Based upon their terms, the Notes may have
"significant original issue discount." The relevant AFR for mid-term debt
instruments issued in April 1998 is 5.62% compounded semiannually. [The Company
cannot yet ascertain whether the Notes will actually constitute AHYDOs under
the foregoing rules. If the Notes are AHYDOs, as described above, a portion of
the tax deductions that would otherwise be available to the Company in respect
of the Notes will be deferred or disallowed, which, in turn, might reduce the
after-tax cash flows of the Company. More particularly, if the Notes constitute
AHYDOs, the Company will not be entitled to deduct OID that accrues with
respect to the Notes until amounts attributable to OID are paid in cash or
property (excluding, however, capital stock of the Company or a related
entity).]
In addition, if the yield to maturity of the Notes exceeds the sum of the
relevant AFR plus six percentage points, such excess amount called the "Excess
Yield," the "disqualified portion" of the OID accruing on the Notes, will be
characterized as a nondeductible dividend with respect to the Company. The
"disqualified portion" of the OID is the lesser of (i) the amount of OID on the
instrument and (ii) the portion of the total return on such instrument that
bears the same ratio to such total return as the "Excess Yield" bears to the
total yield to maturity on the instrument. The tax treatment to holders will be
unaffected by these provisions except that corporate holders of the Notes may
be treated as receiving distributions with respect to the capital stock of the
Company (rather than interest on such Notes) eligible for the dividends
received deduction, subject to applicable limitations, to the extent of the
"disqualified portion" of the OID and to the extent that such distributions
would have been treated as dividends if actually made by the Company with
respect to its capital stock.
MARKET DISCOUNT
Holders of the Notes should note that the resale of the Notes may be
adversely affected by the market discount provisions of sections 1276 through
1278 of the Code. Under the market discount rules, if a holder of a Note (other
than a holder who purchased the Note upon original issuance) purchases it at a
market discount (i.e., at a price below its stated redemption price at
maturity) in excess of a statutorily-defined de minimis amount and thereafter
recognizes gain upon a disposition or retirement of the Note, then the lesser
of the gain recognized or the portion of the market discount that accrued on a
ratable basis (or, if elected, on a constant interest rate basis) generally
will be treated as ordinary income at the time of the disposition. Moreover,
any market discount in a Note may be taxable to an investor to the extent of
appreciation at the time of certain otherwise non-taxable transactions (e.g.,
gifts). Absent an election to include market discount in income as it accrues,
a holder of a market discount debt instrument may be required to defer a
portion of any interest expense that otherwise may be deductible on any
indebtedness incurred or maintained to purchase or carry such debt instrument
until the holder disposes of the debt instrument in a taxable transaction.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Each holder of Notes generally will recognize gain or loss upon the sale,
exchange, repurchase, redemption, retirement or other disposition of those
Notes measured by the difference (if any) between (i) the amount of cash and
the fair market value of any property received (except to the extent that such
cash or other property is attributable to the payment of accrued interest not
previously included in income, which amount will be taxable as ordinary income)
and (ii) the holder's adjusted tax basis in those Notes (including any market
discount previously included in income by the holder). Any such gain or loss
recognized on the sale, exchange, repurchase, redemption, retirement or other
disposition of a Note should be capital gain or loss (except as discussed under
"Market Discount" above), and would be long-term capital gain or loss if the
Note had been held for more than one year at the time of the sale or exchange.
If the Notes had been held by a noncorporate holder for more than 12 months but
not more than 18 months, such capital gains generally shall be subject to tax
at a maximum 28% rate. If the Notes had been held by a non-corporate holder for
more than 18 months, however, such capital gain generally will be subject to
tax at a maximum 20% rate. An investor's initial basis in a Note will be the
cash price it paid therefor.
-78-
<PAGE> 83
BACKUP WITHHOLDING
A holder of Notes may be subject to "backup withholding" at a rate of 31%
with respect to certain "reportable payments," including interest payments and,
under certain circumstances, principal payments on the Notes. These backup
withholding rules apply if the holder, among other things, (i) fails to furnish
a social security number or other taxpayer identification number ("TIN")
certified under penalties of perjury within a reasonable time after the request
therefor, (ii) furnishes an incorrect TIN, (iii) fails to report properly
interest, or (iv) under certain circumstances, fails to provide a certified
statement, signed under penalties of perjury, that the TIN furnished is the
correct number and that such holder is not subject to backup withholding. A
holder who does not provide the Company with its correct TIN also may be
subject to penalties imposed by the IRS. Any amount withheld from a payment to
a holder under the backup withholding rules is creditable against the holder's
federal income tax liability, provided that the required information is
furnished to the IRS. Backup withholding will not apply, however, with respect
to payments made to certain holders, including corporations, tax-exempt
organizations and certain foreign persons ("exempt recipients"), provided their
exemptions from backup withholding are properly established.
The amount of any "reportable payments" including interest made to the
holders of Notes (other than to holders which are exempt recipients) and the
amount of tax withheld, if any, with respect to such payments will be reported
to such holders and to the IRS for each calendar year.
FOREIGN HOLDERS
The following discussion is a summary of the principal U.S. federal income
and estate tax consequences to a Foreign Person that holds a Note. The term
"Foreign Person" means a nonresident alien individual or foreign corporation,
but only if the income or gain on the Note is not "effectively connected with
the conduct of a trade or business within the U.S." If the income or gain on
the Note is "effectively connected with the conduct of a trade or business
within the U.S.," then the nonresident alien individual or foreign corporation
will be subject to tax on such income or gain in essentially the same manner as
a U.S. citizen or resident or a domestic corporation, as discussed above, and
in the case of a foreign corporation, may also be subject to a 30% (or lower
applicable treaty rate) branch profits tax.
Under the portfolio interest exception to the general rules for the
withholding of a tax on interest paid to a Foreign Person, a Foreign Person
will not be subject to U.S. federal income tax (or to withholding) on interest
payments on a Note, provided that (i) the Foreign Person does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote and is not a controlled
foreign corporation with respect to the U.S. that is related to the Company
through stock ownership and (ii) the Company, its paying agent or the person
who would otherwise be required to withhold tax receives either (A) a statement
(an "Owner's Statement") signed under penalties of perjury by the beneficial
owner of the Note in which the owner certifies that the owner is not a U.S.
person, or in the case of an individual, that he is neither a citizen nor a
resident of the United States, and which provides the owner's name and address,
or (B) a statement signed under penalties of perjury by the Financial
Institution holding the Note on behalf of the beneficial owner, together with a
copy of the Owner's Statement. The term "Financial Institution" means a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business and
that holds a Note on behalf of the owner of the Note. A Foreign Person who does
not qualify for the "portfolio interest" exception, would, under current law,
generally be subject to the U.S. federal withholding tax at a flat rate of 30%
(or lower applicable treaty rate) on interest payments.
In general, gain recognized by a Foreign Person upon the redemption,
retirement, sale or exchange of a Note (including any gain representing accrued
market discount) will not be subject to U.S. federal income tax. However, a
Foreign Person may be subject to U.S. federal income tax at a flat rate of 30%
(unless exempt by an applicable treaty) on any such gain if the Foreign Person
is an individual present in the U.S. for 183 days or more during the taxable
year in which the Note is redeemed, retired, sold or exchanged, and certain
other requirements are met.
Subject to applicable estate tax treaty provisions, Notes held at the time
of death (or Notes transferred before death but subject to certain retained
rights or powers) by an individual who at the time of death is a nonresident
alien for estate tax purposes will not be included in such individual's gross
estate for U.S. federal estate tax purposes provided that the individual does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote or hold the Notes
in connection with a U.S. trade or business.
-79-
<PAGE> 84
DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 100,000,000
shares of common stock, par value $0.10 per share, and (ii) 50,000,000 shares
of preferred stock, par value $0.10 per share. There currently are 10,000
shares of the Company's common stock outstanding, all of which are owned of
record and beneficially by MHI. No shares of the Company's preferred stock are
outstanding.
The authorized capital stock of MHI consists of (i) 100,000,000 shares of
Common Stock, par value $.01 per share, and (ii) 50,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"). On March 31, 1998, there
were seven holders of record of Common Stock with 773,425 shares outstanding,
and no shares of Preferred Stock were outstanding.
COMMON STOCK
Holders of shares of Common Stock are entitled to share ratably in such
dividends as may be declared by the Board of Directors and paid by MHI out of
funds legally available therefor, subject to prior rights of any outstanding
shares of any preferred stock. In the event of any dissolution, liquidation or
winding up of MHI, holders of shares of Common Stock are entitled to share
ratably in assets remaining after payment of all liabilities and liquidation
preferences, if any.
Except as otherwise required by law or the Articles of Incorporation, the
holders of Common Stock are entitled to one vote per share on all matters voted
on by shareholders, including the election of directors.
Holders of shares of Common Stock have no preemptive, cumulative voting,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of Common Stock are subject to the rights, preferences
and privileges granted to the holders of any series of preferred stock which
the Company may issue in the future.
The rights and privileges of the holders of the Company's common stock are
substantially similar to those of the holders of the Common Stock.
PREFERRED STOCK
The Board of Directors may, without further action by the shareholders of
MHI, from time to time, direct the issuance of fully authorized shares of
preferred stock in classes or series and may, at the time of issuance,
determine the powers, rights, preferences and limitations of each class or
series. Satisfaction of any dividend preferences on outstanding shares of
preferred stock may reduce the amount of funds available for the payment of
dividends on Common Stock. Also, holders of preferred stock may be entitled to
receive a preference payment in the event of any liquidation, dissolution or
winding up of MHI before any payment is made to the holders of Common Stock.
Under certain circumstances, the issuance of such preferred stock may render
more difficult or tend to discourage a merger, tender offer or proxy contest,
the assumption of control by a holder of a large block of MHI's securities or
the removal of incumbent management.
The rights and privileges of the holders of the Company's preferred stock
are substantially similar to those of the holders of the Preferred Stock.
SPECIAL PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
The Articles of Incorporation and Bylaws of MHI include certain provisions
that could have anti-takeover effects. The provisions enhance the likelihood
of continuity and stability in the composition of, and in the policies
formulated by, the Board of Directors.
Following is a summary of certain of the provisions contained in the
Articles of Incorporation and Bylaws of MHI.
Number of Directors; Filling Vacancies; Removal
The Bylaws provide that the Board of Directors will fix the number of
members of the Board of Directors, provided that no decrease will have the
effect of shortening the term of any incumbent Director, and that the number of
directors shall never be less than one. The Bylaws of MHI provide that the
Board of Directors, acting by majority
-80-
<PAGE> 85
vote of the directors then in office, may fill any newly created directorship
or vacancies on the Board of Directors; however, the Board of Directors may not
fill more than two such vacancies arising from an increase in the number of
directors during the period between any two successive annual meetings of
shareholders.
The Bylaws of MHI provide that any Director or the entire board of
directors may be removed with or without cause at any meeting of shareholders
called expressly for that purpose at which a quorum of shareholders is present,
by a vote of the holders of a majority of the shares then entitled to vote at
an election of directors.
Special Meetings
The Bylaws provide that special meetings of stockholders may be called by
the President of MHI, the Board of Directors or the Chairman of the Board of
Directors, or by written request signed by the holder or holders of at least
10% of all of the then issued and outstanding shares of the capital stock of
MHI entitled to vote at such meeting and stating the purpose or purposes of the
meeting.
Limitations Imposed by Texas Law
The Texas Business Corporation Act (the "TBCA") authorizes corporations to
limit or eliminate the personal liability of directors to corporations and
their shareholders for monetary damages for breach of their fiduciary duty as
directors except for liability of a director resulting from (i) a breach of
such director's duty of loyalty to the corporation or its shareholders, (ii) an
act or omission that is not in good faith or that involves intentional
misconduct or a knowing violation of laws, (iii) a transaction from which the
director received an improper personal benefit or (iv) an act or omission for
which the liability of the director is expressly provided by an applicable
statute. The Articles of Incorporation of MHI limit the liability of directors
(in their capacity as directors but not in their capacity as officers) to MHI
or its shareholders to the fullest extent permitted by the TBCA. The inclusion
of this provision in the Articles of Incorporation may reduce the likelihood of
derivative litigation against directors and may discourage or deter
shareholders from suing directors for breach of their duty of care, even though
such an action, if successful, might otherwise benefit MHI and its
shareholders. The inclusion of such provisions in the Articles of Incorporation
together with a provision requiring MHI to indemnify its directors, officers
and certain other individuals against certain liabilities, is intended to
enable MHI to attract qualified persons to serve as directors who might
otherwise be reluctant to do so. The SEC has taken the position that personal
liability of directors for violations of the federal securities laws cannot be
limited and that indemnification by the issuer for such violations is
unenforceable.
The Articles of Incorporation and Bylaws of the Company are substantially
the same as those of MHI.
WARRANTS
Upon the closing of the sale of the Old Notes, the repayment of the
indebtedness under the T.E.P. Financing and the purchase of the Net Profits
Interest on April 2, 1998, MHI and the Company canceled their existing warrants
previously granted to Cambrian in exchange for a Warrant to purchase 38,671
shares of Common Stock for an exercise price of $8.00 per share. The Warrant
expires August 12, 2001 and contains provisions for registration rights for the
shares of Common Stock acquired upon exercise (see "--Registration Rights"
below), as well as customary anti-dilution provisions, including provisions
providing for adjustments in the exercise price and number of shares in the
event MHI issues additional shares of Common Stock for cash or non-cash
consideration less than the exercise price then in effect. The terms of the
Warrant further provide that at any time after the Common Stock is traded on a
national securities exchange, the Warrant may be exercised by being exchanged
in whole or in part for a number of shares of Common Stock equal to the
difference between the fair market value of the designated number of shares of
Common Stock and the aggregate exercise price then in effect for those
designated shares. "Fair market value" for this purpose includes the last sale
price of the Common Stock reported on a national securities exchange or the
Nasdaq National Market.
In addition, during 1997 MHI granted a Warrant to an individual seller of
oil and natural gas properties which entitles the holder to purchase up to
2,900 shares of Common Stock for a purchase price equal to that price per share
which is 125% of the initial public offering price of the Common Stock. Unless
earlier terminated, the warrant expires on that date which is five years from
the date of the initial public offering.
REGISTRATION RIGHTS
In connection with the issuance to Cambrian of the Warrant to purchase up
to 38,671 shares of Common Stock, MHI granted registration rights regarding
such shares. If at any time prior to the expiration of the Warrant in August
2001, MHI registers any securities for sale pursuant to a registration
statement (with the exception of a Form S-8,
-81-
<PAGE> 86
S-4 or other similar form), upon request by any of the holders of the
outstanding shares underlying the Warrant, MHI shall be required, subject to
certain conditions, to include such securities as a part of such registration
statement. In addition, subject to certain conditions, the holders of not less
than 51% of the shares of Common Stock underlying the Warrant may request, on
one occasion at any time prior to August 2001, that MHI register such
securities for public sale pursuant to a registration statement under the
Securities Act. Individual holders of such shares shall also have certain
demand registration rights, but principally at such holder's cost.
The registration rights provisions in the Cambrian Warrant contain
provisions obligating MHI to indemnify Cambrian for certain liabilities
incurred by it or its successors, including liabilities under the federal
securities laws.
SHAREHOLDERS AGREEMENT
The current shareholders of MHI are parties to a shareholders agreement
dated as of December 4, 1996 (the "Shareholders Agreement"). Under the terms of
the Shareholders Agreement, if a shareholder wishes to sell shares pursuant to
a bona fide offer to purchase them, then the shareholders (other than the
selling shareholder) have the right to purchase those shares on the same terms
in accordance with the proportion of shares of those shareholders electing to
so purchase. If no shareholder exercises that right, then MHI has the right to
purchase those shares on the same terms as set forth in the bona fide offer. If
both MHI and the shareholders do not elect to purchase all of the shares that
are subject to the bona fide offer, then the selling shareholder may sell those
shares not purchased by MHI and the other shareholders pursuant to the terms of
the bona fide offer. If a shareholder is forced to make an involuntary transfer
of Common Stock (by divorce, judicial order or termination of employment), then
the shareholders (other than the transferring shareholder) have the right to
purchase those shares at a price determined in accordance with the Shareholders
Agreement in accordance with the proportion of shares of those shareholders
electing to so purchase. If no shareholder exercises that right, then MHI has
the right to purchase those shares in accordance with the Shareholders
Agreement. If both MHI and the shareholders do not elect to purchase all of the
shares that are subject to involuntary transfer, then the transfer may take
place. Upon the death of a shareholder, MHI is obligated to purchase the shares
owned by the deceased shareholder. The Shareholders Agreement also provides
that each of Messrs. Hart, Farmar, Holditch and Smith shall have the right to
designate one nominee for membership on MHI's Board of Directors and that the
shareholders of MHI will vote their shares of Common Stock for the election of
such nominees. The Shareholders Agreement terminates upon the bankruptcy of MHI
or any merger or consolidation of MHI in which MHI is not the surviving
corporation. Cambrian is not obligated to become a party to the Shareholders
Agreement if Cambrian exercises its Warrant.
-82-
<PAGE> 87
PLAN OF DISTRIBUTION
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third parties unrelated to the Company, the Company believes
that, with the exceptions set forth below, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any person receiving such New Notes, whether or not
such person is the holder (other than any such holder or such other person
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act; provided that, the New Notes are
acquired in the ordinary course of business of the holder or such other person
and neither the holder nor such other person is engaging or intends to engage
in a distribution of the New Notes or has an arrangement or understanding with
any person to participate in the distribution of such New Notes. The Company,
however, has not sought, and does not intend to seek, its own no-action letter
and there can be no assurance that the Commission's staff would make a similar
determination with respect to the Exchange Offer. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes cannot rely on this interpretation by the Commission's staff and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction.
Each broker-dealer that holds Old Notes that were acquired by that
broker-dealer as a result of market-making activities or other trading
activities may exchange such Old Notes (other than for Old Notes that were
acquired directly from the Company or any affiliate of the Company) pursuant to
the Exchange Offer; provided however, such broker-dealer may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with its initial resale of each New Note received in the Exchange
Offer. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of New Notes in
such circumstances. The Company has agreed that it will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in
connection with any such resale for a period of one year following the
Expiration Date, or such shorter period ending on the date that all New Notes
received in the Exchange Offer have been resold by any such broker-dealer.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Because any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, any profit on any such
resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that, by acknowledging that it will deliver,
and by delivering, a Prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal for such period of time as such
persons must comply with such requirements in order to resell the New Notes.
The Company has agreed to pay all expenses relating to their performance under
the Registration Rights Agreement, including the costs of providing this
Prospectus, and to indemnify the holders of the Old Notes against certain
liabilities, including liabilities under the Securities Act.
TRANSFER RESTRICTIONS ON OLD NOTES
OFFERS AND SALES BY THE INITIAL PURCHASERS
The Old Notes have not been registered under the Securities Act and may not
be offered or sold in the United States, or to, or for the account or benefit
of, U.S. Persons except in accordance with an applicable exemption from the
registration requirements thereof. Accordingly the Old Notes were offered and
sold only (i) to QIBs under Rule 144A under the Securities Act and (ii) outside
the United States to persons other than U.S. Persons ("foreign purchasers,"
which term shall include dealers or other professional fiduciaries in the
United States acting on a discretionary basis for foreign beneficial owners
(other than an estate or trust) in offshore transactions meeting the
requirements of Rule 904 of Regulation S under the Securities Act ("Regulation
S")). As used herein, the terms "offshore transaction," "United States" and
"U.S. Person" have the respective meanings given to them in Regulation S.
-83-
<PAGE> 88
INVESTOR REPRESENTATIONS AND RESTRICTIONS ON RESALE
Each purchaser of the Old Notes was deemed to have represented and agreed
as follows:
(1) it was acquiring the Old Notes for its own account or for an account
with respect to which it exercises sole investment discretion, and that it or
such account was (a) a QIB or (b) a non-U.S. Person that is outside the United
States;
(2) it acknowledged that the Old Notes were not registered under the
Securities Act and may not be offered or sold within the United States or to,
or for the account or benefit of, U.S. Persons except as permitted below;
(3) it understood and agreed (x) that such Old Notes were being offered
only in a transaction not involving any public offering within the meaning of
the Securities Act, and (y) that (A) if within two years after the date of
original issuance of the Old Notes or if within three months after it ceases to
be an affiliate (within the meaning of Rule 144 under the Securities Act) of
the Company, it decides to resell, pledge or otherwise transfer the Old Notes
on which the legend set forth below appears, such Old Notes may be resold,
pledged or transferred only (i) to the Company, (ii) so long as such securities
are eligible for resale pursuant to Rule 144A, to a person whom the seller
reasonably believes is a QIB that purchases for its own account or for the
account of a QIB to whom notice is given that the resale, pledge or transfer is
being made in reliance on Rule 144A (as indicated by the box checked by the
transferor on the Certificate of Transfer on the reverse of the Old Note if
such Old Note is not in book entry form), (iii) pursuant to offers and sales
that occur outside the United States in a transaction meeting the requirements
of Rule 904 under the Securities Act, (iv) to an Institutional Accredited
Investor (as indicated by the box checked by the transferor on the Certificate
of Transfer on the reverse of the Old Note if such Old Note is not in
book-entry form) who has certified to the Company and the Trustee for the Old
Notes that such transferee is an Institutional Accredited Investor and is
acquiring the Old Notes for investment purposes and not for distribution, (v)
pursuant to an exemption from the registration requirements of the Securities
Act provided by Rule 144 (if applicable) under the Securities Act or (vi)
pursuant to an effective registration statement under the Securities Act, in
each case in accordance with any applicable securities laws of any state of the
United States, (B) the purchaser will, and each subsequent holder is required
to, notify any purchaser of the Old Notes from it of the resale restrictions
referred to in (A) above, if then applicable, and (C) with respect to any
transfer of the Old Notes by an Institutional Accredited Investor, such holder
will deliver to the Company and the Trustee such certificates and other
information as they may reasonably require to confirm that the transfer by it
complies with the foregoing restrictions;
(4) it is understood that the notification requirement referred to in (3)
above will be satisfied, in the case only of transfers by physical delivery of
Certificated Securities other than a Global Note by virtue of the fact that the
following legend will be placed on the Old Notes unless otherwise agreed by the
Company:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE HOLDER
HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT
THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO
THE SECOND ANNIVERSARY OF THE ISSUANCE HEREOF (OR A PREDECESSOR SECURITY
HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME
DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE
OTHER THAN (1) TO THE COMPANY (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR
RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A
PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER
ON THE REVERSE OF THIS SECURITY), (3) PURSUANT TO OFFERS AND SALES TO NON-U.S.
PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (4) TO AN INSTITUTION THAT
IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER
THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE
CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) THAT IS ACQUIRING THIS
SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN
THE FORM ATTACHED TO THIS SECURITY IS DELIVERED BY THE TRANSFEREE TO THE
COMPANY AND THE TRUSTEE, (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES
ACT OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY
STATE OR THE UNITED STATES.
-84-
<PAGE> 89
AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES IT WILL
FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION
AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS
SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY
PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY
THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A
OR (2) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT.
(5) it (i) had such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of its prospective
investment in the Old Notes and (ii) had the ability to bear the economic risks
of its prospective investment and can afford the complete loss of such
investment;
(6) it received a copy of the Offering Memorandum relating to the offering
and acknowledges that it has had access to such financial and other
information, and has been afforded the opportunity to ask questions of the
Company and receive answers thereto, as it deemed necessary in connection with
its decision to purchase the Old Notes; and
(7) it understood that the Company, the Initial Purchasers and others
relied upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agreed that if any of the acknowledgments,
representations and warranties deemed to have been made by it by its purchase
of the Old Notes are no longer accurate, it shall promptly notify the Company
and the Initial Purchasers. If it acquired the Old Notes as a fiduciary or
agent for one or more investor accounts, it represented that it had sole
investment discretion with respect to each such account and had full power to
make the foregoing acknowledgments, representations and agreements on behalf of
such account.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Haynes and Boone, L.L.P., Houston, Texas.
EXPERTS
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of the Company as of December 31, 1996 and 1997
and for each of the three years in the period ended December 31, 1997, included
in this Prospectus or elsewhere in this Registration Statement on Form S-4 of
which this Prospectus is a part, have been included herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The historical statements of revenues and direct operating expenses of the
properties that are the subject of the Enron Acquisition and the Conoco
Acquisition for the years ended December 31, 1996 and 1997, and the historical
statement of revenues and direct operating expenses of the properties that were
the subject of the Lobo Acquisition for the year ended December 31, 1995 and
the seven-month period ended July 31, 1996, included in this Prospectus or
elsewhere in this Registration Statement on Form S-4 of which this Prospectus
is a part, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
RESERVE ENGINEERS
Information relating to the estimates of proved oil and natural gas
reserves and related future net revenues and the present value thereof as of
December 31, 1996 and 1997, included in this Prospectus and in the Notes to the
Financial Statements, have been derived from the report of Huddleston & Co.,
Inc., independent petroleum engineers. All of such information has been so
included herein in reliance upon the authority of such firm as experts in such
matters.
Information relating to the estimates of proved oil and natural gas
reserves and related future net revenues and the present value thereof as of
December 31, 1995, included in this Prospectus and in the Notes to the
Financial Statements, have been derived from the report of Mohajir &
Associates, Inc., independent petroleum engineers. All of such information has
been so included herein in reliance upon the authority of such firm as experts
in such matters.
-85-
<PAGE> 90
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement under
the Securities Act with respect to the New Notes offered hereby. As permitted
by the rules and regulations of the Commission, this Prospectus does not
contain all of the information set forth in the Registration Statement. For
further information with respect to the Company and the New Notes offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules filed therewith. Statements contained in this Prospectus
concerning the provisions of any contract, agreement or other document referred
to herein or therein are not necessarily complete, but contain a summary of the
material terms of such contracts, agreements or other documents. With respect
to each contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for the complete
contents of the exhibit, and each statement concerning its provisions is
qualified in its entirety by such reference. The Registration Statement may be
inspected, without charge, at the offices of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices at 7 World
Trade Center, New York, New York, 10048 and Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661-2551. Copies of such materials may also by
obtained by mail at prescribed rates from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of such materials may also be obtained from the web site that
the Commission maintains at www.sec.gov.
As a result of the Exchange Offer, the Company will become subject to the
informational requirements of the Exchange Act. Pursuant to the Indenture, the
Company has agreed that, whether or not required by the rules and regulations
of the Commission, so long as any Notes are outstanding, the Company shall
furnish to the registered holders of Notes copies of (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports. In addition, whether or not required by the rules and regulations of
the Commission, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) within the time periods that would have been
applicable had the Company been subject to such rules and regulation and make
such information available to securities analysts and prospective investors
upon request.
-86-
<PAGE> 91
GLOSSARY OF CERTAIN INDUSTRY TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Prospectus. All volumes of natural 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.
Bbls/d. Stock tank barrels per day.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Boe. Barrel of oil equivalent, determined using the ratio of one Bbl of
crude oil, condensate or natural gas liquids to six Mcf of natural gas.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Developed acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production
exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or natural gas
reserves not classified as proved, to find a new reservoir in a field
previously found to be productive of oil or natural gas in another reservoir or
to extend a known reservoir.
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.
MBbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per
day.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Mmbtu. One million Btus.
Mmcf. One million cubic feet.
Mmcf/d. One million cubic feet per day.
Mmcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids,
which approximates the relative energy content of crude oil, condensate and
natural gas liquids as compared to natural gas. Prices have historically been
higher or substantially higher for crude oil than natural gas on an energy
equivalent basis.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.
-87-
<PAGE> 92
Present value. When used with respect to oil and natural 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%.
Productive 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.
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, natural gas and
natural 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 natural 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%.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or natural 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 natural gas property entitling
the owner to a share of oil or natural gas production free of costs of
production.
3-D seismic. Advanced technology method of detecting accumulations of
hydrocarbons identified through a three- dimensional picture of the subsurface
created by the collection and measurement of the intensity and timing of sound
waves transmitted into the earth as they reflect back to the surface.
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 natural 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.
Workover. Operations on a producing well to restore or increase production.
-88-
<PAGE> 93
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Financial Statements:
Unaudited Pro Forma Statement of Operations for
the Year Ended December 31, 1997 ...................................................................... F-3
Unaudited Pro Forma Balance Sheet as of
December 31, 1997 ..................................................................................... F-4
Notes to Unaudited Pro Forma Financial Statements ...................................................... F-5
Unaudited Pro Forma Supplementary Financial Information ................................................ F-8
Financial Statements of Michael Petroleum Corporation :
Report of Independent Accountants ..................................................................... F-10
Balance Sheet as of December 31, 1997 and 1996 ....................................................... F-11
Statement of Operations for each of the Three Years in the Period Ended December 31, 1997 ............ F-12
Statement of Stockholders' Deficit for each of the Three Years in the Period ended December 31, 1997.. F-13
Statement of Cash Flows for each of the Three Years in the Period Ended December 31, 1997 ............ F-14
Notes to Financial Statements ........................................................................ F-15
Financial Statements of Acquired Properties:
Enron Properties:
Report of Independent Accountants ............................................................. F-33
Statement of Revenues and Direct Operating Expenses
of the Enron Properties for the Years Ended
December 31, 1996 and 1997 .................................................................. F-34
Notes to Financial Statement of the Enron Properties .......................................... F-35
Supplementary Financial Information (Unaudited) ............................................... F-36
Conoco Properties:
Report of Independent Accountants ............................................................. F-39
Statement of Revenues and Direct Operating Expenses
of the Conoco Properties for the Years Ended
December 31, 1996 and 1997 .................................................................. F-40
Notes to Financial Statement of the Conoco Properties ......................................... F-41
Supplementary Financial Information (Unaudited) ............................................... F-42
Lobo Properties:
Report of Independent Accountants ............................................................. F-45
Statement of Revenues and Direct Operating Expenses
of the Lobo Properties for the Year Ended
December 31, 1995 and the Seven Months Ended
July 31, 1996 ............................................................................... F-46
Notes to Financial Statement of the Lobo Properties ........................................... F-47
Supplementary Financial Information (Unaudited) ............................................... F-48
</TABLE>
F-1
<PAGE> 94
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma statement of operations for the year ended
December 31, 1997 includes pro forma adjustments that give effect to the
issuance of $135 million of senior note obligations and the application of the
net proceeds therefrom to the repayment of the T.E.P. Financing, the purchase of
the Net Profits Interest and the acquisition of the Enron Properties and the
Conoco Properties as if such transactions had been completed January 1, 1997.
The Lobo Lease does not effect the pro forma statement of operations as it is an
acquisition of undeveloped leases. The unaudited pro forma balance sheet has
been prepared as if such transactions occurred on December 31, 1997.
The unaudited pro forma financial statements are based on the assumptions set
forth in the notes to such unaudited pro forma financial statements. Management
believes that the pro forma adjustments and the underlying assumptions
reasonably present the significant effects of the acquisitions and other
transactions. Such pro forma information should be read in conjunction with the
Company's financial statements and related notes thereto and the statements of
revenues and direct operating expenses and related notes thereto of the Enron
Properties and the Conoco Properties included elsewhere herein and is not
necessarily indicative of the operating results or financial position that
actually would have occurred had the acquisitions and other transactions
occurred as of the dates indicated above, nor do they purport to indicate
operating results or financial position which may be attained in the future.
F-2
<PAGE> 95
MICHAEL PETROLEUM CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(In thousands of dollars)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------------------------
THE THE
ENRON CONOCO OTHER
HISTORICAL PROPERTIES PROPERTIES ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues .......................... $ 9,139 $ 15,166(a) $ 6,904(a) $ $ 31,209
---------- ---------- ---------- ---------- ----------
Operating expenses:
Production costs ............... 1,870 2,339(a) 906(a) 5,115
Depreciation, depletion
and amortization ............ 3,889 4,398(b) 1,690(b) 620 (b) 10,597
Exploration .................... 333 333
General and administrative
expenses .................... 980 980
---------- ---------- ---------- ----------
Total operating
expenses .................. 7,072 6,737 2,596 17,025
---------- ---------- ---------- ----------
Operating income .................. 2,067 $ 8,429 $ 4,308 14,184
========== ==========
(16,554)(c)
Other income (expense) ............ (2,063) 2,179 (c) (16,438)
---------- ----------
Income (loss) before income
tax provision .................. 4 (2,254)(1)
Income tax provision (benefit) .... 11 (800)(d) (789)
---------- ----------
Net loss .......................... $ (7) $ (1,465)(1)
========== ==========
</TABLE>
(1) Pro forma net income excludes (i) the extraordinary loss of $534,000,
net of taxes, on extinguishment of the T.E.P. Financing, and (ii) the
loss of approximately $1,170,000, net of taxes, on termination of the
Company's current hedging contracts.
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-3
<PAGE> 96
MICHAEL PETROLEUM CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
(In thousands of dollars)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................................... $ 782 $ 10,114 (e) $ 10,896
Receivables ........................................................ 4,472 4,472
Prepaid expenses and other ......................................... 1 10,000 (g) 10,001
------------ ------------ ------------
Total current assets ............................................. 5,255 20,114 25,369
Oil and gas properties (successful efforts) ............................ 34,977 89,300 (f) 124,277
Less accumulated depreciation, depletion and
amortization ....................................................... (6,966) (6,966)
------------ ------------ ------------
28,011 89,300 117,311
Other assets ........................................................... 351 4,459 (e) 4,810
------------ ------------ ------------
Total assets ..................................................... $ 33,617 $ 113,873 $ 147,490
============ ============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable ................................................... $ 5,502 $ 5,502
Accrued liabilities ................................................ 298 $ 1,800 (i) 12,098
10,000 (g)
Current portion of long-term debt .................................. 8,056 (8,056)(e)
------------ ------------ ------------
Total current liabilities ........................................ 13,856 3,744 17,600
Long-term debt ......................................................... 19,885 132,636 (e) 132,636
(19,885)(e)
Deferred income taxes .................................................. 1,791 (288)(h) 873
(630)(i)
------------ ------------ ------------
Total liabilities ................................................ 35,532 115,577 151,109
------------ ------------ ------------
Commitments and contingencies
Stockholder's deficit:
Preferred stock ($.10 par value, 50,000,000 shares authorized,
no shares issued).................................................
Common stock ($.10 par value, 100,000,000 shares authorized,
10,000 shares issued)............................................. 1 1
Additional paid-in capital ......................................... 610 610
Accumulated deficit ................................................ (2,526) (534)(h) (4,230)
(1,170)(i)
------------ ------------ ------------
Total stockholder's deficit ...................................... (1,915) (1,704) (3,619)
------------ ------------ ------------
Total liabilities and stockholder's deficit ...................... $ 33,617 $ 113,873 $ 147,490
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-4
<PAGE> 97
MICHAEL PETROLEUM CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(Tables in thousands of dollars)
The following unaudited pro forma statement of operations for the year ended
December 31, 1997 includes pro forma adjustments that give effect to the
issuance of $135 million of senior note obligations (issued at a discount of
1.751%) and the application of the net proceeds therefrom to the repayment of
the T.E.P. Financing, the purchase of the Net Profits Interest and the
acquisition of the Enron Properties and the Conoco Properties as if such
transactions had been completed January 1, 1997. The Lobo Lease does not effect
the pro forma statement of operations as it is an acquisition of an undeveloped
lease. The unaudited pro forma balance sheet has been prepared as if such
transactions occurred on December 31, 1997.
(a) To reflect the recognition of revenues and direct operating expenses
from the acquisitions for the year ended December 31, 1997.
(b) To reflect additional estimated depreciation, depletion and
amortization ("DD&A") attributable to the acquisition of the Enron
Properties, the Conoco Properties and the Net Profits Interest as if
such acquisitions had occurred on January 1, 1997. The additional DD&A
amounts were calculated on the units-of-production method based on pro
forma capitalized costs and estimates of pro forma proved developed and
undeveloped reserves. The Company's actual and pro forma DD&A for the
year ended December 31, 1997 were approximately $1.00 and $.84 per Mcfe
produced, respectively.
(c) To eliminate the historical interest expense of approximately $2.2
million related to the T.E.P. Financing and to reflect the interest
expense which results from the issuance of $135 million of senior note
obligations with a stated interest rate of 11.50%. Interest expense
also includes one year of amortization of $4.8 million of deferred loan
costs and one year amortization of the $2.4 million discount on senior
notes, which are being amortized on a straight-line basis over the
seven year term of the notes.
<TABLE>
<S> <C>
Interest expense - $135 million senior note obligations................ $ 15,525
Amortization of discount - senior note obligations..................... 343
Amortization of deferred loan costs - senior note obligations.......... 686
------------
$ 16,554
============
</TABLE>
A 1/8% change in interest rates would have the impact of increasing
total pro forma interest expense by approximately $169,000.
(d) To reflect income taxes on the pro forma adjustments at an estimated
effective tax rate of 35%.
F-5
<PAGE> 98
(e) To reflect the issuance of $135 million of senior note obligations and
the application of the $127.8 million of net proceeds therefrom, and
the adjustments associated with deferred loan costs related to the
senior note obligations and the T.E.P. Financing as follows:
<TABLE>
<S> <C>
Net proceeds .............................................................. $ 127,836
Repayment of T.E.P. Financing and other long-term debt:
Current portion ........................................................ (8,056)
Long-term portion ...................................................... (19,885)
Unamortized discount on T.E.P. Financing ............................... (481)
Prepayment for 4 Bcf of gas to be delivered from May 1, 1998
to December 31, 1998 to Mobil as consideration for the Lobo Lease ...... (10,000)
Acquisitions:
Repayment of short-term acquisition indebtedness incurred in
connection with the Acquisition of the Enron Properties ............. (45,800)
Conoco Properties for cash ............................................. (22,500)
Net Profits Interest for cash .......................................... (11,000)
------------
$ 10,114
============
Write-off of deferred loan costs - T.E.P. Financing ....................... $ (341)
Deferred loan costs - senior note obligations ............................. 4,800
------------
$ 4,459
============
</TABLE>
(f) To reflect the acquisition of the Enron Properties, the Conoco
Properties, the Lobo Lease and the purchase of the Net Profits Interest
as follows:
<TABLE>
<S> <C>
Enron Properties for short-term acquisition indebtedness to be
repaid with proceeds from the Offering ................................. $ 45,800
Conoco Properties for cash ................................................ 22,500
Lobo Lease for 4 Bcf of gas to be delivered from May 1, 1998 to
December 31, 1998 to Mobil ............................................. 10,000
Net Profits Interest for cash ............................................. 11,000
------------
$ 89,300
============
</TABLE>
(g) To reflect the $10 million prepayment to a gas marketing company for 4
Bcf of gas and the related delivery obligation to Mobil.
(h) To reflect the extraordinary loss on extinguishment of the T.E.P.
Financing as follows:
<TABLE>
<S> <C>
Write-off of deferred loan costs .......................................... $ 341
Unamortized discount on T.E.P. Financing .................................. 481
Deferred tax benefit ...................................................... (288)
------------
Extraordinary loss ..................................................... $ 534
============
</TABLE>
The extraordinary loss is not reflected in the unaudited pro forma
statement of operations.
F-6
<PAGE> 99
(i) To reflect the loss on termination of the Company's current hedging
contract as follows:
<TABLE>
<S> <C>
Hedge contract termination costs .......................... $ 1,800
Deferred tax benefit ...................................... (630)
------------
Loss ................................................... $ 1,170
============
</TABLE>
The loss is not reflected in the unaudited pro forma statement of
operations.
F-7
<PAGE> 100
MICHAEL PETROLEUM CORPORATION
UNAUDITED PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY OIL AND GAS DISCLOSURES (UNAUDITED)
The following pro forma estimated reserve quantities show the effect of the
acquisitions of the Enron Properties, Conoco Properties and the Lobo Lease:
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------
THE ENRON THE CONOCO THE LOBO
DECEMBER 31, 1997: HISTORICAL PROPERTIES PROPERTIES LEASE PRO FORMA
---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Proved:
Oil and condensate (MBbls).......... 265 2,094 1,311 1,775 5,445
Gas (MMcf).......................... 51,165 51,162 24,082 32,289 158,698
Proved developed:
Oil and condensate (MBbls).......... 108 639 424 1,171
Gas (MMcf).......................... 22,937 18,778 7,941 49,656
</TABLE>
F-8
<PAGE> 101
MICHAEL PETROLEUM CORPORATION
UNAUDITED PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY OIL AND GAS DISCLOSURES (UNAUDITED)
The following pro forma estimated standardized measure of discounted future net
cash flows shows the effects of the acquisition of the Enron Properties, Conoco
Properties, Lobo Lease and the Net Profits Interest ("NPI"):
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------------------------------------
THE ENRON THE CONOCO THE LOBO
DECEMBER 31, 1997: HISTORICAL PROPERTIES PROPERTIES LEASE NPI PRO FORMA
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Future cash inflows ................ $ 115,766 $ 154,881 $ 78,702 $ 105,747 $ 12,135 $ 467,231
Less related future:
Production costs ............. (20,226) (27,299) (13,077) (13,621) (2,120) (76,343)
Development costs ............ (17,295) (21,862) (11,199) (22,400) (72,756)
---------- ---------- ---------- ---------- ---------- ----------
Future net cash flows before
income taxes ................... 78,245 105,720 54,426 69,726 10,015 318,132
10% annual discount for
estimating timing of cash
flows .......................... (26,758) (36,499) (19,192) (28,762) (3,717) (114,928)
---------- ---------- ---------- ---------- ---------- ----------
Standardized measure of
discounted future net cash
flows before income taxes ...... 51,487 69,221 35,234 40,964 6,298 203,204
Future income tax expense
(benefit), net of 10% annual
discount ....................... 14,848 13,018 7,081 12,333 (217) 47,063
---------- ---------- ---------- ---------- ---------- ----------
Standardized measure of
discounted future net cash
flows .......................... $ 36,639 $ 56,203 $ 28,153 $ 28,631 $ 6,515 $ 156,141
========== ========== ========== ========== ========== ==========
</TABLE>
F-9
<PAGE> 102
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Michael Petroleum Corporation:
We have audited the accompanying balance sheet of Michael Petroleum Corporation
as of December 31, 1996 and 1997, and the related statements of operations,
stockholder's deficit, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Michael Petroleum Corporation
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for impairment of long-lived assets in 1996.
Coopers & Lybrand L.L.P.
Houston, Texas
March 6, 1998 (except for Note 12
for which the date is April 23, 1998)
F-10
<PAGE> 103
MICHAEL PETROLEUM CORPORATION
BALANCE SHEET
(In thousands of dollars, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 1,181 $ 782
Receivables:
Accrued oil and gas sales .......................................................... 2,078 3,991
Joint interest and other ........................................................... 1,043 481
Prepaid expenses and other ............................................................ 73 1
------------ ------------
Total current assets ........................................................... 4,375 5,255
Oil and gas properties, (successful efforts method), at cost ............................. 19,413 34,977
Less: accumulated depreciation, depletion and amortization .............................. (3,205) (6,966)
------------ ------------
16,208 28,011
Other assets ............................................................................. 418 351
------------ ------------
Total assets ................................................................... $ 21,001 $ 33,617
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable:
Trade .............................................................................. $ 2,571 $ 3,746
Revenue distribution ............................................................... 1,460 1,756
Accrued liabilities ................................................................... 412 298
Current portion of long-term debt ..................................................... 4,902 8,056
------------ ------------
Total current liabilities ...................................................... 9,345 13,856
Long-term debt ........................................................................... 11,784 19,885
Deferred income taxes .................................................................... 1,780 1,791
------------ ------------
Total liabilities .............................................................. 22,909 35,532
------------ ------------
Commitments and contingencies (Note 10)
Stockholder's deficit:
Preferred stock ($.10 par value, 50,000,000 shares authorized, no shares
issued)
Common stock ($.10 par value, 100,000,000 shares authorized,
10,000 shares issued) ............................................................ 1 1
Additional paid-in capital ............................................................ 610 610
Accumulated deficit ................................................................... (2,519) (2,526)
------------ ------------
Total stockholder's deficit .................................................... (1,908) (1,915)
------------ ------------
Total liabilities and stockholder's deficit .................................... $ 21,001 $ 33,617
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE> 104
MICHAEL PETROLEUM CORPORATION
STATEMENT OF OPERATIONS
(In thousands of dollars)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Oil and natural gas sales ............................................. $ 2,109 $ 3,594 $ 9,139
Gain on sale of oil and natural gas properties ........................ 828 182
---------- ---------- ----------
2,937 3,776 9,139
---------- ---------- ----------
Operating expenses:
Production costs ...................................................... 1,228 1,931 1,870
Depreciation, depletion and amortization .............................. 1,272 1,180 3,889
Exploration ........................................................... 850 46 333
General and administrative ............................................ 763 424 980
---------- ---------- ----------
4,113 3,581 7,072
---------- ---------- ----------
Operating (loss) income ................................................... (1,176) 195 2,067
---------- ---------- ----------
Other income (expenses):
Interest income and other ............................................. 67 30 46
Interest expense and other ............................................ (1,084) (924) (2,109)
---------- ---------- ----------
(1,017) (894) (2,063)
---------- ---------- ----------
(Loss) income from continuing operations before income taxes .............. (2,193) (699) 4
(Benefit) provision for income taxes ...................................... (79) 1,780 11
---------- ---------- ----------
Loss from continuing operations ........................................... (2,114) (2,479) (7)
Discontinued operations:
Equity loss in unconsolidated affiliates .............................. (59)
Gain on sale of unconsolidated affiliates,
net of state income taxes of $96 .................................... 2,146
---------- ---------- ----------
Net loss .................................................................. $ (27) $ (2,479) $ (7)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE> 105
MICHAEL PETROLEUM CORPORATION
STATEMENT OF STOCKHOLDER'S DEFICIT
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
SHARES STOCK CAPITAL DEFICIT) TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 .................. 10 1 $ 455 $ 655 $ 1,111
Dividends paid .............................. (465) (465)
Distribution of overriding royalty
interest and interests in equity
investees to stockholders ............... (194) (194)
Net loss .................................... (27) (27)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 .................. 10 1 455 (31) 425
Dividend to MHI ............................. (9) (9)
Issuance of warrants in conjunction
with T.E.P. Financing ................... 155 155
Net loss .................................... (2,479) (2,479)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 .................. 10 1 610 (2,519) (1,908)
Net loss .................................... (7) (7)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 .................. 10 $ 1 $ 610 $ (2,526) $ (1,915)
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE> 106
MICHAEL PETROLEUM CORPORATION
STATEMENT OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $ (27) $ (2,479) $ (7)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation, depletion and amortization ............................... 1,272 1,180 3,889
Deferred income taxes .................................................. 15 1,780 11
Gain on sale of oil and gas properties ................................. (828) (182)
Abandonment of oil and gas properties .................................. 635 249
Noncash interest expense ............................................... 100
Amortization of discount on T.E.P. Financing ........................... 43 131
Equity loss in unconsolidated affiliates ............................... 59
Gain on sale of unconsolidated affiliates .............................. (2,242)
Changes in assets and liabilities:
Decrease (increase) in receivables, accrued oil and gas sales ....... 492 (1,189) (2,333)
(Increase) decrease in receivables, joint interest and other ........ (88) (682) 562
(Increase) decrease in prepaid expenses and other ................... (20) 2 72
(Decrease) increase in accounts payable, trade ...................... (1,203) 1,350 710
(Decrease) increase in accounts payable, revenue distribution ....... (285) 846 296
(Decrease) increase in accrued liabilities .......................... (219) 179 (114)
---------- ---------- ----------
Net cash (used in) provided by operating activities ............ (2,339) 848 3,466
---------- ---------- ----------
Cash flows from investing activities:
Additions to oil and gas properties ......................................... (672) (14,981) (14,963)
Proceeds from sale of oil and gas properties ................................ 953 228
Contributions to unconsolidated affiliates .................................. (482)
Proceeds from sale of unconsolidated affiliates ............................. 1,190
Proceeds from payment of related party note receivable ...................... 302
---------- ---------- ----------
Net cash provided by (used in) investing activities ............ 1,291 (14,753) (14,963)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt ................................................ 2,222 17,329 14,238
Payments on long-term debt .................................................. (392) (2,130) (3,114)
Dividend to MHI ............................................................. (9)
Dividends paid .............................................................. (465)
Additions to deferred loan costs ............................................ (440) (26)
---------- ---------- ----------
Net cash provided by financing activities ...................... 1,365 14,750 11,098
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ............................ 317 845 (399)
Cash and cash equivalents, beginning of period .................................. 19 336 1,181
---------- ---------- ----------
Cash and cash equivalents, end of period ........................................ $ 336 $ 1,181 $ 782
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE> 107
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Michael Petroleum Corporation (the "Company" or "MPC") is engaged in
the acquisition, exploration and development of oil and natural gas
properties principally located in the Lobo Trend of South Texas. The
Company was incorporated in June 1982. The Company, which was owned by
the stockholders of Michael Holdings, Inc. ("MHI"), became a
wholly-owned subsidiary of MHI on July 1, 1996 in a transaction
accounted for at historical cost as a reorganization of entities under
common control.
The Company was merged with and into Michael Gas Production Company
("MGPC"), which was also a wholly-owned subsidiary of MHI. Following
the merger, MGPC changed its name to MPC. This transaction was
accounted for at historical cost as a reorganization of entities under
common control. The financial statements reflect the financial
position, results of operations and cash flows of the combined
companies for all periods presented as if the merger had occurred on
December 31, 1994. All significant intercompany transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term highly liquid investments that
have an original maturity of three months or less. The Company
maintains its cash primarily with one financial institution located in
Houston, Texas. The Company periodically assesses the financial
condition of the institution and believes that any possible credit risk
is minimal.
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for its
oil and gas properties. Under this method of accounting, all property
acquisition costs and costs of exploratory and development wells are
capitalized when incurred, pending determination of whether the well
has found proved reserves. If an exploratory well has not found proved
reserves, the costs of drilling the well are charged to expense. The
costs of development wells are capitalized whether productive or
nonproductive.
Geological and geophysical costs on exploratory prospects and the costs
of carrying and retaining unproved properties are expensed as incurred.
An impairment allowance is provided to the extent that capitalized
costs of unproved properties, on a property-by-property basis, are
considered to be not realizable.
F-15
<PAGE> 108
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
OIL AND GAS AND OTHER PROPERTIES, CONTINUED
Depletion, depreciation and amortization ("DD&A") of development costs
and acquisition costs of proved oil and gas properties is provided
using the units of production method based on proved developed reserves
and proved reserves, respectively. The computation of DD&A takes into
consideration restoration, dismantlement and abandonment costs and the
anticipated proceeds from equipment salvage. The estimated restoration,
dismantlement and abandonment costs are expected to be offset by the
estimated residual value of lease and well equipment.
Gains and losses are recognized on sales of entire interests in proved
and unproved properties. Sales of partial interests are generally
treated as recoveries of costs.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 which requires that long-lived
assets held and used by an entity be reviewed for impairment whenever
events or changes indicate that the net book value of the asset may not
be recoverable. The net book value of an asset is reduced to fair value
if the sum of expected undiscounted future net cash flows from the use
of the asset is less than the net book value of the asset. Under SFAS
No. 121, the Company evaluates impairment of its oil and gas properties
on a field basis. The Company recorded impairment losses of $156,000
and $238,000 during the years ended December 31, 1996 and 1997,
respectively, which is included in DD&A. Prior to the adoption of SFAS
No. 121, the Company recognized an impairment loss if the Company's
total net capitalized costs exceeded the sum of expected undiscounted
future net cash flows.
NATURAL GAS BALANCING
The Company incurs natural gas production volume imbalances in the
ordinary course of business on jointly owned properties. The Company
follows the sales method to account for such imbalances. Under this
method, revenue is recorded based on the Company's net revenue interest
in production taken for delivery. The Company records a liability if
its sales of gas volumes in excess of its entitlements from a jointly
owned reservoir exceed its interest in the remaining estimated natural
gas reserves of such reservoir. Volumetric production is monitored to
minimize imbalances, and such imbalances were not significant at
December 31, 1996 and 1997.
F-16
<PAGE> 109
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
INCOME TAXES
Through June 30, 1996, the Company was taxed under the provisions of
"Subchapter S" of the Internal Revenue Code, which provides that the
individual shareholders are liable for federal income taxes on the
Company's taxable income. Accordingly, no provision for federal income
taxes is reflected in the statement of operations for periods ending
prior to June 30, 1996. Effective July 1, 1996, the Company began
filing a consolidated federal income tax return with MHI.
Deferred income taxes are provided to reflect the tax consequences in
future years of differences between the financial statement and tax
bases of assets and liabilities. Tax credits are accounted for under
the flow-through method, which reduces the provision for income taxes
in the year the tax credits are earned. A valuation allowance is
established to reduce deferred tax assets if it is more likely than not
that the related tax benefits will not be realized. The Company
calculates current and deferred taxes on an individual company basis.
PRICE RISK MANAGEMENT ACTIVITIES
The Company periodically uses swap contracts to hedge or otherwise
reduce the impact of natural gas price fluctuations. Gains and losses
resulting from changes in the market value of the financial instruments
utilized as hedges are deferred and recognized in the statement of
operations, together with the gain or loss on the hedged transaction,
as the physical production is sold under the relevant contracts. Cash
flows resulting from the Company's risk management activities are
classified in the accompanying statement of cash flows in the same
category as the item being hedged.
These instruments are measured for effectiveness on an enterprise basis
both at the inception of the contract and on an ongoing basis. If these
instruments are terminated prior to maturity, resulting gains or losses
continue to be deferred until the hedged item is recognized in income.
In connection with these hedging transactions, the Company may be
exposed to nonperformance by other parties to such agreements, thereby
subjecting the Company to current natural gas prices. However, the
Company only enters into hedging contracts with large financial
institutions and does not anticipate nonperformance.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's receivables are within the oil and
gas industry, primarily from purchasers of oil and gas and joint
venture participants. Collectibility is dependent upon the general
economic conditions of the purchasers and the oil and gas industry. The
receivables are not collateralized and to date, the Company has had
minimal bad debts.
F-17
<PAGE> 110
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables, and accounts payable approximate their fair
value. The carrying value of the Company's long-term debt approximates
fair market value as the debt accrues interest at variable rates which
approximate market conditions. The fair value of derivative financial
instruments is estimated using current market quotes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and 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. The Company's most
significant estimates relate to the assessment of impairment of proved
and unproved oil and gas properties, depreciation, depletion, and
amortization expense, and proved oil and gas reserves (see Note 13).
Actual results could differ from these estimates.
2. OIL AND GAS PROPERTY TRANSACTIONS:
In August 1996, the Company acquired oil and gas properties for
approximately $11.8 million in cash, net of post closing adjustments
totaling $420,000 which were received in 1997. Accordingly, revenues
and expenses from the properties have been included in the Company's
statement of operations from the date of purchase. The pro forma
results of operations, assuming the properties were acquired on January
1 of each respective year are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
Pro forma:
Revenues ...................................... $ 9,598 $ 8,730
Income from continuing operations ............. 2,573 2,497
</TABLE>
F-18
<PAGE> 111
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Notes payable under the comprehensive credit agreement
described below, net of unamortized discount of $612
in 1996 and $481 in 1997 ................................................ $ 16,507 $ 27,785
Installment notes to financial institutions, payable monthly,
interest at rates ranging from 5.9% to 11.26%, due April 1996 to
September 2000, collateralized by vehicles and
office equipment ........................................................ 144 139
Note payable to an insurance company, payable monthly,
interest at 7.85%, due January 1997, unsecured .......................... 12
Note payable to an individual, payable monthly, interest at
8%, due February 2000, unsecured ........................................ 23 17
------------ ------------
Total long-term debt ...................................................... 16,686 27,941
Less: current portion .................................................... (4,902) (8,056)
------------ ------------
Long-term debt ....................................................... $ 11,784 $ 19,885
============ ============
</TABLE>
Estimated annual principal payments at December 31, 1997 are as follows
(in thousands):
<TABLE>
<S> <C>
1998 ....................................................... $ 8,056
1999 ....................................................... 9,647
2000 ....................................................... 9,647
2001 ....................................................... 591
------------
$ 27,941
============
</TABLE>
T.E.P. FINANCING
On August 13, 1996, the Company entered into a comprehensive credit
agreement (the "T.E.P. Financing") with a limited partnership. Under
the T.E.P. Financing, total available credit amounted to approximately
$42.2 million, of which $16.3 million was available for oil and gas
property acquisitions and $25.9 million for development costs. As of
December 31, 1997, $14 million was available for future property
acquisitions and development costs. The T.E.P. Financing expires August
12, 2001.
F-19
<PAGE> 112
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
T.E.P. FINANCING, CONTINUED
The Company utilized loan proceeds of approximately $14.9 million to
acquire proved oil and gas properties located in South Texas (the "Lobo
Properties"). Through December 31, 1996 and 1997, loan proceeds of
approximately $1.8 million and $11.8 million, respectively, have been
used to develop those properties. In conjunction with entering into the
T.E.P. Financing, the Company conveyed to an affiliate of the lender a
net profits interest in all of the Company's oil and gas properties,
including the acquired properties ("Net Profits Interest"). The Net
Profits Interest grants the affiliate 30% of the net profits, as
defined, beginning the earlier of August 12, 2001, or the date of
repayment of all amounts due and occurring pursuant to the T.E.P.
Financing. The Net Profits Interest reduces to 15% of the net profits,
as defined, after payment of $10,000,000 pursuant to the interest. As
part of the T.E.P. Financing, the Company also granted to the lender a
warrant to purchase up to five percent of the Company's common stock at
an exercise price of $625 per share until August 12, 2001. The value
assigned to the Net Profits Interest and warrant was recorded as a
discount to the loan proceeds.
Under the terms of the T.E.P. Financing, principal is payable as a
percentage of net revenue, as defined. As of December 31, 1996 and
1997, the Company had repaid approximately $63,000 and $2.9 million of
principal under the T.E.P. Financing, respectively. Interest is payable
monthly and accrues at a combination of LIBOR plus 4.5% and New York
prime plus certain basis points based on the specific borrowing. At
December 31, 1996 and 1997, the blended effective interest rate
accruing on the loans was 14% and 15%, respectively. The loan is
collateralized by the oil and gas properties and the stock of the
Company.
The T.E.P. Financing contains financial covenants, the most restrictive
of which pertain to the payment of dividends, distributions to
shareholders and the Company's working capital ratio. The T.E.P.
Financing also contains administrative covenants. Except for violations
of certain administrative covenants during the years ended December 31,
1996 and 1997, the Company was in compliance with the covenants of the
T.E.P. Financing. Regarding the violations of such administrative
covenants, the Company obtained a waiver from the lender of the T.E.P.
Financing which agreed not to assert any default based upon such
violations unless they exist after April 15, 1998. The Company plans to
use proceeds from the Private Placement (see Note 12) to repay the
outstanding borrowings under the T.E.P. Financing and repurchase the
Net Profits Interest for $11 million. Upon repayment of the borrowings
under the T.E.P. Financing, the lender will cancel the warrants.
NOTES PAYABLE TO A LIMITED PARTNERSHIP
In August 1996, the Company utilized $2.0 million of the T.E.P.
Financing loan proceeds to pay down certain notes payable to a limited
partnership. The remaining balance on the notes payable of $4.9
million, including accrued interest, was paid through the transfer of
oil and gas properties with a net book value of $4.7 million, resulting
in a gain on the sale of approximately $182,000.
F-20
<PAGE> 113
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. FEDERAL INCOME TAXES:
The components of the net deferred tax liability are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward .................... $ 3,242
Other .............................................. $ 6 30
------------ ------------
Total deferred tax asset ................... 6 3,272
------------ ------------
Deferred tax liabilities:
Oil and gas properties ............................. (1,418) (5,063)
Other .............................................. (368)
------------ ------------
Total deferred tax liability ............... (1,786) (5,063)
------------ ------------
Net deferred tax liability ................. $ (1,780) $ (1,791)
============ ============
</TABLE>
At December 31, 1997, the Company had a net operating loss carryforward
of approximately $9.3 million, which begins expiring in 2017.
Utilization of the net operating loss carryforward is subject to annual
limitations due to certain stock ownership changes that have occurred
or may occur. The Company does not believe a deferred tax asset
valuation allowance is necessary at December 31, 1997 as all tax
carryforwards are expected to be fully utilized.
For the year ended December 31, 1995, the Company was not subject to
federal income taxes (see Note 1) and had a state tax benefit totaling
$79,000.
Income tax expense differs from the amount that would be provided by
applying the statutory U.S. federal income tax rate to (loss) income
before income taxes for the following reasons (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
---------- ----------
<S> <C> <C>
Computed statutory tax (benefit) expense at 35% ....... $ (245) $ 2
Changes in taxes resulting from:
Section 29 credits ................................. (13)
Conversion to C corporation status ................. 2,032
Other .............................................. 6 9
---------- ----------
Total income tax expense ...................... $ 1,780 $ 11
========== ==========
</TABLE>
F-21
<PAGE> 114
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. HEDGING ACTIVITIES:
In 1996, in conjunction with the T.E.P. Financing, the Company entered
into a gas swap contract to hedge or otherwise reduce the impact of
natural gas price fluctuations for other than trading purposes. Under
the terms of the swap agreement, the Company is a fixed-price receiver
on approximately 89,000 Mmbtu per month from January 1998 through
August, 2001. The Swap Agreement covered approximately 72% of the
Company's 1997 natural gas volumes. The average fixed price under the
agreement is $1.90 per Mmbtu. The estimated fair value of the swap
agreement was approximately $(1.1 million) at December 31, 1996 and
1997. This swap contract reduced natural gas revenues by approximately
$313,000 and $1.2 million for the years ended December 31, 1996 and
1997, respectively. The Company is exposed to credit-related losses in
the event of nonperformance by the counterparty, but it does not expect
the counterparty to fail to meet its obligations based on existing
credit ratings (See Note 12).
6. EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) profit sharing plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code ("IRS"). This plan
covers all employees of the Company. The Company, at its discretion,
matches $1.00 for each $1.00 of employee deferral, with the Company's
contribution not to exceed 8% of an employee's salary, subject to
limitations imposed by the IRS. The Company did not make any
contributions to the 401(k) Plan during the years ended December 31,
1995, 1996 and 1997.
7. DISCONTINUED OPERATIONS:
At January 1, 1995, the Company owned a 50% equity interest in two non
oil and gas limited liability companies which were accounted for under
the equity method. On January 20, 1995, the Company obtained a loan of
$2 million from a private lender, the proceeds of which were used to
pay trade obligations. The note provided for interest at 6% above the
reference prime rate. As consideration for making the loan, a 5%
interest in the Company's ownership in the two limited liability
companies was transferred to the lender. The net book value which
approximated fair value of the interest transferred of $100,000 was
recorded as interest expense. The note was collateralized by the
Company's entire interest in the two limited liability companies.
F-22
<PAGE> 115
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
In April 1995, the Company sold a 42% equity interest in each of the
limited liability companies to the private lender for cash proceeds of
approximately $1.2 million plus repayment of the remaining principal
balance of $1.75 million on the loan discussed above, resulting in a
gain of approximately $2.1 million (net of state income taxes of
$96,000). In September 1995, the Company distributed its remaining 7.5%
interest in each of the limited liability companies to its
stockholders. The distribution was recorded at the net book value of
$134,000. The Company's investment in these two companies has been
accounted for as a discontinued operation.
8. RELATED PARTY TRANSACTIONS:
Beginning in April 1996, the Company entered into a two year agreement,
continuing thereafter on a quarterly basis subject to termination by
either party, with Upstream Energy Corporation ("Upstream") whereby
Upstream purchases all of the gas produced by the Company at spot
market prices. Under the terms of the agreement, the Company pays
Upstream a marketing fee of $.03 per Mmbtu which totaled approximately
$57,000, $106,000, and $220,000 for the years ended December 31, 1995,
1996, and 1997, respectively. During the years ended December 31, 1995,
1996 and 1997, Upstream purchased gas produced by the Company for
approximately $668,000, $3.2 million and $9.7 million, respectively. At
December 31, 1996 and 1997, receivables from Upstream of approximately
$2.1 million and $3.9 million, respectively, were included in accrued
oil and gas sales in the balance sheet. The chief executive officer of
the Company had an ownership interest in Upstream until August, 1997.
The Company believes the revenues received were equivalent to those
that would be paid under an arms-length transaction in the normal
course of business.
In July 1997, the Company executed in writing a ten year old verbal
agreement which granted to the Vice President of Exploration of the
Company a 1.5% of 8/8ths overriding royalty interest in leases acquired
either directly or indirectly by the Company or its affiliates in Webb
County or Zapata County, Texas. This overriding royalty interest
expires upon the death of the vice president or upon his termination,
resignation or retirement from the Company. The overriding royalty
interest does not apply to any producing properties acquired by the
Company except for deepenings or sidetracks of existing wells and/or
all new wells drilled on the acquired producing properties.
During the year ended December 31, 1995, the Company distributed its
overriding royalty interest in certain oil and gas properties to the
stockholders. The distribution was recorded at the net book value of
$60,000.
From May to July of 1995 the Company made loans to the Chairman of the
Board and Chief Executive Officer of the Company, in an aggregate
principal amount of $314,700. Interest on the indebtedness accrued at a
rate of 5% per annum and $302,055 of such indebtedness was repaid to
the Company in December 1995. The remaining balance, together with
interest, was paid in May 1997.
F-23
<PAGE> 116
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Interest payments (net of interest
capitalized of $0, $217 and $574
during 1995, 1996 and 1997,
respectively) ................................ $ 1,081 $ 833 $ 1,626
</TABLE>
Non-cash investing and financing transactions not reflected in the
statement of cash flows include the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Changes in accounts payable
related to capital expenditures............... $ 238 $ 465
Distribution to stockholders of overriding
royalty interest.............................. $ 60
Distribution to stockholders of interests in
equity investees.............................. 134
Transfer of interests in equity investees as
repayment of note payable to private
lender........................................ 1,750
Transfer of oil and gas properties as
repayment of note payable to a limited
partnership................................... 4,791
Adjustment to purchase price of certain oil
and gas properties............................ 420
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company has entered into a noncancelable operating lease agreement
for office space in Houston, Texas. The lease term expires in 2001,
with two options to renew the lease for a period of five years each.
Future minimum lease payments required as of December 31, 1997 related
to noncancelable operating leases are as follows:
F-24
<PAGE> 117
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1998...................................... $ 92,500
1999...................................... 67,000
2000...................................... 67,000
2001...................................... 11,000
-----------
$ 237,500
===========
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $90,000, $49,700, and $69,000, respectively.
LEGAL PROCEEDINGS
The Company has been and may in the future be involved as a party in
various legal proceedings, which are incidental to the ordinary course
of business. Management regularly analyzes current information and, as
necessary, provides accruals for probable liabilities on the eventual
disposition of these matters. In the opinion of management and legal
counsel, as of December 31, 1997, there were no threatened or pending
legal matters which would have a material impact on the Company's
results of operations, financial position or cash flows.
YEAR 2000
Although the Company does not expect to incur significant expenditures
to address Year 2000 issues, there can be no assurance that this will
be the case. Additionally, the ability of third parties with whom the
Company transacts business to adequately address their Year 2000 issues
is outside the Company's control. There can be no assurance that the
failure of the Company or such third parties to adequately address
their respective Year 2000 issues will not have a material adverse
effect on the Company's business, financial condition and results of
operations.
11. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income, which is effective for
fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. It
requires (a) classification of items of other comprehensive income by
their nature in a financial statement and (b) display of the
accumulated balance of other comprehensive income separate from
retained earnings and additional paid-in capital in the equity section
of a statement of financial position. Management does not expect the
adoption of SFAS No. 130 to have a material effect on the Company's
financial position, results of operations or cash flows.
F-25
<PAGE> 118
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
In June 1997, the FASB also issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which is effective
for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for reporting information about operating
segments in annual financial statements and requires selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, Financial Reporting
for Segments of a Business Enterprise, but retains the requirement to
report information about major customers. Because the Company operates
in only one segment, management does not expect the adoption of SFAS
No. 131 to have a material affect on the Company's financial statement
disclosures.
In March 1998, the FASB also issued SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, which is
effective for fiscal years beginning after December 15, 1997. SFAS No.
132 revises employers' disclosures about pension and other
postretirement benefit plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the
benefits obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when SFAS No. 87, Employers'
Accounting for Pensions, and No. 88, Employers' Accounting for
Settlements and Curtailments of Deferred Benefit Pension Plans and for
Termination Benefits, were issued. Because the Company does not
currently have pension or other postretirement benefits, management
does not expect the adoption of SFAS No. 132 to have a material affect
on the Company's financial statement disclosures.
12. SUBSEQUENT EVENTS:
PRIVATE PLACEMENT
On April 2, 1998, the Company issued $135 million of senior notes (the
"Notes") at a discount of 1.751% in a transaction exempt from
registration under federal and state securities laws (the "Offering").
The Notes mature in April 2005 and bear interest at a rate of
approximately 11.5% per annum, payable semi-annually in April and
October of each year, commencing October 1998. The Notes are redeemable
at the option of the Company, in whole or in part, at any time after
April 2003, at specified redemption prices, plus accrued and unpaid
interest and liquidated damages, as defined. The Company is required to
comply with certain covenants, which limit, among other things, the
ability of the Company to incur additional indebtedness, pay dividends,
repurchase equity interests, sell assets or enter into mergers and
consolidations.
The Company completed the acquisitions discussed below with proceeds
from the Offering.
F-26
<PAGE> 119
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
ENRON ACQUISITION
On February 5, 1998, the Company entered into a purchase and sale
agreement with Enron Oil & Gas Company ("Enron") (the "Enron
Acquisition"). The purchase and sale agreement provides that Enron will
convey to the Company interests in certain oil and natural gas leases
in Webb County, Hidalgo County and Zapata County, Texas, and all
seismic data owned by Enron covering the properties. The Enron
Acquisition was closed on March 31, 1998.
The purchase price for the Enron Acquisition was $45.8 million, subject
to post-closing adjustments, and the conveyance by the Company to Enron
of all of the Company's interests in certain oil and natural gas
properties in Webb County, Texas. The purchase price was paid in the
form of a promissory note dated March 31, 1998 bearing an interest rate
of 8% per annum and maturing on April 2, 1998. The Company utilized a
portion of the net proceeds of the Offering to repay the promissory
note.
CONOCO ACQUISITION
On February 20, 1998, the Company entered into a purchase and sale
agreement with Conoco Inc. ("Conoco") (the "Conoco Acquisition"). The
purchase and sale agreement provides that Conoco will convey to the
Company certain oil and natural gas leases covering approximately
39,000 acres in Webb County, Texas. On April 2, 1998, the Company paid
$22.5 million, subject to post-closing adjustments, as consideration
for the rights and property conveyed by Conoco as described above.
LOBO LEASE ACQUISITION
On April 20, 1998, the Company entered into a lease with Mobil
effective as of January 1, 1998 covering Mobil's interest in
approximately 40,000 acres in the Lobo Trend (the "Lobo Lease").
Consideration for the Lobo Lease is in the form of future deliveries of
4 Bcf of gas, commencing May 1, 1998 and terminating December 31, 1998.
On April 23, 1998, the Company entered into a contract to secure
delivery of this volume of gas for consideration of $9.98 million.
LINE OF CREDIT
The Company executed a commitment letter with Christiania Bank og
KreditKasse ("Christiania"), under which after closing of the Offering,
if the restrictions and covenants of the Notes permit, the Company
intends to enter into a new reducing revolving credit facility (the
"Credit Facility") which will provide for a maximum loan amount of $50
million with an initial borrowing base of $30 million. Under the Credit
Facility, the principal outstanding will be due and payable upon
maturity on the fourth anniversary of the closing date with interest
payable monthly. The interest rate for borrowings will be calculated at
the Eurodollar Rate plus 1.75% or ABR rate at the election of the
Company. The ABR rate is the highest of (i) the interest rate publicly
announced by Christiania, (ii) the secondary market rate for
three-month certificates of deposit plus 1% and (iii) the federal funds
rate plus 0.5%.
F-27
<PAGE> 120
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
HEDGE CONTRACTS
The Company terminated the gas swap agreement discussed in Note 5 on
April 2, 1998 for a cash payment of $1.8 million.
During April 1998, the Company purchased a gas put option with a strike
price of $2.25 per Mmbtu for approximately $230,000. The put option has
a notional volume of 150,000 Mmbtu per month from May 1, 1998 to April
30, 1999. The Company also entered into a collar contract with floor
price of $2.25 per Mmbtu and a ceiling price of $2.99 per Mmbtu. The
collar has a notional volume of 450,000 Mmbtu per month from May 1,
1998 to April 30, 1999.
13. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES:
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
Capitalized costs related to oil and gas producing activities:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Unproved oil and gas properties ............. $ 3,775 $ 1,247
Proved oil and gas properties ............... 15,638 33,730
---------- ----------
$ 19,413 $ 34,977
========== ==========
</TABLE>
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
Costs incurred for oil and gas property acquisition, exploration and
development activities, whether capitalized or expensed, are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Property acquisition:
Unproved .................. $ 30 $ 2,929 $ 355
Proved .................... 10 9,554 2,425
Exploration .................. 177
Development .................. 632 2,757 12,074
Interest capitalized ......... 217 574
---------- ---------- ----------
Total costs incurred ...... $ 849 $ 15,457 $ 15,428
========== ========== ==========
</TABLE>
SALES OF OIL AND GAS
Substantially all of the Company's natural gas is sold to one purchaser
(see Note 8). Substantially all of the Company's oil and condensate is
sold to two customers.
F-28
<PAGE> 121
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
OIL AND GAS RESERVE QUANTITIES (UNAUDITED)
Users of this information should be aware that the process of
estimating quantities of "proved" and "proved developed" natural gas
and crude oil reserves is very complex, requiring significant
subjective decisions in the evaluation of all available geological,
engineering and economic data for each reservoir. The data for a given
reservoir may also change substantially over time as a result of
numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions.
Consequently, material revisions to existing reserve estimates occur
from time to time. Although every reasonable effort is made to ensure
that reserve estimates reported represent the most accurate assessments
possible, the significance of the subjective decisions required and
variances in available data for various reservoirs make these estimates
generally less precise than other estimates presented in connection
with financial statement disclosures.
The reserve information as of December 31, 1994 and 1995 was prepared
by Mohajir & Associates, Inc. The reserve information as of December
31, 1996 and 1997 was prepared by Huddleston & Co., Inc. The Company
emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of proved
producing oil and gas properties. Accordingly, these estimates are
expected to change as future information becomes available.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate 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
developed reserves are proved reserves that can be expected to be
recovered through existing wells with existing economic and operating
methods.
No major discovery or other favorable or adverse event subsequent to
December 31, 1997 is believed to have caused a material change in the
estimates of proved or proved developed reserves as of that date.
The following table sets forth the Company's net proved reserves,
including the changes therein, and proved developed reserves (all
within the United States) at the end of each of the three years in the
period ended December 31, 1997:
F-29
<PAGE> 122
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
CRUDE OIL NATURAL GAS
(MBbl) (MMcf)
--------- -----------
<S> <C> <C>
Proved developed and undeveloped reserves:
January 1, 1995 .............................. 2,472 7,794
Revision of previous estimates ............. (145) (274)
Extensions, discoveries and other additions. 108 1,270
Production ................................. (79) (430)
Sales of minerals in place ................. (96) (2,451)
--------- -----------
December 31, 1995 ............................ 2,260 5,909
Revision of previous estimates ............. 5,920
Extensions, discoveries and other additions. 9 2,299
Production ................................. (37) (1,324)
Purchases of reserves in place ............. 189 36,442
Sales of minerals in place ................. (2,182)
--------- -----------
December 31, 1996 ............................ 239 49,246
Revision of previous estimates ............. (38) (6,848)
Extensions, discoveries and other additions. 70 9,105
Production ................................. (21) (3,685)
Purchases of reserves in place ............. 15 3,347
--------- -----------
December 31, 1997 ............................ 265 51,165
========= ===========
</TABLE>
<TABLE>
<CAPTION>
CRUDE OIL NATURAL GAS
(MBbl) (MMcf)
--------- -----------
<S> <C> <C>
Proved developed reserves:
January 1, 1995 .............................. 963 4,502
December 31, 1995 ............................ 689 2,627
December 31, 1996 ............................ 79 16,924
December 31, 1997 ............................ 108 22,937
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND GAS RESERVES (UNAUDITED)
SFAS No. 69 prescribes guidelines for computing a standardized measure
of future net cash flows and changes therein relating to estimated
proved reserves. The Company has followed these guidelines which are
briefly discussed below.
F-30
<PAGE> 123
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated
quantities of oil and gas to be produced. Estimated future income taxes
are computed using current statutory income tax rates, including
consideration for estimated future statutory depletion and alternative
fuels tax credits. The resulting future net cash flows are reduced to
present value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such do
not necessarily reflect the Company's expectations of actual revenues
to be derived from those reserves nor their present worth. The
limitations inherent in the reserve quantity estimation process, as
discussed previously, are equally applicable to the standardized
measure computations since these estimates are the basis for the
valuation process.
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Future cash inflows .......................................... $ 53,284 $ 129,588 $ 115,766
Less related future:
Production costs ........................................ (15,890) (19,319) (20,226)
Development costs ....................................... (9,586) (16,070) (17,295)
---------- ---------- ----------
Future net cash flows before income taxes .................... 27,808 94,199 78,245
10% annual discount for estimating timing of cash flows ...... (9,297) (33,472) (26,758)
---------- ---------- ----------
Standardized measure of discounted future net cash flows
before income taxes ....................................... 18,511 60,727 51,487
Future income tax expense, net of 10% annual discount ........ 5,634 18,378 14,848
---------- ---------- ----------
Standardized measure of discounted future net cash flows ..... $ 12,877 $ 42,349 $ 36,639
========== ========== ==========
</TABLE>
F-31
<PAGE> 124
MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
A summary of the changes in the standardized measure of discounted
future net cash flows applicable to proved oil and gas reserves is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Beginning of the period .................................... $ 14,825 $ 12,877 $ 42,349
---------- ---------- ----------
Revisions of previous estimates:
Changes in prices and costs ............................. 2,118 17,803 (9,701)
Changes in quantities ................................... (1,822) 9,108 (12,789)
Changes in future development costs ..................... 1,153 (147) (2,566)
Development costs incurred during the period ............... 25 243 4,402
Additions to proved reserves resulting from extensions
and discoveries, less related costs ...................... 1,909 2,051 11,172
Purchases of reserves in place ............................. 31,082 3,894
Sales of reserves in place ................................. (3,683) (11,983)
Accretion of discount ...................................... 1,928 1,851 6,073
Sales of oil and gas, net of production costs .............. (881) (1,663) (7,269)
Net change in income taxes ................................. (1,176) (12,744) 3,530
Production timing and other ................................ (1,519) (6,129) (2,456)
---------- ---------- ----------
Net increase (decrease) .................................... (1,948) 29,472 (5,710)
---------- ---------- ----------
End of the period .......................................... $ 12,877 $ 42,349 $ 36,639
========== ========== ==========
</TABLE>
F-32
<PAGE> 125
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Michael Petroleum Corporation:
We have audited the accompanying statement of revenues and direct operating
expenses of the Enron Properties for the years ended December 31, 1996 and 1997.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial 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 financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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.
The accompanying financial statement reflects the revenues and direct operating
expenses of the Enron Properties as described in Note 1 and is not intended to
be a complete presentation of the financial position, results of operations or
cash flows of the Enron Properties.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenues and direct operating expenses of the Enron
Properties as described in Note 1 for the years ended December 31, 1996 and 1997
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 9, 1998
F-33
<PAGE> 126
THE ENRON PROPERTIES
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
Year Ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenues .............................................. $ 18,973 $ 15,166
Direct operating expenses ............................. (2,547) (2,339)
---------- ----------
Excess of revenues over direct operating expenses ..... $ 16,426 $ 12,827
========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-34
<PAGE> 127
THE ENRON PROPERTIES
NOTES TO FINANCIAL STATEMENT
1. BASIS OF PRESENTATION:
The accompanying financial statement reflects the revenues and direct
operating expenses relating to certain oil and gas properties located
in South Texas (the "Enron Properties").
The historical financial statements reflecting financial position,
results of operations and cash flows required by generally accepted
accounting principles are not presented, as such information is neither
readily available on an individual property basis nor meaningful for
the properties. During the periods presented, the Enron Properties were
not accounted for as a separate entity. This financial statement does
not include depreciation, depletion and amortization, general and
administrative, interest or federal income tax expense. Accordingly,
the accompanying financial statement is not intended to represent the
financial position, results of operations or cash flows in conformity
with generally accepted accounting principles. This financial statement
may not be representative of future operations.
F-35
<PAGE> 128
THE ENRON PROPERTIES
SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY OIL AND GAS DISCLOSURES (UNAUDITED)
OIL AND GAS RESERVE QUANTITIES
Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" natural gas and crude oil reserves
is very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may also change substantially over time as a result
of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
The reserve information was prepared by the Company and Huddleston & Co., Inc.
The Company emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of proved producing
oil and gas properties. Accordingly, these estimates are expected to change as
future information becomes available.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate 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 developed reserves are proved
reserves that can be expected to be recovered through existing wells with
existing economic and operating methods.
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES ATTRIBUTED TO THE ENRON
PROPERTIES
No major discovery or other favorable or adverse event subsequent to December
31, 1997 is believed to have caused a material change in the estimates of proved
or proved developed reserves as of that date.
The following table sets forth the net proved reserves, including the changes
therein, and proved developed reserves (all within the United States) at the end
of each of the two years in the period ended December 31, 1997:
F-36
<PAGE> 129
<TABLE>
<CAPTION>
CRUDE OIL NATURAL GAS
(MBbl) (MMcf)
--------- -----------
<S> <C> <C>
Proved developed and undeveloped reserves:
January 1, 1996 .................................... 2,486 63,564
Revision of previous estimates
Extensions, discoveries and other additions
Production ...................................... (226) (6,976)
--------- -----------
December 31, 1996 .................................. 2,260 56,588
Revision of previous estimates
Extensions, discoveries and other additions
Production ...................................... (166) (5,426)
--------- -----------
December 31, 1997 .................................. 2,094 51,162
========= ===========
Proved developed reserves:
January 1, 1996 .................................... 1,031 31,179
December 31, 1996 .................................. 805 24,204
December 31, 1997 .................................. 639 18,778
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
SFAS No. 69 prescribes guidelines for computing a standardized measure of future
net cash flows and changes therein relating to estimated proved reserves. The
Company has followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are determined
by applying year-end prices and costs to the estimated quantities of oil and gas
to be produced. The resulting future net cash flows are reduced to present value
amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such do not necessarily reflect
the Company's expectations of actual revenues to be derived from those reserves
nor their present worth. The limitations inherent in the reserve quantity
estimation process, as discussed previously, are equally applicable to the
standardized measure computations since these estimates are the basis for the
valuation process.
F-37
<PAGE> 130
The standardized measure of discounted future net cash flows relating to proved
oil and gas reserves attributed to the Enron Properties is as follows (in
thousands):
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Future cash inflows ....................................................... $ 246,578 $ 154,881
Less related future:
Production costs ....................................................... (29,638) (27,299)
Development costs ...................................................... (21,863) (21,862)
------------ ------------
Future net cash flows ..................................................... 195,077 105,720
10% annual discount for estimated timing of cash flows .................... (61,067) (36,499)
------------ ------------
Present value of future pretax net cash flows for proved reserves ......... $ 134,010 $ 69,221
============ ============
</TABLE>
A summary of the changes in the standardized measure of discounted future net
cash flows applicable to proved oil and gas reserves is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Beginning of the period ................................................... $ 79,718 $ 134,010
------------ ------------
Revisions of previous estimates:
Changes in prices and costs ............................................ 62,746 (65,363)
Changes in quantities...................................................
Changes in future development costs.....................................
Development costs incurred during the period...............................
Additions to proved reserves resulting from extensions and discoveries,
less related costs......................................................
Accretion of discount ..................................................... 7,972 13,401
Sales of oil and gas, net of production costs ............................. (16,426) (12,827)
Production timing and other................................................
------------ ------------
Net increase (decrease) ................................................... 54,292 (64,789)
------------ ------------
End of the period ......................................................... $ 134,010 $ 69,221
============ ============
</TABLE>
F-38
<PAGE> 131
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Michael Petroleum Corporation:
We have audited the accompanying statement of revenues and direct operating
expenses of the Conoco Properties for the years ended December 31, 1996 and
1997. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
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 financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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.
The accompanying financial statement reflects the revenues and direct operating
expenses of the Conoco Properties as described in Note 1 and is not intended to
be a complete presentation of the financial position, results of operations or
cash flows of the Conoco Properties.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenues and direct operating expenses of the Conoco
Properties as described in Note 1 for the years ended December 31, 1996 and 1997
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 9, 1998
F-39
<PAGE> 132
THE CONOCO PROPERTIES
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
Year Ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Revenues .............................................. $ 5,109 $ 6,904
Direct operating expenses ............................. (646) (906)
------------ ------------
Excess of revenues over direct operating expenses ..... $ 4,463 $ 5,998
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-40
<PAGE> 133
THE CONOCO PROPERTIES
NOTES TO FINANCIAL STATEMENT
1. BASIS OF PRESENTATION:
The accompanying financial statement reflects the revenues and direct
operating expenses relating to certain oil and gas properties located
in South Texas (the "Conoco Properties").
The historical financial statements reflecting financial position,
results of operations and cash flows required by generally accepted
accounting principles are not presented, as such information is neither
readily available on an individual property basis nor meaningful for
the properties. During the periods presented, the Conoco Properties
were not accounted for as a separate entity. The financial statement
does not include depreciation, depletion and amortization, general and
administrative, interest or federal income tax expenses. Accordingly,
the accompanying financial statement is not intended to represent the
financial position, results of operations or cash flows in conformity
with generally accepted accounting principles. This financial statement
may not be representative of future operations.
F-41
<PAGE> 134
THE CONOCO PROPERTIES
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
OIL AND GAS RESERVE QUANTITIES
Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" natural gas and crude oil reserves
is very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may also change substantially over time as a result
of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
The reserve information was prepared by the Company and Huddleston & Co., Inc.
The Company emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of proved producing
oil and gas properties. Accordingly, these estimates are expected to change as
future information becomes available.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in the 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 with
existing economic and operating methods.
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES ATTRIBUTED TO THE CONOCO
PROPERTIES
No major discovery or other favorable or adverse event subsequent to December
31, 1997 is believed to have caused a material change in the estimates of proved
or proved developed reserves as of that date.
The following table sets forth the net proved reserves, including the changes
therein, and proved developed reserves (all within the United States) at the end
of each of the two years in the period ended December 31, 1997:
F-42
<PAGE> 135
<TABLE>
<CAPTION>
CRUDE OIL NATURAL GAS
(MBbl) (MMcf)
--------- -----------
<S> <C> <C>
Proved developed and undeveloped reserves:
January 1, 1996 .................................... 1,728 27,895
Revision of previous estimates...................
Extensions, discoveries and other additions......
Production ...................................... (182) (1,621)
--------- -----------
December 31, 1996 .................................. 1,546 26,274
Revision of previous estimates...................
Extensions, discoveries and other additions......
Production ...................................... (235) (2,192)
--------- -----------
December 31, 1997 .................................. 1,311 24,082
========= ===========
Proved developed reserves:
January 1, 1996 .................................... 841 11,754
December 31, 1996 .................................. 658 10,133
December 31, 1997 .................................. 424 7,941
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
SFAS No. 69 prescribes guidelines for computing a standardized measure of future
net cash flows and changes therein relating to estimated proved reserves. The
Company has followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are determined
by applying year-end prices and costs to the estimated quantities of oil and gas
to be produced. The resulting future net cash flows are reduced to present value
amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such do not necessarily reflect
the Company's expectations of actual revenues to be derived from those reserves
nor their present worth. The limitations inherent in the reserve quantity
estimation process, as discussed previously, are equally applicable to the
standardized measure computations since these estimates are the basis for the
valuation process.
F-43
<PAGE> 136
The standardized measure of discounted future net cash flows relating to proved
oil and gas reserves attributed to the Conoco Properties is as follows (in
thousands):
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Future cash inflows ....................................................... $ 144,813 $ 78,702
Less related future:
Production costs ....................................................... (13,983) (13,077)
Development costs ...................................................... (11,199) (11,199)
------------ ------------
Future net cash flows ..................................................... 119,631 54,426
10% annual discount for estimated timing of cash flows .................... (38,564) (19,192)
------------ ------------
Present value of future pretax net cash flows for proved reserves ......... $ 81,067 $ 35,234
============ ============
</TABLE>
A summary of the changes in the standardized measure of discounted future net
cash flows applicable to proved oil and gas reserves is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Beginning of the period ................................................... $ 39,134 $ 81,067
------------ ------------
Revisions of previous estimates:
Changes in prices and costs ............................................ 42,483 (47,942)
Changes in quantities...................................................
Changes in future development costs.....................................
Development costs incurred during the period...............................
Additions to proved reserves resulting from extensions and discoveries,
less related costs......................................................
Purchases of reserves in place.............................................
Accretion of discount ..................................................... 3,913 8,107
Sales of oil and gas, net of production costs ............................. (4,463) (5,998)
Production timing and other................................................
------------ ------------
Net increase (decrease) ................................................... 41,933 (45,833)
------------ ------------
End of the period ......................................................... $ 81,067 $ 35,234
============ ============
</TABLE>
F-44
<PAGE> 137
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Michael Petroleum Corporation:
We have audited the accompanying statement of revenues and direct operating
expenses of the Lobo Properties for the year ended December 31, 1995 and the
seven-month period ended July 31, 1996. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial 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 financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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.
The accompanying financial statement reflects the revenues and direct operating
expenses of the Lobo Properties as described in Note 1 and is not intended to be
a complete presentation of the financial position, results of operations or cash
flows of the Lobo Properties.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenues and direct operating expenses of the Lobo
Properties as described in Note 1 for the year ended December 31, 1995 and the
seven-month period ended July 31, 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 27, 1998
F-45
<PAGE> 138
THE LOBO PROPERTIES
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(In thousands)
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, JULY 31,
1995 1996
------------ ------------
<S> <C> <C>
Revenues .............................................. $ 6,661 $ 4,954
Direct operating expenses ............................. (974) (651)
------------ ------------
Excess of revenues over direct operating expenses ..... $ 5,687 $ 4,303
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-46
<PAGE> 139
THE LOBO PROPERTIES
NOTES TO FINANCIAL STATEMENT
1. BASIS OF PRESENTATION:
The accompanying financial statement reflects the revenues and direct
operating expenses relating to certain oil and gas properties located
in South Texas (the "Lobo Properties").
The historical financial statements reflecting financial position,
results of operations and cash flows required by generally accepted
accounting principles are not presented, as such information is neither
readily available on an individual property basis nor meaningful for
the properties. During the periods presented, the Lobo Properties were
not accounted for as a separate entity. This financial statement does
not include depreciation, depletion and amortization, general and
administrative, interest or federal income tax expenses. Accordingly,
the accompanying financial statement is not intended to represent the
financial position, results of operations or cash flows in conformity
with generally accepted accounting principles. This financial statement
may not be representative of future operations.
F-47
<PAGE> 140
THE LOBO PROPERTIES
SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY OIL AND GAS DISCLOSURES (UNAUDITED)
OIL AND GAS RESERVE QUANTITIES
Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" natural gas and crude oil reserves
is very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may also change substantially over time as a result
of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
The reserve information was prepared by the Company and Huddleston & Co., Inc.
The Company emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of proved producing
oil and gas properties. Accordingly, these estimates are expected to change as
future information becomes available.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate 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 developed reserves are proved
reserves that can be expected to be recovered through existing wells with
existing economic and operating methods.
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES ATTRIBUTED TO THE 1996 LOBO
ACQUISITION
The following table sets forth the Company's net proved reserves, including the
changes therein, and proved developed reserves (all within the United States)
for the year ended December 31, 1995 and the seven months ended July 31, 1996:
F-48
<PAGE> 141
<TABLE>
<CAPTION>
CRUDE OIL NATURAL GAS
(MBbl) (MMcf)
--------- -----------
<S> <C> <C>
Proved developed and undeveloped reserves:
January 1, 1995 .................................... 217 40,601
Revision of previous estimates...................
Extensions, discoveries and other additions......
Production ...................................... (21) (2,925)
--------- -----------
December 31, 1995 .................................. 196 37,676
Revision of previous estimates...................
Extensions, discoveries and other additions......
Production ...................................... (8) (1,416)
--------- -----------
July 31, 1996 ...................................... 188 36,260
========= ===========
Proved developed reserves:
January 1, 1995 .................................... 89 14,981
December 31, 1995 .................................. 68 12,056
July 31, 1996 ...................................... 60 10,639
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
SFAS No. 69 prescribes guidelines for computing a standardized measure of future
net cash flows and changes therein relating to estimated proved reserves. The
Company has followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are determined
by applying year-end prices and costs to the estimated quantities of oil and gas
to be produced. The resulting future net cash flows are reduced to present value
amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such do not necessarily reflect
the Company's expectations of actual revenues to be derived from those reserves
nor their present worth. The limitations inherent in the reserve quantity
estimation process, as discussed previously, are equally applicable to the
standardized measure computations since these estimates are the basis for the
valuation process.
F-49
<PAGE> 142
The standardized measure of discounted future net cash flows relating to proved
oil and gas reserves attributed to the Lobo Properties is as follows (in
thousands):
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, JULY 31,
1995 1996
------------ ------------
<S> <C> <C>
Future cash inflows ....................................................... $ 74,510 $ 83,952
Less related future:
Production costs ....................................................... (18,181) (17,388)
Development costs ...................................................... (12,601) (12,601)
------------ ------------
Future net cash flows ..................................................... 43,728 53,963
10% annual discount for estimated timing of cash flows .................... (14,532) (18,750)
------------ ------------
Present value of future pretax net cash flows for proved reserves ......... $ 29,196 $ 35,213
============ ============
</TABLE>
A summary of the changes in the standardized measure of discounted future net
cash flows applicable to proved oil and gas reserves is as follows (in
thousands):
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, JULY 31,
1995 1996
------------ ------------
<S> <C> <C>
Beginning of the period ........................................................ $ 24,094 $ 29,196
------------ ------------
Revisions of previous estimates:
Changes in prices and costs ................................................. 8,379 7,400
Changes in quantities.......................................................
Changes in future development costs.........................................
Development costs incurred during the period...................................
Additions to proved reserves resulting from extensions and discoveries,
less related costs..........................................................
Accretion of discount .......................................................... 2,410 2,920
Sales of oil and gas, net of production costs .................................. (5,687) (4,303)
Production timing and other....................................................
------------ ------------
Net increase (decrease) ........................................................ 5,102 6,017
------------ ------------
End of the period .............................................................. $ 29,196 $ 35,213
============ ============
</TABLE>
F-50
<PAGE> 143
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act permits the
Company, in certain circumstances, to indemnify any present or former director,
officer, employee or agent of the Company against judgments, penalties, fines,
settlements and reasonable expenses incurred in connection with a proceeding in
which any such person was, is or is threatened to be, made a party by reason of
holding such office or position, but only to a limited extent for obligations
resulting from a proceeding in which the person is found liable on the basis
that a personal benefit was improperly received or in circumstances in which
the person is found liable in a derivative suit brought on behalf of the
Company.
Article XII of the Articles of Incorporation of the Company provides as
follows:
"A director of the Corporation shall not be liable to the Corporation or its
shareholders for monetary damages for an act or omission made in the director's
capacity as a director, except for the following:
(A) a breach of the director's duty of loyalty to the Corporation or its
shareholders;
(B) an act or omission not in good faith that involves intentional
misconduct or a knowing violation of the law;
(C) a transaction from which the director received an improper benefit,
whether or not the benefit resulted from an action taken within the scope of
the director's office;
(D) an act or omission for which the liability of a director is expressly
provided by statute; or
(E) an act related to an unlawful stock repurchase or payment of
dividend."
Article IV, Section 4 of the Company's Bylaws provides as follows:
"No director, officer, or member of a committee shall be liable for his acts as
such if he is excused from liability under any present or future provision of
the Texas Business Corporation Act."
Also in the Company's Bylaws, Article IV, Section 5 provides the following:
"(a) As used in this section:
(1) "Corporation" includes any domestic or foreign predecessor
entity of the Corporation in a merger, consolidation or other
transaction in which the liabilities of the predecessor are
transferred to the Corporation by operation of law and in any other
transaction in which the Corporation assumes the liabilities of the
predecessor but does not specifically exclude liabilities that are the
subject matter of this Section 5.
(2) "Director" means any person who is or was a director of the
Corporation and any person who, while a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary
of another foreign or domestic corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit plan or other
enterprise.
(3) "Expenses" include court costs and attorneys' fees.
(4) "Official Capacity" means
(A) when used with respect to a Director, the office of
director in the Corporation, and
(B) when used with respect to a person other than a
Director, the elective or appointive office in the
Corporation held by the officer or the employment or
agency relationship undertaken by the employee or
agent on behalf of the Corporation,
but neither A or B above includes service for any other foreign or
domestic corporation or any partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise.
II-1
<PAGE> 144
(5) "Proceeding" means any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative or investigative, any appeal in such an action,
suit or proceeding, and any inquiry or investigation that
could lead to such an action, suit or proceeding.
(b) The Corporation may indemnify any person who was, is or is threatened
to be made a named defendant or respondent in any Proceeding because the person
is or was a Director only if it is determined in accordance with paragraph (f)
of this Section 5 that the person:
(1) conducted himself in good faith;
(2) reasonably believed:
(A) in the case of conduct in his Official Capacity as a
Director of the Corporation, that his conduct was in
the Corporation's best interests, and
(B) in all other cases, that his conduct was at least not
opposed to the Corporation's best interests; and
(3) in the case of any criminal Proceeding, had no reasonable
cause to believe his conduct was unlawful.
(c) Except to the extent permitted by paragraph (e) of this Section 5, a
Director may not be indemnified under subsection 5(b) in respect of a
Proceeding:
(1) in which the person is found liable on the basis that personal
benefit was improperly received by him; or
(2) in which the person is found liable to the Corporation.
(d) The termination of any Proceeding by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the person did not meet the requirements set forth
in subsection 5(b). A person shall be deemed to have been found liable in
respect of any claim, issue or matter only after the person shall have been so
adjudged by a court of competent jurisdiction after exhaustion of all appeals
therefrom.
(e) A person may be indemnified under subsection 5(b) against judgments,
penalties (including excise and similar taxes), fines, settlements and
reasonable Expenses actually incurred by the person in connection with the
Proceeding; but if the person is found liable to the Corporation or is found
liable on the basis that personal benefit was improperly received by the
person, the indemnification (i) is limited to reasonable Expenses actually
incurred by the person in connection with the Proceeding, and (ii) shall not be
made in respect of any proceeding in which the person shall have been found
liable for willful or intentional misconduct in the performance of his duty to
the Corporation.
(f) No indemnification under subsection 5(b) shall be made by the
Corporation unless authorized in the specific case after a determination has
been made that the Director has met the standard of conduct set forth in
subsection 5(b). Such determination shall be made:
(1) by the Board of Directors by a majority vote of a quorum
consisting of directors who at the time of the vote are not
named defendants or respondents in the Proceeding;
(2) if such quorum cannot be obtained, then by a majority vote of
a committee of the Board of Directors, designated to act in
the matter by a majority vote of the full Board of Directors
(in which vote directors who are named defendants or
respondents may participate), which committee shall consist
solely of two or more directors who at the time of the vote
are not named defendants or respondents in the Proceeding; or
(3) by special legal counsel, selected by the Board of Directors
or a committee thereof by vote as set forth in clauses (1) or
(2) of this subsection 5(f), or, if the requisite quorum of
the full Board of Directors cannot be obtained therefor and
such a committee cannot be established, by a majority vote of
the full Board of Directors (in which vote directors who are
named defendants or respondents may participate); or
II-2
<PAGE> 145
(4) by the shareholders in a vote that excludes the shares held by
directors who are named defendants or respondents in the
Proceeding.
(g) Authorization of indemnification and determination as to
reasonableness of Expenses shall be made in the same manner as the
determination that indemnification is permissible, except that if the
determination that indemnification is permissible is made by special legal
counsel, authorization of indemnification and determination as to
reasonableness of Expenses shall be made in the manner specified in clause (3)
in subsection 5(f) for the selection of such counsel. A provision contained in
the Articles of Incorporation, the Bylaws, a resolution of shareholders or
directors, or an agreement that makes mandatory the indemnification permitted
under subsection 5(b) shall be deemed to constitute authorization of
indemnification in the manner required by this section even though such
provision may not have been adopted or authorized in the same manner as the
determination that indemnification is permissible.
(h) A Director who has been wholly successful, on the merits or otherwise,
in the defense of any Proceeding in which he is a party because he is or was a
Director shall be indemnified by the Corporation against reasonable Expenses
incurred by him in connection with the Proceeding.
(i) If, upon application of a Director, a court of competent jurisdiction
determines, after giving any notice the court considers necessary, that the
Director is fairly and reasonably entitled to indemnification in view of all
the relevant circumstances, whether or not he has met the standard of conduct
set forth in subjection 5(b) or has been found liable in the circumstances
described in subsection 5(c), the court may order such indemnification as the
court determines is proper and equitable. The court by law is required to
limit indemnification to reasonable Expenses if the Proceeding is brought by or
on behalf of the Corporation or if the Director is found liable to the
Corporation or is found liable on the basis of circumstances described in
subsection 5(c)(1).
(j) Reasonable expenses incurred by a Director, who was, is, or is
threatened to be made a named defendant or respondent to a Proceeding may be
paid or reimbursed by the Corporation in advance of the final disposition of
such Proceeding and without the determination specified in subsection 5(f) or
the authorization or determination specified in subsection 5(g) after receipt
by the Corporation of a written affirmation by the Director of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Corporation as authorized in this Section 5, and a written undertaking by
or on behalf of the Director to repay the amount paid or reimbursed if it shall
ultimately be determined that he has not met that standard or if it is
ultimately determined that indemnification of the director against expenses
incurred by him in connection with that proceeding is prohibited by subsection
5(e). A provision contained in the Articles of Incorporation, these Bylaws, a
resolution of shareholders or directors, or an agreement that makes mandatory
the payment or reimbursement permitted hereunder shall be deemed to constitute
authorization of that payment or reimbursement. The written undertaking
required above must be an unlimited general obligation of the Director but need
not be secured. It may be accepted without reference to financial ability to
make repayment.
(k) The indemnification provided by this Section 5 shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any statute, including, but not limited to, Article 2.02-1 of the Texas
Business Corporation Act, Bylaw, agreement, insurance policy, vote of
shareholders or disinterested directors or otherwise, both as to action in
their Official Capacity and as to action in another capacity while holding such
office, and shall 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; provided, however, no provision
for the Corporation to indemnify or to advance Expenses to a Director who was,
is or is threatened to be made a named defendant or respondent to a Proceeding,
whether contained in the Articles of Incorporation, these Bylaws, a resolution
of shareholders or directors, an agreement or otherwise (except as contemplated
by subsection (p)), shall be valid unless consistent with this Section 5 or, to
the extent that indemnity hereunder is limited by the Articles of
Incorporation, consistent therewith.
(l) Nothing contained in this Section 5 shall limit the Corporation's
power to pay or reimburse Expenses incurred by a Director in connection with
his appearance as a witness in a Proceeding at a time when he is not named
defendant or respondent in the Proceeding.
(m) Unless limited by the Articles of Incorporation of the Corporation,
(1) an officer of the Corporation shall be indemnified as and to
the same extent provided in subsection (h) and (i) for a
Director and shall be entitled to the same extent as a
Director to seek indemnification pursuant to the provisions of
such subsections; and
(2) the Corporation may indemnify and advance Expenses to an
officer, employee or agent of the Corporation to the same
extent that it may indemnify and advance Expenses to Directors
pursuant to this Section 5.
II-3
<PAGE> 146
(n) The Corporation may indemnify and advance Expenses to persons who are
not or were not officers, employees or agents of the Corporation but who are or
were serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of
another foreign or domestic corporation, partnership or joint venture, sole
proprietorship, trust, other enterprise, or employee benefit plan to the same
extent that it may indemnify and advance expenses to Directors under this
Section 5.
(o) The Corporation may indemnify and advance Expenses to an officer,
employee, agent or person described pursuant to Section 5(n) and who is not a
Director to such further extent, consistent with law, as may be provided by the
Articles of Incorporation of the Corporation, these Bylaws, general or specific
action of the Board of Directors, or contract or as permitted or required by
common law.
(p) The Corporation may purchase and maintain insurance or another
arrangement on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or who is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, other
enterprise or employee benefit plan, against any liability asserted against him
and incurred by him in any such a capacity or arising out of his status as such
a person, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of the Texas Business Corporation
Act or this Section 5. If the insurance or other arrangement is with a person
or entity that is not regularly engaged in the business of providing insurance
coverage, the insurance or arrangement may provide for a payment of a liability
with respect to which the Corporation would not have the power to indemnify the
person only if including coverage for the additional liability has been
approved by the shareholders of the Corporation. Without limiting the power of
the Corporation to procure or maintain any kind of insurance or other
arrangement, a Corporation may, for the benefit of persons indemnified by the
Corporation, (1) create a trust fund, (2) establish any form of self-insurance,
(3) secure its indemnity obligation by grant of a security interest or other
lien on the assets of the Corporation, or (4) establish a letter of credit,
guaranty, or surety arrangement. The insurance or other arrangement may be
procured, maintained, or established within the Corporation or with any insurer
or other person deemed appropriate by the Board of Directors regardless of
whether all or part of the stock or other securities of the insurer or other
person are owned in whole or in part by the Corporation. In the absence of
fraud, the judgment of the Board of Directors as to the terms and conditions of
the insurance or other arrangement and the identity of the insurer or other
person participating in an arrangement shall be conclusive and the insurance or
arrangement shall not be voidable and shall not subject the directors approving
the insurance or arrangement to liability, on any ground, regardless of whether
directors participating in the approval are beneficiaries of the insurance or
arrangement.
(q) Any indemnification of, or advance of Expenses to a Director in
accordance with this Section 5 shall be reported in writing to the shareholders
with or before the notice or waiver of notice of the next shareholders' meeting
or with or before the next submission to shareholders of a consent to action
without a meeting pursuant to Section A, Article 9.10 of the Texas Business
Corporation Act, and in any case, within the 12-month period immediately
following the date of the indemnification or advance.
(r) For purposes of this Section 5, the Corporation shall be deemed to
have requested a Director to serve as the trustee of an employee benefit plan
whenever the performance by him of his duties to the Corporation also imposes
duties on, or otherwise involves services by, him to the plan or participants
or beneficiaries of the plan. Excise taxes assessed on a Director with respect
to an employee benefit plan pursuant to applicable law shall be deemed "fines".
Action taken or omitted by him with respect to an employee benefit plan in the
performance of his duties for a purpose reasonably believed by him to be in the
interest of the participants and beneficiaries of the plan shall be deemed to
be for a purpose which is not opposed to the best interests of the
Corporation."
MHI has entered into Indemnity Agreements with each of the directors
of MHI (who also serve as the directors of the Company), pursuant to which MHI
has agreed to indemnify each director to the fullest extent permitted under the
Texas Business Corporation Act. In addition, pursuant to the Agreement, MHI
shall advance reasonable expenses incurred by each director under certain
circumstances in any proceeding in which each director was, is or is threatened
to be named a defendant.
II-4
<PAGE> 147
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1* Articles of Incorporation of the Company.
3.2* By-Laws of the Company.
4.1* Purchase Agreement, dated as of April 30, 1998, by and among the Company, Michael Holdings,
Inc., Bear, Stearns & Co. Inc., Jefferies & Company, Inc. and Raymond James & Associates,
Inc.
4.2* Indenture, dated as of April 2, 1998, between the Company and State Street Bank and Trust
Company, as Trustee.
4.3* Registration Rights Agreement dated March 30, 1998, by and among the Company, Bear, Stearns
& Co. Inc, Jefferies & Company, Inc. and Raymond James & Associates, Inc.
5.1* Opinion of Haynes and Boone, L.L.P.
10.1*** Michael Holdings, Inc. 1998 Stock Option Plan.
10.2** Employment Agreement dated April 1, 1998 between the Company and Glenn D. Hart.
10.3** Employment Agreement dated April 1, 1998 between the Company and Michael G. Farmar.
10.4** Employment Agreement dated April 1, 1998 between the Company and Jerry F. Holditch.
10.5* Purchase and Sale Agreement dated February 20, 1998 by and between the Company and Conoco
Inc.
10.6* Purchase and Sale Agreement dated February 5, 1998 by and between the Company and Enron Oil
and Gas Company.
10.7* Stock Purchase Warrant granted by Michael Holdings, Inc. to Cambrian Capital Partners,
L.P., dated April 2, 1998.
10.8* Form of Indemnification Agreement by and between the Company and its directors.
10.9* Assets Agreement dated April 20, 1998 by and between the Company and Mobil Exploration &
Producing U.S. Inc. acting as Agent for Mobil Producing Texas & New Mexico Inc.
10.10* Oil and Gas Lease dated April 20, 1998 by and between the Company and Mobil Producing Texas
& New Mexico Inc.
10.11* Warrant to Purchase Shares of Common Stock granted by Michael Holdings, Inc. to Dale L.
Schwartzhoff.
10.12* First Amended and Restated Shareholders Agreement of the Company.
12.1* Statement regarding computation of ratio of earnings to fixed charges.
23.1* Consent of Haynes and Boone, L.L.P. (included in Exhibit 5.1).
23.2* Consent of Coopers & Lybrand L.L.P.
23.3* Consent of Huddleston & Co., Inc.
23.4* Consent of Mohajir & Associates, Inc.
25.1* Statement of Eligibility and Qualification on Form T-1 of Trustee.
</TABLE>
II-5
<PAGE> 148
<TABLE>
<S> <C>
27.1* Financial Data Schedule.
99.1*** Form of Letter of Transmittal.
99.2*** Form of Notice of Guaranteed Delivery.
</TABLE>
- ------------------
* Filed herewith.
** Management compensation or incentive plan filed herewith.
*** To be filed by amendment.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3)
of the Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission pursuant
to rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in this
Registration Statement when it becomes effective;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Trust Indenture Act.
The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
II-6
<PAGE> 149
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-7
<PAGE> 150
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Company has duly caused this Registration Statement on Form S-4 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas, on the 8th day of May, 1998.
MICHAEL PETROLEUM CORPORATION
By: /s/ MICHAEL G. FARMAR
-------------------------------------
Michael G. Farmar
President and Chief Operating Officer
POWER OF ATTORNEY
Each of the undersigned officers and directors of Michael Petroleum
Corporation (the "Company") hereby constitutes and appoints Glenn D. Hart and
Michael G. Farmar, and each of them (with full power to each of them to act
alone), his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and on his behalf and in his name, place and stead, in
any and all capacities, to sign, execute and file this registration statement
under the Securities Act of 1933, as amended, and any or all amendments
(including, without limitation, 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, as amended, with all exhibits and
any and all documents required to be filed with respect thereto, with the
Securities and Exchange Commission or any regulatory authority, granting until
such attorneys-in-fact and agents, and each of them acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same,
as fully to all intents and purposes as he himself might or could do if
personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
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 the 8th day of May, 1998.
<TABLE>
<CAPTION>
NAME: CAPACITIES:
<S> <C>
/s/ GLENN D. HART Chairman of the Board and Chief Executive Officer
------------------------------------ (Principal Executive Officer)
Glenn D. Hart
/s/ MICHAEL G. FARMAR President, Chief Operating Officer and Director
------------------------------------
Michael G. Farmar
/s/ JERRY F. HOLDITCH Vice President-Exploration and Director
------------------------------------
Jerry F. Holditch
/s/ ROBERT L.SWANSON Vice President-Finance
------------------------------------ (Principal Accounting and Financial Officer)
Robert L. Swanson
/s/ JIM R. SMITH Director
------------------------------------
Jim R. Smith
</TABLE>
II-8
<PAGE> 151
<TABLE>
<S> <C>
/s/ JACK I. TOMPKINS Director
------------------------------------
Jack I. Tompkins
/s/ BRYANT H. PATTON Director
------------------------------------
Bryant H. Patton
</TABLE>
II-9
<PAGE> 152
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1* Articles of Incorporation of the Company.
3.2* By-Laws of the Company.
4.1* Purchase Agreement, dated as of April 30, 1998, by and among the Company, Michael Holdings,
Inc., Bear, Stearns & Co. Inc., Jefferies & Company, Inc. and Raymond James & Associates,
Inc.
4.2* Indenture, dated as of April 2, 1998, between the Company and State Street Bank and Trust
Company, as Trustee.
4.3* Registration Rights Agreement dated March 30, 1998, by and among the Company, Bear, Stearns
& Co. Inc, Jefferies & Company, Inc. and Raymond James & Associates, Inc.
5.1* Opinion of Haynes and Boone, L.L.P.
10.1*** Michael Holdings, Inc. 1998 Stock Option Plan.
10.2** Employment Agreement dated April 1, 1998 between the Company and Glenn D. Hart.
10.3** Employment Agreement dated April 1, 1998 between the Company and Michael G. Farmar.
10.4** Employment Agreement dated April 1, 1998 between the Company and Jerry F. Holditch.
10.5* Purchase and Sale Agreement dated February 20, 1998 by and between the Company and Conoco
Inc.
10.6* Purchase and Sale Agreement dated February 5, 1998 by and between the Company and Enron Oil
and Gas Company.
10.7* Stock Purchase Warrant granted by Michael Holdings, Inc. to Cambrian Capital Partners,
L.P., dated April 2, 1998.
10.8* Form of Indemnification Agreement by and between the Company and its directors.
10.9* Assets Agreement dated April 20, 1998 by and between the Company and Mobil Exploration &
Producing U.S. Inc. acting as Agent for Mobil Producing Texas & New Mexico Inc.
10.10* Oil and Gas Lease dated April 20, 1998 by and between the Company and Mobil Producing Texas
& New Mexico Inc.
10.11* Warrant to Purchase Shares of Common Stock granted by Michael Holdings, Inc. to Dale L.
Schwartzhoff.
10.12* First Amended and Restated Shareholders Agreement of the Company.
12.1* Statement regarding computation of ratio of earnings to fixed charges.
23.1* Consent of Haynes and Boone, L.L.P. (included in Exhibit 5.1).
23.2* Consent of Coopers & Lybrand L.L.P.
23.3* Consent of Huddleston & Co., Inc.
23.4* Consent of Mohajir & Associates, Inc.
25.1* Statement of Eligibility and Qualification on Form T-1 of Trustee.
</TABLE>
<PAGE> 153
<TABLE>
<S> <C>
27.1* Financial Data Schedule.
99.1*** Form of Letter of Transmittal.
99.2*** Form of Notice of Guaranteed Delivery.
</TABLE>
- ------------------
* Filed herewith.
** Management compensation or incentive plan filed herewith.
*** To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
MICHAEL GAS PRODUCTION CORPORATION
The undersigned natural person, being of the age of eighteen (18)
years or more, acting as incorporator of a corporation (the "Corporation")
under the Texas Business Corporation Act, does hereby adopt the following
Articles of Incorporation for the Corporation:
ARTICLE I
NAME
The name of the Corporation is Michael Gas Production Corporation.
ARTICLE II
DURATION
The period of the duration of the Corporation is perpetual.
ARTICLE III
PURPOSE AND POWERS
The purpose or purposes for which the Corporation is organized are:
To transact any and all lawful business for which corporations may be
incorporated under the Texas Business Corporation Act.
ARTICLE IV
CAPITAL STOCK
Section 1. Authorized shares. The total number of shares of stock
which the Corporation shall have authority to issue is one hundred fifty
million (150,000,000), of which stock fifty million (50,000,000) shares of the
par value of $0.10 each, amounting in the aggregate to $5,000,000 shall be
designated Preferred Stock (hereinafter referred to as "Preferred Stock"),and
of which stock one hundred million (100,000,000) shares of the par value of
$0.10 each, amounting in the aggregate to $10,000,000 shall be designated
Common Stock (hereinafter referred to as "Common Stock").
Section 2. Issuance of Preferred Stock in Series. Shares of
Preferred Stock may be issued from time to time in one or more series, each
such series to have distinctive serial designations, as shall hereafter be
created and determined in the resolution or resolutions providing for the issue
of such Preferred Stock from time to time adopted by the Board of Directors of
the Corporation pursuant to authority so to do, which is hereby vested in the
Board of Directors of the Corporation.
Section 3. Characteristics of Preferred Stock. Each series of
Preferred Stock:
(a) may have such number of shares;
<PAGE> 2
(b) may have such voting powers, full or limited, or may be
without voting powers;
(c) may be subject to redemption at such time or times and at such
prices;
(d) may be entitled to receive dividends (which may be cumulative
or noncumulative) at such rate or rates, on such conditions,
from such date or dates, and at such times, and payable in
preference to, or in such relation to, the dividends payable
on any other class or classes or series of stock;
(e) may have such rights upon the dissolution or liquidation of,
or upon any distribution of the assets of, the Corporation;
(f) may be made convertible into, or exchangeable for, shares of
any other class or classes or of any other series of the same
or any other class or classes of stock of the Corporation at
such price or prices or at such rates of exchange, and with
such adjustments;
(g) may be entitled to the benefit of a sinking fund or purchase
fund to be applied to the purchase or redemption of shares of
such series in such amount or amounts;
(h) may be entitled to the benefit of conditions and restrictions
upon the creation of indebtedness of the Corporation or any
subsidiary, upon the issue of any additional stock (including
additional shares of such series or of any other series) and
upon the payment of dividends or the making of other
distributions on, and the purchase, redemption or other
acquisition by the Corporation or any subsidiary of any
outstanding stock of the Corporation; and
(i) may have such other relative, participating, optional or other
special rights, and qualifications, limitations or
restrictions thereof;
all as shall be stated in such resolution or resolutions of the Board of
Directors of the Corporation providing for the issue of such Preferred Stock in
one or more series created thereby.
Section 4. Increase or Decrease in Shares of a Series. Except where
otherwise adopted by the Board of Directors of the Corporation providing for
the issue of any series of Preferred Stock created thereby, the number of
shares comprising such series may be increased or decreased (but not below the
number of shares then outstanding) from time to time by like action of the
Board of Directors of the Corporation.
Section 5. Reissuance of Shares of Preferred Stock. Shares of any
series of Preferred Stock which have been redeemed (whether through the
operation of a sinking fund or otherwise), purchased or otherwise acquired by
the Corporation, or which, if convertible or exchangeable, have been converted
into or exchanged for shares of stock of any other class or classes, shall have
the status of authorized and unissued shares of Preferred Stock and may be
reissued as part of the series of which they were originally a part or may be
reclassified or reissued as part of a new series of Preferred Stock to be
created by resolution
<PAGE> 3
or resolutions of the Board of Directors or as part of any other series of
Preferred Stock, all subject to the conditions or restrictions adopted by the
Board of Directors of the Corporation providing for the issue of any series of
Preferred Stock and to any filing required by law.
Section 6. Rights and Voting. Each share of Common Stock shall
entitle the holder thereof to one vote, in person or by proxy, at any and all
meetings of the shareholders of the Corporation on all propositions before such
meetings.
Section 7. Dividends. Subject to all of the rights of the Preferred
Stock or any series thereof, the holders of Common Stock shall be entitled to
receive, when, as and if declared by the Board of Directors of the Corporation,
out of funds legally available therefor, dividends payable in cash, stock or
otherwise.
Section 8. Liquidation, Dissolution and Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, and after the holders of the Preferred Stock of each series shall
have been paid in full the amounts to which they respectively shall be
entitled, or a sum sufficient for such payments in full share have been set
aside, the remaining net assets of the Corporation shall be distributed pro
rata to the holders of Common Stock in accordance with their respective rights
and interests, to the exclusion of the holders of the Preferred Stock.
ARTICLE V
INITIAL CONSIDERATION FOR ISSUANCE OF SHARES
The Corporation will not commence business until it has received for
the issuance of its shares consideration of the value of One Thousand Dollars
($1,000.00), consisting of money, labor done, or property actually received.
ARTICLE VI
INITIAL REGISTERED OFFICE AND AGENT
The post office address of its initial registered office is 13101
Northwest Freeway, Suite 320, Houston, Texas 77040, and the name of its initial
registered agent at such address is Glenn D. Hart.
ARTICLE VII
BOARD OF DIRECTORS
The initial Board of Directors consists of four (4) directors, and the
names and addresses of the persons to serve as the initial directors of the
corporation until the first annual meeting of shareholders or until their
successors are elected and qualified are:
<PAGE> 4
<TABLE>
<CAPTION>
Name Address
- ---- -------
<S> <C>
Glenn D. Hart 13101 Northwest Freeway, Suite 320
Houston, Texas 77040
Michael G. Farmar 13101 Northwest Freeway, Suite 320
Houston, Texas 77040
Stanley T. Polak 13101 Northwest Freeway, Suite 320
Houston, Texas 77040
Jerry Holditch 13101 Northwest Freeway, Suite 320
Houston, Texas 77040
</TABLE>
The number of directors constituting the Board of Directors shall be
fixed by, or in the manner provided in, the Bylaws or amendments thereto.
ARTICLE VIII
VOTING; CUMULATIVE VOTING DENIED
No shareholder shall have the right to cumulate his votes for the
election of directors, but each share shall be entitled to one vote in the
election of each director and for all other purposes. A majority is sufficient
for any action which requires the vote or concurrence of shareholders. Any
action required to be taken or which may be taken at a meeting of the
shareholders may be taken without a meeting, without prior notice and without a
vote if a written consent setting forth the action so taken has been signed by
those shareholders holding a majority of the votes entitled to vote on such
action.
ARTICLE IX
DENIAL OF PREEMPTIVE RIGHTS
No shareholder of the Corporation or any other person shall have any
preemptive rights whatsoever to acquire additional, unissued, or treasury
shares of the Corporation, or securities of the Corporation convertible into or
carrying a right to subscribe to or acquire shares or other securities of the
Corporation.
ARTICLE X
INCORPORATOR
The name and address of the incorporator is as follows:
<TABLE>
<CAPTION>
Name Address
- ---- -------
<S> <C>
J. Randolph Ewing 9 Greenway Plaza, Suite 3100
Houston, Texas 77046
</TABLE>
<PAGE> 5
ARTICLE XI
BYLAWS
The initial Bylaws of the Corporation shall be adopted by its Board of
Directors. The power to alter, amend, or repeal the Bylaws or adopt new Bylaws
is vested in the Board of Directors, subject to repeal or change by action of
the shareholders.
ARTICLE XII
LIMITATION OF LIABILITY
A director of the Corporation shall not be liable to the Corporation
or its shareholders for monetary damages for an act or omission made in the
director's capacity as a director, except for the following:
(A) a breach of the director's duty of loyalty to the Corporation
or its shareholders;
(B) an act or omission not in good faith or that involves
intentional misconduct or a knowing violation of the law;
(C) a transaction from which the director received an improper
benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office;
(D) an act or omission for which the liability of the director is
expressly provided by statute; or
(E) an act related to an unlawful stock repurchase or payment of
dividend.
Any repeal or amendment of this Article by the shareholders of the
Corporation shall be prospective only, and shall not adversely affect any
limitation on the liability of a director of the Corporation existing at the
time of such repeal or amendment. In addition to the circumstances in which a
director shall not be liable pursuant to the provisions of this Article XII, a
director shall not be liable to the fullest extent permitted by any provision
of the statutes of Texas hereafter enacted that further limits the liability of
a director.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
24th day of June, 1996.
INCORPORATOR:
/s/ J. RANDOLPH EWING
--------------------------------------
J. RANDOLPH EWING
<PAGE> 6
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF MICHAEL GAS PRODUCTION CORPORATION
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned Corporation hereby adopts the following
Articles of Amendment to its Articles of Incorporation.
ARTICLE I
The name of the Corporation is Michael Gas Production Corporation.
ARTICLE II
The following Amendment to the Articles of Incorporation was adopted
by the shareholders of the Corporation on March 13, 1998:
The Amendment alters or changes Article I of the original Articles of
Incorporation, and Article I is hereby amended through restatement to read as
follows:
"ARTICLE I
NAME. The name of the Corporation is Michael Petroleum Corporation."
ARTICLE III
The number of the shares of the Corporation outstanding at the time of
such adoption was 10,000; and the number of the shares entitled to vote thereon
was 10,000.
ARTICLE IV
The holders of all of the shares outstanding and entitled to vote on
said amendment have signed a consent in writing pursuant to Article 9.10
adopting said amendment and any written notice required by Article 9.10 has
been given.
DATED this 25th day of March, 1998.
MICHAEL GAS PRODUCTION CORPORATION
By: /s/ GLENN D. HART
-----------------------------------
Name: Glenn D. Hart
-----------------------------------
Title: Chief Executive Officer
-----------------------------------
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
MICHAEL PETROLEUM CORPORATION
A TEXAS CORPORATION
Date of Adoption: July 1, 1996
<PAGE> 2
MICHAEL PETROLEUM CORPORATION
BYLAWS
ARTICLE I
OFFICES AND RECORDS
Section 1. Registered Office. Until the Board of Directors otherwise
determines, the registered office of the Corporation required by the Texas
Business Corporation Act to be maintained in the State of Texas shall be the
registered office named in the original Articles of Incorporation of the
Corporation, but such registered office may be changed from time to time by the
Board of Directors in the manner provided by law. Should the Corporation
maintain a place of business in Texas, such registered office need not be
identical to the principal place of business of the Corporation.
Section 2. Other Offices. The Corporation may also have offices at
such other places or locations, within or without the State of Texas, as the
Board of Directors may determine or the business of the Corporation may
require.
Section 3. Records. The books and records of the Corporation, except
as otherwise provided by statute or these Bylaws, shall be kept in the offices
of the Corporation or in such other place within or without of the State of
Texas as shall be determined by the Board of Directors.
ARTICLE II
SHAREHOLDERS
Section 1. Meetings of Shareholders. Any meeting of the
shareholders, annual or special, shall be held at the principal place of
business of the Corporation, or at such other place within or without the State
of Texas as may be determined by the Board of Directors. However, any meeting
may be held at any place within or without the State of Texas designated in a
waiver or waivers of notice signed by, or in the aggregate signed by, all of
the shareholders.
Section 2. Annual Meeting. An annual meeting of the shareholders
shall be held at such place, within or without the State of Texas, on such
date, and at such time as the Board of Directors shall fix each year as set
forth in the notice of meeting, which date shall be within thirteen (13) months
subsequent to the later of the date of incorporation or the last annual meeting
of shareholders, for the purpose of electing directors and for the transaction
of any and all such other business as may be properly brought before or
submitted to the meeting. Any and all business of any nature or character
whatsoever may be transacted, and action may be taken thereon, at any annual
meeting, except as otherwise provided by law or by these Bylaws.
Section 3. Special Meetings. Special meetings of the shareholders
for any purpose or purposes, unless otherwise prescribed by statute or by law
or by the Articles of Incorporation of the Corporation, may be called by the
President, the Chairman of the Board (if any) or the Board of Directors, and
shall be called by the Chairman of the Board (if any), the President or the
Secretary upon written request therefor, stating the purpose or purposes of the
meeting, delivered to such officer, signed by the then holder(s) of at least
ten percent (10%) of all of the then issued and outstanding shares of the
capital stock of the Corporation entitled to be voted at such meeting.
- 2 -
<PAGE> 3
Section 4. Notices of Shareholders' Meetings. Written or printed
notice stating the place, day and hour of each meeting of the shareholders,
and, in case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (10) days nor more than
sixty (60) days before the date of the meeting, either personally or by mail,
by or at the direction of the President, the Secretary, or the officer or
person calling the meeting, to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail address to the shareholder at his address
as it appears on the share transfer records of the Corporation, with postage
thereon prepaid. Any notice required to be given to any shareholder pursuant
to this Section 4 need not be given to the shareholder if (1) notice of two
consecutive annual meetings and all notices of meetings held during the period
between those annual meetings, if any, or (2) all (but in no event less than
two) payments (if sent by first class mail) by the Corporation of distributions
with respect to its stock or interest on securities during a 12-month period
have been mailed to that person, addressed to his address as shown on the share
transfer records of the Corporation, and have been returned as undeliverable.
If a shareholder described in the immediately preceding sentence delivers to
the Corporation a written notice setting forth his then current address, the
requirement that notice be given to that person shall be reinstated.
Section 5. Quorum of Shareholders. Unless otherwise required by law
or provided in the Articles of Incorporation, the holders of one-third (1/3) of
the shares entitled to vote, represented in person or by proxy shall constitute
a quorum at a meeting of shareholders. In no event shall a quorum consist of
the holders of less than one-third (1/3) of the shares entitled to vote.
Except as provided in Section 12 of this Article II, the vote of the holders of
a majority of the shares entitled to vote and represented at a meeting at which
a quorum is present shall be the act of the shareholders' meeting, unless the
vote of a greater number is required by law, the Articles of Incorporation or
these Bylaws. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the subsequent
withdrawal of enough shareholders to leave less than a quorum or the refusal of
any shareholder present in person or by proxy to vote or participate.
Section 6. Adjournments of Annual and Special Meetings of
Shareholders. If the holders of the amount of shares necessary to constitute a
quorum shall fail to attend any meeting of the shareholder sin person or by
proxy, then the holders of a majority of the shares entitled to vote which are
represented in person or by proxy at the meeting may adjourn any such meeting
from time to time without notice, other than by announcement at the meeting of
the time and place at which the meeting will reconvene, until holders of the
amount of shares requisite to constitute a quorum shall be present at the
particular meeting or at any adjournment thereof, in person or by proxy. The
holders of a majority of the shares entitled to vote and which are represented
in person or by proxy at a meeting may also adjourn any annual or special
meeting of the shareholders from time to time and without notice, other than by
announcement at the meeting of the time and place at which the meeting will
reconvene, until the transaction of any and all business submitted or proposed
to be submitted to such meeting or any adjournment thereof shall have been
completed. If the adjournment is for more than 60 days, or if after
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record entitled to
vote at such meeting. At any such adjourned meeting at which a quorum is
present, in person or by proxy, any business may be transacted which might have
been transacted at the meeting as originally notified or called.
Section 7. Procedure at Meetings of Shareholders. The President of
the Corporation, or in the event of his absence, failure or refusal to act, a
Vice President of the Corporation shall call each meeting of the shareholders
to order and shall act as Chairman of such meeting. If for any reason
whatsoever neither the President nor a Vice President of the Corporation acts
or will act as the Chairman of the meeting of
- 3 -
<PAGE> 4
shareholders, then the shareholders present, in person or by proxy, and
entitled to vote thereat may by majority vote appoint a Chairman who shall act
as Chairman of the meeting.
The Secretary of the Corporation, or in the event of his absence,
failure or refusal to act, an Assistant Secretary, shall act as Secretary of
each meeting of the shareholders. If for any reason whatsoever neither the
Secretary nor an Assistant Secretary acts or will act as Secretary of the
meeting of shareholders, then the Chairman of the meeting or, if he fails to do
so, the shareholders present, either in person or by proxy, and entitled to
vote thereat may by majority vote appoint any person to act as Secretary of the
meeting and such person shall act as Secretary of the meeting.
The Chairman of any meeting shall determine the order of business and
the procedure at the meeting, including such regulation of the manner of voting
and the conduct of discussion as seem to him in order. Unless the Chairman of
the meeting shall otherwise determine, the order of business shall be as
follows:
(a) Calling of meeting to order.
(b) Election of a Chairman and the appointment of a Secretary, if
necessary.
(c) Presentation of proof of the due calling of the meeting.
(d) Presentation and examination of proxies and determination of a
quorum.
(e) Reading and settlement of the minutes of the previous meeting.
(f) Reports of officers and committees.
(g) The election of directors if an annual meeting, or a meeting
called for that purpose.
(h) Unfinished business.
(i) New business.
(j) Adjournment.
Section 8. Attendance and Proxies. Each shareholder entitled to vote
at a shareholders' meeting may attend such meeting and vote in person or may
attend such meeting by proxy, and vote by such proxy. Proxies of a shareholder
may only be appointed by an instrument in writing executed by the shareholder
or by such shareholder's duly authorized attorney-in-fact and filed with the
Secretary of the Corporation before or at the time of the particular meeting,
and the attendance or the vote at any such meeting of a proxy of any such
shareholder so appointed shall for all purposes be considered as the attendance
or vote in person of such shareholder. Telegram, telex, cablegram or similar
transmission by the shareholder, or a photographic, photostatic, facsimile, or
similar reproduction of a writing executed by the shareholder, shall be treated
as an execution in writing of the proxy for the purposes of the preceding
sentence. All proxies shall be received and taken charge of and all ballots
shall be received and canvassed by the Secretary of the meeting who shall
decide all questions touching upon the qualification of voters, the validity of
the proxies, and the acceptance or rejection of votes, unless an inspector or
inspectors shall have been appointed by the Chairman of the
- 4 -
<PAGE> 5
meeting in which event such inspector or inspectors shall decide all such
questions. No proxy shall be valid after eleven (11) months from the date of
its execution unless otherwise expressly provided in the proxy. Each proxy
shall be revocable unless expressly provided therein to be irrevocable and
unless otherwise made irrevocable by law.
Should a proxy designate two or more persons to act as proxies, unless
such instrument shall provide to the contrary, a majority of such persons
present at any meeting at which their powers thereunder are to be exercised
shall have and may exercise all of the powers of voting or given consents
thereby conferred, or if only one be present, then such powers may be exercised
by that one or, if any even number attend and a majority do not agree on any
particular issue, each proxy so attending shall be entitled to exercise such
powers with respect to the percentage of the total shares equal to the
percentage reached by dividing the number one by the total number of proxies
representing such shares.
Section 9. Voting of Shares. At each meeting of the shareholders,
each outstanding share standing in the shareholder's name on the share transfer
records of the Corporation shall be entitled to one (1) vote on each matter
submitted to vote at such meeting, subject, however, to the provisions of
Section 6 of ARTICLE VIII of these Bylaws, and except to the extent that the
Articles of Incorporation provide for more or less than one vote per share or,
if and to the extent permitted by law, limit or deny voting rights to the
holders of the shares of any class or series, or as otherwise provided by law.
Treasury shares, shares of the Corporation's stock owned by another corporation
the majority of the voting stock of which is owned or controlled by the
Corporation, and shares of the Corporation's stock held by a corporation in a
fiduciary capacity shall not be voted, directly or indirectly, at any meeting,
and shall not be counted in determining the total number of outstanding shares
at any given time.
At each election for directors by the shareholders, every shareholder
entitled to vote at such election shall have the right to vote, in person or by
proxy, the number of shares owned by him for as many person as there are
directors to be elected and for whose election he has a right to vote, or,
unless expressly prohibited by the Articles of Incorporation of the
Corporation, to cumulate his votes by giving one candidate as many votes as the
number of such directors multiplied by his shares shall equal or by
distributing such votes on the same principle among any number of such
candidates. If cumulative voting of shares of capital stock of the Corporation
has not been denied in the Articles of Incorporation, any shareholder thereby
having cumulative voting rights and who intends to cumulate his votes shall
give written notice of such intention to the Secretary of the Corporation on or
before the day preceding the election at which such shareholder intends to
cumulate his votes, and all shareholders may cumulate his votes as provided for
herein.
Section 10. Voting of Shares Owned by Another Corporation. Shares
standing in the name of another corporation, domestic or foreign, on the books
and records of the Corporation and having voting rights may be voted by such
officer, agent or proxy as the bylaws of such other corporation may authorize
or, in the absence of such authorization, as the board of directors of such
other corporation may determine, provided, however, that when any foreign
corporation without a permit to do business in the State of Texas lawfully owns
or may lawfully own or acquire stock in a Texas corporation, it shall not be
unlawful for such foreign corporation to vote such stock and to participate in
the management and control of the business and affairs of such Texas
corporation, as other shareholders, subject to all laws, rules and regulations
governing Texas corporations and especially subject to the provisions of the
antitrust laws of the State of Texas.
Section 11. Shares Held by Fiduciaries, Receivers, Pledges. Shares
held by an administrator, executor, guardian or conservator may be voted by him
so long as such shares forming a part of an estate are in the possession and
form a part of the estate being served by him, either in person or by proxy,
without a
- 5 -
<PAGE> 6
transfer of such shares into his name. Shares standing in the name of a
trustee may be voted by him, either in person or by proxy, but not trustee
shall be entitled to vote shares held by him unless such shares shall have been
transferred into his name as trustee. Shares standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without such shares being
transferred on the books and records of the Corporation in the name of the
pledgee, and thereafter the pledgee shall be entitled to vote the shares so
transferred.
Section 12. Decisions at Meetings of Shareholders. At all meetings
of the shareholders all elections of Directors shall be determined by a
plurality of the votes of the shareholders entitled to vote represented in
person or by proxy, quorum being present, and all other questions, business and
matters, except those of which the manner of deciding is otherwise expressly
governed by the Texas Business Corporation Act or by the Articles of
Incorporation or by these Bylaws, shall be decided by the vote of the holders
of a majority of the votes of the shareholders entitled to vote, represented in
person or by proxy, a quorum being present. All voting shall be viva voce,
except that upon the determination of the Chairman of the meeting or upon the
demand of any qualified voter or his proxy, voting on any questions, matter or
business at such meeting shall be by ballot. In the event any business,
question or matter is so voted upon by ballot, then each ballot shall be signed
by the shareholder voting or by his proxy and shall state the number of shares
so voted.
At any meeting at which a vote is taken by ballots, the Chairman of
the meeting shall appoint one or more inspectors who shall subscribe an oath or
affirmation to execute faithfully the duties of inspector at such meeting with
strict impartiality and according to the best of his ability. Such inspector
shall receive the ballots, count the votes and make and sign a certificate of
the result thereof. The Chairman of the meeting may appoint any person to
serve as an inspector, except no candidate for the office of director shall be
appointed as an inspector.
Section 13. List of Shareholders. A complete list of shareholders
entitled to vote at each shareholders' meeting or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each, shall be prepared by the Secretary and kept on file at the
registered office or principal place of business of the Corporation and shall
be subject to inspection by any shareholder at any time during usual business
hours for a period of at least ten (10) days prior to such meeting and shall be
produced and kept open at such meeting and at all times during such meeting
shall be subject to inspection by any shareholder. The original share transfer
records shall be prima facie evidence as to the identity of the shareholders
entitled to examine such list or share transfer records or to vote at any
meeting of the shareholders.
Section 14. Record Date. The Board of Directors shall have the power
to close the share transfer records of the Corporation or, in lieu thereof, to
fix a record date for the determination of the shareholders entitled to notice
of or to vote at any meeting of the shareholders and at any adjournment thereof
and to fix a record date for any other purpose as provided in Section 6 of
ARTICLE VIII of these Bylaws.
Section 15. Action by Written Consent. Any action required or which
may be taken at any annual or special meeting of the shareholders may be taken
without a meeting without prior notice and without a vote if a consent or
consents in writing, setting forth the action so taken, shall be signed by
those shareholders holding the number of votes necessary to approve the taking
of such action at a meeting at which all shareholders entitled to vote with
respect to the subject matter thereof were present and voting, and such consent
shall have the same force and effect as a vote at a meeting and may be state as
such in any articles or document filed with the Secretary of State of Texas.
No written consent shall be effective to take the action that is the subject of
the consent unless it bears the date of signature of each shareholder who signs
- 6 -
<PAGE> 7
the consent and unless, within sixty (60) days after the date of the earliest
dated consent delivered to the Corporation, a consent or consents signed by the
holder or holders of shares having not less than the minimum number of votes
that would be necessary to take the action that is the subject of the consent
are delivered to the Corporation pursuant to this paragraph shall be by hand or
certified or registered mail, return receipt requested. Delivery to the
Corporation's principal place of business shall be addressed to the President
of Chief Executive Officer of the Corporation. A telegram, telex, cablegram,
or similar transmission by a shareholder, or a photographic, photostatic,
facsimile, or similar reproductions of a writing signed by a shareholder, shall
be regarding as signed by the shareholder for purposes of this Section 15.
Prompt notice of the taking of any action by shareholders without a meeting by
less than unanimous written consent shall be given to those shareholders who do
not consent in writing to the action.
Section 16. Meeting by Telephone or Similar Communications Equipment.
Subject to the provisions required or permitted by the Texas Business
Corporation Act for notice of meetings, unless otherwise restricted by these
Bylaws or the Articles of Incorporation, shareholders may participate in and
hold a meeting by means of conference telephone or other similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in a meeting pursuant to this Section 16 shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of object to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Board of Directors. The powers of the Corporation shall
be exercised by or under the authority of, and the business, property and
affairs of the Corporation shall be managed under the direction of, the Board
of Directors and, subject to such restrictions, if any, as may be imposed by
law, the Articles of Incorporation or by these Bylaws, the Board of Directors
may, and are fully authorized to, do all such lawful acts and things as may be
done by the Corporation. Directors need not be residents of the State of Texas
or shareholders of the Corporation.
Section 2. Number of Directors. The number of directors which shall
constitute the entire Board of Directors shall be determined from time to time
by resolution by the Board of Directors, provided that no decrease shall have
the effect of shortening the term of any incumbent director, and further
provided that the number of directors shall never be less than one (1). If the
Board of Directors makes no such determination, the number of directors shall
be the number set forth in the Articles of Incorporation.
Section 3. Election and Term. Except as otherwise provided in
Section 5 of this ARTICLE III, the directors shall be elected each year at the
annual meeting of the shareholders, or at a special meeting of the shareholders
held in lieu of the annual meeting. Each such director shall hold office,
unless he is removed in accordance with the provisions of these Bylaws or he
resigns. for the term for which he is elected and until his successor shall
have been elected and qualified. Each director shall qualify by accepting his
election to office either expressly or by acting as a director.
Section 4. Resignation. Any director or officer of the Corporation
may resign at any time as provided in Section 4 of ARTICLE IX of these Bylaws.
- 7 -
<PAGE> 8
Section 5. Vacancy and Increase. Any vacancy occurring in the Board
of Directors may be filled by the affirmative vote of a majority of the
remaining directors though less than a quorum of the Board of Directors. A
director elected to fill a vacancy shall be elected for the unexpired term of
his predecessor in office and until his successor shall have been elected and
qualified. A directorship to be filled by reason of an increase in the number
of directors may be filled by the Board of Directors for a term of office
continuing only until the next election of one or more directors by the
shareholders; provided, however, that the Board of Directors may not fill more
than two such directorships during the period between any two successive annual
meetings of shareholders. Any vacancy occurring in the Board of Directors or
any directorship to be filled by reason of an increase in the number of
directors may also be filled by election at an annual or special meeting of
shareholders called for that purpose.
Section 6. Removal. At any meeting of shareholders at which a quorum
of shareholders is present called expressly for that purpose, any director or
the entire Board of Directors may be removed from office, with or without
cause, by a vote of the holders of a majority of the shares then entitled to
vote at an election of directors; provided that, in case the shareholders have
the right to cumulate votes for the election of directors, if less than the
entire Board is to be removed, no director may be removed if the votes cast
against his removal would be sufficient to elect him if then cumulatively voted
at any election of the entire Board of Directors, or if there be classes of
directors, at an election of the class of directors of which such director is a
part, and any vacancy or vacancies in the Board resulting therefrom may be
filled by the remaining directors, though less than a quorum, or by the
shareholders, whichever shall first act thereon.
Section 7. Meeting of Directors. Meetings of the Board of Directors,
regular or special, may be held either within or without the State of Texas.
Section 8. First Meeting. Each newly elected Board of Directors may
hold its first meeting for the purpose of organization and the transaction of
business, if a quorum is present, immediately after and at the same place as
the annual meeting of the shareholders, and no notice of such meeting shall be
necessary.
Section 9. Election of Officers. At the first meeting of the Board
of Directors in each year at which a quorum shall be present, the Board of
Directors shall proceed to the election of the officers of the Corporation.
Section 10. Regular Meetings. Regular meetings of the Board of
Directors may be held at such times and places as shall be designated or
determined by the Board of Directors. Notice of such regular meetings shall
not be required.
Section 11. Special Meetings. Special meetings of the Board of
Directors shall be held whenever and wherever called or provided to be held by
the Chairman of the Board (if any), the President or by a majority of the
directors then in office, and at the place, day and hour determined by the
officer or such majority of the directors calling or providing for the holding
of the particular meeting, in each instance, and such determination may be
conclusively evidenced in a call, waiver of notice or other communication
signed by the officers or such majority of the directors.
Section 12. Notice. The Secretary of an Assistant Secretary shall,
but in the event of the absence of the Secretary or an Assistant Secretary or
the failure, inability, refusal or omission on the part of the Secretary or an
Assistant Secretary so to do, any other officer of the Corporation may, give
notice to each
- 8 -
<PAGE> 9
director of each special meeting, and of the place, day and hour of the
particular meeting, in person or by mail, or by telephone, telegraph or other
means of communication, at least twenty-four (24) hours before the meeting.
The attendance of a director at any meeting shall constitute a waiver of notice
of such meeting, except where a director attends a meeting for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.
Section 13. Business to be Transacted. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or any waiver of notice of such
meeting. Any and all business of any nature or character whatsoever may be
transacted and action may be taken thereon at any meeting, regular or special,
of the Board of Directors. At any meeting at which every director shall be
present, even though without any notice, any business may be transacted.
Section 14. Quorum - Adjournment if Quorum is Not Present. A
majority of the number of directors fixed by, or in the manner provided in, the
Articles of Incorporation or these Bylaws shall constitute a quorum for the
transaction of any business, unless a greater number is required by law or by
the Articles of Incorporation or these Bylaws. At any meeting, regular or
special or any first meeting, of the Board of Directors, if there be less than
a quorum present, a majority of those present may adjourn the meeting from time
to time without notice, other than by announcement at the meeting of the time
and place at which the meeting will reconvene, until a quorum shall be present
at the meeting. A majority of the directors present at any meeting of the
Board of Directors, or if only one director may be present, then such director,
may adjourn any meeting of the Board from time to time without notice, other
than be announcement at such meeting of the time and place at which the meeting
will reconvene, until the transaction of any and business submitted or proposed
to be submitted to such meeting or any adjournment thereof shall have been
completed. The act of the majority of the directors present at any meeting of
the Board of Directors at which a quorum is present shall constitute the act of
the Board of Directors, unless the act of a greater number is required by law
or the Articles of Incorporation or these Bylaws.
Section 15. Order of Business. At all meetings of the Board of
Directors, business shall be transacted in such order as the Board of Directors
may determine. At all meetings of the Board of Directors, if a Chairman of the
Board has theretofore been elected by the Board of Directors pursuant to the
provisions of Section 8 of ARTICLE VI of these Bylaws, the Chairman of the
Board shall preside, but if a Chairman of the Board has not theretofore been
elected or, if elected, he should be absent, the President shall preside and in
the absence of the President, a Vice President shall preside, but if none of
such officers shall be present or preside at any meeting of the Board, then a
Chairman shall be chosen by the Board from among the directors present and such
Chairman so chosen shall preside at the meeting.
The Secretary of the Corporation, or in his absence, an Assistant
Secretary, shall act as Secretary of the meetings of the Board of Directors,
but in the absence of the Secretary and an Assistant Secretary, or if for any
reason neither acts as Secretary thereof, the presiding officer shall appoint
any person of his choice to act, and such person shall act, as Secretary of the
meeting.
Section 16. Presumption of Assent. A directors of the Corporation
who is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
taken unless his dissent shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as Secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the Secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to
a director who voted in favor of such action.
- 9 -
<PAGE> 10
Section 17. Compensation. Unless otherwise restricted by the
Articles of Incorporation, the Board of Directors shall have authority to fix
the compensation of directors. Nothing herein contained shall be construed so
as to preclude any director from serving the Corporation in any other capacity
or receiving compensation therefor. members of special or standing committees
may be allowed a fixed sum and expenses of attendance, if any, at committee
meetings.
Section 18. Action by Unanimous Consent. Any action required or
permitted to be taken at a meeting of the Board of Directors or any committee
may be taken without a meeting if a consent in writing, setting forth the
action so taken, is signed by all members of the Board of Directors or
committee, as the case may be. Such consent shall have the same force and
effect as a unanimous vote at a meeting, and may be stated as such in any
document or instrument filed with the Secretary of State of the State of Texas.
Section 19. Meeting by Telephone or Similar Communications Equipment.
Subject to the provisions required or permitted by the Texas Business
Corporation Act for notice of meetings, unless otherwise restricted by these
Bylaws or the Articles of Incorporation, the Board of Directors or any
committee thereof designated by the Board of Directors, may participate in and
hold a meeting of the Board of Directors or any such committee by means of
conference telephone or other similar communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section 19 shall constitute
presence in person at such meeting, except where a person participates in the
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
Section 20. Approval or Ratification of Acts or Contracts by
Shareholders. The Board of Directors in its discretion may submit any act or
contract for approval or ratification at any annual meeting of the
shareholders, or at any special meeting of the shareholders called for the
purpose of considering any such act or contract, and any act or contract that
shall be approved or be ratified by the vote of the shareholders holding a
majority of the issued and outstanding shares of stock of the Corporation
entitled to vote and present in person or by proxy at such meeting, provided
that a quorum is present, shall be as valid and as binding upon the Corporation
and upon all of the shareholders as if it has been approved or ratified by
every shareholder of the Corporation.
ARTICLE IV
OFFICERS' AND DIRECTORS' SERVICES, CONFLICTING
INTERESTS, INDEMNIFICATION AND INSURANCE
Section 1. Services. No director and, unless otherwise determined by
the Board of Directors, no officer of the Corporation, shall be required to
devote his time or any particular portion of his time or render services or any
particular services exclusively to the Corporation. Every director and, unless
otherwise determined by the Board of Directors, every officer of the
Corporation shall be entirely free to engage, participate and invest in any and
all businesses, enterprises and activities, either similar or dissimilar to the
business, enterprise and activities of the Corporation, without the breach of
any duty to the Corporation or to its shareholders and without accountability
or liability to the Corporation or its shareholders.
Every director and, unless otherwise determined by the Board of
Directors, every officer of the Corporation shall, respectively, be entirely
free to act for, serve and represent any other corporation, any entity or any
person, in any capacity, and be or become a director or officer, or both, of
any other corporation or any entity, irrespective of whether or not the
business, purposes, enterprises and activities, or any of them,
- 10 -
<PAGE> 11
thereof be similar or dissimilar to the business, purposes, enterprises and
activities, or any of them, of the Corporation, without the breach of any duty
to the Corporation or to its shareholders and without accountability or
liability to the Corporation or to its shareholders.
Section 2. Directors' and Officers' Interests in Contracts. No
contract or transaction between the Corporation and one or more of its
directors or officers, or between the Corporation and any other corporation,
partnership, association, or other organization or entity in which one or more
of the Corporation's directors or officers are directors or officers or have a
financial interest, shall be void or voidable solely for such reason, solely
because the director or officer is present at or participates in the meeting of
the Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if (i) the material facts of his relationship or interest shall be disclosed or
known to the Board of Directors or the committee, and the Board of Directors or
such committee shall in good faith authorize, approve or ratify such contract
or other transaction by a vote of a majority of the disinterested directors
present, even though the disinterested directors be less than a quorum, (ii)
the material facts of such relationship or interest and of such contract or
transaction shall be disclosed or known to the shareholders entitled to vote
thereon and such shareholders shall in good faith authorize, approve or ratify
such contract or other transaction, or (iii) such contract or other transaction
is fair to the Corporation at the time of its authorization, approval or
ratification by the Board of Directors or any committee thereof or the
shareholders; nor shall any director or officer be responsible to, or liable to
account to, the Corporation for any profits realized by or from or through any
such contract or other transaction of the Corporation so authorized, ratified
or approved, by reason of such interest or his being or having been a director
or officer, or both, of the Corporation. Nothing herein contained shall create
responsibility or liability in or in connection with any such event or present
the authorization, ratification or approval of such contracts or other
transactions in any other manner permitted by law or by statute. This Section
2 shall not be construed to invalidate any contract or other transaction which
would otherwise be valid under the common or statutory law applicable thereto.
Common or interested directors may be counted in determining the presence of a
quorum at the meeting of the Board of Directors or committee thereof which
authorizes any such contract or transaction.
Section 3. Reliance Upon Books, Reports and Records. Neither a
director nor a member of any committee shall be liable if, acting in good faith
and exercising ordinary care, he (i) relied and acted upon (a) written
financial statements of the Corporation (including without limitation financial
statements that include subsidiary corporations or other corporations accounted
for on a consolidated basis or on the equity method of accounting) that purport
to present the financial condition of the Corporation in accordance with
generally accepted accounting principles, or (b) financial statements prepared
on the basis of accounting used to file the Corporation's federal income tax
return or any other accounting practices and principles that are reasonable in
the circumstances, or (c) any financial information, including without
limitation, condensed or summary financial statements, that are prepared on a
basis consistent with financial statements described pursuant to subclauses
(i)(a) and (i)(b) of this sentence, or (d) a fair valuation or information from
any other method that is reasonable under the circumstances, or (e) any
combination of the statements, valuations or information authorized by this
clause (i), (ii) relied upon the written advice of counsel, (iii) considered
the worth of the assets of the Corporation to be at least equal to their book
value, or (iv) in determining whether the Corporation made adequate provisions
for payment, satisfaction or discharge of all of its liabilities and
obligations, relied in good faith with ordinary care upon financial statements
of, or other information concerning, any person who was or become contractually
obligated to pay, satisfy or discharge some or all of those liabilities or
obligations.
- 11 -
<PAGE> 12
Section 4. Non-Liability of Directors and Officers in Certain Cases.
No director, officer, or member of a committee shall be liable for his acts as
such if he is excused from liability under any present or future provision of
the Texas Business Corporation Act.
Section 5. Indemnification of Directors, Officers, Employees and
Agents.
(a) As used in this section:
(1) "Corporation" includes any domestic or foreign
predecessor entity of the Corporation in a merger, consolidation or
other transaction in which the liabilities of the predecessor are
transferred to the Corporation by operation of law and in any other
transaction in which the Corporation assumes the liabilities of the
predecessor but does not specifically exclude liabilities that are the
subject matter of this Section 5.
(2) "Director" means any person who is or was a director
of the corporation and any person, while a director of the
Corporation, is or was serving at the request of the Corporation as a
director, officer, partner, venturer, proprietor, trustee, employee,
agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan or other enterprise.
(3) "Expenses" include court costs and attorneys' fees.
(4) "Official Capacity" means
(A) when used with respect to a Director, the
office of director in the Corporation, and
(B) when used with respect to a person other than
a Director, the elective or appointive office in the
Corporation held by the officer or the employment or agency
relationship undertaken by the employee or agent on behalf of
the Corporation,
but neither A nor B above includes service for any other foreign or
domestic corporation or any partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise.
(5) "Proceeding" means any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, any appeal in such an action, suit or
proceeding, and any inquiry or investigation that could lead to such
an action, suit or proceeding.
(b) The Corporation may indemnify any person who was, is or is
threatened to be made a named defendant or respondent in any Proceeding because
the person is or was a Director only if it is determined in accordance with
paragraph (f) of this Section 5 that the person:
(1) conducted himself in good faith;
(2) reasonably believed:
- 12 -
<PAGE> 13
(A) in the case of conduct in his Official
Capacity as a Director of the Corporation, that his conduct
was in the Corporation's best interests, and
(B) in all other cases, that his conduct was at
least not opposed to the Corporation's best interests; and
(3) in the case of any criminal Proceeding, had no
reasonable cause to believe his conduct was unlawful.
(c) Except to the extent permitted by paragraph (e) of this
Section 5, a Director may not be indemnified under subsection 5(b) in respect
of a Proceeding:
(1) in which the person is found liable on the basis that
personal benefit was improperly received by him; or
(2) in which the person is found liable to the
Corporation.
(d) The termination of any Proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its equivalent
is not, of itself, determinative that the person did not meet the requirements
set forth in subsection 5(b). A person shall be deemed to have been found
liable in respect of any claim, issue or matter only after the person shall
have been so adjudged by a court of competent jurisdiction after exhaustion of
all appeals therefrom.
(e) A person may be indemnified under subsection 5(b) against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable Expenses actually incurred by the person in connection with the
Proceeding; but if the person is found liable to the Corporation or is found
liable on the basis that personal benefit was improperly received by the
person, the indemnification (i) is limited to reasonable Expenses actually
incurred by the person in connection with the Proceeding, and (2) shall not be
made in respect of any proceeding in which the person shall have been found
liable for willful or intentional misconduct in the performance of his duty to
the Corporation.
(f) No indemnification under subsection 5(b) shall be made by the
Corporation unless authorized in the specific case after a determination has
been made that the Director has met the standard of conduct set forth in
subsection 5(b). Such determination shall be made:
(1) by the Board of Directors by a majority vote of a
quorum consisting of directors who at the time of the vote are not
named defendants or respondents in the Proceeding;
(2) if such quorum cannot be obtained, then by a majority
vote of a committee of the Board of Directors, designated to act in
the matter by a majority vote of the full Board of Directors (in which
vote directors who are named defendants or respondents may
participate), which committee shall consist solely of two or more
directors who at the time of the vote are not named defendants or
respondents in the Proceeding; or
(3) by special legal counsel, selected by the Board of
Directors or a committee thereof by vote as set forth in clauses (1)
or (2) of this subsection 5(f) or, if the requisite quorum of the full
Board of Directors cannot be obtained therefor and such a committee
cannot be established, by a
- 13 -
<PAGE> 14
majority vote of the full Board of Directors (in which vote directors
who are named defendants or respondents may participate); or
(4) by the shareholders in a vote that excludes the
shares held by directors who are named defendants or respondents in
the Proceeding.
(g) Authorization of indemnification and determination as to
reasonableness of Expenses shall be made in the same manner as the
determination that indemnification is permissible, except that if the
determination that indemnification is permissible is made by special legal
counsel, authorization of indemnification and determination as to
reasonableness of Expenses shall be made in the manner specified in clause (3)
in subsection 5(f) for the selection of such counsel. A provision contained in
the Articles of Incorporation, the Bylaws, a resolution of shareholders or
directors, or an agreement that makes mandatory the indemnification permitted
under subsection 5(b) shall be deemed to constitute authorization of
indemnification in the manner required by this section even though such
provision may not have been adopted or authorized in the same manner as the
determination that indemnification is permissible.
(h) A Director who has been wholly successful, on the merits or
otherwise, in the defense of any Proceeding in which he is a party because he
is or was a Director shall be indemnified by the Corporation against reasonable
Expenses incurred by him in connection with the Proceeding.
(i) If, upon application of a Director, a court of competent
jurisdiction determines, after giving any notice the court considers necessary,
that the Director is fairly and reasonably entitled to indemnification in view
of all the relevant circumstances, whether or not he has met the standard of
conduct set forth in subsection 5(b) or has been found liable in the
circumstances described in subsection 5(c), the court may order such
indemnification as the court determines is proper and equitable. The court by
law is required to limit indemnification to reasonable Expenses if the
Proceeding is brought by or on behalf of the Corporation or if the Director is
found liable to the Corporation or is found liable on the basis of
circumstances described in subsection 5(c)(1).
(j) Reasonable Expenses incurred by a Director who was, is, or is
threatened to be made a named defendant or respondent to a Proceeding may be
paid or reimbursed by the Corporation in advance of the final disposition of
such Proceeding and without the determination specified in subsection 5(f) or
the authorization or determination specified in subsection 5(g) after receipt
by the Corporation of a written affirmation by the Director of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Corporation as authorized in this Section 5, and a written undertaking by
or on behalf of the Director to repay the amount paid or reimbursed if it
shall ultimately be determined that he has not met that standard or if it is
ultimately determined that indemnification of the director against expenses
incurred by him in connection with that proceeding is prohibited by subsection
5(e). A provision contained in the Articles of Incorporation, these Bylaws, a
resolution of shareholders or directors, or an agreement that makes mandatory
the payment or reimbursement permitted hereunder shall be deemed to constitute
authorization of that payment or reimbursement. The written undertaking
required above must be an unlimited general obligation of the Director but need
not be secured. It may be accepted without reference to financial ability to
make repayment.
(k) The indemnification provided by this Section 5 shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any statute, including, but not limited to, Article 2.02-1 of the Texas
Business Corporation Act, Bylaw, agreement, insurance policy, vote of
shareholders or disinterested directors or otherwise, both as to action in
their Official Capacity and as to action in another
- 14 -
<PAGE> 15
capacity while holding such office, and shall 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; provided,
however, no provision for the Corporation to indemnify or to advance Expenses
to a Director who was, is or is threatened to be made a named defendant or
respondent to a Proceeding, whether contained in the Articles of Incorporation,
these Bylaws, a resolution of shareholders or directors, an agreement or
otherwise (except as contemplated by subsection(p)), shall be valid unless
consistent with this Section 5 or, to the extent that indemnity hereunder is
limited by the Articles of Incorporation, consistent therewith.
(l) Nothing contained in this Section 5 shall limit the
Corporation's power to pay or reimburse Expenses incurred by a Director in
connection with his appearance as a witness in a Proceeding at a time when he
is not a named defendant or respondent in the Proceeding.
(m) Unless limited by the Articles of Incorporation of the
Corporation,
(1) an officer of the Corporation shall be indemnified as
and to the same extent provided in subsection (h) and (I) for a
Director and shall be entitled to the same extent as a Director to
seek indemnification pursuant to the provisions of such subsections;
and
(2) the Corporation may indemnify and advance Expenses to
an officer, employee or agent of the Corporation to the same extent
that it may indemnify and advance Expenses to Directors pursuant to
this Section 5.
(n) The Corporation may indemnify and advance Expenses to person
who are not or were not officers, employees, or agents of the Corporation but
who are or were serving at the request of the Corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another foreign or domestic corporation, partnership, joint
venture, sole proprietorship, trust, other enterprise, or employee benefit plan
to the same extent that it may indemnify and advance expenses to Directors
under this Section 5.
(o) The Corporation may indemnify and advance Expenses to an
officer, employee, agent or person described pursuant to Section 5(n) and who
is not a Director to such further extent, consistent with law, as may be
provided by the Articles of Incorporation of the Corporation, these Bylaws,
general or specific action of the Board of Directors, or contract or as
permitted or required by common law.
(p) The Corporation may purchase and maintain insurance or another
arrangement on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or who is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, other
enterprise or employee benefit plan, against any liability asserted against him
and incurred by him in any such a capacity or arising out of his status as such
a person, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of the Texas Business Corporation
Act or this Section 5. If the insurance or other arrangement is with a person
or entity that is not regularly engaged in the business of providing insurance
coverage, the insurance or arrangement may provide for a payment of a liability
with respect to which the Corporation would not have the power to indemnify the
person only if including coverage for the additional liability has been
approved by the shareholders of the Corporation. Without limiting the power of
the Corporation to procure or maintain any kind of insurance or other
arrangement, a Corporation may, for the benefit of persons indemnified by the
Corporation, (1) create a trust fund, (2) establish any form of self-insurance,
(3) secure its indemnity
- 15 -
<PAGE> 16
obligation by grant of a security interest or other lien on the assets of the
Corporation, or (4) establish a letter of credit, guaranty, or surety
arrangement. The insurance or other arrangement may be procured, maintained,
or established within the Corporation or with any insurer or other person
deemed appropriate by the Board of Directors regardless of whether all or part
of the stock or other securities of the insurer or other person owned in whole
or in part by the Corporation. In the absence of fraud, the judgment of the
Board of Directors as to the terms and conditions of the insurance or other
arrangement and the identity of the insurer or other person deemed
participating in an arrangement shall be conclusive and the insurance or
arrangement shall not be voidable and shall not subject the directors approving
the insurance or arrangement to liability, on any ground, regardless of whether
directors participating in the approval are beneficiaries of the insurance or
arrangement.
(q) Any indemnification of, or advance of Expenses to a Director
in accordance with this Section 5 shall be reported in writing to the
shareholders with or before the notice or waiver of notice of the next
shareholders' meeting or with or before the next submission to shareholders of
a consent to action without a meeting pursuant to Section A, Article 9.10 of
the Texas Business Corporation Act, and in any case, within the 12-month period
immediately following the date of the indemnification or advance.
(r) For purposes of this Section 5, the Corporation shall be
deemed to have requested a Director to serve as the trustee of an employee
benefit plan whenever the performance by him of his duties to the Corporation
also imposes duties on, or otherwise involves services by, him to the plan or
participants or beneficiaries of the plan. Excise taxes assessed on a Director
with respect to an employee benefit plan pursuant to applicable law shall be
deemed "fines". Action taken or omitted by him with respect to an employee
benefit plan in the performance of his duties for a purpose reasonably believed
by him to be in the interest of the participants and beneficiaries of the plan
shall be deemed to be for a purpose which is not opposed to the best interests
of the Corporation.
ARTICLE V
BOARD COMMITTEES
The Board of Directors, by resolution adopted by a majority of the
full Board of Directors, may designate from among its members one or more
committees, each of which, to the extent provided in such resolution or in the
Articles of Incorporation or in these Bylaws, shall have and may exercise all
of the authority of the Board of Directors, except that no such committee shall
have the authority of the Board of Directors in reference to (1) amending the
Articles of Incorporation, except that a committee may, to the extent provided
in the resolution designating the committee or in the Articles of Incorporation
or these Bylaws, exercise the authority of the Board of Directors vested in it
in accordance with Article 2.13 of the Texas Business Corporation Act, (2)
proposing a reduction in the stated capital of the Corporation in the manner
permitted by Article 4.12 of the Texas Business Corporation Act, (3) approving
a plan of merger or share exchange of the Corporation, (4) recommending to the
shareholders the sale, lease or exchange of all or substantially all of the
property and assets of the Corporation otherwise than in the usual and regular
course of its business, (5) recommending to the shareholders a voluntary
dissolution of the Corporation or a revocation thereof, (6) amending, altering
or repealing these Bylaws or adopting new Bylaws for the Corporation, (7)
filling vacancies in the Board of Directors or any such committee or
designating alternative members thereof, (8) filling any directorship to be
filled by reason of an increase in the number of directors, (9) electing or
removing officers or members or alternative members of any such committee, (10)
fixing the compensation of any member or alternative members of such committee,
or (11) altering or repealing any resolution of the Board of directors that by
its terms provides that it shall not be so amendable or repealable;
- 16 -
<PAGE> 17
\and, unless the resolution establishing the committee or the Articles of
Incorporation expressly so provide, no such committee shall have the power and
authority to authorize any distribution by the Corporation to any of the
shareholders or issuance of shares of the Corporation. A majority of all of
the members of any such committee may determine its action and fix the time and
place of its meetings, unless the Board of Directors shall otherwise provide.
At every meeting of any such committee, the presence of a majority of all of
the members thereof shall constitute a quorum and the affirmative vote of a
majority F.O. the members present shall be necessary for the adoption by it of
any resolution. The Board of Directors shall have power at any time to change
the number and members of any such committee, to fill vacancies and to
discharge any such committee. The Board of Directors may designate one or more
directors as alternate members of any committee, who may, subject to any
limitation imposed by the Board of Directors, replace any absent or
disqualified member of the committee at any meeting of such committee. In the
absence or disqualification of a member of a committee, the member or members
present at any meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of the absent or disqualified
member. The designation of such committee and the delegation thereto of
authority shall not operate to relieve the Board of Directors, or any member
thereof, of any responsibility imposed by law.
ARTICLE VI
OFFICERS
Section 1. Principal Officers. The officers of the Corporation shall
be chosen by the Board of Directors. The officers shall be a President and a
Secretary and may include one or more Vice Presidents, a Treasurer and such
number of Assistant Secretaries and Assistant Treasurers as the Board may from
time to time determine or elect and if elected and so designated by the Board
of Directors, a Chairman of the Board. Any person may hold two or more offices
at the same time.
Section 2. Additional Officers. The Board may appoint such other
officers and agents as it shall deem necessary.
Section 3. Terms of Officers. Each officer shall hold his office
until his successor shall have been duly elected and qualified or until
his death or until he shall resign or shall have been removed in the manner
hereinafter provided.
Section 4. Salaries. The salaries or other compensation of the
officers and agents of the Corporation shall be fixed from time to time by the
Board of Directors.
Section 5. Removal. Any officer or agent or member of any committee
elected or appointed by the Board of Directors may be removed by the Board of
Directors whensoever in its judgment the best interests of the Corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an
officer or agent or member of any committee shall not of itself create contract
rights.
Section 6. Vacancies. A vacancy in the office of any officer may be
filled by the vote of a majority of the directors then in office.
Section 7. Powers and Duties of Officers. The officers so chosen
shall perform the duties and exercise the powers expressly conferred or
provided for in these Bylaws, as well as the usual duties and powers incident
to such office, respectively, and such other duties and powers as may be
assigned to them by the Board of Directors or by the President.
Section 8. Chairman of the Board. The Board of Directors may select
from among its members a Chairman of the Board who may, if so elected, preside
at all meetings of the Board of Directors and approve
- 17 -
<PAGE> 18
the minutes of all proceedings thereat, and he shall be available to consult
with and advise the officers of the Corporation with respect to the conduct of
the business and affairs of the Corporation and shall have such other powers
and duties as designated in accordance with these Bylaws and as from time to
time may be assigned to him by the Board of Directors. The Chairman of the
Board, subject to the control of the Board of Directors, shall be the Chief
Executive Officer, and he shall have general executive charge, management and
control of the affairs, properties and operations of the Corporation in the
ordinary course of its business with all such duties, powers and authority with
respect to such affairs, properties and operations as may be reasonably
incident to such responsibilities; he may appoint or employ and discharge
employees and agents of the Corporation and fix their compensation; he may
make, execute, acknowledge and deliver any and all contracts, leases, deeds,
conveyances, assignments, bills of sale, transfers, releases and receipts, and
any and all mortgages, deeds of trust, indentures, pledges, chattel mortgages,
liens and hypothecations, and any and all bonds, debentures, notes, other
evidences of indebtedness and any and all other obligations and encumbrances
and any and all other instruments, documents and papers of any kind or
character for and on behalf of and in the name of the Corporation; and with the
Secretary or an Assistant Secretary, he may sign all certificates for shares of
the capital stock of the Corporation; and he shall do and perform such other
duties and have such additional authority and powers as from time to time may
be assigned to or conferred upon him by the Board of directors.
Section 9. President. In the absence of the Chairman of the Board or
in the event of his disability or refusal to act, the President shall perform
the duties of the Chief Executive Officer, and when so acting, shall have all
of the powers of and be subject to all of the restrictions upon the Chairman of
the Board. The President shall perform such other duties as may be assigned to
him by the Chairman of the Board or by the Board of Directors of the
Corporation. Any action taken by the President in the performance of the
duties of the Chief Executive Officer shall be conclusive evidence of the
absence or inability to act of the Chairman of the Board at the time such
action was taken.
Section 10. Vice Presidents. In the absence of the President or in
the event of his disability or refusal to act, the Vice President (or in the
event there be more than one Vice President, the Executive Vice President, if
any, and then any other Vice Presidents in the order designated, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the President, and when so acting, shall have all of the powers
of and be subject to all of the restrictions upon the President. Any Vice
President shall perform such other duties as may be assigned to him by the
President or by the Board of Directors of the Corporation. Any action taken by
a Vice President in the performance of the duties of the President shall be
conclusive evidence of the absence or inability to act of the President at the
time such action was taken.
Section 11. Treasurer. The Treasurer shall have custody of all funds
and securities of the Corporation which come into his hands. When necessary or
proper, he may endorse on behalf of the Corporation, for collection, checks,
notes and other obligations and shall deposit the same to the credit of the
Corporation in such banks or depositories as shall be selected or designed by
or in the manner prescribed by the Board of Directors. Whenever required by
the Board of Directors he shall render a statement of his cash account. He
shall enter or cause to be entered, punctually and regularly, on the books of
the Corporation to be kept by him or under his supervision or direction for
that purpose, full and accurate accounts of all moneys received and paid out
by, for or on account of the Corporation. He shall at all reasonable times
exhibit his books and accounts and other financial records to any director of
the Corporation during business hours. He shall have such other powers and
duties as may be conferred upon or assigned to him by the Board of Directors.
The Treasurer shall perform all acts incident to the position of Treasurer
subject always to the control of the Chief Executive Officer and the Board of
Directors. He
- 18 -
<PAGE> 19
shall, if required by the Board of Directors, give such bond for the faithful
discharge of his duties in such form and amount as the Board of Directors may
require.
Section 12. Assistant Treasurers. Each Assistant Treasurer shall
have the usual powers and duties pertaining to his office, together with such
other powers and duties as may be conferred upon or assigned to him by the
Board of Directors. The Assistant Treasurers shall have and exercise the
powers of the Treasurer during that officer's absence or inability or refusal
to act.
Section 13. Secretary. The Secretary (1) shall keep the minutes of
all meetings of the Board of Directors and the minutes of all meetings of the
shareholders, in books provided for that purpose, (2) shall attend to the
giving and serving of all notices, (3) may sign with the President or Vice
President in the name of the corporation and/or attest the signature of either
to, all contracts, conveyances, transfers, assignments, encumbrances,
authorizations and all other instruments, documents and papers, of any and
every description whatsoever, of or executed for or on behalf of the
Corporation and affix the seal of the Corporation thereto, (4) may sign with
the President or a Vice President all certificates for shares of the capital
stock of the Corporation and affix the corporate seal of the Corporation
thereto, (5) shall have charge of and maintain and keep or supervise and
control the maintenance and keeping of the stock certificate books, share
transfer records and such other books and papers as the Board of Directors may
authorize, direct or provide for, all of which shall at all reasonable times be
open to the inspection of any director, upon request, at the office of the
corporation during business hours, (6) shall in general perform all of the
duties incident to the office of Secretary subject to the control of the
President and the Board of directors, and (7) shall have such other powers and
duties as may be conferred upon or assigned to him by the Board of Directors.
Section 14. Assistant Secretaries. Each Assistant Secretary shall
have the usual powers and duties pertaining to his office, together with such
other powers and duties as may be conferred upon or assigned to him by the
Board of Directors or the Secretary. The Assistant Secretaries shall have and
exercise the powers of the Secretary during that officer's absence or inability
or refusal to act.
Section 15. Securities of Other Corporations. The President or any
Vice President or the Secretary or the Treasurer of the Corporation shall have
power and authority to transfer, enforce for transfer, vote, consent or take
any other action with respect to any securities of another issuer which may be
held or owned by the Corporation and to make, execute and deliver any waiver,
proxy or consent with respect to any such securities and otherwise to exercise
any and all rights and powers which the Corporation may possess by reason of
its ownership of securities in such other corporation, including the exercise
of any voting rights.
ARTICLE VII
BOOKS, DOCUMENTS AND ACCOUNTS
The Corporation shall keep correct and complete books and records of
account and shall keep minutes of the proceedings of its shareholders. The
Board of Directors shall have power to keep the books, documents and accounts
of the Corporation outside the State of Texas, except that record of its
shareholders, giving the names and address of all shareholders and the number
and class of shares held by each shall be kept at its registered office or
principal place of business, or at the office of its transfer agent or
registrar and the original or a duplicate stock ledger shall at all times be
kept within the State of Texas.
- 19 -
<PAGE> 20
ARTICLE VIII
CAPITAL STOCK
Section 1. Stock Certificates. The certificates for shares of the
capital stock of the Corporation shall be in such form, not inconsistent with
that required by law and the Articles of Incorporation, as shall be approved by
the Board of Directors. They shall be consecutively numbered and shall be
entered in the books of the Corporation as they are issued and shall exhibit
the holder's name and number of shares. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by, or in the name
of, the Corporation by the President or a Vice President and either the
Secretary or an Assistant Secretary of the Corporation, certifying the number
of shares (and, if the stock of the Corporation shall be divided into classes
or series, the class and series of such shares) owned by him in the
Corporation, with the seal of the Corporation or a facsimile thereof impressed
or printed thereon. Where any such certificate is countersigned by a transfer
agent or registered by a registrar, either of which is another than the
Corporation itself or an employee of the Corporation, the signatures of the
President or Vice President and the Secretary or Assistant Secretary upon a
certificate may be facsimiles, engraved or printed. In case any officer who
shall have signed or whose facsimile signature shall have been placed on any
such certificate shall have ceased to be such officer of the Corporation,
whether because of death, resignation or otherwise, before such certificate is
issued, such certificate may nevertheless be issued and delivered by the
Corporation with the same effect as if the person were such officer at the date
of its issuance.
Section 2. Transfers. Stock of the Corporation shall be transferable
in the manner prescribed by the laws of the State of Texas and in these Bylaws.
Transfers of stock shall be made on the books of the Corporation only by the
person named in the certificate, or by his attorney-in-fact or legal
representative, duly and lawfully authorized in writing, and upon the surrender
of the certificate therefor, which shall be cancelled before the new
certificate for a like number of shares shall be issued. Upon surrender to the
Corporation or a transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
The Board of Directors may appoint a transfer agent or a registrar for
each class of stock, and may require all stock certificates to bear the
signature of such transfer agent and of such registrar or either of them. The
stock record books and the blank stock certificate books shall be kept by the
Secretary, or at the office of such transfer agent or transfer agents as the
Board of Directors may from time to time by resolution determine.
Section 3. Registered Holders. The Corporation shall be entitled to
treat the person in whose name any share of stock or any warrant, right or
option is registered as the owner thereof for all purposes and shall not be
bound to recognize any equitable or other claim to, or interest in, such share,
warrant, right or option on the part of any other person, whether or not the
Corporation shall have notice thereof, save as may be expressly provided
otherwise by the laws of the State of Texas.
Section 4. New Certificates. The Corporation may, in its sole
discretion, issue a new certificate for shares of its stock in the place of any
certificate theretofore issued by it, alleged to have been lost or destroyed
certificate, or his legal representative, to give the Corporation such
statement under oath or other evidence of such loss or destruction as the Board
may desire, and a bond in form, amount and with such surety as the Board of
Directors may prescribe or determine, and sufficient, in the sole judgment of
the Board, to indemnify and protect the Corporation against any and all claims,
liabilities, costs and expenses that may be made or asserted against it or
which it may suffer or incur or pay, on account of the alleged loss
- 20 -
<PAGE> 21
of any such certificate or the issuance of such new certificate. A new
certificate may be issued without requiring any bond when, in the sole
discretion of the Board, it is proper so to do.
Section 5. Distributions. The Board of Directors may declare
distributions of the assets of the Corporation to its shareholders as the Board
deems expedient and as permitted by law under the provisions of the Texas
Business Corporation Act. Before declaring any distributions there may be
reserved out of the earned surplus such sums as the Board of Directors deems
proper for working capital or as a reserve fund to meet contingencies or for
equalizing distributions, or for such other purposes as the Board may deem
conducive to the interests of the Corporation, and the Board may abolish any
such reserve in the manner in which it was created.
Section 6. Record Dates and Closing of Share Transfer Records. For
the purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive a
distribution by the Corporation (other than a distribution involving a purchase
or redemption by the Corporation of any of its own shares) or a share dividend,
or in order to make a determination of shareholders for any other proper
purpose (other than determining shareholders entitled to consent to action by
shareholders proposed to be taken without a meeting of shareholders), the Board
of Directors of the Corporation may provide that the share transfer records
shall be closed for the purpose of determining shareholders entitled to notice
of or to vote at a meeting of shareholders, such books shall be closed for at
least ten (10) days immediately preceding such meeting. In lieu of closing the
share transfer records, the Board of Directors may fix in advance a date as the
record date for any such determination of shareholders, such date in any case
to be not more than sixty (60) days and, in case of a meeting of shareholders,
not less than ten (10) days prior to the date on which the particular action
requiring such determination of shareholders is to be taken. If the share
transfer records are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a distribution,
the date on which the notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such distribution is adopted, as
the case may be, shall be the record date for such determination of
shareholders. When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided herein, such determination
shall apply to any adjournment thereof except where the determination has been
made through the closing of share transfer records and the stated period of
closing has expired.
Unless a record date shall have previously been fixed or determined
pursuant to this Section 6, whenever action by shareholders is proposed to be
taken by consent in writing without a meeting of shareholders, the Board of
Directors may fix a record date for the purpose of determining shareholders
entitled to consent to that action, which record date shall not precede, and
shall not be more than ten (10) days after, the date upon which the resolution
fixing the record date is adopted by the Board of Directors. If no record date
has been fixed by the Board of Directors and the prior action of the Board of
Directors is not required by the Texas Business Corporation Act, the record
date for determining shareholders entitled to consent to action in writing
without a meeting shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office, its principal place of
business, or the Secretary or an Assistant Secretary of the Corporation.
Delivery shall be by hand or by certified or registered mail, return receipt
requested. Delivery to the Corporation's principal place of business shall be
addressed to the President or the Chief Executive Officer of the Corporation.
If no record date shall have been fixed by the Board of Directors and prior
action of the Board of Directors is required by the Texas Business Corporation
Act, the record date for determining shareholders entitled to consent to action
in writing without a meeting shall be at the close of business on the date on
which the Board of Directors adopts a resolution taking such prior action.
- 21 -
<PAGE> 22
Section 7. Regulations. The Board of Directors shall have power and
authority to make all such rules and regulations as they may deem expedient
concerning the issue, transfer and registration or the replacement of
certificates for shares of the capital stock of the Corporation.
ARTICLE IX
MISCELLANEOUS PROVISIONS
Section 1. Fiscal Year. The fiscal year of the Corporation shall be
such as the Board of Directors shall, by resolution, provide or establish or
such as the President shall determine subject to approval of the Board.
Section 2. Seal. The seal of the Corporation shall be in such form
as the Board of Directors shall prescribe, and may be used by causing it or a
facsimile thereof to be impressed, or printed, or reproduced or in any other
manner affixed. The Secretary shall have charge of the seal. If and when so
directed by the Board of Directors, duplicates of the seal may be kept and used
by the Treasurer or by the Assistant Secretary or Assistant Treasurer.
Section 3. Notice and Waiver of Notice. Whenever any notice is
required to be given under the provisions of the Texas Business Corporation Act
or under the provisions of these Bylaws or the Articles of Incorporation of the
Corporation, said notice shall be deemed to be sufficient if given by
depositing the same in a post office box in a sealed post-paid wrapper
addressed to the person entitled thereto at his post office address as the same
appears on the books or other records of the Corporation, and such notice shall
be deemed to have been given and received if given in any other manner or by
any other means authorized or provided for elsewhere in these Bylaws. A
written waiver of notice, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be equivalent to
the giving of such notice.
Section 4. Resignations. Any director or officer may resign at any
time. Each such resignation shall be made in writing and shall take effect at
the time specified therein, or, if no time be specified, at the time of its
receipt by either the Board of Directors or the President or the Secretary.
The acceptance of a resignation shall not be necessary to make it effective,
unless expressly so provided in the resignation.
Section 5. Depositories. Funds of the Corporation not otherwise
employed shall be deposited in such banks or other depositories as either the
Board of Directors or the President or the Treasurer may select or approve.
Section 6. Signing of Checks and Notes. In addition to and
cumulative of, but in no way limiting or restricting, any other provision of
these Bylaws which confer any authority relative thereto, all checks, drafts
and other orders for the payment of money out of funds of the corporation and
all notes and other evidences of indebtedness of the Corporation shall be
signed on behalf of the Corporation, in such manner, and by such officer or
person as shall be determined or designated by the Board of Directors;
provided, however, that if, when, after and as authorized or provided for by
the Board of Directors, the signature of any such officer or person may be a
facsimile or engraved or printed, and shall have the same force and effect and
bind the Corporation as though such officer or person had signed the same
personally, and, in the event of the death, disability, removal or resignation
of any such officer or person, if the Board of Directors
- 22 -
<PAGE> 23
shall so determine or provide, as though and with the same effect as if such
death, disability, removal or resignation had not occurred.
Section 7. Gender and Number. Wherever used or appearing in these
Bylaws, pronouns of the masculine gender shall include the persons of the
female sex as well as the neuter gender and the singular shall include the
plural wherever appropriate.
Section 8. Laws and Statutes. Wherever used or appearing in these
Bylaws, the words "law" or "laws" or "statute" or "statutes," respectively,
shall mean and refer to laws and statutes, or a law or statue, of the State of
Texas, to the extent only that such is or are expressly applicable, except
where otherwise expressly stated or the context requires that such words not be
so limited.
Section 9. Headings. The headings of the Articles and Sections of
these Bylaws are inserted for convenience of reference only and shall not be
deemed to be a part thereof or used in the construction or interpretation
thereof.
ARTICLE X
AMENDMENTS
These Bylaws may, from time to time, be added to, changed, altered,
amended or repealed or new Bylaws may be made or adopted by the Board of
Directors at any meeting of the Board of Directors, subject to repeal or change
by action of the shareholders, unless the power to alter, amend or repeal the
Bylaws is reserved to the shareholders in the Articles of Incorporation of the
Corporation.
- 23 -
<PAGE> 1
EXHIBIT 4.1
$135,000,000
Michael Petroleum Corporation
11 1/2% Senior Notes due 2005
PURCHASE AGREEMENT
March 30, 1998
BEAR, STEARNS & CO. INC.
JEFFERIES & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Ladies and Gentlemen:
Michael Petroleum Corporation (the "Company"), a Texas corporation and
a wholly owned subsidiary of Michael Holdings, Inc., a Texas corporation
("MHI"), proposes to issue and sell to you (the "Initial Purchasers"), upon the
terms set forth herein ("this Agreement"), $135,000,000 principal amount of the
Company's 11 1/2% Senior Notes due 2005 (the "Notes"). The Notes will be
issued pursuant to an indenture, to be dated as of April 2, 1998 (the
"Indenture") by and between the Company and State Street Bank and Trust
Company, as trustee (the "Trustee"), substantially in the form previously
furnished to you. Concurrently herewith, the Company and each of the Initial
Purchasers will enter into a Registration Rights Agreement, of even date
herewith (the "Registration Rights Agreement"), substantially in the form
attached hereto as Exhibit A. Pursuant to the Registration Rights Agreement,
the Company has agreed, among other things, to file with, and cause to be
declared effective by, the Securities and Exchange Commission (the
"Commission") a registered exchange offer under the Securities Act of 1933, as
amended (the "Securities Act"), relating to an offer to exchange the Notes for
a like principal amount of debt securities of the Company which have been
registered under the Securities Act identical in all material respects to the
Notes.
Capitalized terms not specifically defined herein are defined in the
Offering Memorandum referred to below, and used herein as so defined.
1. Representations and Warranties of the Company and MHI.
The Company and MHI, jointly and severally, represent and warrant to
each of the Initial Purchasers as follows:
<PAGE> 2
a. The Company has prepared and furnished to the Initial
Purchasers a preliminary offering memorandum, dated March 14, 1998, with
respect to the Notes that is subject to completion (hereafter, the "Preliminary
Memorandum") and is also preparing and furnishing to the Initial Purchasers a
final offering memorandum, dated the date hereof, with respect to the Notes
that includes information with respect to the rate of interest on the Notes and
other data (hereafter, the "Definitive Memorandum" and, collectively with the
Preliminary Memorandum, the "Offering Memorandum"). The Definitive Memorandum,
at the date thereof and at all times thereafter to and including the Closing
Date (as hereinafter defined) does not and will not contain an untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that the Company makes no representation or warranty as to information
contained in or omitted from the Offering Memorandum, as amended or
supplemented, in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any of the Initial Purchasers
specifically for inclusion in the Offering Memorandum. The Preliminary
Memorandum, at the date thereof and at all times subsequent thereto to the date
hereof, did not contain an untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. No stop order preventing the use of the Offering Memorandum,
or any amendment or supplement thereto, or any order asserting that any of the
transactions contemplated by this Agreement are subject to the registration
requirements of the Securities Act, has been issued.
b. Subsequent to the respective dates as of which
information is given in the Definitive Memorandum, except as set forth in the
Definitive Memorandum, there has not been any material adverse change in the
business, prospects, properties, operations, condition (financial or other) or
results of operations of the Company and MHI, taken as a whole, whether or not
arising from transactions in the ordinary course of business, and since the
date of the latest balance sheet included in the Definitive Memorandum, neither
the Company nor MHI has incurred or undertaken any liabilities or obligations,
direct or contingent, that are material to the Company and MHI taken as a
whole, except for liabilities or obligations that were incurred or undertaken
in the ordinary course of business or that are fully reflected or disclosed in
the Definitive Memorandum.
c. Each of the Company and MHI has all requisite
corporate power and authority to execute, deliver and perform its obligations
under this Agreement and to consummate the transactions contemplated hereby,
including, without limitation, the corporate power and authority to issue, sell
and deliver the Notes as provided herein. The Company has all requisite
corporate power and authority to execute, deliver and perform its obligations
under the Registration Rights Agreement,
-2-
<PAGE> 3
the Indenture and the Notes and to consummate the transactions contemplated
thereby.
d. This Agreement and the Registration Rights Agreement
have been duly and validly authorized, executed and delivered by the Company
and each is a valid and binding agreement of the Company enforceable against it
in accordance with its terms, except insofar as (i) such enforcement may be
subject to (A) applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (B) general principles of equity
(regardless of whether enforcement is sought in a proceeding at law or in
equity) and (ii) rights to indemnification and contribution may be limited by
federal or state securities laws or public policy relating thereto. This
Agreement has been duly and validly authorized, executed and delivered by MHI
and is a valid and binding agreement of MHI enforceable against it in
accordance with its terms, except insofar as (i) such enforcement may be
subject to (A) applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (B) general principles of equity
(regardless of whether enforcement is sought in a proceeding at law or in
equity) and (ii) rights to indemnification and contribution may be limited by
federal or state securities laws or public policy relating thereto. This
Agreement and the Registration Rights Agreement conform in all material
respects to the descriptions thereof contained in the Offering Memorandum.
e. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement, the Indenture and the Notes and
the consummation of the transactions contemplated hereby and thereby, including
the issuance, sale and delivery of the Notes and application of the proceeds of
the sale thereof as set forth in the Offering Memorandum, will not (i) conflict
with or result in a breach of any of the terms and provisions of, or constitute
a default (or an event that with notice or lapse of time, or both, would
constitute a default) or require consent under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
the Company or MHI pursuant to, the terms of any agreement, instrument,
franchise, license or permit to or by which the Company or MHI is a party or
may be bound (other than those as to which requisite waivers or consents have
been obtained by the Company or MHI), or (ii) violate or conflict with any
provision of the articles of incorporation, by-laws or equivalent instruments
of the Company or MHI or any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or
body having jurisdiction over the Company or MHI or any of their respective
properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court or
any public, governmental or regulatory agency or body having jurisdiction over
the Company or MHI or any of their respective properties or assets is required,
which has not been obtained, for the execution, delivery and performance of
this Agreement, the Registration Rights Agreement, the Indenture and the Notes
-3-
<PAGE> 4
or the consummation of the transactions contemplated hereby and thereby except
as may be required for compliance with federal and state securities laws in
connection with the purchase of the Notes by the Initial Purchasers and
performance of the Company's obligations under the Registration Rights
Agreement.
f. Each of the Company and MHI has been duly formed, is
validly existing as a corporation in good standing under the laws of the State
of Texas and has the corporate power and authority required to carry on its
business as described in the Offering Memorandum and to own, lease and operate
its properties, and each is duly qualified and is in good standing as a foreign
corporation authorized to transact business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not (i)
result, individually or in the aggregate, in a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and MHI, taken as a whole, (ii) interfere with or adversely affect the
issuance or marketability of the Notes pursuant hereto or (iii) in any manner
draw into question the validity of this Agreement, the Registration Rights
Agreement, the Indenture or the Notes or the transactions described in the
Offering Memorandum under the caption "Use of Proceeds" (any of the events set
forth in clauses (i), (ii) or (iii), a "Material Adverse Effect").
g. All of the outstanding shares of capital stock of the
Company have been duly and validly authorized and issued and are fully paid and
non-assessable, and are owned by MHI, free and clear of any security interest,
claim, lien or encumbrance, except for security interests relating to the
T.E.P. Financing. All of the outstanding shares of capital stock of MHI have
been duly and validly authorized and issued and are fully paid and
non-assessable, and are owned as set forth in the Offering Memorandum under the
caption "Principal Shareholders", free and clear of any security interest,
claim, lien or encumbrance, except for encumbrances relating to that certain
Amended and Restated Shareholders Agreement dated December 4, 1996, by and
among MHI and its shareholders. On the Closing Date, there will not be any
rights granted to or in favor of any person to acquire, at present or in the
future, any such capital stock or other equity interests of the Company or MHI,
except as disclosed in the Offering Memorandum. The Company has no
subsidiaries, and MHI has no subsidiaries other than the Company.
h. The authorized, issued and outstanding capital stock
of the Company, as of December 31, 1997, was (i) 100,000,000 shares of common
stock, par value $.10 per share, authorized ("Common Stock"), of which 10,000
shares are issued and outstanding and (ii) 50,000,000 shares of preferred
stock, par value $.10 per share, authorized (the "Preferred Stock"), of which
no shares are issued and outstanding. No additional shares of capital stock of
the Company have been authorized or issued since December 31, 1997. As of the
Closing Date, all of the outstanding shares of Common Stock will have been duly
authorized and validly
-4-
<PAGE> 5
issued, fully paid and non-assessable and will not have been issued in
violation of any preemptive or similar rights. As of the Closing Date, except
as disclosed in the Offering Memorandum, (i) there will be no outstanding
securities of the Company convertible into or evidencing the right to purchase
or subscribe for any shares of capital stock of the Company; (ii) there will be
no outstanding or authorized options, warrants, calls, subscriptions, rights,
commitments or any other agreements of any character obligating the Company to
issue any shares of its capital stock or any securities convertible into or
evidencing the right to purchase or subscribe for any shares of such stock; and
(iii) there will be no agreements with respect to the voting, sale or transfer
of any shares of capital stock of the Company to which the Company is a party.
i. The authorized, issued and outstanding capital stock
of MHI, as of December 31, 1997, was (i) 100,000,000 shares of common stock,
par value $.10 per share, authorized ("MHI Common Stock"), of which 773,425
shares are issued and outstanding and (ii) 50,000,000 shares of preferred
stock, par value $.10 per share, authorized, of which no shares are issued and
outstanding. No additional shares of capital stock of MHI have been authorized
or issued since December 31, 1997. As of the Closing Date, all of the
outstanding shares of MHI Common Stock will have been duly authorized and
validly issued, fully paid and non-assessable and will not have been issued in
violation of any preemptive or similar rights. As of the Closing Date, except
as disclosed in the Offering Memorandum, (i) there will be no outstanding
securities of MHI convertible into or evidencing the right to purchase or
subscribe for any shares of capital stock of MHI; (ii) there will be no
outstanding or authorized options, warrants, calls, subscriptions, rights,
commitments or any other agreements of any character obligating MHI to issue
any shares of its capital stock or any securities convertible into or
evidencing the right to purchase or subscribe for any shares of such stock; and
(iii) there will be no agreements with respect to the voting, sale or transfer
of any shares of capital stock of MHI to which MHI is a party.
j. The Notes have been duly and validly authorized by
all necessary corporate action and, when authenticated by the Trustee and
issued, sold and delivered by the Company pursuant to this Agreement against
payment therefor, will have been duly and validly executed, authenticated,
issued and delivered and will constitute valid and binding obligations of the
Company entitled to the benefits of the Indenture and enforceable against the
Company in accordance with their terms, except insofar as such enforcement may
be subject to (i) applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) general principles of equity
(regardless of whether enforcement is sought in a proceeding at law or in
equity). The Notes, when issued, will conform in all material respects to the
description thereof set forth in the Offering Memorandum.
-5-
<PAGE> 6
k. The Indenture conforms in all material respects to
the description thereof set forth in the Offering Memorandum, conforms in all
material respects with the requirements of the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"), applicable to indentures to be qualified
thereunder, has been duly and validly authorized by all necessary corporate
action and, when executed and delivered by the Company and the Trustee, will
constitute a valid and binding agreement of the Company enforceable against the
Company in accordance with its terms, except insofar as such enforcement may be
subject to (i) applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) general principles of equity
(regardless of whether enforcement is sought in a proceeding at law or in
equity).
l. Neither MHI nor the Company is (i) in violation of
its charter or by-laws or other governing instrument, (ii) in default in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any other
agreement, indenture or instrument to which it is a party or by which it or any
of its property is bound, except for those defaults that, individually or in
the aggregate, would not have a Material Adverse Effect, or (iii) in violation
of any local, state, federal or foreign law, statute, ordinance, rule,
regulation, requirement, judgment or court decree (including, without
limitation, environmental laws, statutes, ordinances, rules, regulations,
judgment or court decrees) applicable to it or any of its assets or properties
(whether owned or leased), except for violations that, individually or in the
aggregate, would not have a Material Adverse Effect. To the best knowledge of
the Company and MHI, there exists no condition that, with notice, the passage
of time or otherwise, would constitute a violation of its charter or bylaws or
other governing instrument, or a default under any bond, debenture, note or any
other evidence of indebtedness or in any other agreement, indenture or
instrument to which it is a party or by which it or any of its property is
bound, except for those defaults that, individually or in the aggregate, would
not have a Material Adverse Effect.
m. There is (i) no action, suit, investigation or
proceeding before or by any court, arbitrator or governmental agency, body or
official, domestic or foreign, now pending or, to the best knowledge of the
Company and MHI, threatened to which the Company or MHI is or may be a party or
to which any of their respective properties or assets is subject, (ii) no
statute, rule, regulation or order that has been enacted, adopted or issued by
any governmental agency or, to the best knowledge of the Company and MHI, that
has been proposed by any governmental body and (iii) no injunction, restraining
order or order of any nature by a federal or state court or foreign court of
competent jurisdiction to which the Company or MHI is or may be subject or to
which the properties or assets of the Company or MHI is or may be subject,
that, in the case of clauses (i), (ii) and (iii) above, (x) is required to be
disclosed in the Offering Memorandum and is not so disclosed or (y) could
reasonably
-6-
<PAGE> 7
be expected to have a Material Adverse Effect. There is no contract or
document material to the Company and MHI, taken as a whole, that would be
required to be described in the Offering Memorandum if it were a prospectus
included in a registration statement on Form S-3 under the Securities Act that
is not so described.
n. Each of the Company and MHI has and, after giving
effect to the Transactions, will have all necessary licenses, consents,
authorizations, approvals, orders, certificates and permits (collectively,
"Licenses") of and from, and has made all declarations and filings with and
satisfied all eligibility and other similar requirements imposed by all
federal, state, local and other governmental authorities, all self-regulatory
organizations and all courts and other tribunals, in each case as required for
the conduct of the business in which it is engaged, and each such License is in
full force and effect, except to the extent that the failure to obtain any such
License or to make any such declaration or filing or satisfy any such
requirement would not have a Material Adverse Effect. Neither the Company nor
MHI has received any notice of proceedings relating to, or has any reason to
believe that any governmental body or agency is considering limiting,
suspending, modifying or revoking, any such License that would have a Material
Adverse Effect.
o. Coopers & Lybrand L.L.P., whose reports are included
in the Offering Memorandum, is an independent public accountant (as defined in
the Securities Act) with respect to the Company and MHI.
p. The consolidated financial statements of MHI and
respective notes thereto included in the Offering Memorandum present fairly in
all material respects the consolidated financial position, results of
operations, cash flows and stockholders' deficit of MHI (as reflected in such
financial statements) in conformity with generally accepted accounting
principles on the basis stated therein at the respective dates or for the
respective periods to which they apply; the statements of revenues and direct
operating expenses and respective notes thereto related to the Lobo Properties
and the properties to be acquired pursuant to each of the Conoco Acquisition
and the Enron Acquisition present fairly in all material respects the revenues
and direct operating expenses of the properties to which they relate in
conformity with generally accepted accounting principles on the basis stated
therein at the respective dates or for the respective periods to which they
apply; all of such statements and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial and
statistical information and data set forth in the Offering Memorandum, in all
material respects, present fairly the information purported to be shown thereby
at the respective dates or for the respective periods to which they apply and
have been prepared on a basis consistent with such financial statements and the
books and records of the Company and the other entities as to which such
information is shown. The pro forma financial statements of MHI included in
the Definitive Memorandum have been prepared in accordance with the published
rules
-7-
<PAGE> 8
and regulations of the Commission applicable to pro forma financial statements
(except for earnings per share information, which has been omitted from such
pro forma financial statements) and the assumptions used in the preparation
thereof are reasonable and appropriate to give pro forma effect in all material
respects to the transactions or circumstances described therein.
q. On December 31, 1997, after giving pro forma effect
to the issuance and sale of the Notes pursuant hereto, the application of the
net proceeds therefrom and the Transactions, the Company would have had an
authorized and outstanding capitalization as set forth in the Offering
Memorandum under "Capitalization."
r. The Company is not an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
s. Neither the Company nor any person acting on its
behalf (provided that no representation is made as to the Initial Purchasers or
any other person acting on their behalf) has offered the Notes for sale by
means of any general solicitation or general advertising within the meaning of
Rule 502(c) under the Securities Act. Neither the Company nor any of its
affiliates has offered the Notes to any person except through the Initial
Purchasers. Neither the Company nor any person acting on its behalf (provided
that no representation is made as to the Initial Purchasers or any other person
acting on their behalf) has offered the Notes or any similar securities for
sale to, or solicited any offer to buy any of the same from, or otherwise
approached or negotiated in respect thereof with, any person other than the
Initial Purchasers and not more than 35 other institutional investors. Neither
the Company nor any affiliate (as defined in Rule 501(b) under the Securities
Act) thereof has, directly or indirectly, or through any agent, within the six
months preceding the date hereof, sold, offered for sale, solicited offers to
buy or otherwise negotiated in respect of the sale of any security of the same
or a similar class as the Notes other than to the Initial Purchasers pursuant
to this Agreement.
t. Since the date of the Preliminary Memorandum, none of
the Company, MHI or any of their affiliates has (i) sold, bid or, purchased or
paid any person any compensation for soliciting purchases of the Notes or (ii)
paid or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company or MHI, other than to the Initial
Purchasers pursuant to this Agreement.
u. Assuming the accuracy of the Initial Purchasers'
representations contained in Section 3 hereof and the Initial Purchasers'
compliance with their covenants therein set forth, it is not necessary, in
connection with the sale and delivery of the Notes to the Initial Purchasers
and the offer and resale of the Notes
-8-
<PAGE> 9
by the Initial Purchasers, in each case in the manner contemplated by this
Agreement and the Offering Memorandum, to register the Notes under the
Securities Act or to qualify the Indenture under the Trust Indenture Act.
v. Neither the Company nor MHI (i) has violated any
environmental, safety, health or similar law or regulation applicable to its
business relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants,
including, without limitation, the Clean Air Act, as amended, the Clean Water
Act, as amended, the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, the Federal Water Pollution Control Act, as amended,
the Resource Conservation and Recovery Act, as amended, the Toxic Substances
Control Act, as amended, the Oil Pollution Act, as amended, the Occupational
Safety and Health Act, as amended, and comparable state and local laws and
other safety, health and environmental conservation or protection laws
("Environmental Laws"), the effect of which would be to cause, individually or
in the aggregate, a Material Adverse Effect, or (ii) lacks any notices,
permits, licenses or other approvals required of them under applicable
Environmental Laws or is violating any terms and conditions of any such notice,
permit, license or approval, the effect of which would be to cause,
individually or in the aggregate, a Material Adverse Effect. Without
limitation of the foregoing, there is as of the date hereof no litigation or
action pending or, to the best knowledge of the Company and MHI, threatened
against the Company or MHI relating to any violation of any Environmental Laws
with respect to the assets or business of the Company or MHI which is required
to be disclosed in the Offering Memorandum, or which might result, individually
or in the aggregate, in a Material Adverse Effect.
w. There is no alleged liability, or to the best
knowledge of the Company and MHI, potential liability (including, without
limitation, alleged or potential liability or investigatory costs, cleanup
costs, governmental response costs, natural resource damages, property damages,
personal injuries or penalties) of the Company or MHI arising out of, based on
or resulting from (i) the presence or release into the environment of any
Hazardous Material (as defined) at any location leased or owned by the Company
or MHI or (ii) any violation or alleged violation of any Environmental Law,
which alleged or potential liability is required to be disclosed in the
Offering Memorandum, other than as disclosed therein, or could reasonably by
expected to have a Material Adverse Effect. The term "Hazardous Material"
means (i) any "hazardous substance" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
(ii) any "hazardous waste"; as defined by the Resource Conservation and
Recovery Act, as amended, (iii) any petroleum or petroleum product, (iv) any
polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous,
dangerous or toxic chemical, material, waste or substance regulated under or
within the meaning of any other law relating to the
-9-
<PAGE> 10
protection of human health or the environment or imposing liability or
standards of conduct concerning any such chemical material, waste or substance.
x. Neither the Company nor MHI has violated any Federal,
state or local law relating to discrimination in the hiring, promotion or pay
of employees nor any applicable wage or hour laws, nor any provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the
rules and regulations promulgated thereunder, nor has the Company or MHI
engaged in any unfair labor practice, which in each case might result, singly
or in the aggregate, in a Material Adverse Effect. There is (i) no significant
unfair labor practice complaint pending against the Company or MHI or, to the
best knowledge of the Company and MHI, threatened against any of them before
the National Labor Relations Board or any state or local labor relations board,
and no significant grievance or significant arbitration proceeding arising out
of or under any collective bargaining agreement is so pending against the
Company or MHI or, to the best knowledge of the Company and MHI, threatened
against any of them, (ii) no significant strike, labor dispute, slowdown or
stoppage pending against the Company or MHI or, to the best knowledge of the
Company and MHI, threatened against the Company or MHI and (iii) to the best
knowledge of the Company and MHI, no union representation question currently
exists with respect to the employees of the Company or MHI and, to the best
knowledge of the Company and MHI, no union organizing activities are taking
place, except (with respect to any matter specified in clause (i), (ii) or
(iii) above, individually or in the aggregate) such as could not have a
Material Adverse Effect.
y. All tax returns required to be filed by the Company
and MHI in any jurisdiction (including foreign jurisdictions) have been so
filed (except to the extent that the failure to make any such filing would not
have a Material Adverse Effect), and all taxes, assessments, fees and other
charges shown thereon to be due and payable have been paid, other than those
being contested in good faith or those currently payable without penalty or
interest. Neither the Company nor MHI knows of any actual or proposed material
additional tax assessments for any fiscal period against it or MHI. None of
the Company's nor MHI's tax returns are under audit, and no waivers of the
statute of limitations or extensions of time with respect to any tax returns
have been granted to the Company or MHI, except such as would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.
z. The Company and MHI maintain insurance covering their
properties, operations, personnel and businesses. In the Company's and MHI's
reasonable judgment, such insurance insures against such losses and risks as
are adequate in accordance with customary industry practice to protect the
Company and MHI and their businesses. Neither the Company nor MHI has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other expenditures will have to be made in order to continue
such insurance. All such
-10-
<PAGE> 11
insurance is outstanding and duly in force on the date hereof and will be
outstanding and duly in force on the Closing Date.
aa. The Company and MHI have and, after giving effect to
the Transactions, will have good and defensible title to their interests in oil
and gas properties and good and indefeasible title to all other real and
personal property owned by them, in each case free and clear of all liens and
defects except such as are described in the Offering Memorandum or would not
result in a Material Adverse Effect and do not materially interfere with the
use made or proposed to be made of such properties by the Company and MHI; and
any real property and buildings held under lease by the Company and MHI are
held by them under valid, subsisting and enforceable leases with such
exceptions as would not have a Material Adverse Effect and do not materially
interfere with the use made or proposed to be made of such property and
buildings by the Company and MHI. Except to the extent described in the
Offering Memorandum, the leases, options to lease, drilling concessions or
other arrangements held by the Company and MHI reflect in all material respects
the rights of the Company and MHI to develop the unexplored and undeveloped
acreage to produce undeveloped oil and natural gas reserves, as described in
the Offering Memorandum. The Company and MHI have exercised reasonable
diligence, with respect to acquiring or otherwise procuring such leases,
options to lease, drilling concessions and other arrangements, as is customary
in the industry.
bb. The information which was supplied by the Company to
Huddleston & Co., Inc. ("Huddleston"), independent petroleum engineers, for
purposes of evaluating the oil and gas reserves of the Company, Enron Oil & Gas
Company and Conoco Inc. as of December 31, 1997, including, without limitation,
production, costs of operation and development, current prices for production,
agreements relating to current and future operations and sales of production,
was true and correct in all material respects on the dates such estimates were
made and such information was supplied and was prepared in accordance with
customary industry practices, as indicated in the letter of Huddleston included
in the Definitive Memorandum at Annex A (the "Huddleston Letter"); Huddleston
was, as of the date of the Huddleston Letter, and is, as of the date hereof,
independent with respect to the Company and MHI; other than normal production
of the reserves and intervening product price fluctuations, the Company is not
aware of any facts or circumstances that would result in a materially adverse
change in the reserves, or the present value of future net cash flows
therefrom, as described in the Definitive Memorandum and as reflected in the
Huddleston Letter and the reserve report referenced therein; estimates of such
reserves and present values as described in the Definitive Memorandum and
reflected in the Huddleston Letter and the reserve report referenced therein
comply in all material respects to the applicable requirements of Regulation
S-X and Industry Guide 2 under the Securities Act. Except as set forth in the
Definitive Memorandum, there has been no event, trend or condition that
-11-
<PAGE> 12
would have the effect of materially revising downward the estimates of pro
forma proved reserves of the Company as of December 31, 1997.
cc. Except as (i) disclosed to the Initial Purchasers in
writing, (ii) disclosed in or contemplated by the Definitive Memorandum or
(iii) not required to be disclosed in the Definitive Memorandum, the Company is
not engaged in any negotiations, nor is it a party to any existing agreements,
arrangements or understandings, with respect to any acquisitions, combinations
or dispositions of assets or securities that would be material to the Company
and its subsidiaries, taken as a whole.
dd. In reliance upon and subject to the accuracy of the
representations of the Initial Purchasers contained in Section 3 hereof,
neither the execution and delivery of this Agreement and the Registration
Rights Agreement nor the sale of the Notes to be purchased by the Initial
Purchasers is a prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code), with respect to any employee benefit plans
sponsored by the Company or MHI, that is not exempt by statute, regulation or
class exemption. The Company and MHI are in compliance in all material
respects with all presently applicable provisions of ERISA; no "reportable
event" (as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company or MHI would have any material
liability; neither the Company nor MHI has incurred or expects to incur
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 (whether or not
waived) or 4971 of the Code; and each "pension plan" for which the Company or
MHI would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, that would cause the loss of
such qualification except, in each case, for any such event as would not have a
Material Adverse Effect.
ee. Other than discounts and commissions of the Initial
Purchasers as described in the Definitive Memorandum, no fees or commissions
will be payable by the Company to any broker, finder or investment banker with
respect to the issuance and sale of any of the Notes pursuant to the terms of
this Agreement.
ff. No statement, representation or warranty made by the
Company or MHI in this Agreement or the Registration Rights Agreement or made
in any certificate or document required by any of the foregoing agreements to
be delivered by the Company or MHI (or their agents, attorneys or
representatives) to the Initial Purchasers, is, was or will be, when made,
inaccurate, untrue or incorrect in any material respect.
-12-
<PAGE> 13
gg. Neither the Company nor any agent thereof acting on
its behalf has taken, and none of them will take, any action that might cause
this Agreement or the issuance or sale of the Notes or the Exchange Notes or
the application of proceeds thereof to violate Section 7 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") or any regulation issued
pursuant thereto, including, without limitation, Regulation G, T, U or X of the
Board of Governors of the Federal Reserve System, in each case as in effect now
or as the same may hereafter be in effect on the Issue Date.
hh. The Notes, when issued, will not be of the same class
(within the meaning of Rule 144A under the Securities Act) as other securities
of the Company that are listed on a national securities exchange registered
under Section 6 of the Exchange Act, or quoted in a U.S. automated interdealer
quotation system of a registered national securities association.
ii. No action has been taken and no statute, rule,
regulation or order has been enacted, adopted or issued by any governmental
agency that prevents the issuance of the Notes or prevents or suspends the use
of the Offering Memorandum; no injunction, restraining order or order of any
nature by a federal or state court of competent jurisdiction has been issued
that prevents the issuance of the Notes or prevents or suspends the sale of the
Notes in any jurisdiction referred to in Section 4(e) hereof; and every request
of any securities authority or agency of any jurisdiction for additional
information has been complied with in all material respects.
jj. There are no holders of securities of the Company or
MHI who, by reason of the execution by the Company and MHI of this Agreement or
by the Company of the Registration Rights Agreement, the Indenture or the
Notes, or the consummation by the Company and MHI of the transactions
contemplated hereby and thereby, have the right to request or demand that the
Company or MHI register, under the Securities Act or analogous foreign laws and
regulations, securities held by them in connection with the Exchange Offer.
kk. Neither of the Company nor MHI intends to, nor does
it believe that it will, incur debts beyond its ability to pay such debts as
they mature. The present fair saleable value of the assets of the Company and
MHI, taken as a whole, exceeds the amount that will be required to be paid on
or in respect of the existing debts and other liabilities (including contingent
liabilities) of the Company and MHI as they become absolute and matured. The
assets of the Company and MHI, taken as a whole, do not constitute unreasonably
small capital to carry out the business of the Company and MHI taken as a
whole, as conducted or as proposed to be conducted. Upon the issuance of the
Notes and the consummation of the Transactions, the present fair saleable value
of the assets of the Company and MHI, taken as a whole, will exceed the amount
that will be required to be paid on or in
-13-
<PAGE> 14
respect of the existing debts and other liabilities (including contingent
liabilities) of the Company and MHI, taken as a whole, as they become absolute
and matured. Upon the issuance of the Notes and the consummation of the
Transactions, the assets of the Company and MHI, taken as a whole, will not
constitute unreasonably small capital to carry out their businesses as now
conducted, including the capital needs of the Company and MHI, taking into
account the projected capital requirements and capital availability of the
Company and MHI, taken as a whole.
ll. Neither the Company nor any of its affiliates or any
person acting on its or their behalf (other than the Initial Purchasers, as to
whom the Company and MHI make no representation) has engaged or will engage in
any directed selling efforts within the meaning of Regulation S under the
Securities Act ("Regulation S") with respect to the Notes.
mm. The Company has not taken, or omitted to take, any
action to cause the Notes offered and sold in reliance on Regulation S to be
offered and sold in transactions other than in offshore transactions.
nn. The sale of the Notes pursuant to Regulation S is not
part of a plan or scheme to evade the registration provisions of the Securities
Act.
oo. The Company, MHI and their respective affiliates and
all persons acting on their behalf (other than the Initial Purchasers, as to
whom the Company and MHI make no representation) have complied with and will
comply with the offering restrictions requirements of Regulation S applicable
to them and their activities in connection with the offering of the Notes
outside the United States and, in connection therewith, the Offering Memorandum
contains or will contain the disclosure required by Rule 902(h) of the
Securities Act.
pp. The Notes sold in reliance on Regulation S will be
represented upon issuance by a temporary global security that may not be
exchanged for definitive securities until the expiration of the 40-day
restricted period referred to in Rule 903(c)(3) of the Securities Act and only
upon certification of beneficial ownership of Notes by non- U.S. persons or
U.S. persons who purchased such Notes in transactions that were exempt from the
registration requirements of the Securities Act.
qq. The industry and market-related data included in the
Offering Memorandum are based on or derived from sources which the Company and
MHI believe to be reliable and accurate in all material respects.
rr. The Company has delivered to the Initial Purchasers
true and correct copies of all documents and agreements related to the
Transactions, including all exhibits and schedules thereto.
-14-
<PAGE> 15
ss. Neither the Company nor MHI has (i) taken, directly
or indirectly, any action designed to, or that might reasonably be expected to,
cause or result in stabilization or manipulation of the price of any security
of the Company or MHI to facilitate the sale and resale of the Notes or (ii)
since the date of the Preliminary Memorandum (A) sold, bid for, purchased or
(B) paid any person (other than the Initial Purchasers pursuant to the terms
herein) any compensation for soliciting another to purchase any other
securities from the Company or MHI.
tt. No registration under the Securities Act of the Notes
is required for the sale of the Notes to the Initial Purchasers or for the
resale of the Notes pursuant to the procedures and upon the terms and subject
to the conditions set forth in this Agreement and the Definitive Memorandum,
assuming the accuracy of the Initial Purchasers' representations set forth in
Section 3 hereof. No form of general solicitation or general advertising (as
defined in Regulation D under the Securities Act) was used by the Company, MHI
or any of their respective representatives (other than the Initial Purchasers,
as to which the Company and MHI make no representation or warranty) in
connection with the offer and sale of any of the Notes or in connection with
the resale of the Notes pursuant to the procedures and upon the terms and
subject to the conditions set forth in this Agreement and the Definitive
Memorandum, including, but not limited to, articles, notices or other
communications published in any newspaper, magazine, or similar medium or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by an general solicitation or advertising. No securities of
the same class as the Notes have been offered or sold by the Company or MHI
within the six-month period immediately prior to the date hereof.
uu. Each of the Preliminary Memorandum and the Definitive
Memorandum, as of its date, and each amendment or supplement thereto, as of its
date, contains the information specified in, and meets the requirements of,
Rule 144A(d)(4) under the Securities Act.
vv. Each certificate signed by any officer of the Company
or MHI and delivered to the Initial Purchasers or counsel for the Initial
Purchasers shall be deemed to be a representation and warranty by the Company
or MHI, as the case may be, to the Initial Purchasers as to the matters covered
thereby.
2. Purchase, Sale and Delivery of the Notes.
a. Subject to the terms and conditions and in reliance
upon the representations, warranties and covenants of the Company, MHI and the
Initial Purchasers herein set forth, the Company agrees to sell to the Initial
Purchasers and the Initial Purchasers agree to purchase from the Company
$135,000,000 principal amount of Notes, in the respective principal amounts set
forth opposite their names
-15-
<PAGE> 16
on Schedule I hereto, at a price of 98.249% of their principal amount. The
obligations of the Initial Purchasers under this Section 2(a) are several and
not joint.
b. Delivery of the Notes against payment of the purchase
price therefor shall be made at the offices of Fulbright & Jaworski L.L.P.
located at 1301 McKinney, Suite 5100, Houston, Texas 77010, or such other
location as may be mutually acceptable to the Initial Purchasers and the
Company. Such delivery and payment shall be made at 10:00 a.m., New York time,
on the third full business day next following the date of this Agreement, or at
such other time as shall be agreed upon by the Initial Purchasers and the
Company. The time and date of such delivery and payment are herein called the
"Closing Date." One or more certificates evidencing beneficial interests in
the Notes registered in the name of Cede & Co., as nominee of The Depository
Trust Company ("DTC"), or in the name of such other eligible nominee of DTC
identified by the Initial Purchasers to the Company in writing at least two
full business days prior to the Closing Date, in the principal amounts
corresponding to the aggregate principal amount of the Notes (the "Global
Notes") shall be delivered to the Initial Purchasers by the Company, against
payment of the purchase price therefor by wire transfer of same day funds, to
an account designated by the Company, provided that the Company shall give at
least one business day's prior written notice to the Initial Purchasers of the
information required to effect such wire transfer.
c. The Company will permit the Initial Purchasers to
examine and package the Global Notes for delivery at least one full business
day prior to the Closing Date.
d. It is understood that each certificate evidencing a
Note shall bear a legend substantially to the following effect:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE
BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED
OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE
ISSUANCE HEREOF (OR A PREDECESSOR SECURITY HERETO) OR (Y) BY ANY
HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE
THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER
THAN (1) TO THE COMPANY (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR
RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"),
TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A
-16-
<PAGE> 17
PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR
OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY
THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS SECURITY), (3) PURSUANT TO OFFERS AND SALES TO
NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (4) TO
AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE
501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY
THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS SECURITY) THAT IS ACQUIRING THIS SECURITY FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE
FORM ATTACHED TO THIS SECURITY IS DELIVERED BY THE TRANSFEREE TO THE
COMPANY AND THE TRUSTEE, (5) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF
APPLICABLE) UNDER THE SECURITIES ACT OR (6) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OR THE
UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS
SECURITY AGREES IT WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH
CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO
CONFIRM THAT ANY TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE
FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS
SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT
IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A
OR (2) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE
SECURITIES ACT. THIS SECURITY IS SUBJECT TO A REGISTRATION RIGHTS
AGREEMENT DATED AS OF MARCH 30, 1998, AMONG THE COMPANY AND BEAR,
STEARNS & CO. INC., JEFFERIES & COMPANY, INC. AND RAYMOND JAMES &
ASSOCIATES, INC., A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
-17-
<PAGE> 18
3. Offering and Resale of the NOTES.
Each Initial Purchaser hereby acknowledges that the Notes have not
been registered under the Securities Act and that they are being offered and
sold pursuant to an exemption from registration contained in the Securities Act
based in part on its representations contained in this Agreement, including,
without limitation, the following: it has substantial experience in evaluating
and investing in private placement transactions of securities in companies
similar to the Company so that it is capable of evaluating the merits and risks
of its investment in the Company; it acknowledges that it must bear the
economic risk of this investment indefinitely unless the Notes are registered
under the Securities Act or an exemption from registration is available; it has
received and read the Offering Memorandum and has had an opportunity to discuss
the Company's business, management and financial affairs with directors,
officers and other management of the Company and ask questions of, and receive
answers from, the Company and its management regarding the terms and conditions
of its investment in the Company. Each Initial Purchaser represents and
warrants that it is a qualified institutional buyer (as defined in Rule 144A
under the Securities Act ("QIBs")). Each Initial Purchaser agrees with the
Company that (a) it has not and will not solicit offers for, or offer or sell,
the Notes by any form of general solicitation or general advertising (as those
terms are used in Regulation D under the Securities Act) or in any manner
involving a public offering within the meaning of Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder, and (b) in
connection with the initial placement of the Notes, it has and will solicit
offers for the Notes only from, and will offer the Notes only (i) to persons
whom it reasonably believes to be QIBs in accordance with Rule 144A, to whom
notice has been given that such sale or delivery is being made in reliance on
Rule 144A under the Securities Act, and, in each case, in transactions under
Rule 144A, or (ii) outside the United States in reliance on Regulation S under
the Securities Act. The Initial Purchaser agrees that it will not offer, sell
or deliver any of the Notes in any jurisdiction outside the United States, its
territories and possessions except under circumstances that will result in
compliance with the provisions of Regulation S under the Securities Act and the
applicable laws of such jurisdiction. Each Initial Purchaser understands that
no action has been taken to permit a public offering of the Notes in any
jurisdiction within or without the United States where action would be required
for such purpose. Each Initial Purchaser agrees not to cause any advertisement
of the Notes to be published in any newspaper or periodical or posted in any
public place and not to issue any circular relating to the Notes, except in any
such case with the consent of the Company. Each Initial Purchaser agrees to
send and give a copy of the Definitive Memorandum (as the same may be
supplemented or amended) to each purchaser of the Notes in connection with
written confirmation of the sale of the Notes to such person.
4. Agreements of the Company and MHI.
The Company and MHI, jointly and severally, agree with the Initial
Purchasers as follows:
-18-
<PAGE> 19
a. The Company and MHI will advise the Initial
Purchasers promptly (and, if so requested by the Initial Purchasers, will
confirm such advice in writing) of (i) the occurrence, during the period
referred to in paragraph (d) below, of any event of which the Company or MHI
have knowledge that makes any statement of a material fact made in the
Definitive Memorandum untrue or that requires the addition of any statement of
a material fact to, or other material change in, the Definitive Memorandum in
order to make the statements therein, in light of the circumstances existing
when it is delivered to a purchaser, not misleading and (ii) the issuance by
any state securities commission of any stop order suspending the qualification
or exemption from qualification of the Notes for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purpose by any state
securities commission or other regulatory authority. The Company and MHI shall
use their reasonable best efforts to prevent the issuance of any stop order or
order suspending the qualification or exemption of any Notes under any state
securities or "Blue Sky" laws and, if at any time any state securities
commission or other regulatory authority shall issue an order suspending the
qualification or exemption of any Notes under any state securities or "Blue
Sky" laws, the Company and MHI shall use their reasonable best efforts to
obtain the withdrawal or lifting of such order at the earliest possible time.
b. The Company will furnish to the Initial Purchasers
and to those persons whom the Initial Purchasers identify to the Company such
number of copies of the Definitive Memorandum, and any amendments thereof or
supplements thereto, as the Initial Purchasers may reasonably request.
c. The Company (i) will not make any amendment of or
supplement to the Offering Memorandum regarding which the Initial Purchasers
shall not previously have been consulted or use any such proposed amendment or
supplement to which the Initial Purchasers shall reasonably and in good faith
object and (ii) shall promptly prepare, upon the Initial Purchaser's request,
any amendment or supplement to the Offering Memorandum that in the opinion of
counsel to the Initial Purchasers may be necessary or advisable in connection
with resales by the Initial Purchasers pursuant to the procedures and upon the
terms and subject to the conditions set forth in the Offering Memorandum.
d. If, during the period from the date of the Definitive
Memorandum through the Closing Date, and for so long thereafter as in the
opinion of the Initial Purchasers' counsel the Definitive Memorandum is
required to be delivered in connection with resales of the Notes by the Initial
Purchasers, any event shall occur as a result of which it becomes necessary to
amend or supplement the Definitive Memorandum in order that the Definitive
Memorandum will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading in light of the circumstances existing when the Definitive
Memorandum is or is to be delivered to a purchaser, or if it
-19-
<PAGE> 20
becomes necessary to amend or supplement the Definitive Memorandum to comply
with any law, the Company promptly will prepare an appropriate amendment of or
supplement to the Definitive Memorandum so that the Definitive Memorandum, as
so amended or supplemented, does not include such untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein not misleading, in light of the circumstances existing when
it is so delivered, or so that the Definitive Memorandum will comply with law,
and the Company will furnish to the Initial Purchasers such number of copies
thereof as they reasonably may request.
e. The Company will cooperate with the Initial
Purchasers and their counsel in connection with the registration or
qualification of the Notes under the securities or "Blue Sky" laws of such
jurisdictions as they may request, will continue such qualification in effect
for so long as required to permit the continuance of sales of and dealings in
the Notes within such jurisdictions to complete the resale by them of all of
the Notes as specified in Section 3 hereof, and will file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to register or qualify as a foreign
corporation where it is not now so qualified or to take any action that would
subject it to taxation or service of process.
f. So long as any of the Notes are outstanding, the
Company or MHI will furnish to the Initial Purchasers as soon as available a
copy of each report mailed generally by the Company or MHI to holders of Common
Stock of the Company or MHI or filed by the Company or MHI with the Commission,
whether such report or filing is required by the Indenture or otherwise, and
such other publicly available information concerning the Company or MHI as the
Initial Purchasers reasonably may request.
g. So long as and at any time that the Notes are
outstanding and are "restricted securities" within the meaning of Rule
144(a)(3) under the Securities Act and the Company is not subject to Section 13
or 15(d) of the Exchange Act, the Company, upon request of any holder of the
Notes, will furnish to such holder, and to any prospective purchaser or
purchasers of the Notes, designated by such holder, information satisfying the
requirements of subsection (d)(4)(i) of Rule 144A under the Securities Act.
h. The Company and MHI will use their best efforts, and
will cooperate with the Initial Purchasers, to cause the Notes to be eligible
for inclusion in the Private Offerings, Resales and Trading through Automated
Linkages ("PORTAL") market of the National Association of Securities Dealers,
Inc. ("NASD") and to obtain approval of the Notes by DTC for "book-entry"
transfer.
-20-
<PAGE> 21
i. The Company and MHI will not, and will not authorize
or knowingly permit any person acting on their behalf to, offer to sell or
solicit offers to buy any of the Notes by means of any form of general
solicitation or general advertising within the meaning of Section 502(c) under
Regulation D under the Securities Act or in any manner involving a public
offering or distribution of the Notes within the meaning of the Securities Act.
j. The Company shall not take any action or omit to take
any action, which taking or omission, as the case may be, would result in the
Company becoming an "investment company" or a company controlled by an
"investment company" within the meaning of, or require the Company to register
as an "investment company" under, the Investment Company Act of 1940, as
amended.
k. Whether or not the transaction contemplated by this
Agreement is consummated or this Agreement becomes effective or is terminated,
to pay all costs, expenses, fees and taxes incident to the performance of the
obligations of the Company and MHI hereunder, including in connection with:
(i) the preparation, printing, filing and distribution of the Offering
Memorandum (including, without limitation, financial statements) and all
amendments and supplements thereto required pursuant hereto, (ii) the
preparation (including, without limitation, duplication costs) and delivery of
all preliminary and final Blue Sky Memoranda and all other agreements,
memoranda, correspondence and all other documents prepared and delivered in
connection herewith and with resales by the Initial Purchasers (other than the
cost of preparation of this Agreement and the Registration Rights Agreement),
(iii) the issuance, transfer and delivery of the Notes to the Initial
Purchasers, (iv) the qualification or registration of the Notes for offer and
sale under the securities or Blue Sky laws of the several states (including,
without limitation, the cost of printing and mailing a preliminary and final
Blue Sky Memorandum and the reasonable fees and disbursements of counsel for
the Initial Purchasers relating thereto), (v) furnishing such copies of the
Offering Memorandum, and all amendments and supplements thereto, as may be
requested for use in connection with resales by the Initial Purchasers, (vi)
the preparation of certificates for the Notes (including, without limitation,
printing and engraving thereof), (vii) the fees, disbursements and expenses of
the Company's and MHI's counsel and accountants, (viii) all fees and expenses
(including fees and expenses of counsel) of the Company and MHI in connection
with the approval of the Notes by DTC for "book-entry" transfer, (ix) rating
the Notes by the rating agencies, (x) the reasonable fees and expenses of the
Trustee and its counsel, (xi) the performance by the Company and MHI of their
other obligations under this Agreement and by the Company of its obligations
under the Registration Rights Agreement, the Indenture and the Notes, and the
consummation of the transactions contemplated hereby and thereby and (xii)
"roadshow" travel and other expenses incurred in connection with the marketing
and sale of the Notes; provided that, except as provided in this Section 4(k)
and in
-21-
<PAGE> 22
Section 9(c), the Initial Purchasers shall pay their own costs and expenses,
including the costs and expenses of their counsel.
l. The Company will apply the net proceeds from the sale
of the Notes as set forth under the caption "Use of Proceeds" in the Definitive
Memorandum.
m. The Company and MHI will not (and will direct their
affiliates not to) take, directly or indirectly, any action that is designed,
or might reasonably be expected, to cause or result in the stabilization or
manipulation of the price of any security of the Company or MHI to facilitate
the sale or resale of the Notes. Except as permitted by the Securities Act,
neither the Company nor MHI will distribute any (i) preliminary offering
memorandum, including, without limitation, the Preliminary Memorandum, (ii)
definitive offering memorandum, including, without limitation, the Definitive
Memorandum, or (iii) other offering material in connection with the offering
and sale of the Notes.
n. During the period beginning from the date hereof and
continuing to and including the date which is six months after the Closing
Date, neither the Company nor any affiliate thereof shall sell, offer for sale,
solicit offers to buy or otherwise negotiate in respect of the sale of any
"security" (as defined in Section 2(1) of the Securities Act) of the same or a
similar class as the Notes, other than as contemplated by the Registration
Rights Agreement.
o. The Company and MHI will use their reasonable best
efforts to do and perform all things required or necessary to be done and
performed under this Agreement by them prior to the Closing Date and to satisfy
all conditions precedent to the delivery of the Notes.
p. Not to sell, offer for sale or solicit offers to buy
or otherwise negotiate in respect of any security (as defined in the Securities
Act) that would be integrated with the sale of the Notes, in a manner that
would require the registration under the Securities Act of the sale to the
Initial Purchasers or the resale by the Initial Purchasers to QIBs or to
non-U.S. persons outside the United States in reliance upon Regulation S of the
Notes or to take any action that would result in the resales by the Initial
Purchasers not being exempt from registration under the Securities Act.
q. To comply with all of its agreements set forth in the
Registration Rights Agreement and all agreements set forth in the
representations letter of the Company to DTC relating to the approval of the
Notes by DTC for "book-entry" transfer.
-22-
<PAGE> 23
r. Prior to the Closing Date, to furnish to the Initial
Purchasers, as soon as they have been prepared in the ordinary course by the
Company, copies of any unaudited interim financial statements for any period
subsequent to the periods covered by the financial statements appearing in the
Offering Memorandum.
5. Indemnification.
a. The Company and MHI, jointly and severally, agree to
indemnify and hold harmless each Initial Purchaser, its directors, officers and
employees and each person, if any, who controls such Initial Purchaser, now or
hereafter, and their directors, officers and employees within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act (the Initial
Purchasers and each such person being sometimes hereafter referred to as an
"Indemnified Person"), from and against any and all losses, claims, damages,
awards, liabilities and judgments (collectively, "Losses") arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Offering Memorandum or in any amendments thereof or
supplements thereto (including, without limitation, the financial statements,
accounting and statistical data included therein and the related notes
thereto), or by any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
except insofar as, and only to the extent that, such Losses arise out of or are
based upon any such untrue statement or omission or alleged untrue statement or
omission based upon the information relating to such Initial Purchaser
furnished by it to the Company expressly for use therein and used in conformity
therewith. This indemnity is and will be in addition to any liability which
the Company and MHI otherwise may have.
b. In case any action or proceeding (including any
governmental investigation or inquiry) shall be brought or asserted against an
Indemnified Person, or notice of any such claim is received, with respect to
which indemnity may be sought against the Company or MHI, such Indemnified
Person shall promptly notify the Company and MHI in writing and the Company and
MHI shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such Indemnified Person and the payment of all
reasonable fees and expenses of such defense; provided that the failure by any
such Indemnified Person to so notify the Company and MHI shall not relieve the
Company and MHI of their indemnification obligations under Sections 5(a) and
(b) hereof, except to the extent that the Company and MHI are materially
prejudiced or forfeit substantive rights and defenses by reason of such
failure. Such Indemnified Person shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified
Person, unless (i) the employment of such counsel has been authorized in
writing by the Company and MHI, (ii) the Company and MHI have failed promptly
to assume the defense and employ counsel (reasonably satisfactory to such
Indemnified Person), or
-23-
<PAGE> 24
(iii) the named parties to any such action (including any impleaded parties)
include both such Indemnified Person and the Company or MHI, and such
Indemnified Person shall have been advised by such counsel that there may be
one or more legal defenses available to such Indemnified Person that are
different from or additional to those available to the Company or MHI, as the
case may be, and in the reasonable judgment of such counsel it is advisable for
such Indemnified Party to employ separate counsel (in all of which cases, if
such Indemnified Person notifies the Company and MHI in writing that it elects
to employ separate counsel at the expense of the Company and MHI, the Company
and MHI shall not have the right to assume the defense of such action on behalf
such Indemnified Person; it being understood, however, that the Company and MHI
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for such Indemnified Person and any other Indemnified Persons, which
firm shall be designated in writing by such Indemnified Persons (which shall be
reasonably satisfactory to the Company and MHI) and that all such fees and
expenses shall be reimbursed promptly as they are billed. The Company and MHI
shall not be liable for any settlement of any such action or proceeding
effected without their written consent (not to be unreasonably withheld) and if
settled with their written consent or if there is a final, unappealable
judgment for the plaintiff, the Company and MHI agree to jointly and severally
indemnify and hold harmless such Indemnified Persons from and against any loss
or liability by reason of such settlement or judgment. Without limiting the
generality of the foregoing, the Company and MHI shall not effect any
settlement of any pending or threatened proceeding in respect of which any
Indemnified Person is or has been threatened to be made a party where indemnity
could have been sought hereunder by such Indemnified Person unless the Company
and MHI shall have obtained the prior written consent of such Indemnified
Person (not to be unreasonably withheld); provided, however, that the Company
and MHI may effect such a settlement without the consent of such Indemnified
Person if such settlement includes an unconditional release of such Indemnified
Person from all liability for claims that are the subject matter of such
proceeding or the Company and MHI indemnify such Indemnified Person in writing
and post a bond for an amount equal to the maximum liability for all such
claims as contemplated above or provide other security for such indemnity as
shall be reasonably satisfactory to such Indemnified Person.
c. Each Initial Purchaser agrees, severally and not
jointly, to indemnify and hold harmless the Company and MHI, their directors,
officers and employees and each person, if any, controlling the Company and MHI
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act from and against any and all Losses to the same extent as the
foregoing indemnity from the Company and MHI to the Initial Purchasers but only
with respect to information relating to such Initial Purchaser furnished in
writing by such Initial Purchaser
-24-
<PAGE> 25
expressly for use in the Offering Memorandum or any amendment thereof or
supplement thereto and used in conformity therewith; provided, however, that in
no case shall any Initial Purchaser be liable or responsible for any amount in
excess of the discounts and commissions received by the Initial Purchaser in
connection with the sale of the Notes, as set forth on the cover page of the
Offering Memorandum. In case any action or proceeding shall be brought against
the Company and MHI, any of their directors, any of their officers or any such
controlling person based on the Offering Memorandum or any amendment thereof or
supplement thereto and in respect of which indemnity may be sought against an
Initial Purchaser, such Initial Purchaser shall have the same rights and duties
as are given to the Company and MHI by Section 5(b) hereof (except that if the
Company and MHI shall have assumed the defense thereof, such Initial Purchaser
shall not be required to do so, and in such case such Initial Purchaser may
employ separate counsel therein and participate in the defense thereof but the
fees and expenses of such counsel shall be at such Initial Purchaser's
expense), and the Company, MHI, their directors, officers and employees and
each such controlling person shall have the same rights and duties as are given
to such Initial Purchaser by Section 5(b) hereof. The Company and MHI
acknowledge that the only information furnished in writing by or on behalf of
any Initial Purchaser expressly for use in the Offering Memorandum consists of
the following: (i) the last full paragraph of text appearing on the outside
front cover page of the Definitive Memorandum, (ii) the names of the Initial
Purchasers in the form they appear on the outside front cover page of the
Definitive Memorandum and in the table under the caption "Plan of Distribution"
in the Definitive Memorandum, (iii) the first sentence of the second paragraph
following the table under the caption "Plan of Distribution" in the Definitive
Memorandum, (iv) the third sentence of the third paragraph following the table
under the caption "Plan of Distribution" in the Definitive Memorandum and (v)
the first sentence of the fifth paragraph following the table under the caption
"Plan of Distribution" in the Definitive Memorandum.
d. If the indemnification provided for in this Section 5
is unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any Losses (other than by reason of exceptions provided in
such Section), then the party who would otherwise be responsible for such
indemnification, in lieu of, or in addition to, indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such Losses (i) in such proportion as is appropriate to reflect
the relative benefits received by the indemnifying party on the one hand and
the indemnified party on the other hand from the offering of the Notes or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
indemnifying party and the indemnified party in connection with the statements
or omissions which resulted in such Losses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
MHI and an Initial Purchaser shall be deemed to be in the same proportion as
the total net proceeds from the
-25-
<PAGE> 26
Offering (before deducting expenses) received by the Company and MHI, and the
total discounts and commissions received by such Initial Purchasers, bear to
the total price of the Notes to investors, in each case as set forth in the
table on the cover page of the Definitive Memorandum. The relative fault of
the Company and MHI and such Initial Purchaser shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company and MHI or such Initial
Purchaser and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and MHI and the Initial Purchasers agree that it would not
be just and equitable if contribution pursuant to this Section 5(d) were
determined by pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an indemnified
party as a result of Losses shall be deemed to include, subject to the
limitations set forth above, any legal or other fees or expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 5, each Initial Purchaser shall not be required to contribute any
amount in excess of the amount of the total discount applicable to the Notes
purchased by such Initial Purchaser. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 5(d), each
director, officer and employee of an Initial Purchaser or the Company and MHI,
and each person, if any, who controls an Initial Purchaser or the Company and
MHI within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, shall have the same rights to contribution as such Initial
Purchaser or the Company and MHI, as the case may be.
6. Conditions of the Initial Purchasers' Obligations.
The Initial Purchasers' obligations to purchase and pay for the Notes
shall be subject to (i) the accuracy of the representations and warranties of
the Company and MHI herein contained as of the date hereof and as of the
Closing Date, (ii) the absence in any certificates, opinions, written
statements or letters furnished pursuant to this Section 6 to the Initial
Purchasers or to their counsel, of any qualification or limitation not
previously approved by the Initial Purchasers, (iii) the performance by the
Company and MHI of their respective obligations hereunder required to be
performed on or prior to the Closing Date, and (iv) the following additional
conditions:
a. Since the date of the latest balance sheet included
in the Definitive Memorandum: (i) there shall not have been any material
adverse change, or any development involving a prospective material adverse
change, in the capital
-26-
<PAGE> 27
stock or in the long-term debt of the Company or MHI from that set forth in or
contemplated by the Definitive Memorandum, (ii) the Company shall have no
liability or obligation, direct or contingent, that is material to the Company
and MHI, taken as a whole, other than those reflected in the Definitive
Memorandum; and (iii) there shall not have been any material adverse change, or
any development involving a prospective material adverse change, in the
financial condition, business, properties, prospects, oil and gas reserves, net
worth or results of operations of the Company and MHI, taken as a whole,
except, in each case, as expressly described in the Definitive Memorandum.
b. The representations and warranties made by the
Company and MHI herein shall be true and correct on and as of the Closing Date
with the same effect as though such representations and warranties had been
made on and as of the Closing Date; and the Company and MHI shall have complied
in all material respects with all agreements hereunder required to be performed
by the Company and MHI.
c. As to each Initial Purchaser, the purchase of and
payment for the Notes to be purchased by such Initial Purchaser hereunder shall
not be prohibited or enjoined (temporarily or permanently) by any applicable
law or governmental regulation, order or other restriction.
d. The Definitive Memorandum shall have been printed and
copies distributed to the Initial Purchasers not later than 10:00 a.m., New
York time, on the day following the date of this Agreement or at such later
date and time as to which the Initial Purchasers may agree, and no stop order
suspending the qualification or exemption from qualification of the Notes in
any jurisdiction referred to in Section 4(e) shall have been issued and no
proceeding for that purpose shall have been commenced or shall be pending or
threatened.
e. No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency which would, as of the Closing Date, prevent the issuance
of the Notes; no action, suit or proceeding shall have been commenced and be
pending against or affecting or, to the best knowledge of the Company or MHI,
threatened against, the Company or MHI before any court or arbitrator or any
governmental body, agency or official that, if adversely determined, could
reasonably be expected to result in a Material Adverse Effect; and no stop
order shall have been issued preventing the use of the Offering Memorandum, or
any amendment or supplement thereto, or which could reasonably be expected to
have a Material Adverse Effect, on the condition, financial or otherwise, or
the earnings, business affairs or business prospects of the Company and MHI,
taken as a whole.
f. On the Closing Date, the Initial Purchasers shall
have received the opinion of Haynes and Boone, L.L.P., counsel to the Company
and MHI, dated the
-27-
<PAGE> 28
Closing Date, addressed to the Initial Purchasers, and in form and scope
reasonably satisfactory to the Initial Purchasers' counsel, substantially as
set forth in Exhibit B hereto.
g. On the Closing Date, the Initial Purchasers shall
have received a certificate, dated the Closing Date, signed by each of the
Chairman of the Board and Vice President - Finance or the President and the
Vice President - Finance of each of the Company and MHI, and such other
certificates of executive officers as the Initial Purchasers may specify
confirming the matters set forth in paragraphs (a), (b) (d) and (e) of this
Section 6.
h. On the Closing Date, the Initial Purchasers shall
have received from Fulbright & Jaworski L.L.P., an opinion, dated the Closing
Date, addressed to the Initial Purchasers, with respect to the Company, MHI,
the Offering Memorandum, the offer, sale and resale of the Notes and other
related matters as the Initial Purchasers reasonably may require, and the
Company shall have furnished to such firm such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters.
i. Concurrently with the execution and delivery of this
Agreement, the Initial Purchasers shall have received from Coopers & Lybrand
L.L.P., and on the Closing Date, the Initial Purchasers shall have received
from Coopers & Lybrand L.L.P., a letter addressed to the Initial Purchasers,
dated the date of its delivery, substantially in the form and to the effect and
with respect to such matters as shall have been previously agreed upon by the
Initial Purchasers.
j. Concurrently with the execution and delivery of this
Agreement, the Initial Purchasers shall have received from Huddleston, and on
the Closing Date, the Initial Purchasers shall have received from Huddleston, a
letter addressed to the Initial Purchasers, dated the date of its delivery,
substantially in the form and to the effect and with respect to such matters as
shall have been previously agreed upon by the Initial Purchasers.
k. On the Closing Date, the Company shall have entered
into the Registration Rights Agreement and the Initial Purchasers shall have
received counterparts, conformed as executed, thereof.
l. On the Closing Date, the Company and the Trustee
shall have entered into the Indenture and the Initial Purchasers shall have
received counterparts, conformed as executed, thereof.
m. Each of the Enron Acquisition and the Conoco
Acquisition shall be consummated prior to, or simultaneously with, the Closing
of the offering on substantially the terms described in the Definitive
Memorandum, and the Initial
-28-
<PAGE> 29
Purchasers shall have received counterparts, conformed as executed, of such
documentation as they deem necessary to evidence the consummation thereof.
n. All outstanding indebtedness under the T.E.P.
Financing, including any related swap arrangements, shall be repaid prior to,
or simultaneously with, the Closing of the offering, and the Initial Purchasers
shall have received counterparts, conformed as executed, of such documentation
as they deem necessary to evidence such repayment.
o. The acquisition of the Net Profits Interest from
Cambrian shall be consummated prior to, or simultaneously with, the Closing of
the offering, and the Initial Purchasers shall have received counterparts,
conformed as executed, of such documentation as they deem necessary to evidence
the consummation thereof.
p. Prior to, or simultaneously with, the Closing of the
offering, Cambrian shall surrender the original warrants granted to Cambrian in
connection with the conveyance by the Company to Cambrian of the Net Profits
Interest and the Company shall issue to Cambrian a new warrant on substantially
the terms described in the Definitive Memorandum, and the Initial Purchasers
shall have received counterparts, conformed as executed, of such documentation
as they deem necessary to evidence the consummation thereof.
q. The Notes shall have been approved for trading on
PORTAL.
r. There shall not have been any announcement by any
"nationally recognized statistical rating organization", as defined for
purposes of Rule 463(g) under the Securities Act, that (i) it is downgrading
its rating assigned to any class of securities of the Company or (ii) it is
reviewing its ratings assigned to any class of securities of the Company with a
view to possible downgrading, or with negative implications, or direction not
determined.
s. The indebtedness owed by the Company to Enron Oil &
Gas Company in connection with the closing of the Enron Acquisition shall have
been repaid prior to, or simultaneously with, the Closing of the offering, and
the Initial Purchasers shall have received counterparts, conformed as executed,
of such documentation as they deem necessary to evidence such repayment.
t. Prior to the Closing Date, the Company and MHI shall
have furnished to the Initial Purchasers such further information, certificates
and documents as the Initial Purchasers reasonably may request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to the Initial
Purchasers or to their counsel
-29-
<PAGE> 30
pursuant to this Section 6 shall not be reasonably satisfactory in form and
scope in all material respects to the Initial Purchasers and to their counsel,
all of the Initial Purchasers' obligations hereunder may be cancelled by them
at, or at any time prior to, the Closing Date. Notice of such cancellation
shall be given to the Company and MHI in writing or by telephone, telecopy,
telex or telegraph, confirmed in writing.
7. Effective Date of Agreement and Termination.
a. This Agreement shall become effective upon its
execution.
b. This Agreement may be terminated at any time prior to
the Closing Date by the Initial Purchasers upon notice to the Company and MHI
if any of the following has occurred: (i) since the respective dates as of
which information is provided in the Definitive Memorandum, any material
adverse change, or any development involving a prospective material adverse
change, in the financial condition, business, properties, prospects, oil and
gas reserves, net worth or results of operations of the Company and MHI, taken
as a whole, which would, in the Initial Purchasers' reasonable judgment, make
it impracticable to market the Notes on the terms and in the manner
contemplated in the Offering Memorandum, (ii) any outbreak or escalation of
hostilities or other national or international calamity or crisis or material
adverse change in economic conditions, if the effect of such outbreak,
escalation, calamity, crisis or change on the financial markets of the United
States would, in the Initial Purchasers' reasonable judgment, make it
impracticable to market the Notes on the terms and in the manner specified in
the Offering Memorandum, (iii) any suspension of trading in securities on the
New York Stock Exchange, Inc., the American Stock Exchange or The Nasdaq Stock
Market or the imposition of any limitation on prices (other than limitations on
hours or number of days of trading) for securities on any such exchange or The
Nasdaq Stock Market, (iv) the reenactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in the Initial Purchasers'
reasonable judgment materially and adversely affects, or will materially and
adversely affect, the business or operations of the Company and MHI, taken as a
whole, (v) the declaration of a banking moratorium by either federal or New
York State authorities, (vi) the taking of any action by any federal, state or
local government or agency in respect of its monetary or fiscal affairs that in
the Initial Purchasers' reasonable judgment could have a material adverse
effect on the financial markets in the United States, or (viii) there shall
have been such a material adverse change in general economic, political or
financial conditions or if the effect of international conditions on the
financial markets in the United States shall be such as, in the Initial
Purchasers' judgment, makes it inadvisable or impracticable to market the Notes
on the terms and in the manner contemplated in the Offering Memorandum.
-30-
<PAGE> 31
8. Default by One or More of the Initial Purchasers. If one or
more of the Initial Purchasers shall fail on the Closing Date to purchase the
Notes that it or they are obligated to purchase under this Agreement (the
"Defaulted Notes") and (i) if the aggregate principal amount of the Defaulted
Notes does not exceed 10% of the aggregate principal amount of the Notes
purchased hereunder, the non-defaulting Initial Purchasers shall be obligated
to purchase the Defaulted Notes in the same proportion as the amount set forth
opposite their names on Schedule I bears to the aggregate principal amount of
the Notes purchased hereunder or (ii) if the aggregate principal amount of the
Defaulted Notes equals or exceeds 10% of the aggregate principal amount of the
Notes purchased hereunder, the non-defaulting Initial Purchasers shall have the
right, but not the obligation, within five days thereafter, to make
arrangements for one of more of the non-defaulting Initial Purchasers to
purchase all, but not less than all, of the Defaulted Notes in such amounts as
may be agreed upon and upon the terms herein set forth; if, however, the
non-defaulting Initial Purchasers shall not have completed such arrangements
within such five-day period, then this Agreement shall terminate without
liability on the part of any non-defaulting Initial Purchaser, the Company or
MHI. No action taken pursuant to this Section 8 shall relieve any defaulting
Initial Purchaser from liability in respect of its default.
9. Miscellaneous
a. Notices given pursuant to any provision of this
Agreement shall be given by facsimile transmission or by notice in writing hand
delivered or by certified mail, postage prepaid, return receipt requested. All
such notices shall be sent to the facsimile transmission number or address (as
the case may be) as follows:
(i) if to the Company or MHI, to:
Michael Petroleum Corporation
13101 Northwest Freeway, Suite 320
Houston, Texas 77040
Attention: President
Fax Number: (713) 895-0320
with a copy to:
Haynes and Boone, L.L.P.
1000 Louisiana Street, Suite 4300
Houston, Texas 77002-5012
Attention: Marc H. Folladori
Fax Number: (713) 547-2600
-31-
<PAGE> 32
(ii) if to the Initial Purchasers, to:
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Attention: Corporate Finance Department
Fax Number: (212) 272-3092
and
Jefferies & Company, Inc.
11100 Santa Monica Boulevard
Los Angeles, California 90025
Attention: Jerry Gluck
Fax Number: (310) 914-1014
and
Raymond James & Associates
880 Carillon Parkway
St. Petersburg, Florida 33716
Attention: Corporate Finance Department
Fax Number: (813) 573-8058
with a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Attention: Charles L. Strauss
Fax Number: (713) 651-5246
b. The respective indemnities, contribution agreements,
representations, warranties and other statements of the Company and MHI and the
Initial Purchasers set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery of and
payment for the Notes, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of the officers or directors of any
of the Company and MHI or any controlling person of the Company or MHI and (ii)
acceptance of the Notes and payment for them hereunder. The respective
agreements, indemnities and other statements set forth in Sections 4(k) and 5
hereof shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement.
-32-
<PAGE> 33
c. If this Agreement shall be terminated by the Initial
Purchasers because of any failure or refusal on the part of the Company or MHI
to comply with the terms or to fulfill any of the conditions of this Agreement,
the Company and MHI shall reimburse the Initial Purchasers for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by them in connection with the offering of the Notes.
d. Except as otherwise provided, this Agreement has been
and is made solely for the benefit of and shall be binding upon the Company and
MHI, their respective directors and officers, the Initial Purchasers, any
controlling persons referred to herein and their respective successors and
assigns, all as and to the extent provided in this Agreement, and no other
person shall acquire or have any right under or by virtue of this Agreement.
The term "successors and assigns" shall not include a purchaser of any of the
Notes from the Initial Purchasers merely because of such purchase.
Notwithstanding the foregoing it is expressly understood and agreed that each
purchaser of the Notes from the Initial Purchasers is intended to be a
beneficiary of the Company's and MHI's covenants contained in the Registration
Rights Agreement to the same extent as if the Notes were sold and those
covenants were made directly to such purchaser by the Company and MHI, and each
such purchaser shall have the right to take action against either of the
Company and MHI to enforce, and obtain monetary recovery for damages resulting
from any breach of, those covenants.
e. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to instruments
made and performed wholly in such state and without regard to the choice of law
provisions of such state.
f. This Agreement may be signed in counterparts, all of
which taken together shall constitute but one and the same original instrument.
Please confirm that the foregoing correctly sets forth the mutual
agreement and understanding between the Company, MHI and the Initial Purchasers
as to the subject matter herein set forth.
-33-
<PAGE> 34
PURCHASE AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above:
Very truly yours,
MICHAEL PETROLEUM CORPORATION
By: /s/ MICHAEL FARMAR
------------------------------------
Name: Michael Farmar
-----------------------------------
Title: President
----------------------------------
MICHAEL HOLDINGS, INC.
By: /s/ MICHAEL FARMAR
------------------------------------
Name: Michael Farmar
-----------------------------------
Title: President
----------------------------------
<PAGE> 35
PURCHASE AGREEMENT SIGNATURE PAGE
Accepted and agreed to as of
the first date written above
BEAR, STEARNS & CO. INC.
By: /s/ T. ANDREW BUGAS
---------------------------------
Name: T. Andrew Bugas
---------------------------------
Title: Senior Managing Director
-------------------------------
JEFFERIES & COMPANY, INC.
By: /s/ JOE MALY
-----------------------------------
Name: Joe Maly
---------------------------------
Title: Managing Director
--------------------------------
RAYMOND JAMES & ASSOCIATES, INC.
By: /s/ JAMES A. MCDANIEL
--------------------------------
Name: James A. McDaniel
---------------------------------
Title: Managing Director
--------------------------------
<PAGE> 36
SCHEDULE I
<TABLE>
<CAPTION>
Principal Amount
<S> <C>
Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . $ 94,500,000
Jefferies & Company, Inc. . . . . . . . . . . . . . . . 33,750,000
Raymond James & Associates, Inc. . . . . . . . . . . . 6,750,000
----------------
Total . . . . . . . . . . . . . . . . $ 135,000,000
================
</TABLE>
<PAGE> 1
EXHIBIT 4.2
================================================================================
MICHAEL PETROLEUM CORPORATION
as Issuer,
AND
STATE STREET BANK AND TRUST COMPANY
as Trustee
--------------------------------
INDENTURE
DATED AS OF APRIL 2, 1998
--------------------------------
$135,000,000
SERIES A AND SERIES B
11 1/2% SENIOR NOTES DUE 2005
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA SECTION INDENTURE SECTION
<S> <C>
310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8; 7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8; 7.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3
313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6; 7.7
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6; 11.2
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2; 4.3; 11.2; 11.5
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(b)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5; 11.2
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(a)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(c)
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11
316(a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2; 6.4; 9.2
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4
317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4
318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1
318(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1
- -------------------------
</TABLE>
N.A. means Not Applicable
NOTE: This Cross-Reference table shall not, for any purpose, be deemed part of
this Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
<S> <C> <C> <C>
SECTION 1.1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2. OTHER DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 1.4. RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE II
THE SECURITIES
SECTION 2.1. FORM AND DATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.2. EXECUTION AND AUTHENTICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.3. REGISTRAR AND PAYING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.4. PAYING AGENT TO HOLD MONEY IN TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.5. HOLDER LISTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.6. TRANSFER AND EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.7. REPLACEMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 2.8. OUTSTANDING SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 2.9. TREASURY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 2.10. TEMPORARY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 2.11. CANCELLATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 2.12 DEFAULTED INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 2.13. PERSONS DEEMED OWNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE III
REDEMPTION
SECTION 3.1. NOTICE TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 3.2. SELECTION OF SECURITIES TO BE REDEEMED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 3.3. NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 3.4. EFFECT OF NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 3.5. DEPOSIT OF REDEMPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 3.6. SECURITIES REDEEMED IN PART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 3.7. OPTIONAL REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 3.8. EQUITY OFFERING REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
i
<PAGE> 4
<TABLE>
ARTICLE IV
COVENANTS
<S> <C> <C> <C>
SECTION 4.1. PAYMENT OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 4.2. SEC REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 4.3. COMPLIANCE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 4.4. MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 4.5. CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 4.6. WAIVER OF STAY, EXTENSION OR USURY LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 4.7. PAYMENT OF TAXES AND OTHER CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 4.8. MAINTENANCE OF PROPERTIES AND INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 4.9. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 4.10. LIMITATION ON RESTRICTED PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 4.11. LIMITATION ON SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.12. LIMITATION ON LIENS SECURING INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 4.13. LIMITATION ON SALE/LEASEBACK TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 4.14. LIMITATION ON PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES . . . . . . . . . . . . . . . . . . . 47
SECTION 4.15. LIMITATION ON ISSUANCES AND SALES OF RESTRICTED SUBSIDIARY STOCK . . . . . . . . . . . . . . . . 47
SECTION 4.16 LIMITATION ON TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 4.17. CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 4.18. LIMITATION ON LINE OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ARTICLE V
SUCCESSOR CORPORATION
SECTION 5.1. WHEN COMPANY MAY MERGE, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 5.2. SUCCESSOR CORPORATION SUBSTITUTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 6.2. ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 6.3. OTHER REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 6.4. WAIVER OF PAST DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 6.5. CONTROL BY MAJORITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 6.6. LIMITATION ON REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 6.7. RIGHTS OF HOLDERS TO RECEIVE PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 6.8. COLLECTION SUIT BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 6.10. PRIORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 6.11. UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
</TABLE>
ii
<PAGE> 5
<TABLE>
ARTICLE VII
TRUSTEE
<S> <C> <C> <C>
SECTION 7.1. DUTIES OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 7.2. RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 7.4. TRUSTEE'S DISCLAIMER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 7.5. NOTICE OF DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 7.7. COMPENSATION AND INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 7.8. REPLACEMENT OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY . . . . . . . . . . . . . . . . . . . . . . . 61
ARTICLE VIII
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.1. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . . . 62
SECTION 8.2. LEGAL DEFEASANCE AND DISCHARGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 8.3. COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 8.4. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 8.5. DEPOSITED MONEY AND U.S. GOVERNMENT SECURITIES TO BE HELD IN TRUST;
OTHER MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 8.6. REPAYMENT TO COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 8.7. REINSTATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.1. WITHOUT CONSENT OF HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 9.2. WITH CONSENT OF HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 9.3. COMPLIANCE WITH TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 9.5. NOTATION ON OR EXCHANGE OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 9.6. TRUSTEE PROTECTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 9.7. RESTRICTIONS ON PAYMENTS FOR AMENDMENTS, WAIVERS AND MODIFICATIONS . . . . . . . . . . . . . . . 68
ARTICLE X
GUARANTEES
SECTION 10.1. UNCONDITIONAL GUARANTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 10.2. GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 10.3. ADDITION OF GUARANTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 10.4. RELEASE OF A GUARANTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
</TABLE>
iii
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
SECTION 10.5. LIMITATION OF GUARANTOR'S LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 10.6. CONTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 10.7. EXECUTION AND DELIVERY OF GUARANTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 10.8. "TRUSTEE" TO INCLUDE PAYING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 10.9. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. TRUST INDENTURE ACT CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 11.2. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 11.3. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 11.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 11.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.6. RULES BY TRUSTEE AND AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.7. LEGAL HOLIDAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.8. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.9. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.10. NO PERSONAL LIABILITY OF DIRECTORS, ADVISORS, MANAGERS, OFFICERS,
EMPLOYEES, INCORPORATORS, MEMBERS AND STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.11. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 11.12. DUPLICATE ORIGINALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 11.13. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 11.14 TABLE OF CONTENTS, HEADINGS, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
</TABLE>
SIGNATURES
EXHIBITS
<TABLE>
<S> <C> <C>
EXHIBIT A-1 Form of Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1-1
EXHIBIT A-2 Form of Security representing Regulation S Temporary Global Note . . . . . . . . . . . A-2-1
EXHIBIT B-1 Certificate of Transferor from 144A Global Note to Regulation S
Global Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1-1
EXHIBIT B-2 Certificate of Transferor from Regulation S Global Note to 144A
Global Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2-1
EXHIBIT B-3 Certificate of Transferor of Definitive Securities . . . . . . . . . . . . . . . . . . B-3-1
EXHIBIT B-4 Certificate of Transferor from Global Note to Definitive Security . . . . . . . . . . . B-4-1
EXHIBIT C Certificate of Institutional Accredited Investor . . . . . . . . . . . . . . . . . . C-1
EXHIBIT D Form of Notation of Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
EXHIBIT E Form of Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
</TABLE>
_________________
NOTE: This Table of Contents shall not, for any purpose, be deemed to be
a part of this Indenture.
iv
<PAGE> 7
INDENTURE, dated as of April 2, 1998, between MICHAEL PETROLEUM
CORPORATION, a Texas corporation (the "COMPANY"), and STATE STREET BANK AND
TRUST COMPANY, as Trustee.
Each party agrees as follows for the benefit of the other parties and
for the equal and ratable benefit of the Holders of the Company's 11 1/2%
Series A Senior Notes due 2005 (as issued pursuant to, and as may be amended or
supplemented from time to time in accordance with, the terms of this Indenture,
the "SERIES A NOTES") and the Company's 11 1/2% Series B Senior Notes due 2005
(as issued pursuant to, and as may be amended or supplemented from time to time
in accordance with, the terms of this Indenture, the "SERIES B NOTES", and
together with the Series A Notes, collectively the "SECURITIES"), without
preference of one series of Notes over the other.
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.1. DEFINITIONS.
"144A GLOBAL NOTE" means a permanent global senior note that contains
the paragraph referred to in footnote 1 and the additional schedule referred to
in footnote 3 to the form of the Security attached hereto as Exhibit A-1, and
that is deposited with the Securities Custodian and registered in the name of
the Depository or its nominee, representing a series of Securities sold in
reliance on Rule 144A or another exemption from the registration requirements
of the Securities Act, other than Regulation S.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" or "ACNTA" means (without
duplication), as of the date of determination, (a) the sum of (i) discounted
future net revenue from proved oil and gas reserves of the Company and its
Restricted Subsidiaries calculated in accordance with SEC guidelines before any
state or federal income taxes, as estimated by independent petroleum engineers
in a reserve report prepared as of the end of the Company's most recently
completed fiscal year, as increased by, as of the date of determination, the
discounted future net revenue of (A) estimated proved oil and gas reserves of
the Company and its Restricted Subsidiaries attributable to any acquisition
consummated since the effective date of such initial or year-end reserve
reports and (B) estimated oil and gas reserves of the Company and its
Restricted Subsidiaries attributable to extensions, discoveries and other
additions and upward revisions of estimates of proved oil and gas reserves due
to exploration, development or exploitation, production or other activities
conducted or otherwise occurring since the effective date of such initial or
year-end reserve reports which, in the case of sub-clauses (A) and (B) above,
would, in accordance with standard industry practice, result in such increases,
in each case calculated in accordance with SEC guidelines (utilizing the prices
utilized in such initial or year-end reserve reports), and decreased by, as of
the date of determination, the discounted future net revenue of (C) estimated
proved oil and gas reserves of the Company and its Restricted Subsidiaries
produced or disposed of since the effective date of such initial or year-end
reserve reports and (D) reductions in the estimated oil and gas reserves of the
Company and its Restricted Subsidiaries since the effective date of such
initial or year-end reserve reports attributable to downward revisions of
estimates of proved oil and gas reserves due to exploration, development or
exploitation, production or other activities conducted or otherwise occurring
since the effective date of such initial or year-end reserve reports which
would, in accordance with standard industry practice, result in such revisions,
in each case calculated in accordance with SEC guidelines (utilizing the prices
utilized in such initial or year-end reserve reports); provided that, in the
case of each of the determinations made pursuant to sub-clauses (A) through (D)
above, such increases and decreases shall be as estimated by the Company's
engineers, except that if as a result of such acquisitions, dispositions,
discoveries, extensions or revisions, there is a Material Change and in
connection with the incurrence of Indebtedness under Section 4.9(a), all or any
part of an increase in
<PAGE> 8
discounted future net revenue resulting from the matters described in
sub-clauses (A) and (B) above, are needed to permit the incurrence of such
Indebtedness, then the discounted future net revenue utilized for purposes of
this clause (a)(i) shall be confirmed in writing by independent petroleum
engineers provided that, in the event that the determinations made pursuant to
sub-clauses (C) and (D) above, when taken alone, would not cause a Material
Change, then such written confirmation need only cover the incremental
additions to discounted future net revenues resulting from the determinations
made pursuant to sub-clauses (A) and (B) above to the extent needed to permit
the incurrence of such Indebtedness, (ii) the capitalized costs that are
attributable to oil and gas properties of the Company and its Restricted
Subsidiaries to which no proved oil and gas reserves are attributed, based on
the Company's books and records as of a date no earlier than the date of the
Company's latest annual or quarterly financial statements, (iii) the Net
Working Capital on a date no earlier than the date of the Company's latest
annual or quarterly financial statements and (iv) the greater of (I) the net
book value on a date no earlier than the date of the Company's latest annual or
quarterly financial statements and (II) the appraised value, as estimated by
independent appraisers, of other tangible assets (including Investments in
unconsolidated Subsidiaries of the Company) of the Company and its Restricted
Subsidiaries, as of a date no earlier than the date of the Company's latest
audited financial statements, minus (b) the sum of (i) minority interests, (ii)
any non-current portion of gas balancing liabilities of the Company and its
Restricted Subsidiaries reflected in the Company's latest annual or quarterly
financial statements, (iii) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the prices utilized in the Company's
initial or year-end reserve reports), attributable to reserves which are
required to be delivered to third parties to fully satisfy the obligations of
the Company and its Restricted Subsidiaries with respect to Volumetric
Production Payments on the schedules specified with respect thereto, (iv) the
discounted future net revenue, calculated in accordance with SEC guidelines,
attributable to reserves subject to Dollar-Denominated Production Payments
which, based on the estimates of production included in determining the
discounted future net revenue specified in clause (a)(i) above (utilizing the
same prices utilized in the Company's initial or year-end reserve reports),
would be necessary to fully satisfy the payment obligations of the Company and
its Restricted Subsidiaries with respect to Dollar-Denominated Production
Payments on the schedules specified with respect thereto and (v) the discounted
future net revenue, calculated in accordance with SEC guidelines (utilizing the
same prices utilized in the Company's initial or year-end reserve reports),
attributable to reserves subject to participation interests, overriding royalty
interests or other interests of third parties, pursuant to participation,
partnership, vendor financing or other agreements then in effect, or which
otherwise are required to be delivered to third parties. If the Company
changes its method of accounting from the successful efforts method to the full
cost method or a similar method of accounting, Adjusted Consolidated Net
Tangible Assets will continue to be calculated as if the Company was still
using the successful efforts method of accounting.
"ADJUSTED NET ASSETS" of a Guarantor at any date shall mean the lesser
of (i) the amount by which the fair value of the property of such Guarantor
exceeds the total amount of liabilities, including, without limitation,
contingent liabilities (after giving effect to all other fixed and contingent
liabilities incurred or assumed on such date), but excluding liabilities under
the Guarantee of such Guarantor at such date and (ii) the amount by which the
present fair saleable value of the assets of such Guarantor at such date
exceeds the amount that will be required to pay the probable liability of such
Guarantor on its debts (after giving effect to all other fixed and contingent
liabilities incurred or assumed on such date and after giving effect to any
collection from any Subsidiary of such Guarantor in respect of the obligations
of such Subsidiary under the Guarantee), excluding debt in respect of the
Guarantee, as they become absolute and matured.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct
2
<PAGE> 9
the management and policies of such Person directly or indirectly, whether
through the ownership of Voting Stock, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided that a corporation shall not be deemed an Affiliate of the Company
solely by reason of having a single common director with the Company who
constitutes less than a majority of the directors of either the Company and the
other corporation.
"AGENT" means any Registrar, Paying Agent or co-registrar.
"APPLICABLE PROCEDURES" means, with respect to any transfer or
exchange of or for beneficial interests in any Global Note, the rules and
procedures of the Depository, Euroclear and Cedel, as applicable, that apply to
such transfer or exchange.
"ASSET SALE" means any sale, issue, lease, transfer, exchange or other
disposition having a fair market value of $1,000,000 or more (or series of
sales, leases, transfers, exchanges or dispositions during any fiscal year
having an aggregate fair market value of such amount) of shares of Capital
Stock of a Restricted Subsidiary (other than directors' Qualifying Shares), or
of property or assets (including the creation of Dollar-Denominated Production
Payments and Volumetric Production Payments, other than Dollar-Denominated
Production Payments and Volumetric Production Payments created or sold in
connection with the financing of, and within 30 days after, the acquisition of
the properties subject thereto) or any interests therein (each referred to for
purposes of this definition as a disposition) by the Company or any of its
Restricted Subsidiaries, including any disposition by means of a merger,
consolidation or similar transaction (other than (a) by the Company to a Wholly
Owned Restricted Subsidiary or by a Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary, (b) a sale of oil, gas or other hydrocarbons or other
mineral products in the ordinary course of business of the Company's oil and
gas production operations, (c) any abandonment, farm-in, farm-out, lease and
sub-lease of developed and/or undeveloped properties made or entered into in
the ordinary course of business (but excluding (i) any sale of a net profits or
overriding royalty interest, in each case conveyed from or burdening proved
developed or proved undeveloped reserves and (ii) any sale of hydrocarbons or
other mineral products as a result of the creation of Dollar-Denominated
Production Payments or Volumetric Production Payments, other than
Dollar-Denominated Production Payments and Volumetric Production Payments
created or sold in connection with the financing of, and within 30 days after,
the acquisition of the properties subject thereto), (d) the disposition of all
or substantially all of the assets of the Company in compliance with Article V
or Section 4.13, as the case may be, (e) the issuance by the Company of shares
of its Capital Stock, (f) any trade or exchange by the Company or any
Restricted Subsidiary of oil and gas properties for other oil and gas
properties owned or held by another Person provided that (i) the fair market
value of the properties traded or exchanged by the Company or such Restricted
Subsidiary (including any cash or Cash Equivalents, not to exceed 15% of such
fair market value, to be delivered by the Company or such Restricted
Subsidiary) is reasonably equivalent to the fair market value of the properties
(together with any cash or Cash Equivalents, not to exceed 15% of such fair
market value) to be received by the Company or such Restricted Subsidiary as
determined in good faith by the Board of Directors of the Company, which
determination shall be certified by a resolution of the Board of Directors
delivered to the Trustee if such fair market value is in excess of $5,000,000,
provided that if such resolution indicates that such fair market value is in
excess of $10,000,000 such resolution shall be accompanied by a written
appraisal by a nationally recognized investment banking firm or appraisal firm,
in each case specializing or having a specialty in oil and gas properties, and
(ii) such exchange is approved by a majority of Disinterested Directors of the
Company, and (g) the sale, transfer or other disposition in the ordinary course
of business of oil and natural gas properties, or interests therein, provided
that such properties either (i) do not have proved reserves attributed to them
or (ii) were purchased for the purpose of offering such properties for resale
or participations by other Persons).
3
<PAGE> 10
"ATTRIBUTABLE INDEBTEDNESS" means, with respect to any particular
lease under which any Person is at the time liable and at any date as of which
the amount thereof is to be determined, the present value of the total net
amount of rent required to be paid by such Person under the lease during the
primary term thereof, without giving effect to any renewals at the option of
the lessee, discounted from the respective due dates thereof to such date at
the rate of interest per annum implicit in the terms of the lease. As used in
the preceding sentence, the net amount of rent under any lease for any such
period shall mean the sum of rental and other payments required to be paid with
respect to such period by the lessee thereunder excluding any amounts required
to be paid by such lessee on account of maintenance and repairs, insurance,
taxes, assessments, water rates or similar charges. In the case of any lease
which is terminable by the lessee upon payment of a penalty, such net amount of
rent shall also include the amount of such penalty, but no rent shall be
considered as required to be paid under such lease subsequent to the first date
upon which it may be so terminated.
"AVERAGE LIFE" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (i) the product of (x) the
number of years from such date to the date of each successive scheduled
principal payment of such Indebtedness multiplied by (y) the amount of such
principal payment by (ii) the sum of all such principal payments.
"BANK CREDIT FACILITY" means a revolving credit, term credit and/or
letter of credit facility, the proceeds of which are used for working capital
and other general corporate purposes to be entered into by one or more of the
Company and/or its Restricted Subsidiaries and certain financial institutions,
as amended, extended or refinanced from time to time. The Credit Facility will
constitute a Bank Credit Facility.
"BOARD OF DIRECTORS" means, with respect to any Person, the board of
directors of such Person or any committee of the board of directors of such
Person duly authorized to act on behalf of the board of directors of such
Person, or if not a board of directors or such authorized committee, a
comparable governing body of such Person or any committee of such governing
body duly authorized to act on behalf of such governing body.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors or the managing partner(s)
of such Person and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"BUSINESS DAY" means any day on which the New York Stock Exchange,
Inc. is open for trading and which is not a Legal Holiday.
"CAPITAL STOCK" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of
corporate stock, partnership interests or limited liability company membership
interests and any and all warrants, options and rights with respect thereto
(whether or not currently exercisable), including each class of common stock
and preferred stock or interests of such Person.
"CAPITALIZED LEASE OBLIGATIONS" of any Person means the obligations of
such Person to pay rent or other amounts under a lease of property, real or
personal, that is required to be capitalized for financial reporting purposes
in accordance with GAAP, and the amount of such obligations shall be the
capitalized amount thereof determined in accordance with GAAP.
4
<PAGE> 11
"CASH EQUIVALENTS" means (i) any evidence of Indebtedness with a
maturity of 90 days or less issued or directly and fully guaranteed or insured
by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) demand and time deposits and certificates of
deposit or acceptances with a maturity of 90 days or less of any financial
institution that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $500,000,000; (iii)
commercial paper with a maturity of 90 days or less issued by a corporation
that is not an Affiliate of the Company and is organized under the laws of any
state of the United States or the District of Columbia and rated at least A-1
by Standard & Poor's Ratings Services at least P-1 by Moody's Investors
Service, Inc.; (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (i) above
entered into with any commercial bank meeting the specifications of clause (ii)
above; and (v) overnight bank deposits and bankers' acceptances at any
commercial bank meeting the qualifications specified in clause (ii) above.
"CEDEL" means Cedel bank, societe anonyme.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i)
the sale, lease or transfer, in one or a series of related transactions, of all
or substantially all of MHI's assets or the Company's assets, in either case,
to any Person or group (as such term is used in Section 13(d)(3) of the
Exchange Act); (ii) the adoption of a plan relating to the liquidation or
dissolution of MHI or the Company; (iii) the acquisition, directly or
indirectly, by any Person or group (as such term is used in Section 13(d)(3) of
the Exchange Act) of beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act) of more than 50% of the aggregate voting power of the Voting
Stock of MHI or the Company (for the purposes of this definition, such other
Person shall be deemed to beneficially own any Voting Stock of a specified
corporation held by a parent corporation, if such other Person is the
beneficial owner (as defined above), directly or indirectly, of more than 35%
of the voting power of the Voting Stock of such parent corporation); or (iv)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors of MHI or the Company (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of MHI or the Company, as the case
may be, was approved by a vote of 66 2/3% of the directors of MHI or the
Company, as the case may be, then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of MHI or the Company, as the case may be, then in office.
"COMPANY" means the party named as such above, until a successor
replaces such Person in accordance with the terms of this Indenture, and
thereafter means such successor.
"CONSOLIDATED INTEREST COVERAGE RATIO" means, for any Reference
Period, the ratio on a pro forma basis of (a) the sum of (i) Consolidated Net
Income, (ii) Consolidated Interest Expense, (iii) Consolidated Tax Expense,
(iv) exploration expense, (v) ceiling limitation writedowns under SEC
guidelines, (vi) depreciation and depletion of the Company and its Restricted
Subsidiaries, as determined in accordance with GAAP on a consolidated basis
plus (vii) amortization of the Company and its Restricted Subsidiaries
including, without limitation, amortization of capitalized debt issuance costs,
as determined in accordance with GAAP on a consolidated basis, in each case as
determined for the Reference Period to (b) Consolidated Interest Expense for
such Reference Period; provided, that, in calculating each of the items set
forth in the foregoing, (1) acquisitions which occurred during the Reference
Period or subsequent to the Reference Period and on or prior to the date of the
transaction giving rise to the need to calculate the Consolidated Interest
Coverage Ratio (the "TRANSACTION DATE") shall be assumed to have occurred on
the first day of the Reference Period, (2) the incurrence of any
5
<PAGE> 12
Indebtedness (including the issuance of the Securities) or issuance of any
Disqualified Stock during the Reference Period or subsequent to the Reference
Period and on or prior to the Transaction Date shall be assumed to have
occurred on the first day of such Reference Period, (3) any Indebtedness that
had been outstanding during the Reference Period that has been repaid on or
prior to the Transaction Date shall be assumed to have been repaid as of the
first day of such Reference Period, (4) the Consolidated Interest Expense
attributable to interest on any Indebtedness or dividends on any Disqualified
Stock bearing a floating interest (or dividend) rate shall be computed on a pro
forma basis as if the rate in effect on the Transaction Date was the average
rate in effect during the entire Reference Period and (5) in determining the
amount of Indebtedness pursuant to Section 4.9, the incurrence of Indebtedness
or issuance of Disqualified Stock giving rise to the need to calculate the
Consolidated Interest Coverage Ratio and, to the extent the net proceeds from
the incurrence or issuance thereof are used to retire Indebtedness, the
application of the proceeds therefrom shall be assumed to have occurred on the
first day of the Reference Period.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to the Company and
its Restricted Subsidiaries, for the Reference Period, the aggregate amount
(without duplication) of (a) interest expensed in accordance with GAAP
(including, in accordance with the following sentence, interest attributable to
Capitalized Lease Obligations, but excluding interest attributable to
Dollar-Denominated Production Payments and amortization of deferred debt
expense) during such period in respect of all Indebtedness of the Company and
its Restricted Subsidiaries (including (i) amortization of original issue
discount on any Indebtedness (other than with respect to the Securities), (ii)
the interest portion of all deferred payment obligations, calculated in
accordance with GAAP and (iii) all commissions, discounts and other fees and
charges owed with respect to bankers' acceptance financings and currency and
interest rate swap arrangements, in each case to the extent attributable to
such period), and (b) dividend requirements of the Company and its Restricted
Subsidiaries with respect to any Preferred Stock or Disqualified Stock
dividends (whether in cash or otherwise (except dividends paid solely in shares
of Capital Stock other than Disqualified Stock)) paid (other than to the
Company or any of its Restricted Subsidiaries), declared, accrued or
accumulated during such period, divided by one minus the applicable actual
combined federal, state, local and foreign income tax rate of the Company and
its Subsidiaries (expressed as a decimal), on a consolidated basis, for the
Reference Period preceding the date of the transaction giving rise to the need
to calculate Consolidated Interest Expense, in each case to the extent
attributable to such period and excluding items eliminated in consolidation.
For purposes of this definition, (y) interest on a Capitalized Lease Obligation
shall be deemed to accrue at an interest rate reasonably determined by the
Company to be the rate of interest implicit in such Capitalized Lease
Obligation in accordance with GAAP, and (z) interest expense attributable to
any Indebtedness represented by the guarantee by the Company or a Restricted
Subsidiary of the Company of an obligation of another Person (other than the
Company or any other Restricted Subsidiary) shall be deemed to be the interest
expense attributable to the Indebtedness guaranteed.
"CONSOLIDATED NET INCOME" of the Company means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided, however, that there shall not be included in such Consolidated Net
Income: (a) any net income of any Person if such Person is not the Company or a
consolidated Restricted Subsidiary, except that (i) subject to the limitations
contained in clause (d) below, the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash or Cash Equivalents actually distributed by
such Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in clause
(c) below) and (ii) the Company's equity in a net loss of any such Person
(other than an Unrestricted Subsidiary) for such period shall be included in
determining such Consolidated
6
<PAGE> 13
Net Income; (b) any net income (or loss) of any Person acquired by the Company
or a Subsidiary of the Company in a pooling of interests transaction for any
period prior to the date of such acquisition; (c) the net income of any
Restricted Subsidiary to the extent that the payment of dividends or the making
of distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, is prohibited; (d) any gain (but not loss) realized upon the sale or
other disposition of any property, plant or equipment of the Company or any
Restricted Subsidiary (including pursuant to any Sale/Leaseback Transaction)
which is not sold or otherwise disposed of in the ordinary course of business
and any gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person; (e) any gain (but not loss) from currency exchange
transactions not in the ordinary course of business consistent with past
practice; (f) the cumulative effect of a change in accounting principles; (g)
any writedowns of noncurrent assets; and (h) any gain (but not loss)
attributable to extraordinary items.
"CONSOLIDATED NET WORTH" means, with respect to the Company and its
Restricted Subsidiaries, as at any date of determination, the sum of Capital
Stock (other than Disqualified Stock) and additional paid-in capital plus
retained earnings (or minus accumulated deficit) minus all intangible assets,
including, without limitation, organization costs, patents, trademarks,
copyrights, franchises, research and development costs, and any amount
reflected in treasury stock, of the Company and its Restricted Subsidiaries
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED TAX EXPENSE" means, for any period, the provisions for
federal, state, local and foreign income taxes (including state franchise taxes
accounted for as income taxes in accordance with GAAP) of the Company and its
Restricted Subsidiaries for such period as determined on a consolidated basis
in accordance with GAAP.
"CREDIT FACILITY" means the credit agreement to be entered into
between the Company and Christiania Bank og KreditKasse, as administrative
agent, and the lenders from time to time parties thereto, as amended and in
effect from time to time.
"DEFAULT" means any event which is, or after notice or passage of time
would be, an Event of Default.
"DEFINITIVE SECURITIES" means Securities that are in the form of the
Security attached hereto as Exhibit A-1, that do not include the text referred
to in footnote 1 thereof, and do not have attached the additional schedule
referred to in footnote 3 thereof.
"DEPOSITARY" means, with respect to the Securities issuable or issued
in whole or in part in global form, the Person specified in Section 2.3 as the
Depositary with respect to the Securities, until a successor shall have been
appointed and become such pursuant to the applicable provision of this
Indenture, and, thereafter, "Depositary" shall mean or include such successor.
"DISINTERESTED DIRECTOR" means, with respect to (i) an Affiliate
Transaction or series of related Affiliate Transactions, (ii) any valuation of
the aggregate Investments of the Company and the Restricted Subsidiaries in an
Unrestricted Subsidiary at the time that it is redesignated a Restricted
Subsidiary, (iii) any valuation of the aggregate Investments of the Company and
the Restricted Subsidiaries in a Restricted Subsidiary at the time it is
redesignated an Unrestricted Subsidiary, (iv) any valuation of any asset(s)
(other than cash) or securities proposed to be transferred or issued by the
Company or any Restricted Subsidiary, as the case may be, pursuant to a
Restricted Payment, or (v) any valuation or determination required in
connection with consideration received in an Asset Sale or the transfer or
exchange of oil and gas properties for oil and gas properties purported to be
excluded from an Asset Sale, a member of the Board of Directors of the Company
who has no financial interest, and whose employer has no direct or
7
<PAGE> 14
indirect financial interest, in such Affiliate Transaction or series of related
Affiliate Transactions or such transaction giving rise to any such valuation.
"DISQUALIFIED STOCK" means any Capital Stock of the Company or any
Restricted Subsidiary of the Company which, by its terms (or by the terms of
any security into which it is convertible or for which it is exchangeable), or
upon the happening of any event or with the passage of time, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the Maturity Date or which is exchangeable or convertible into debt
securities of the Company or any Restricted Subsidiary of the Company, except
to the extent that such exchange or conversion rights cannot be exercised prior
to the Maturity Date.
"DOLLAR-DENOMINATED PRODUCTION PAYMENTS" mean production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"EFFECTIVE REGISTRATION" means the Company shall have (i) commenced an
Exchange Offer for the Securities pursuant to an effective registration
statement under the Securities Act or (ii) filed and caused to become effective
the Notes Shelf Registration under the Securities Act for the sale of
Securities by Holders.
"EQUITY OFFERING" means any underwritten public offering of common
stock of the Company pursuant to a registration statement filed pursuant to the
Securities Act or any private placement of Capital Stock (other than
Disqualified Stock) of the Company (other than to any Person who, prior to such
private placement, was a Subsidiary of the Company or any other Person
controlled by the Company) which offering or placement is consummated after the
Issue Date.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EUROCLEAR" means Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear system.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC thereunder.
"EXCHANGE OFFER" means the offer that may be made by the Company
pursuant to the Registration Rights Agreement to exchange Series B Notes for
Series A Notes.
"GAAP" means generally accepted accounting principles as in effect in
the United States of America as of the Issue Date.
"GLOBAL NOTE" means, individually and collectively, the Regulation S
Temporary Global Note, the Regulation S Permanent Global Note and the 144A
Global Note.
"GUARANTEE" means any Guarantee issued pursuant to Article X of this
Indenture.
"GUARANTOR" means (i) each of the Subsidiaries that becomes a
guarantor of the Securities in compliance with the provisions of Article X of
this Indenture and (ii) each of the Persons that executes
8
<PAGE> 15
a supplemental indenture in which such Person agrees to be bound by the terms of
this Indenture, in each case until such time, if any, such guarantor is
released from its Guarantee pursuant to Section 10.4.
"HOLDER" means a Person in whose name a Security is registered on the
Registrar's books.
"INDEBTEDNESS" means, without duplication, with respect to any Person,
(a) all obligations of such Person (i) in respect of borrowed money (whether or
not the recourse of the lender is to the whole of the assets of such Person or
only to a portion thereof), (ii) evidenced by bonds, notes, debentures or
similar instruments, (iii) representing the balance deferred and unpaid of the
purchase price of any property or services (other than accounts payable or
other obligations arising in the ordinary course of business), (iv) evidenced
by bankers' acceptances or similar instruments issued or accepted by banks, (v)
for the payment of money relating to a Capitalized Lease Obligation, or (vi)
evidenced by a letter of credit or a reimbursement obligation of such Person
with respect to any letter of credit; (b) all net obligations of such Person
under hedging arrangements including interest rate swap obligations, commodity
swap obligations and foreign currency hedges, except to the extent such net
obligations are taken into account in the determination of future net revenues
from proved oil and gas reserves for purposes of the calculation of Adjusted
Consolidated Net Tangible Assets; (c) all liabilities of others of the kind
described in the preceding clauses (a) or (b) that such Person has guaranteed
or that are otherwise its legal liability (including, with respect to any
Production Payment, any warranties or guaranties of production or payment by
such Person with respect to such Production Payment but excluding other
contractual obligations of such Person with respect to such Production
Payment); (d) Indebtedness (as otherwise defined in this definition) of another
Person secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person, the amount of such obligations being
deemed to be the lesser of (1) the full amount of such obligations so secured
and (2) the fair market value of such asset, as determined in good faith by the
Board of Directors of such Person, which determination shall be evidenced by a
resolution of such Board; (e) with respect to such Person, the liquidation
preference or any mandatory redemption payment obligations in respect of
Disqualified Stock; (f) the aggregate preference in respect of amounts payable
on the issued and outstanding shares of Preferred Stock of any of the Company's
Restricted Subsidiaries in the event of any voluntary or involuntary
liquidation, dissolution or winding up (excluding any such preference
attributable to such shares of Preferred Stock that are owned by such Person or
any of its Restricted Subsidiaries; provided, that if such Person is the
Company, such exclusion shall be for such preference attributable to such
shares of Preferred Stock that are owned by the Company or any of its
Restricted Subsidiaries); and (g) any and all deferrals, renewals, extensions,
refinancings and refundings (whether direct or indirect) of, or amendments,
modifications or supplements to, any liability of the kind described in any of
the preceding clauses (a), (b), (c), (d), (e), (f) or this clause (g), whether
or not between or among the same parties. Subject to clause (c) of the
preceding sentence, neither Dollar-Denominated Production Payments nor
Volumetric Production Payments shall be deemed to be Indebtedness.
"INDENTURE" means this Indenture, as amended or supplemented from time
to time in accordance with the terms hereof.
"INDIRECT PARTICIPANT" means a Person who holds an interest through a
Participant.
"INSTITUTIONAL ACCREDITED INVESTOR" means an "accredited investor" as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
"INVESTMENT" of any Person means (i) all investments by such Person in
any other Person (including its Affiliates) in the form of direct or indirect
loans, advances or capital contributions, (ii) all direct or indirect
guarantees of, or Liens created or permitted to secure, Indebtedness or other
obligations
9
<PAGE> 16
of any other Person by such Person, (iii) all direct or indirect purchases or
other acquisitions for consideration by such Person of assets, Indebtedness,
Capital Stock or other securities of any other Person and (iv) all other items
that directly or indirectly would be classified as investments (including,
without limitation, purchases of assets outside the ordinary course of
business) or advances on a balance sheet of such Person prepared in accordance
with GAAP. For purposes of the definition of "Unrestricted Subsidiary," the
definition of "Restricted Payment" and Section 4.10, (a) an "Investment" in an
Unrestricted Subsidiary shall be deemed to include and be valued at the fair
market value of the net assets of any Subsidiary of the Company at the time
that such Subsidiary is designated an Unrestricted Subsidiary and (b) any
Investment in, or any property transferred to or from, an Unrestricted
Subsidiary shall be valued at its fair market value at the time of transfer, in
each case, as determined in good faith by the Board of Directors of the
Company.
"ISSUE DATE" means the first date on which the Securities are issued
under this Indenture.
"LIEN" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or
equivalent statute or statutes) of any jurisdiction).
"LIQUIDATED DAMAGES" shall have the meaning given such term in Section
6 of the Registration Rights Agreement.
"MATERIAL CHANGE" means an increase or decrease (excluding changes
that result solely from changes in prices) of more than either (i) 10% from the
end of the immediately preceding fiscal quarter in the estimated discounted
future net revenue from proved oil and gas reserves of the Company and its
Restricted Subsidiaries, or (ii) 20% from the end of the immediately preceding
year in the estimated discounted future net revenue from proved oil and gas
reserves of the Company and its Restricted Subsidiaries, in each case calculated
in accordance with clause (a)(i) of the definition of Adjusted Consolidated Net
Tangible Assets; provided, however, that the following will be excluded from the
calculation of Material Change: (a) any acquisitions of oil and gas reserves
made after the end of the immediately preceding year for which the discounted
future net revenues have been estimated by independent petroleum engineers since
the end of the preceding year and on which a report or reports exist and (b) any
disposition of properties existing at the beginning of the current quarter or
current year, as the case may be, for purposes of clause (i) or clause (ii)
above, that have been disposed of as provided in Section 4.11.
"MATURITY DATE" means April 1, 2005.
"MHI" means Michael Holdings, Inc., a Texas corporation.
"MULTIEMPLOYER PLANS" means a PBGC Plan that is a multiemployer plan
as defined in Section 3(37) of ERISA.
"NET CASH PROCEEDS" means (a) with respect to any Asset Sale or
Sale/Leaseback Transaction of any Person, an amount equal to aggregate cash
proceeds received (including any cash proceeds received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, and excluding any other consideration until such
time as such
10
<PAGE> 17
consideration is converted into cash) therefrom, in each case net of all legal,
title and recording tax expenses, commissions and other fees and expenses
incurred, and all federal, state or local taxes required to be accrued as a
liability as a consequence of such Asset Sale or Sale/Leaseback Transaction,
and in each case net of all Indebtedness which is secured by such assets, in
accordance with the terms of any Lien upon or with respect to such assets, or
which must, by its terms or in order to obtain a necessary consent to such
Asset Sale or Sale/Leaseback Transaction or by applicable law, be repaid out of
the proceeds from such Asset Sale or Sale/Leaseback Transaction and which is
actually so repaid, and (b) in the case of any sale by the Company of
securities pursuant to subclauses (B) or (C) of Section 4.10(a)(iii), the
amount of aggregate net cash proceeds received by the Company, after payment of
expenses, commissions, discounts and any other transaction costs incurred in
connection therewith.
"NET WORKING CAPITAL" means (i) all current assets of the Company and
its Restricted Subsidiaries, minus (ii) all current liabilities of the Company
and its Restricted Subsidiaries (including the current portion of gas balancing
liabilities), except current liabilities included in Indebtedness.
"NON-RECOURSE INDEBTEDNESS" means Indebtedness (i) as to which neither
the Company nor any Restricted Subsidiary (a) provides credit support of any
kind, including any undertaking, agreement or instrument which would constitute
Indebtedness, (b) is directly or indirectly liable for such Indebtedness (by
virtue of any Lien on any stock or asset of the Company or any Restricted
Subsidiary or by virtue of the Company or such Restricted Subsidiary being the
primary obligor or guarantor of, or otherwise liable in respect on, such
Indebtedness) or (c) constitutes a lender, (ii) no default with respect to
which (including any rights which the holders thereof may have to take
enforcement action against such Person) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or its
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity, and (iii) as to which each lender thereof has been notified and has
agreed, in writing, that it will not have any recourse, directly or indirectly,
to the stock or assets of the Company or any Restricted Subsidiary.
"NOTES SHELF REGISTRATION" shall have the meaning given such term in
the Registration Rights Agreement.
"OBLIGATIONS" means any principal, premium, interest, Liquidated
Damages, fees, indemnifications, reimbursements, penalties, damages and other
liabilities payable under the documentation governing any Indebtedness.
"OFFICER" means, with respect to any Person, the Chairman of the
Board, the President, any Vice President, the Chief Financial Officer or the
Treasurer of such Person.
"OFFICERS' CERTIFICATE" means, with respect to any Person, a
certificate signed by two Officers or by an Officer and either a Secretary,
Assistant Secretary or Assistant Treasurer of such Person, that meets the
requirements of Section 11.5. One of the Officers signing an Officers'
Certificate given pursuant to Section 4.3(a) shall be the principal executive,
financial or accounting Officer of the Person delivering such certificate.
"OIL AND GAS BUSINESS" means the business of the exploration for, and
exploitation, development, production, processing (but not refining),
marketing, storage and transportation of, hydrocarbons, and other related
energy and natural resources businesses (including oil and gas services
businesses related to the foregoing).
11
<PAGE> 18
"OIL AND GAS SECURITIES" means the Voting Stock of a Person primarily
engaged in the Oil and Gas Business, provided that if such Voting Stock is not
registered under Section 12 of the Exchange Act, simultaneously with the
acquisition thereof by the Company or any Restricted Subsidiary, as applicable,
the issuer of such Voting Stock shall become a Wholly Owned Restricted
Subsidiary.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee, that meets the requirements of Section
11.5. The counsel may be an employee of or counsel to the Company or the
Trustee.
"PARTICIPANT" means, with respect to DTC, Euroclear or Cedel, a Person
who has an account with DTC, Euroclear or Cedel, respectively (and, with
respect to DTC, shall include Euroclear and Cedel).
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"PBGC PLAN" shall mean any employee pension benefit plan as defined in
Section 3(2) of ERISA sponsored by the Company or an ERISA Affiliate which is
subject to Title IV of ERISA or Section 412 of the Code.
"PERMITTED BUSINESS INVESTMENTS" means (i) Investments in assets used
in the Oil and Gas Business; (ii) the entry into operating agreements, joint
ventures, processing agreements, farmout agreements, development agreements,
area of mutual interest agreements, contracts for the sale, transportation or
exchange of oil and natural gas, unitization agreements, pooling arrangements,
joint bidding agreements, service contracts, partnership agreements (whether
general or limited) or other similar or customary agreements, transactions,
properties, interests or arrangements, and Investments and expenditures in
connection therewith or pursuant thereto, in each case made or entered into in
the ordinary course of the Oil and Gas Business, excluding solely for purposes
of this clause (ii), however, Investments in corporations; (iii) the
acquisition of working interests, royalty interests or mineral leases relating
to oil and gas properties; (iv) Investments by the Company or any Wholly Owned
Restricted Subsidiary in any Person which is, or will become, contemporaneously
with the making of such Investment, a Wholly Owned Restricted Subsidiary and
which is engaged in the Oil and Gas Business; (v) Investments in the Company by
any Wholly Owned Restricted Subsidiary; (vi) Investments permitted under
Section 4.11; (vii) Investments in any Person, other than an Unrestricted
Subsidiary, the consideration for which consists of Capital Stock (other than
Disqualified Stock); (viii) Investments constituting obligations under hedging
arrangements described in clause (vii) of the definition of "Permitted
Indebtedness;" and (ix) Investments in Unrestricted Subsidiaries the assets of
which consist of assets used in the Oil and Gas Business (other than cash and
Cash Equivalents) received by the Company from any Person other than a
Subsidiary of the Company solely as a result of the issuance of Capital Stock
of the Company (other than Disqualified Stock) in exchange therefor.
"PERMITTED COMPANY REFINANCING INDEBTEDNESS" means Indebtedness of the
Company, the net proceeds of which are used to renew, extend, refinance, refund
or repurchase outstanding Indebtedness of the Company, provided that (i) if the
Indebtedness (including the Securities) being renewed, extended, refinanced,
refunded or repurchased is pari passu with or subordinated in right of payment
to the Securities, then such Indebtedness is pari passu or subordinated in
right of payment to, as the case may be, the Securities at least to the same
extent as the Indebtedness being renewed, extended, refinanced, refunded or
repurchased, (ii) such Indebtedness is scheduled to mature no earlier than the
Indebtedness being renewed, extended, refinanced, refunded or repurchased, and
(iii) such Indebtedness has an Average Life at the time such Indebtedness is
incurred that is equal to or greater than the Average Life of the Indebtedness
being renewed, extended, refinanced, refunded or repurchased; provided,
further, that
12
<PAGE> 19
such Indebtedness (to the extent that such Indebtedness constitutes Permitted
Company Refinancing Indebtedness) is in an aggregate principal amount (or, if
such Indebtedness is issued at a price less than the principal amount thereof,
the aggregate amount of gross proceeds therefrom is) not in excess of the
aggregate principal amount then outstanding of the Indebtedness being renewed,
extended, refinanced, refunded or repurchased (or if the Indebtedness being
renewed, extended, refinanced, refunded or repurchased was issued at a price
less than the principal amount thereof, then not in excess of the amount of
liability in respect thereof determined in accordance with GAAP).
"PERMITTED FINANCIAL INVESTMENTS" means money market mutual or similar
funds having assets in excess of $500,000,000, and the following kinds of
instruments if, on the date of purchase or other acquisition of any such
instrument by the Company or any Subsidiary of the Company, the remaining term
to maturity is not more than one year: (i) readily marketable obligations
issued or unconditionally guaranteed as to principal of and interest on by the
United States of America or by any agency or authority controlled or supervised
by and acting as an instrumentality of the United States of America; (ii)
repurchase obligations for instruments of the type described in clause (i) for
which delivery of the instrument is made against payment; (iii) obligations
(including, but not limited to, demand or time deposits, bankers' acceptances
and certificates of deposit) issued by a depository institution or trust
company incorporated or doing business under the laws of the United States of
America, any state thereof or the District of Columbia or a branch or
subsidiary of any such depository institution or trust company operating
outside the United States, provided, that such depository institution or trust
company has, at the time of the Company's or such Subsidiary's investment
therein or contractual commitment providing for such investment, capital
surplus or undivided profits (as of the date of such institution's most
recently published financial statements) in excess of $500,000,000; and (iv)
commercial paper issued by any corporation, if such commercial paper has, at
the time of the Company's or any of its Subsidiary's investment therein or
contractual commitment providing for such investment, credit ratings of A-1 (or
higher) by Standard & Poor's Ratings Services and P-1 (or higher) by Moody's
Investors Services, Inc.
"PERMITTED INDEBTEDNESS" means (i) Indebtedness of the Company and its
Restricted Subsidiaries outstanding as of the Issue Date; (ii) Indebtedness of
the Company and its Restricted Subsidiaries under a Bank Credit Facility as the
same may be amended, refinanced or replaced, in a principal amount outstanding
at any time not to exceed a principal amount equal to the greater of (a)
$35,000,000 and (b) 15% of Adjusted Consolidated Net Tangible Assets, in each
instance, plus related accrued interest and costs, less any Net Cash Proceeds
applied pursuant to Section 4.11(b) to repay or prepay such Indebtedness that
results in a permanent reduction in any revolving credit or other commitment
relating thereto or the maximum amount that may be borrowed thereunder,
provided that the aggregate amount of applied Net Cash Proceeds shall not
permanently reduce the amount of Permitted Indebtedness under this clause (ii)
below $10,000,000 principal amount plus related accrued interest and costs;
(iii) other Indebtedness of the Company and its Restricted Subsidiaries in a
principal amount not to exceed $5,000,000 at any one time outstanding; (iv)
Indebtedness of the Company to any Wholly Owned Restricted Subsidiary of the
Company and Indebtedness of any Restricted Subsidiary of the Company to the
Company or another Wholly Owned Restricted Subsidiary; (v) Permitted Company
Refinancing Indebtedness; (vi) Permitted Subsidiary Refinancing Indebtedness;
(vii) obligations under non-speculative hedging arrangements that the Company
and its Subsidiaries enter into in the ordinary course of business for the
purpose of protecting their production against fluctuations in oil and natural
gas prices; (viii) Indebtedness under the Securities; and (ix) Indebtedness of
a Subsidiary of the Company pursuant to its Guarantee of the Securities
pursuant to Article X.
"PERMITTED INVESTMENTS" means Permitted Business Investments and
Permitted Financial Investments.
13
<PAGE> 20
"PERMITTED LIENS" means (i) Liens outstanding as of the Issue Date;
(ii) Liens now or hereafter securing a Bank Credit Facility; provided, however,
such Liens are limited to securing Indebtedness in an amount not in excess of
that permitted to be incurred in accordance with clause (ii) of the definition
of Permitted Indebtedness; (iii) Liens now or hereafter securing any interest
rate hedging obligations so long as the related Indebtedness (a) constitutes
Senior Indebtedness or (b) is, or is permitted to be under this Indenture,
secured by a Lien on the same property securing such interest rate obligations;
(iv) Liens now or hereafter securing any interest rate hedging obligations so
long as the related Indebtedness (a) constitutes the Securities (or any
Permitted Company Refinancing Indebtedness in respect thereof) or (b) is, or is
permitted to be under this Indenture, secured by a Lien on the same property
securing such interest rate hedging obligations; (v) Liens securing
Indebtedness, the proceeds of which are used to refinance secured Indebtedness
of the Company or its Restricted Subsidiaries; provided, that such Liens extend
to or cover only the property or assets currently securing the Indebtedness
being refinanced; (vi) Liens for taxes, assessments and governmental charges
not yet delinquent or being contested in good faith and for which adequate
reserves have been established to the extent required by GAAP; (vii)
mechanics', workmen's, materialmen's, operators' or similar Liens arising in
the ordinary course of business; (viii) Liens in connection with workers'
compensation, unemployment insurance or other social security, old age pension
or public liability obligations; (ix) Liens, deposits or pledges to secure the
performance of bids, tenders, contracts (other than contracts for the payment
of money), leases, public or statutory obligations, surety, stay, appeal
indemnity, performance or other similar bonds, or other similar obligations
arising in the ordinary course of business; (x) survey exceptions,
encumbrances, easements or reservations of, or rights of others for, rights of
way, zoning or other restrictions as to the use of real properties, and minor
defects in title which, in the case of any of the foregoing, were not incurred
or created to secure the payment of borrowed money or the deferred purchase
price of property or services, and in the aggregate do not materially adversely
affect the value of such properties or materially impair use for the purposes
of which such properties are held by the Company or any Restricted
Subsidiaries; (xi) Liens on, or related to, properties to secure all or part of
the costs incurred in the ordinary course of business of exploration, drilling,
development or operation thereof; (xii) Liens on pipeline or pipeline
facilities which arise out of operation of law; (xiii) judgment and attachment
Liens not giving rise to an Event of Default or Liens created by or existing
from any litigation or legal proceeding that are currently being contested in
good faith by appropriate proceedings and for which adequate reserves have been
made; (xiv) (a) Liens upon any property of any Person existing at the time of
acquisition thereof by the Company or a Restricted Subsidiary, (b) Liens upon
any property of a Person existing at the time such Person is merged or
consolidated with the Company or any Restricted Subsidiary or existing at the
time of the sale or transfer of any such property of such Person to the Company
or any Restricted Subsidiary, or (c) Liens upon any property of a Person
existing at the time such Person becomes a Restricted Subsidiary; provided,
that in each case such Lien has not been created in contemplation of such sale,
merger, consolidation, transfer or acquisition, and provided that in each such
case no such Lien shall extend to or cover any property of the Company or any
Restricted Subsidiary other than the property being acquired and improvements
thereon; (xv) Liens on deposits to secure public or statutory obligations or in
lieu of surety or appeal bonds entered into in the ordinary course of business;
(xvi) Liens in favor of collecting or payor banks having a right of setoff,
revocation, refund or chargeback with respect to money or instruments of the
Company or any Subsidiary of the Company on deposit with or in possession of
such bank; (xvii) purchase money security interests granted in connection with
the acquisition of assets in the ordinary course of business and consistent
with past practices, provided, that (A) such Liens attach only to the property
so acquired with the purchase money indebtedness secured thereby and (B) such
Liens secure only Indebtedness that is not in excess of 100% of the purchase
price of such assets; (xviii) Liens reserved in oil and gas mineral leases for
bonus or rental payments and for compliance with the terms of such leases;
(xix) Liens arising under partnership agreements, oil and gas leases, farm-out
agreements, division orders, contracts for the sale, purchase, exchange,
transportation or processing (but not refining) of oil, gas or other
hydrocarbons, unitization
14
<PAGE> 21
and pooling declarations and agreements, development agreements, operating
agreements, area of mutual interest agreements, and other similar agreements
which are customary in the Oil and Gas Business; (xx) Liens securing
obligations under non-speculative hedging arrangements that the Company enters
into in the ordinary course of business for the purpose of protecting its
production against fluctuations in oil and natural gas prices; and (xxi) Liens
to secure Dollar-Denominated Production Payments and Volumetric Production
Payments.
"PERMITTED SUBSIDIARY REFINANCING INDEBTEDNESS" means Indebtedness of
any Restricted Subsidiary, the net proceeds of which are used to renew, extend,
refinance, refund or repurchase outstanding Indebtedness of such Restricted
Subsidiary, provided that (i) if the Indebtedness (including any Guarantee)
being renewed, extended, refinanced, refunded or repurchased is pari passu with
or subordinated in right of payment to the Guarantee, then such Indebtedness is
pari passu with or subordinated in right of payment to, as the case may be, the
Guarantee at least to the same extent as the Indebtedness being renewed,
extended, refinanced, refunded or repurchased, (ii) such Indebtedness is
scheduled to mature no earlier than the Indebtedness being renewed, extended,
refinanced, refunded or repurchased, and (iii) such Indebtedness has an Average
Life at the time such Indebtedness is incurred that is equal to or greater than
the Average Life of the Indebtedness being renewed, extended, refinanced,
refunded or repurchased, provided, further, that such Indebtedness (to the
extent that such Indebtedness constitutes Permitted Subsidiary Refinancing
Indebtedness) is in an aggregate principal amount (or, if such Indebtedness is
issued at a price less than the principal amount thereof, the aggregate amount
of gross proceeds therefrom is) not in excess of the aggregate principal amount
then outstanding of the Indebtedness being renewed, extended, refinanced,
refunded or repurchased (or if the Indebtedness being renewed, extended,
refinanced, refunded or repurchased was issued at a price less than the
principal amount thereof, then not in excess of the amount of liability in
respect thereof determined in accordance with GAAP).
"PERSON" means any individual, corporation, partnership, limited
liability company, joint venture, trust, estate, unincorporated organization or
government or any agency or political subdivision thereof.
"PREFERRED STOCK" as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated), which is
preferred as to the payment of dividends, or upon any voluntary or involuntary
liquidation or dissolution of such corporation, over shares of Capital Stock of
any other class of such corporation.
"PRODUCTION PAYMENTS" means, collectively, Dollar-Denominated
Production Payments and Volumetric Production Payments.
"PRO FORMA" means, with respect to any calculation made or required to
be made pursuant to the terms of this Indenture, a calculation in accordance
with Article XI of Regulation S-X under the Securities Act.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A
under the Securities Act.
"REFERENCE PERIOD" means, with respect to any Person, the four full
consecutive fiscal quarters ended with the last full fiscal quarter for which
financial information is available immediately preceding any date upon which
any determination is to be made pursuant to the terms of the Securities or this
Indenture.
15
<PAGE> 22
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of March 30, 1998, by and among the Company and each of the
purchasers named on the signature pages thereto, as such agreement may be
amended, modified or supplemented from time to time.
"REGULATION S" means Regulation S under the Securities Act.
"REGULATION S GLOBAL NOTE" means a Regulation S Temporary Global Note
or Regulation S Permanent Global Note, as appropriate.
"REGULATION S PERMANENT GLOBAL NOTE" means a permanent global senior
note that contains the paragraph referred to in footnote 1 and the additional
schedule referred to in footnote 3 to the form of Security attached hereto as
Exhibit A-1, and that is deposited with the Securities Custodian and registered
in the name of the Depository, representing a series of Securities sold in
reliance on Regulation S.
"REGULATION S TEMPORARY GLOBAL NOTE" means a temporary global senior
note in the form of Security attached hereto as Exhibit A-2, and that is
deposited with the Securities Custodian and registered in the name of the
Depository, representing a series of Securities sold in reliance on Regulation
S.
"REPORTABLE EVENT" means an event listed in Section 4043(c) of ERISA.
"RESTRICTED BENEFICIAL INTEREST" means any beneficial interest of a
Participant or Indirect Participant in a Restricted Global Note.
"RESTRICTED DEFINITIVE SECURITIES" means the Definitive Securities
that are required to bear the Restricted Legend.
"RESTRICTED GLOBAL NOTES" means the 144A Global Note and the
Regulation S Global Note, each of which is required to bear the Restricted
Legend.
"RESTRICTIVE LEGEND" means the legend set forth on the face of the
form of Security pursuant to Section 2.6(f).
"RESTRICTED PAYMENT" means, with respect to any Person, any of the
following: (i) the declaration or payment of any dividend or the making of any
other payment or distribution in respect or on account of such Person's Capital
Stock (other than (a) dividends or distributions payable solely in Capital
Stock (other than Disqualified Stock) and (b) in the case of Restricted
Subsidiaries of the Company, dividends or distributions payable to the Company
or to a Restricted Subsidiary of the Company); (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock, or any option,
warrant, or other right to acquire shares of Capital Stock, of the Company or
any of its Restricted Subsidiaries (but excluding (a) any cashless exercise of
warrants or options or (b) payments in respect of cash elections or phantom
stock or similar awards under any director or employee benefit plan or
arrangement provided such payment is recorded as a compensation expense under
GAAP); (iii) the making of any payment (principal or otherwise) on or with
respect to, or the purchase, defeasance, repurchase, redemption or other
acquisition or retirement for value, prior to any scheduled maturity, scheduled
repayment or scheduled sinking fund payment, of any Indebtedness which is
subordinated in right of payment to the Securities or Guarantees, as the case
may be; and (iv) the making by such Person of any Investment other than a
Permitted Investment.
16
<PAGE> 23
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company other than
an Unrestricted Subsidiary. The Board of Directors of the Company may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that (i) immediately after giving effect to such designation, the
Company could incur at least $1.00 in additional Indebtedness pursuant to
Section 4.9(a), (ii) such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of any outstanding Indebtedness of such
Unrestricted Subsidiary and such Indebtedness is permitted under Section
4.9(a), calculated on a pro forma basis as if such designation had occurred at
the beginning of the four-quarter Reference Period, and (iii) no Default or
Event of Default would be in existence following such designation.
"RULE 144A" means Rule 144A promulgated under the Securities Act.
"SALE/LEASEBACK TRANSACTION" means with respect to the Company or any
of its Restricted Subsidiaries, any arrangement with any Person providing for
the leasing by the Company or any of its Restricted Subsidiaries of any
principal property, acquired or placed into service more than 180 days prior to
such arrangement, whereby such property has been or is to be sold or
transferred by the Company or any of its Restricted Subsidiaries to such
Person.
"SEC" means the Securities and Exchange Commission.
"SECURITIES" has the meaning assigned to that term in the introductory
paragraph hereof, and the term "SECURITY" means any of them, as the context may
require.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SECURITIES CUSTODIAN" means the Trustee, as custodian with respect to
the Securities in global form, or any successor entity thereto.
"SENIOR INDEBTEDNESS" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter incurred), unless such Indebtedness
is contractually subordinate or junior in right of payment of principal,
premium and interest to the Securities.
"SENIOR INDEBTEDNESS OF A GUARANTOR" means any Indebtedness of such
Guarantor (whether outstanding on the Issue Date or thereafter incurred),
unless such Indebtedness is contractually subordinate or junior in right of
payment of principal, premium and interest to the Guarantees.
"SERIES A NOTES" has the meaning assigned to that term in the
introductory paragraph hereof, and for sake of reference to the Registration
Rights Agreements, are referred to in the Registration Rights Agreement as the
"Registrable Notes".
"SERIES B NOTES" has the meaning assigned to that term in the
introductory paragraph hereof, and for sake of reference to the Registration
Rights Agreements, are referred to in the Registration Rights Agreement as the
"Exchange Notes".
"STATED MATURITY" means, when used with respect to any Security or any
installment of interest thereon, the date specified in such Security as the
fixed date on which the principal of such Security or such installment of
interest is due and payable, and, when used with respect to any other
Indebtedness or any installment of interest thereon, means the date specified
in the instrument evidencing or governing
17
<PAGE> 24
such Indebtedness as the fixed date on which the principal of such Indebtedness
or such installment of interest is due and payable.
"SUBORDINATED INDEBTEDNESS OF A GUARANTOR" means any Indebtedness of
such Guarantor (whether outstanding on the date hereof or hereafter incurred)
which is contractually subordinate or junior in right of payment of principal,
premium and interest to the Guarantees.
"SUBORDINATED INDEBTEDNESS OF THE COMPANY" means any Indebtedness of
the Company (whether outstanding on the date hereof or hereafter incurred)
which is contractually subordinate or junior in right of payment of principal,
premium and interest to the Securities.
"SUBSIDIARY" of any Person means (i) a corporation a majority of whose
Voting Stock is at the time, directly or indirectly, owned by such Person, by
one or more subsidiaries of such Person or by such Person and one or more
subsidiaries of such Person, (ii) a partnership in which such Person or a
subsidiary of such Person is, at the date of determination, a general or
limited partner of such partnership, but only if such Person is, or one or more
of its subsidiaries or such Person and one or more of its subsidiaries are,
entitled to receive more than 50% of the assets of such partnership upon its
dissolution, or (iii) any other Person (other than a corporation or
partnership) in which such Person, directly or indirectly, at the date of
determination thereof, has (x) at least a majority ownership interest or (y)
the power to elect or direct the election of a majority of the directors or
other governing body of such Person.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections
77aaa-77bbbb) as in effect on the date of this Indenture, except as provided in
Section 9.3.
"TRANSFER RESTRICTED SECURITIES" means Securities that bear the
Restrictive Legend.
"TRUST OFFICER" means any officer or assistant officer within the
corporate trust department of the Trustee assigned by the Trustee to administer
its corporate trust matters.
"TRUSTEE" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means the successor.
"UNRESTRICTED DEFINITIVE SECURITIES" means one or more Definitive
Securities that do not and are not required to bear the Restricted Legend.
"UNRESTRICTED GLOBAL NOTES" means one or more Global Notes that do not
and are not required to bear the Restricted Legend.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company that
is designated as an Unrestricted Subsidiary by the Board of Directors of the
Company pursuant to a board resolution in accordance with the requirements of
the following sentence (and so long as such Subsidiary continues to meet such
requirements) and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board
of Directors of the Company may designate any Subsidiary of the Company
(including a newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary, by a resolution of the Board of Directors of the Company as
evidenced by written notice thereof and the filing and officers' certificate
referred to in the next following sentence delivered to the Trustee, only if at
the time of and after giving effect to such designation, (a) the Company could
incur at least $1.00 of additional Indebtedness pursuant to Section 4.9(a), (b)
the Company could make an additional Restricted Payment of at least $1.00
pursuant to Section 4.10(a), (c) such Subsidiary does not own or hold any
Capital Stock of, or any Lien on any
18
<PAGE> 25
property of, the Company or any Restricted Subsidiary, (d) such Subsidiary is
not liable, directly or indirectly, with respect to any Indebtedness other than
Non-Recourse Indebtedness, (e) such Subsidiary is not a party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary unless such agreement, contract, arrangement or understanding does
not violate the terms of Section 4.16, and (f) such Subsidiary is a Person with
respect to which neither the Company nor any Restricted Subsidiary has any
direct or indirect obligation (1) to subscribe for additional Capital Stock or
(2) to maintain or preserve such Subsidiary's financial condition or to cause
such Subsidiary to achieve any specified levels of operating results, in each
case, except to the extent otherwise permitted by the Indenture. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing requirements and was permitted by
Section 4.10(a). If, at any time, any Unrestricted Subsidiary would fail to
meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture, and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of the Company as of such date (and, if
such Indebtedness is not permitted to be incurred as of such date under Section
4.9, the Company shall be in default of such Section).
"U.S. GOVERNMENT SECURITIES" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case
under clauses (i) or (ii) are not callable or redeemable at the option of the
issuer thereof.
"U.S. LEGAL TENDER" means such coin or currency of the United States
as at the time of payment shall be legal tender for the payment of public and
private debts.
"VOLUMETRIC PRODUCTION PAYMENTS" mean production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"VOTING STOCK" means, with respect to any Person, securities of any
class or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or only so long as no senior class of stock has voting
power by reason of contingency) to vote in the election of members of the Board
of Directors or other governing body of such Person.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means a Restricted Subsidiary 95%
or more of the Capital Stock of which is owned by the Company or another Wholly
Owned Restricted Subsidiary, other than (i) directors' qualifying shares, if
applicable, and (ii) shares required by applicable law of a foreign
jurisdiction to be partially owned by the government of such jurisdiction or
Person of such or another foreign jurisdiction in order for such Subsidiary to
transact business in such jurisdiction, if such Subsidiary is organized in a
foreign jurisdiction, in each case, so long as the Company or such other Wholly
Owned Restricted Subsidiary controls the management and business of such
Restricted Subsidiary and derives the economic benefits of ownership of such
Restricted Subsidiary to substantially the same extent as if such Restricted
Subsidiary were wholly owned by the Company or such other Wholly Owned
Restricted Subsidiary.
19
<PAGE> 26
SECTION 1.2. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Term Defined in Section
---- ------------------
<S> <C> <C>
"AFFILIATE TRANSACTION" 4.16
"BANKRUPTCY LAW" 6.1
"CHANGE OF CONTROL OFFER" 4.17
"CHANGE OF CONTROL NOTICE" 4.17
"CHANGE OF CONTROL PAYMENT" 4.17
"CHANGE OF CONTROL PAYMENT DATE" 4.17
"CORPORATE TRUST OFFICE" 4.4
"COVENANT DEFEASANCE" 8.3
"CUSTODIAN" 6.1
"DEFAULTED INTEREST" 2.12
"DTC" 2.3
"EVENT OF DEFAULT" 6.1
"EXCESS PROCEEDS" 4.11
"FUNDING GUARANTOR" 10.6
"INCUR" 4.9
"LEGAL DEFEASANCE" 8.2
"LEGAL HOLIDAY" 11.7
"NET PROCEEDS OFFER" 4.11
"NET PROCEEDS OFFER AMOUNT" 4.11
"NET PROCEEDS PAYMENT DATE" 4.11
"OFFER AMOUNT" 4.11
"OFFER PERIOD" 4.11
"PAYING AGENT" 2.3
"PAYMENT DEFAULT" 6.1
"PAYMENT RESTRICTION" 4.14
"PERIOD" 4.11
"PURCHASE DATE" 4.11
"REGISTRAR" 2.3
</TABLE>
SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms, if used in this Indenture, have the following
meanings:
"COMMISSION" means the SEC.
"INDENTURE SECURITIES" means the Securities and the Guarantees.
"INDENTURE SECURITY HOLDER" means a Holder.
"INDENTURE TO BE QUALIFIED" means this Indenture.
"INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Trustee.
20
<PAGE> 27
"OBLIGOR" on the indenture securities means the Company, the
Guarantors and any other obligor on the Securities or the Guarantees.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule under
the TIA have the meanings assigned to them.
SECTION 1.4. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(3) "OR" is not exclusive, and "INCLUDING" means
"including without limitation,"; "including but not limited to" or
words of similar import;
(4) words in the singular include the plural, and words
in the plural include the singular;
(5) any gender used in this Indenture shall be deemed to
include the neuter, masculine or feminine genders;
(6) provisions apply to successive events and
transactions;
(7) "HEREIN," "HEREOF", "HEREUNDER" and other words of
similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
(8) all references herein to particular Articles,
Sections and Exhibits, and to clauses, subclauses, paragraphs or
sub-paragraphs of Articles, Sections and Exhibits, refer to this
Indenture unless expressly otherwise indicated; and
(9) references to sections of or rules under the
Securities Act or the Exchange Act shall be deemed to include
substitute replacement or successor sections or rules adopted by the
SEC from time to time.
ARTICLE II
THE SECURITIES
SECTION 2.1. FORM AND DATING.
(a) General. The Securities and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit A-1 or Exhibit
A-2. The Securities may have notations, legends or endorsements required by
law, stock exchange rule or usage. Each Security shall be dated the date of
its authentication. The Securities shall be issued in denominations of $1,000
and integral multiples thereof.
The Series A Notes and the Series B Notes shall be considered
collectively to be a single class for all purposes of this Indenture, including
waivers, amendments, redemptions and offers to purchase.
21
<PAGE> 28
The terms and provisions contained in the Securities shall constitute,
and are hereby expressly made, a part of this Indenture and the Company, the
Guarantors and the Trustee, by their execution and delivery of this Indenture,
expressly agree to such terms and provisions and to be bound thereby; provided,
if any provision of any Security conflicts with the express provisions of this
Indenture, such provisions of this Indenture shall govern and be controlling.
(b) Global Notes. Series A Notes offered and sold to QIBs in
reliance on Rule 144A shall be issued initially in the form of one or more 144A
Global Notes, which shall be deposited on behalf of the purchasers of the
Series A Notes represented thereby with the Securities Custodian and registered
in the name of the Depository or a nominee of the Depository, duly executed by
the Company and authenticated by the Trustee as hereinafter provided. The
aggregate principal amount of the 144A Global Notes may from time to time be
increased or decreased by adjustments made on the records of the Trustee and
the Depository or its nominee, as the case may be, in connection with transfers
of interests as hereinafter provided.
Series A Notes offered and sold in reliance on Regulation S, if any,
shall be issued initially in the form of the Regulation S Temporary Global
Note, which shall be deposited on behalf of the purchasers of the Series A
Notes represented thereby with the Securities Custodian and registered in the
name of the Depository or the nominee of the Depository for the accounts of
designated agents holding on behalf of Euroclear or Cedel, duly executed by the
Company and authenticated by the Trustee as hereinafter provided. The "40-day
restricted period" (as defined in Regulation S) shall be terminated upon the
receipt by the Trustee of (i) a written certificate from the Depository,
together with copies of certificates from Euroclear and Cedel certifying that
they have received certification of non-United States beneficial ownership of
100% of the aggregate principal amount of the Regulation S Temporary Global
Note (except to the extent of any beneficial owners thereof who acquired an
interest therein pursuant to another exemption from registration under the
Securities Act and who will take delivery of a beneficial ownership interest in
a 144A Global Note, all as contemplated by Section 2.6(a)(ii)), and (ii) an
Officers' Certificate from the Company confirming the foregoing. Following the
termination of the 40-day restricted period, beneficial interests in the
Regulation S Temporary Global Note shall be exchanged for beneficial interests
in one or more Regulation S Permanent Global Notes pursuant to the Applicable
Procedures. Simultaneously with the authentication of Regulation S Permanent
Global Notes, the Trustee shall cancel the Regulation S Temporary Global Note.
The aggregate principal amount of the Regulation S Temporary Global Note and
the Regulation S Permanent Global Notes may from time to time be increased or
decreased by adjustments made on the records of the Trustee and the Depository
or its nominee, as the case may be, in connection with transfers of interests
as hereinafter provided.
Each Global Note shall represent such of the outstanding Securities as
shall be specified therein and each shall provide that it shall represent the
aggregate amount of outstanding Securities from time to time endorsed thereon
and that the aggregate amount of outstanding Securities represented thereby may
from time to time be reduced or increased, as appropriate, to reflect
exchanges, redemptions and transfers of interests. Any endorsement of a Global
Note to reflect the amount of any increase or decrease in the amount of
outstanding Securities represented thereby shall be made by the Trustee or the
Securities Custodian, at the direction of the Trustee, in accordance with
instructions given by the Holder thereof as required by Section 2.6.
The provisions of the "Operating Procedures of the Euroclear System"
and "Terms and Conditions Governing Use of Euroclear" and the "Management
Regulations" and "Instructions to Participants" of Cedel shall be applicable to
interests in the Regulation S Temporary Global Note and the Regulation S
Permanent Global Notes, if any, that are held by Participants through Euroclear
or Cedel. The Trustee shall have no obligation to notify Holders of any such
procedures or to monitor or enforce compliance with the same.
22
<PAGE> 29
(c) Book-Entry Provisions. Participants shall have no rights
either under this Indenture with respect to any Global Note held on their
behalf by the Depository or by the Securities Custodian as custodian for the
Depository or under such Global Note, and the Depository may be treated by the
Company, the Trustee and any Agent of the Company or the Trustee as the
absolute owner of such Global Note for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any Agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depository
or impair, as between the Depository and its Participants, the operation of
customary practices of such Depository governing the exercise of the rights of
an owner of a beneficial interest in any Global Note.
(d) Definitive Securities. Securities issued in definitive form
under circumstances herein expressly provided shall be in the form of
Definitive Securities, duly executed by the Company and authenticated by the
Trustee as herein provided.
SECTION 2.2. EXECUTION AND AUTHENTICATION.
Two Officers of the Company shall sign the Securities on behalf of the
Company, and one Officer of each Guarantor shall sign the notation on the
Securities relating to the Guarantee of such Guarantor on behalf of such
Guarantor, in each case by manual or facsimile signature. The Company's seal
shall be reproduced on the Securities.
If an Officer of the Company or any Guarantor whose signature is on a
Security no longer holds that office at the time the Security is authenticated,
the Security shall be valid nevertheless.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security and
the Guarantee. These signatures shall be conclusive evidence that the
Security has been authenticated under this Indenture. Each Security shall be
dated the date of its authentication.
The Trustee shall authenticate (i) the Series A Notes for original
issue up to the aggregate principal amount of $135,000,000 and (ii) the Series
B Notes from time to time for issue only in exchange for a like principal
amount of Series A Notes, in each case, upon a written order of the Company
signed by two Officers of the Company, which written order shall specify (x)
the amount of Securities to be authenticated, (y) whether the Securities are
Series A Notes or Series B Notes and (z) the amount of Securities to be issued
in global form or definitive form. Subject to Section 2.7, the aggregate
principal amount of Securities outstanding at any time may not exceed
$135,000,000. Each Security authenticated for original issuance shall bear the
Restricted Legend.
The Trustee may appoint an authenticating agent to authenticate
Securities. An authenticating agent may authenticate Securities whenever the
Trustee may do so, except on original issuance. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent and each reference to authentication of the Securities includes
authentication of the Guarantee. An authenticating agent has the same rights
as an Agent to deal with the Company or its Affiliates.
The Securities shall be issuable only in registered form without
coupons and only in denominations of $1,000 and any integral multiple thereof.
23
<PAGE> 30
SECTION 2.3. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where Securities may be
presented for registration of transfer or for exchange (the "REGISTRAR") and an
office or agency where Securities may be presented for payment (the "PAYING
AGENT"). The Registrar shall keep a register of the Securities and of their
transfer and exchange. Where the Trustee is acting as or has been appointed
Registrar and/or Paying Agent, the Company may appoint one or more
co-registrars and one or more additional paying agents with the prior consent
of the Trustee, whose consent shall not be unreasonably withheld. The term
"Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture, and such agreement shall incorporate the
TIA's provisions of this Indenture that relate to such Agent. Such agency
agreement shall provide for reasonable compensation for such services and
otherwise shall implement the provisions of this Indenture that relate to
Agent. The Company shall notify the Trustee of the name and address of any
Agent and shall furnish the Trustee with an executed counterpart of any such
agency agreement. If the Company fails to maintain or act as Registrar or
Paying Agent, the Trustee shall act as such and shall be duly compensated
therefor.
The Registrar or a co-registrar and a Paying Agent shall be maintained
by the Company in the Borough of Manhattan, the City of New York. The Company
initially designates the Trustee as the Registrar and Paying Agent.
The Company initially appoints The Depository Trust Company ("DTC") to
act as Depositary with respect to the Global Notes.
The Company initially appoints the Trustee to act as the Registrar and
Paying Agent and to act as Securities Custodian with respect to the Global
Notes.
SECTION 2.4. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that such Paying Agent will hold in trust for the benefit of
Holders or the Trustee all money held by such Paying Agent for the payment of
principal of, or premium, if any, interest or Liquidated Damages, if any, on,
the Securities (whether such money shall have been paid to it by the Company or
any Guarantor), and will notify the Trustee of any Default by the Company or
any Guarantor in making any such payment. While any such Default continues,
the Trustee may require the Paying Agent to pay all money held by it to the
Trustee. Except as provided in the immediately preceding sentence, the Company
at any time may require a Paying Agent to pay all money held by it to the
Trustee and to account for any funds disbursed and, if the Company requires
such payment, the Company shall give prior notice to the Trustee and provide
appropriate money transfer instructions to the Paying Agent. Upon such payment
over to the Trustee and accounting for any funds disbursed, such Paying Agent
(if other than the Company or a Guarantor) shall have no further liability for
the money. If the Company or a Guarantor acts as Paying Agent, it shall
segregate and hold as separate trust funds for the benefit of the Holders all
money held by it as Paying Agent. Upon any bankruptcy or reorganization
proceedings relating to the Company, the Trustee shall serve as Paying Agent
for the Securities.
SECTION 2.5. HOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders and shall otherwise comply with TIA Section 312(a). If
24
<PAGE> 31
the Trustee is not the Registrar, the Company shall furnish or cause to be
furnished to the Trustee at least ten Business Days prior to each interest
payment date, and at such other times as the Trustee may request in writing, a
list in such form and as of such date as the Trustee may reasonably require of
the names and addresses of Holders, and the Company shall otherwise comply with
TIA Section 312(a).
SECTION 2.6. TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Global Notes. The transfer and
exchange of Global Notes or beneficial interests therein shall be effected
through the Depository, in accordance with this Indenture and the Applicable
Procedures. Beneficial interests in a Global Note may be transferred to
Persons who take delivery thereof in the form of a beneficial interest in the
same Global Note in accordance with the Applicable Procedures and, in the case
of a Transfer Restricted Security, the transfer restrictions set forth in the
legend in Section 2.6(f). Transfers of beneficial interests in the Global Notes
to Persons required to take delivery thereof in the form of an interest in
another Global Note shall be permitted as follows:
(i) 144A Global Note to Regulation S Global Note. If, at
any time, an owner of a beneficial interest in a 144A Global Note
deposited with the Depository (or the Trustee as custodian for the
Depository) wishes to transfer its beneficial interest in such 144A
Global Note to a Person who is required or permitted to take delivery
thereof in the form of an interest in a Regulation S Global Note, such
owner shall, subject to the Applicable Procedures, exchange or cause
the exchange of such interest for an equivalent beneficial interest in
a Regulation S Global Note as provided in this Section 2.6(a)(i). Upon
receipt by the Trustee of (A) instructions given in accordance with
the Applicable Procedures from a Participant directing the Trustee to
credit or cause to be credited a beneficial interest in the Regulation
S Global Note in an amount equal to the beneficial interest in the
144A Global Note to be transferred, (B) a written order given in
accordance with the Applicable Procedures containing information
regarding the Participant account of the Depository and the Euroclear
or Cedel account to be credited with such increase and, in the case of
Global Notes that are Transfer Restricted Securities, (C) a
certificate in the form of Exhibit B-1 given by the owner of such
beneficial interest stating that the transfer of such interest has
been made in compliance with the transfer restrictions applicable to
the Global Notes and pursuant to and in accordance with Rule 903 or
Rule 904 of Regulation S, then the Trustee, as Registrar, shall
instruct the Depository to reduce or cause to be reduced the aggregate
principal amount of the applicable 144A Global Note and to increase or
cause to be increased the aggregate principal amount of the applicable
Regulation S Global Note by the principal amount of the beneficial
interest in the 144A Global Note to be transferred, to credit or cause
to be credited to the account of the Person specified in such
instructions, a beneficial interest in the Regulation S Global Note
equal to the reduction in the aggregate principal amount of the 144A
Global Note, and to debit, or cause to be debited, from the account of
the Person making such transfer the beneficial interest in the 144A
Global Note that is being transferred.
(ii) Regulation S Global Note to 144A Global Note. If, at
any time, after the expiration of the 40- day restricted period, an
owner of a beneficial interest in a Regulation S Global Note deposited
with the Depository (or with the Trustee as custodian for the
Depository) wishes to transfer its beneficial interest in such
Regulation S Global Note to a Person who is required or permitted to
take delivery thereof in the form of an interest in a 144A Global
Note, such owner shall, subject to the Applicable Procedures, exchange
or cause the exchange of such interest for an equivalent beneficial
interest in a 144A Global Note as provided in this Section 2.6(a)(ii).
Upon receipt by the Trustee of (A) instructions from Euroclear or
Cedel, if applicable, and the Depository, directing the Trustee, as
Registrar, to credit or cause to be credited a beneficial interest in
the 144A Global Note equal to the beneficial interest in the
25
<PAGE> 32
Regulation S Global Note to be transferred, such instructions to
contain information regarding the Participant account with the
Depository to be credited with such increase, (B) a written order
given in accordance with the Applicable Procedures containing
information regarding the participant account of the Depository and,
in the case of Global Notes that are Transfer Restricted Securities,
(C) a certificate in the form of Exhibit B-2 attached hereto given by
the owner of such beneficial interest stating (1) if the transfer is
pursuant to Rule 144A, that the Person transferring such interest in a
Regulation S Global Note reasonably believes that the Person acquiring
such interest in a 144A Global Note is a QIB and is obtaining such
beneficial interest in a transaction meeting the requirements of Rule
144A, (2) that the transfer complies with the requirements of Rule 144
under the Securities Act, (3) if the transfer is pursuant to any other
exemption from the registration requirements of the Securities Act,
that the transfer of such interest has been made in compliance with
the transfer restrictions applicable to the Global Notes and pursuant
to and in accordance with the requirements of the exemption claimed,
such statement to be supported by an Opinion of Counsel from the
transferee or the transferor in form reasonably acceptable to the
Company and to the Registrar and in each case of clause (1), (2) or
(3) of this Section 2.6(a)(ii), in accordance with any applicable
securities laws of any state of the United States or any other
applicable jurisdiction or (4) such transfer is being effected
pursuant to an effective registration statement under the Securities
Act, then the Trustee, as Registrar, shall instruct the Depository to
reduce or cause to be reduced the aggregate principal amount of such
Regulation S Global Note and to increase or cause to be increased the
aggregate principal amount of the applicable 144A Global Note by the
principal amount of the beneficial interest in the Regulation S Global
Note to be transferred, and the Trustee, as Registrar, shall instruct
the Depository, concurrently with such reduction, to credit or cause
to be credited to the account of the Person specified in such
instructions a beneficial interest in the applicable 144A Global Note
equal to the reduction in the aggregate principal amount of such
Regulation S Global Note and to debit or cause to be debited from the
account of the Person making such transfer the beneficial interest in
the Regulation S Global Note that is being transferred.
(b) Transfer and Exchange of Definitive Securities.
(i) Transfer and Exchange of Definitive Securities for
Definitive Securities. When Definitive Securities are presented by a
Holder to the Registrar with a request to register the transfer of the
Definitive Securities or to exchange such Definitive Securities for an
equal principal amount of Definitive Securities of other authorized
denominations, the Registrar shall register the transfer or make the
exchange as requested only if the Definitive Securities are presented
or surrendered for registration of transfer or exchange, are endorsed
or accompanied by a written instrument of transfer in form
satisfactory to the Registrar duly executed by such Holder or by his
attorney, duly authorized in writing and the Registrar receives the
following documentation (all of which may be submitted by facsimile):
(A) in the case of Definitive Securities that are
Transfer Restricted Securities, such request shall be
accompanied by the following additional information and
documents, as applicable:
(1) if such Transfer Restricted Security
is being delivered to the Registrar by a Holder for
registration in the name of such Holder, without
transfer, or such Transfer Restricted Security is
being transferred (y) to the Company or any of its
Subsidiaries or (z) pursuant to an effective
registration statement under the Securities Act, a
certification to that effect from such Holder (in
substantially the form of Exhibit B-3 );
26
<PAGE> 33
(2) if such Transfer Restricted Security
is being transferred to a QIB in accordance with Rule
144A under the Securities Act or pursuant to an
exemption from registration in accordance with Rule
144 under the Securities Act or pursuant to an
effective registration statement under the Securities
Act, a certification to that effect from such Holder
(in substantially the form of Exhibit B-3);
(3) if such Transfer Restricted Security
is being transferred to a Non-U.S. Person in an
offshore transaction in accordance with Rule 904
under the Securities Act, a certification to that
effect from such Holder (in substantially the form of
Exhibit B-3 but containing the certification called
for by clauses (1) through (4) of Exhibit B-1
hereto); or
(4) if such Transfer Restricted Security
is being transferred to an Institutional Accredited
Investor in reliance on an exemption from the
registration requirements of the Securities Act other
than those listed in subparagraph (2) or (3) above, a
certification to that effect from such Holder (in
substantially the form of Exhibit B-3), and a
certification substantially in the form of Exhibit C
from the transferee, and, if such transfer is in
respect of an aggregate principal amount of
Securities of less than $100,000, an Opinion of
Counsel acceptable to the Company that such transfer
is in compliance with the Securities Act and any
applicable blue sky laws of any state of the United
States; and
(B) in the case of Unrestricted Definitive
Securities, a Holder thereof may transfer such Securities to a
Person who takes delivery thereof in the form of an
Unrestricted Definitive Security, and upon receipt of a
request to register such a transfer, the Registrar shall
register the Unrestricted Definitive Securities pursuant to
the instructions from the Holder thereof.
(ii) Transfer and Exchange of Definitive Securities for
Beneficial Interests. A Definitive Security may not be transferred or
exchanged for a beneficial interest in a Global Note except for a
beneficial interest in either a 144A Global Note or a Regulation S
Permanent Global Note, in each case upon satisfaction of the
applicable requirements set forth below. Upon receipt by the Trustee
of a Definitive Security, duly endorsed or accompanied by appropriate
instruments of transfer, in form satisfactory to the Trustee, together
with:
(1) if such Definitive Security is a Restricted
Definitive Security, and the exchange or transfer is for a
beneficial interest (y) in a 144A Global Note, then a
certification from the Holder thereof to the effect that such
Holder is a QIB or, if such Holder is transferring same, that
such transferee is a Person that such Holder reasonably
believes to be a QIB in accordance with Rule 144A, or (z) in a
Regulation S Permanent Global Note, then a certification to
the effect that such Holder is not a U.S. Person, when it
acquired the Security it was not a U.S. Person, and that it
acquired the Security in an offshore transaction that was in
compliance with Regulation S, or if such Holder is
transferring same, that such transfer was made pursuant to an
offer and sale to a Non-U.S. Person that occurred outside the
United States in a transaction meeting the requirements of
Rule 904 under the Securities Act; and
(2) whether or not such Definitive Security is a
Restricted Definitive Security, written instructions from the
Holder thereof directing the Trustee to make, or
27
<PAGE> 34
to direct the Securities Custodian to make, an endorsement on
the applicable Global Note to reflect an increase in the
aggregate principal amount of the Securities represented by
such Global Note,
the Trustee shall cancel such Definitive Security in accordance with
Section 2.11 and cause, or direct the Securities Custodian to cause,
in accordance with the standing instructions, agreements and
procedures existing between the Depository and the Securities
Custodian (including the Applicable Procedures), the aggregate
principal amount of the Securities represented by such Global Note to
be increased accordingly (and the accompanying Schedule to such Global
Note to be endorsed accordingly). If no applicable Global Notes are
then outstanding (other than as a result of either of the occurrences
referred to in Section 2.6(e)), the Company shall issue and, upon
receipt of an authentication order in accordance with Section 2.2, the
Trustee shall authenticate a new appropriate Global Note in the
appropriate principal amount.
(c) Transfer of a Beneficial Interest in a 144A Global Note or
Regulation S Permanent Global Note for a Definitive Security.
(i) Any Person having a beneficial interest in a 144A
Global Note or Regulation S Permanent Global Note may upon request,
subject to the Applicable Procedures, exchange such beneficial
interest for a Definitive Security, upon receipt by the Trustee of
written instructions or such other form of instructions as is
customary for the Depository (or Euroclear or Cedel, if applicable),
from the Depository or its nominee on behalf of any Person having a
beneficial interest in a 144A Global Note or Regulation S Permanent
Global Note, and, in the case of a Transfer Restricted Security, the
following additional information and documents (all of which may be
submitted by facsimile):
(A) if such beneficial interest is being
transferred to the Person designated by the Depository as
being the beneficial owner or to the Company or any of its
Subsidiaries, a certification to that effect from such Person
(in substantially the form of Exhibit B-4);
(B) if such beneficial interest is being
transferred to a QIB in accordance with Rule 144A under the
Securities Act or pursuant to an exemption from registration
in accordance with Rule 144 under the Securities Act or
pursuant to an effective registration statement under the
Securities Act, a certification to that effect from the
transferor (in substantially the form of Exhibit B-4);
(C) if such beneficial interest is being
transferred to a Non-U.S. Person in an offshore transaction in
accordance with Rule 904 under the Securities Act, a
certification to that effect from the transferor (in
substantially the form of Exhibit B-4 but containing the
certification called for by clauses (1) through (4) of Exhibit
B-1); or
(D) if such beneficial interest is being
transferred to an Institutional Accredited Investor, pursuant
to a private placement exemption from the registration
requirements of the Securities Act other than those listed in
subparagraph (B) or (C) above, a certification to that effect
from such Holder (in substantially the form of Exhibit B-4), a
certification from the applicable transferee (in substantially
the form of Exhibit C) and, if such transfer is in respect of
an aggregate principal amount of Securities of less than
$100,000, an Opinion of Counsel acceptable to the Company that
28
<PAGE> 35
such transfer is in compliance with the Securities Act and any
applicable blue sky laws of any state of the United States.
in which case the Trustee or the Securities Custodian, at the
direction of the Trustee, shall, in accordance with the standing
instructions and procedures existing between the Depository and the
Securities Custodian, cause the aggregate principal amount of 144A
Global Notes or Regulation S Permanent Global Notes, as applicable, to
be reduced accordingly and, following such reduction, the Company
shall execute and, the Trustee shall authenticate and deliver to the
transferee a Definitive Security in the appropriate principal amount.
(ii) Definitive Securities issued in exchange for a
beneficial interest in a 144A Global Note or Regulation S Permanent
Global Note, as applicable, pursuant to this Section 2.6(c) shall be
registered in such names and in such authorized denominations as the
Depository, pursuant to instructions from its direct or Indirect
Participants or otherwise, shall instruct the Trustee. The Trustee
shall deliver such Definitive Securities to the Persons in whose names
such Securities are so registered. Following any such issuance of
Definitive Securities, the Trustee, as Registrar, shall instruct the
Depository to reduce or cause to be reduced the aggregate principal
amount of the applicable Global Note to reflect the transfer.
(d) Restrictions on Transfer and Exchange of Global Notes.
Notwithstanding any other provision of this Indenture (other than the
provisions set forth in Section 2.6(f)), a Global Note may not be transferred
as a whole except by the Depository to a nominee of the Depository or by a
nominee of the Depository to the Depository or another nominee of the
Depository or by the Depository or any such nominee to a successor Depository
or a nominee of such successor Depository.
(e) Authentication of Definitive Securities in Absence of
Depository or Company's Election. If at any time (i) the Depository for the
Securities notifies the Company that the Depository is unwilling or unable to
continue as Depository for the Global Notes and a successor Depository for the
Global Notes is not appointed by the Company within 90 days after delivery of
such notice, and the Trustee is notified in writing of the foregoing by the
Company, or (ii) the Company, at its option, notifies the Trustee in writing
that it elects to cause issuance of Securities in the form of Definitive
Securities under the Indenture, then upon surrender by the Holders of Global
Notes, the Company shall execute, and the Trustee shall, upon receipt of an
authentication order in accordance with Section 2.2, authenticate and deliver,
Definitive Securities in an aggregate principal amount equal to the principal
amount of the Global Notes in exchange for such Global Notes.
(f) Legends.
(i) Except as permitted by the following paragraphs (ii),
(iii) and (iv), each Security certificate evidencing a Global Note or
a Definitive Security (and all Securities issued in exchange therefor
or substitution thereof) shall bear a legend in substantially the
following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE
BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED
OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE
ISSUANCE HEREOF (OR A PREDECESSOR SECURITY HERETO) OR (Y) BY ANY
HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE
THREE MONTHS
29
<PAGE> 36
PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO
THE COMPANY, (2) SO LONG AS THE SECURITY IS ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A
PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS
BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED
BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF
THIS SECURITY), (3) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS
THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (4) TO AN
INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY
THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS SECURITY) THAT IS ACQUIRING THIS SECURITY FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE
FORM ATTACHED TO THIS SECURITY IS DELIVERED BY THE TRANSFEREE TO THE
COMPANY AND THE TRUSTEE, (5) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF
APPLICABLE) UNDER THE SECURITIES ACT OR (6) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OR THE
UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS
SECURITY AGREES IT WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH
CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO
CONFIRM THAT ANY TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE
FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS
SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT
IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A
OR (2) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE
SECURITIES ACT. THIS SECURITY IS SUBJECT TO A REGISTRATION RIGHTS
AGREEMENT DATED AS OF MARCH 30, 1998, AMONG THE COMPANY AND BEAR,
STEARNS & CO. INC., JEFFERIES & COMPANY, INC. AND RAYMOND JAMES &
ASSOCIATES, INC., A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY."
(ii) Upon any sale or transfer of a Transfer Restricted
Security (including any Transfer Restricted Security represented by a
Global Note) pursuant to Rule 144 under the Securities Act or pursuant
to an effective registration statement under the Securities Act
(including an Effective Registration involving the Notes Registration
Statement):
(A) in the case of any Transfer Restricted
Security that is a Definitive Security, the Registrar shall
permit the Holder thereof to exchange such Transfer Restricted
Security for a Definitive Security that does not bear the
Restrictive Legend and
30
<PAGE> 37
rescind any restriction on the transfer of such Transfer
Restricted Security upon certification from the transferring
holder substantially in the form of Exhibit B-3; and
(B) in the case of any Transfer Restricted
Security represented by a Global Note, such Transfer
Restricted Security shall not be required to bear the
Restrictive Legend, but shall continue to be subject to the
provisions of Sections 2.6(a) and (c) hereof; provided,
however, that with respect to any request for an exchange of a
Transfer Restricted Security that is represented by a Global
Note for a Definitive Security that does not bear the
Restrictive Legend, which request is made in reliance upon
Rule 144 or pursuant to an effective registration statement,
the Holder thereof shall certify in writing to the Registrar
that such request is being made pursuant to Rule 144 or
pursuant to an effective registration statement (such
certification to be substantially in the form of Exhibit B-4).
(iii) Upon any sale or transfer of a Transfer Restricted
Security (including any Transfer Restricted Security represented by a
Global Note) in reliance on any exemption from the registration
requirements of the Securities Act (other than exemptions pursuant to
Rule 144 under the Securities Act) in which the Holder or the
transferee provides an Opinion of Counsel to the Company and the
Registrar in form and substance reasonably acceptable to the Company
and the Registrar (which Opinion of Counsel shall also state that the
transfer restrictions contained in the legend are no longer
applicable):
(A) in the case of any Transfer Restricted
Security that is a Definitive Security, the Registrar shall
permit the Holder thereof to exchange such Transfer Restricted
Security for a Definitive Security that does not bear the
Restrictive Legend and rescind any restriction on the transfer
of such Transfer Restricted Security; and
(B) in the case of any Transfer Restricted
Security represented by a Global Note, such Transfer
Restricted Security shall not be required to bear the
Restrictive Legend, but shall continue to be subject to the
provisions of Sections 2.6(a) and (c).
(iv) Notwithstanding the foregoing, upon consummation of
an Exchange Offer, the Company shall issue and, upon receipt of an
authentication order in accordance with Section 2.2, the Trustee shall
authenticate one or more Unrestricted Global Notes in aggregate
principal amount equal to the sum of (A) the principal amount of the
Restricted Beneficial Interests tendered for acceptance by Persons
that are not (1) broker-dealers, (2) Persons participating in the
distribution of the Series B Notes or (3) Persons who are affiliates
(as defined in Rule 144) of the Company and accepted for exchange in
the Exchange Offer and (B) the principal amount of the Restricted
Definitive Securities accepted for exchange in the Exchange Offer,
unless the Holders of such Restricted Definitive Securities shall
request the receipt of Definitive Securities, in which case the
Company shall execute and the Trustee shall authenticate and deliver
to the Persons designated by the Holders of such Restricted Definitive
Securities one or more Definitive Securities without the Restrictive
Legend in the appropriate principal amount. Concurrently with the
issuance of such Unrestricted Global Notes, the Trustee shall cause
the aggregate principal amount of the applicable Restricted Global
Notes to be reduced accordingly.
(g) Cancellation and/or Adjustment of Global Notes. At such time
as all beneficial interests in Global Notes have been exchanged for Definitive
Securities, redeemed, repurchased or cancelled, all Global Notes shall be
returned to or retained and cancelled by the Trustee in accordance with Section
2.11. At any time prior to such cancellation, if any beneficial interest in a
Global Note is
31
<PAGE> 38
exchanged for Definitive Securities, redeemed, repurchased or cancelled, the
principal amount of Securities represented by such Global Note shall be reduced
accordingly and an endorsement shall be made on such Global Note, by the
Trustee or the Securities Custodian, at the direction of the Trustee, to
reflect such reduction.
(h) General Provisions Relating to Transfers and Exchanges.
(i) To permit registrations of transfers and exchanges,
subject to this Section 2.6, the Company shall execute and, upon the
written order of the Company signed by two Officers of the Company,
the Trustee shall authenticate Definitive Securities and Global Notes
at the Registrar's request.
(ii) No service charge shall be made to a Holder for any
registration of transfer or exchange, but the Company may require
payment of a sum sufficient to cover any transfer tax or similar
governmental charge payable in connection therewith (other than any
such transfer taxes or similar governmental charge payable upon
exchange or transfer pursuant to Sections 3.7, 4.11, 4.17 and 9.5).
(iii) The Registrar shall not be required to register the
transfer of or exchange any Security selected for redemption in whole
or in part, except the unredeemed portion of any Security being
redeemed in part.
(iv) All Definitive Securities and Global Notes issued
upon any registration of transfer or exchange of Definitive Securities
or Global Notes shall be the valid obligations of the Company,
evidencing the same debt, and entitled to the same benefits under this
Indenture, as the Definitive Securities or Global Notes surrendered
upon such registration of transfer or exchange.
(v) The Company and the Registrar shall not be required:
(A) to issue, to register the transfer of or to
exchange Securities during a period beginning at the opening
of business 15 days before the day of any selection of
Securities for redemption under Section 3.2 and ending at the
close of business on the day of selection;
(B) to register the transfer of or to exchange
any Security so selected for redemption in whole or in part,
except the unredeemed portion of any Security being redeemed
in part;
(C) to register the transfer of or to exchange a
Security between a record date and the next succeeding
interest payment date; or
(D) to register the transfer of a Security other
than in amounts of $1,000 or multiple integrals thereof.
(vi) Prior to due presentment for the registration of a
transfer of any Security, the Trustee, any Agent and the Company may
deem and treat the Person in whose name any Security is registered as
the absolute owner of such Security for the purpose of receiving
payment of principal of and interest on such Securities, and neither
the Trustee, any Agent nor the Company shall be affected by notice to
the contrary.
32
<PAGE> 39
(vii) The Trustee shall authenticate Definitive Securities
and Global Notes in accordance with the provisions of Section 2.2.
SECTION 2.7. REPLACEMENT SECURITIES.
If a mutilated Security is surrendered to the Trustee or if a Holder
claims, and the Trustee receives evidence to its satisfaction, that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee, upon written order of the Company signed by two Officers of
the Company, shall authenticate a replacement Security if the requirements of
the Trustee are met. An indemnity bond may be required by the Trustee or the
Company that is sufficient in the judgment of the Company and the Trustee to
protect the Company, the Guarantors, the Trustee or any Agent from any loss
which any of them may suffer if a Security is replaced. The Company may charge
for its expenses (including fees and expenses of the Trustee) in replacing a
Security. If, after the delivery of such replacement Security, a bona fide
purchaser of the original Security in lieu of which such replacement Security
was issued presents for payment or registration such original Security, the
Trustee shall be entitled to recover such replacement Security from the Person
to whom it was delivered or any Person taking therefrom, except a bona fide
purchaser, and shall be entitled to recover upon the security or indemnity
provided therefor to the extent of any loss, damage, cost or expense incurred
by the Company, any Guarantor, the Trustee or any Agent in connection
therewith.
Subject to the provisions of the final sentence of the preceding
paragraph of this Section 2.7, every replacement Security is an additional
obligation of the Company and shall be entitled to all of the benefits of this
Indenture equally and proportionately with all other Securities duly issued
hereunder.
SECTION 2.8. OUTSTANDING SECURITIES.
Securities outstanding at any time are all Securities authenticated by
the Trustee except for those cancelled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Note effected by the
Trustee in accordance with the provisions hereof, and those described in this
Section 2.8 as not outstanding. Except as set forth in Section 2.9, a Security
does not cease to be outstanding because the Company, the Guarantors or any of
their respective Subsidiaries or Affiliates holds the Security.
If a Security is replaced pursuant to Section 2.7, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the entire principal of, and premium, interest and Liquidated
Damages, if any, on, any Security are considered paid under Section 4.1, it
ceases to be outstanding and interest and Liquidated Damages, if any, on it
cease to accrue.
If the Paying Agent (other than the Company, a Subsidiary of the
Company or an Affiliate of any thereof) holds, on a redemption date or maturity
date, money sufficient fully to pay Securities payable on that date, then on
and after that date such Securities shall be deemed to be no longer outstanding
and shall cease to accrue interest and Liquidated Damages, if any.
SECTION 2.9. TREASURY SECURITIES.
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Company, any Guarantor or an Affiliate of the Company shall be
considered as though they are not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent,
33
<PAGE> 40
only Securities that the Trustee knows are so owned shall be so disregarded.
Notwithstanding the foregoing, Securities that the Company, a Subsidiary of the
Company or an Affiliate of the Company offers to purchase or acquire pursuant
to an offer, exchange offer, tender offer or otherwise shall not be deemed to
be owned by the Company, any Guarantor or an Affiliate of the Company until
legal title to such Securities passes to the Company, such Guarantor or such
Affiliate, as the case may be.
SECTION 2.10. TEMPORARY SECURITIES.
Until definitive Securities are ready for delivery, the Company may
prepare and, upon written order of the Company signed by two Officers of the
Company, the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of definitive Securities but may
have variations that the Company considers appropriate for temporary Securities
and as shall be reasonably acceptable to the Trustee. Without unreasonable
delay, the Company shall prepare and the Trustee shall authenticate and deliver
definitive Securities in exchange for a like principal amount of temporary
Securities surrendered to it. Until so exchanged, Holders of temporary
Securities shall in all respects be entitled to all benefits of this Indenture.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Securities surrendered to them for registration of transfer, exchange or
payment. The Trustee, and no one else, shall cancel all Securities surrendered
for registration of transfer, exchange, payment, replacement or cancellation
and, at the written request of the Company, shall destroy cancelled Securities
(subject to the record retention requirements of the Exchange Act). Except as
provided in Section 2.7, the Company may not issue new Securities to replace
Securities that it has paid or delivered to the Trustee for cancellation, other
than as contemplated by the Exchange Offer.
Securities that are redeemed by the Company, that are repurchased by
the Company pursuant to Section 4.11 or Section 4.17, or that are otherwise
acquired by the Company, shall be surrendered to the Trustee for cancellation.
SECTION 2.12 DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the Securities, it
shall pay the defaulted interest in any lawful manner plus, to the extent
lawful, interest payable on the defaulted interest (taken together, the
"DEFAULTED INTEREST"), to the Persons who are Holders on a subsequent special
record date, in each case at the rate provided in the Securities and in Section
4.1 hereof. The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on each Security and the date of
proposed payment. At least 15 days before the special record date, the Company
shall mail to each Holder to be paid thereon a notice stating the special
record date, the payment date and the amount of Defaulted Interest to be paid.
In the event that the Company has elected to cause a Paying Agent to pay the
Defaulted Interest, the Company shall so notify the Paying Agent at least 15
days before the special record date, which notice shall also set forth the
special record date, the payment date and the aggregate amount of Defaulted
Interest to be paid. At least five days before such payment date, the Company
shall deposit with the Paying Agent money sufficient to pay all of the
Defaulted Interest on the payment date therefor and instruct the Paying Agent
in writing to pay to specified Holders on the payment date. On the payment
date, the Paying Agent shall make the payments in accordance with the Company's
written instructions from funds deposited with the Paying Agent for the purpose
of making such Defaulted Interest payments.
34
<PAGE> 41
SECTION 2.13. PERSONS DEEMED OWNERS.
The Company, the Trustee, any Paying Agent and any authenticating
agent may treat the Person in whose name any Security is registered as the
owner of such Security for the purpose of receiving payments of principal of,
or premium, if any, interest or Liquidated Damages, if any, on, such Security
and for all other purposes. None of the Company, the Trustee, any Paying Agent
or any authenticating agent shall be affected by any notice to the contrary.
ARTICLE III
REDEMPTION
SECTION 3.1. NOTICE TO TRUSTEE.
If the Company elects to redeem Securities pursuant to the optional
redemption provisions of paragraph 5 of the Securities, it shall furnish to the
Trustee and the Registrar, at least 45 days but not more than 60 days before
the redemption date (unless the Trustee consents to a shorter period in
writing), an Officers' Certificate setting forth the redemption date, the
principal amount of Securities to be redeemed and the redemption price.
SECTION 3.2. SELECTION OF SECURITIES TO BE REDEEMED.
If less than all of the Securities are to be redeemed at any time, the
Trustee shall select the Securities to be redeemed in compliance with the
requirements of the principal national securities exchange, if any, on which the
Securities are listed, or if the Securities are not so listed, on a pro rata
basis, by lot or by any other method that the Trustee considers fair and
appropriate; provided that no Securities with a principal amount of $1,000 or
less will be redeemed in part. The Trustee shall make the selection from
outstanding Securities not previously called for redemption not less than 30 nor
more than 60 days prior to the redemption date. The Trustee may select for
redemption portions of the principal of Securities that have denominations
larger than $1,000. Securities and portions of them it selects shall be in
amounts of $1,000 or whole multiples of $1,000. Provisions of this Indenture
that apply to Securities called for redemption also apply to portions of
Securities called for redemption. The Trustee shall notify the Company promptly
of the Securities or portions of Securities selected for redemption.
SECTION 3.3. NOTICE OF REDEMPTION.
(a) At least 30 days but not more than 60 days before the date
fixed for redemption, the Company shall mail a notice of redemption by
first-class mail to each Holder of Securities to be redeemed at such Holder's
registered address.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the redemption date;
(2) the redemption price;
(3) the aggregate principal amount of Securities being
redeemed;
(4) the name and address of the Paying Agent;
35
<PAGE> 42
(5) that Securities called for redemption must be
surrendered to the Paying Agent at the address specified in such
notice to collect the redemption price;
(6) that, unless the Company defaults in the payment of
the redemption price or accrued interest or Liquidated Damages, if
any, interest and Liquidated Damages, if any, on Securities called for
redemption ceases to accrue on and after the redemption date, and the
only remaining right of the Holders is to receive payment of the
redemption prices in respect of the Securities upon surrender to the
Paying Agent of the Securities;
(7) if any Security is being redeemed in part, the
portion of the principal amount of such Security to be redeemed and
that, after the redemption date, upon surrender of such Security, a
new Security or Securities in principal amount equal to the unredeemed
portion will be issued;
(8) the paragraph of the Securities pursuant to which the
Securities called for redemption are being redeemed; and
(9) the CUSIP number of the Securities.
(b) At the Company's request, the Trustee shall give the notice of
redemption required in Section 3.3(a) in the Company's name and at the
Company's expense; provided, however, that the Company shall deliver to the
Trustee, at least 45 days prior to the redemption date (unless the Trustee
consents to a shorter notice period in writing), an Officers' Certificate
requesting that the Trustee give such notice and setting forth the information
to be stated in such notice as provided in Section 3.3(a).
SECTION 3.4. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.3,
Securities called for redemption become due and payable on the redemption date
at the redemption price. A notice of redemption may not be conditional. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price, plus accrued interest and Liquidated Damages, if any, to the redemption
date.
SECTION 3.5. DEPOSIT OF REDEMPTION PRICE.
At least one Business Day prior to the redemption date, the Company
shall deposit with the Paying Agent (or if the Company or any of its Affiliates
is acting as the Company's Paying Agent, segregate and hold in trust as
provided in Section 2.4) money available on the redemption date sufficient to
pay the redemption price of, and accrued interest and Liquidated Damages, if
any, on, the Securities to be redeemed on that date. The Paying Agent shall
promptly return to the Company any money so deposited which is not required for
that purpose upon the written request of the Company, except with respect to
monies owed as obligations to the Trustee pursuant to Article VII.
If the Company complies with the provisions of the preceding
paragraph, on and after the redemption date, interest and Liquidated Damages,
if any, shall cease to accrue on the Securities or the portions of Securities
called for redemption. If a Security is redeemed on or after an interest
record date but on or prior to the related interest payment date, then any
accrued and unpaid interest and Liquidated Damages, if any, shall be paid to
the Person in whose name such Security was registered at the close of business
on such record date. If any Security called for redemption shall not be so
paid upon redemption because of the failure of the Company to comply with the
preceding paragraph, interest and Liquidated Damages, if any, will continue to
be payable on the unpaid principal and premium, if any, including from
36
<PAGE> 43
the redemption date until such principal and premium, if any, is paid, and, to
the extent lawful, on any interest and Liquidated Damages not paid on such
unpaid principal, in each case at the rate provided in the Securities and in
Section 4.1.
SECTION 3.6. SECURITIES REDEEMED IN PART.
Upon surrender of a Security that is to be redeemed in part, the
Company shall issue and the Trustee shall authenticate for the Holder, at the
expense of the Company, a new Security equal in aggregate amount to the
unredeemed portion of the Security surrendered.
SECTION 3.7. OPTIONAL REDEMPTION.
The Securities shall not be redeemable at the Company's option prior
to April 1, 2003. Thereafter, the Securities may be redeemed at any time at
the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as a percentage of
the principal amount of the Securities to be redeemed) set forth below, plus,
in each case, accrued and unpaid interest and Liquidated Damages, if any, on
the Securities so redeemed to the redemption date, if redeemed during the
12-month period beginning on April 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003 105.750%
2004 and thereafter 100.000%
</TABLE>
Any redemption pursuant to this Section 3.7 shall be made, to the
extent applicable, pursuant to the provisions of Sections 3.1 through 3.6.
SECTION 3.8. EQUITY OFFERING REDEMPTION.
Notwithstanding the provisions of Section 3.7, prior to April 1, 2001,
the Company may redeem up to 30% of the aggregate principal amount of the
Securities originally issued at a redemption price of 111.5% of the aggregate
principal amount of the Securities so redeemed, plus accrued and unpaid
interest and Liquidated Damages, if any, on the Securities so redeemed to the
date of redemption, with all or a portion of the aggregate net proceeds
received by the Company from one or more Equity Offerings; provided that (i) at
least 65% of the aggregate principal amount of the Securities originally issued
remains outstanding immediately after the occurrence of each such redemption,
and (ii) each such redemption shall occur within 90 days after the date of the
closing of each such Equity Offering.
Any redemption pursuant to this Section 3.8 shall be made pursuant to
the provisions of Section 3.1 through 3.6.
37
<PAGE> 44
ARTICLE IV
COVENANTS
SECTION 4.1. PAYMENT OF SECURITIES.
The Company shall pay the principal of, and premium, if any, interest
and Liquidated Damages, if any, on, the Securities on the dates and in the
manner provided in the Securities and this Indenture. Principal, premium,
interest and Liquidated Damages, if any, shall be considered paid on the date
due if the Paying Agent, if other than the Company or any Subsidiary thereof,
holds as of 10:00 a.m. New York time on the due date money deposited by the
Company designated for and sufficient to pay all principal, premium, interest
and Liquidated Damages, if any, then due.
The Company shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on overdue principal, and premium, if
any, at the rate borne by the Securities to the extent lawful; and it shall pay
interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue installments of interest and Liquidated Damages, if
any, (without regard to any applicable grace period) at the same rate to the
extent lawful.
SECTION 4.2. SEC REPORTS.
(a) The Company, within 15 days after it files the same with the
SEC, shall deliver to Holders, copies of the annual reports and the
information, documents and other reports (or copies of any such portions of any
of the foregoing as the SEC may by rules and regulations prescribe) that the
Company is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC (if the SEC will so accept) and
provide the Trustee and the Holders with such quarterly and annual reports and
such information, documents and other reports specified in Sections 13 and
15(d) of the Exchange Act, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operation", and with respect to the annual
information only, a report thereon by the Company's certified independent
public accountants. The Company and each Guarantor shall also comply with the
provisions of TIA Section 314(a).
(b) The Company may request the Trustee on behalf of the Company
at the Company's expense to mail the foregoing to Holders. In such case, the
Company shall timely provide the Trustee with a sufficient number of copies of
all reports and other documents and information that the Trustee may be
required to deliver to Holders under this Section.
(c) The Company and the Guarantors shall furnish to the Holders,
prospective purchasers of the Securities and security analysts, upon their
request, the information, if any, required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
SECTION 4.3. COMPLIANCE CERTIFICATES.
(a) The Company shall deliver to the Trustee, within 90 days after
the end of each fiscal year of the Company, an Officers' Certificate
substantially in the form of Exhibit E, stating that a review of the
activities of the Company and its Subsidiaries during the preceding fiscal year
has been made under the supervision of the signing Officers with a view to
determining whether each of the Company and such Subsidiaries has kept,
observed, performed and fulfilled its obligations under this Indenture, and
further
38
<PAGE> 45
stating, as to each such Officer signing such certificate, that, to the best of
such Officer's knowledge, the Company and each Guarantor has kept, observed,
performed and fulfilled each and every covenant contained in this Indenture and
is not in default in the performance or observance of any of the terms,
provisions and conditions hereof (or, if a Default or Event of Default shall
have occurred, describing all such Defaults or Events of Default of which such
Officer may have knowledge and what action the Company is taking or proposes to
take with respect thereto), and that to the best of such Officers' knowledge,
no event has occurred and remains in existence by reason of which payments on
account of the principal of, or premium, if any, interest and Liquidated
Damages, if any, on, the Securities is prohibited or if such event has
occurred, a description of the event and what action the Company is taking or
proposes to take with respect thereto. Such Officers' Certificate shall comply
with TIA Section 314(a)(4). The Company hereby represents that, as of the
Issue Date, its fiscal year ends December 31, and hereby covenants that it
shall notify the Trustee at least 30 days in advance of any change in its
fiscal year.
(b) So long as not contrary to the then current recommendations of
the American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.2(a) shall be accompanied by a
written statement of the Company's certified independent public accountants
(which shall be a firm of established national reputation) that in making the
examination necessary for certification of such financial statements, nothing
has come to their attention that would lead them to believe that the Company
has violated any provisions of Article IV or Article V or, if any such
violation has occurred, specifying the nature and period of existence thereof.
Where such financial statements are not accompanied by such a written
statement, the Company shall furnish the Trustee with an Officers' Certificate
stating that any such written statement would be contrary to the then current
recommendations of the American Institute of Certified Public Accountants.
(c) The Company and the Guarantors shall, so long as any of the
Securities are outstanding, deliver to the Trustee within 5 Business Days of
any Officer becoming aware of any Default or Event of Default or default in the
performance of any covenant, agreement or condition contained in this
Indenture, an Officers' Certificate specifying such Default or Event of Default
and what action the Company or any Guarantor proposes to take with respect
thereto.
SECTION 4.4. MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in the Borough of Manhattan, The
City of New York, an office or agency where Securities may be presented or
surrendered for payment, where Securities may be surrendered for registration
of transfer or exchange and where notices and demands to or upon the Company in
respect of the Securities and this Indenture may be served. Initially, such
office or agency will be State Street Bank & Trust Company of New York, N.A.,
61 Broadway, 15th Floor, New York, New York 10006, and the Company shall give
prompt written notice to the Trustee of the location, and any change in the
location, of such office or agency. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the
Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served at such office of the agent of the Trustee, and
the Company hereby appoints such agent of the Trustee as its agent to receive
all such presentations, surrenders, notices and demand.
Subject to Section 2.3, the Company may also from time to time
designate one or more other offices or agencies where the Securities may be
presented or surrendered for any or all such purposes and may from time to time
rescind such designations; provided, that no such designation or rescission
shall in any manner relieve the Company of its obligation to maintain an office
or agency in the Borough of Manhattan, The City of New York, for such purposes.
The Company will give prompt written notice to the Trustee of any such
designation or rescission and of any change in the location of any such other
39
<PAGE> 46
office or agency. The Company hereby designates the address of the Trustee set
forth in Section 11.2 (the "CORPORATE TRUST OFFICE") as one of such other
offices or agencies of the Company in accordance with Section 2.3.
SECTION 4.5. CORPORATE EXISTENCE.
Subject to Section 5.1 and Section 10.2, the Company will do or cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence and the corporate, partnership or other existence of
each of its Subsidiary and all rights (charter and statutory) and franchises of
the Company and its Subsidiaries; provided, that the Company shall not be
required to preserve the corporate existence of any Subsidiary, or any such
right or franchise, if the Board of Directors of the Company shall determine
that the preservation thereof is no longer desirable in the conduct of the
business of the Company and of the Company and its Subsidiaries taken as a
whole, and that the loss thereof is not, and foreseeably will not be, adverse
to the timely payment and performance of the obligations under the Securities
and otherwise under this Indenture, or otherwise disadvantageous in any other
material respect to the Holders.
SECTION 4.6. WAIVER OF STAY, EXTENSION OR USURY LAWS.
Each of the Company and the Guarantors covenants (to the extent that
each may lawfully do so) that it shall not at any time insist upon, plead, or
in any manner whatsoever claim or take the benefit or advantage of, any stay,
extension, or usury law or other law, which would prohibit or forgive the
Company or any Guarantor from paying all or any portion of the principal of, or
premium, if any, interest or Liquidated Damages, if any, on, the Securities as
contemplated herein, wherever enacted, now or at any time hereafter in force,
or which may affect the covenants or the timely and complete performance of
this Indenture; and (to the extent that it may lawfully do so) each of the
Company and the Guarantors hereby expressly waives all benefit or advantage of
any such law, and covenants that it shall not, by resort to any such law or
otherwise, hinder, delay or impede the execution of any power herein granted to
the Trustee, but shall suffer and permit the execution of every such power as
though no such law had been enacted.
SECTION 4.7. PAYMENT OF TAXES AND OTHER CLAIMS.
The Company shall pay or discharge, and shall cause each of its
Subsidiaries to pay and discharge, before the same shall become delinquent, (a)
all taxes, assessments and governmental charges levied or imposed upon the
Company or any such Subsidiary or upon the income, profits or property of the
Company or any such Subsidiary and (b) all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a Lien upon the property of
the Company or any Subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
diligently contested in good faith by appropriate proceedings.
SECTION 4.8. MAINTENANCE OF PROPERTIES AND INSURANCE.
(a) The Company shall cause all properties used or held for use in
the conduct of its business or the business of any Subsidiary to be maintained
and kept in good condition, repair and working order (ordinary wear and tear
excepted) and supplied with all necessary equipment and shall cause to be made
all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary so that there
is no material adverse effect to the Company and its Subsidiaries, taken as a
whole; provided, however, that nothing in this Section shall prevent the
40
<PAGE> 47
Company from discontinuing the operation or maintenance of any such property,
or abandoning or disposing of it, if such discontinuance, abandonment or
disposal is, in the judgment of the Board of Directors of the Company,
desirable in the conduct of its business and of the business of it and its
Subsidiaries taken as a whole and not adverse to the timely payment and
performance of the obligations under this Indenture or otherwise
disadvantageous in any other material respect to the Holders.
(b) The Company shall provide or cause to be provided, for itself
and each of its Subsidiaries, insurance (including appropriate self-insurance)
against loss or damage of the kinds that, in the reasonable, good faith opinion
of the Company, are adequate and appropriate for the conduct of the business of
the Company and such Subsidiaries in a prudent manner, with reputable insurers
or with the government of the United States or an agency or instrumentality
thereof, in such amounts, with such deductibles, and by such methods as shall
be customary, in the reasonable, good faith opinion of the Company, for
corporations similarly situated in the industry.
SECTION 4.9. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS.
(a) The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, issue, incur, assume,
guarantee, become liable, contingently or otherwise, with respect to or
otherwise become responsible for the payment of (collectively, "INCUR") any
Indebtedness (other than Permitted Indebtedness); provided, however, that if no
Default or Event of Default shall have occurred and be continuing at the time
or as a consequence of the incurrence of such Indebtedness, the Company or its
Restricted Subsidiaries may incur Indebtedness if, on a pro forma basis, after
giving effect to such incurrence and the application of the proceeds therefrom,
both of the following tests shall have been satisfied: (i) the Consolidated
Interest Coverage Ratio for the last four fiscal quarter Reference Period
immediately preceding the incurrence of such Indebtedness is at least (a)
2.25-to-1.0 with respect to any date of incurrence of additional Indebtedness
occurring on or before the first anniversary date of the Issue Date, (b)
2.50-to-1.0 with respect to any date of incurrence of additional Indebtedness
occurring after the first anniversary date of the Issue Date and on or before
October 1, 2000, or (c) 2.75-to-1.0 with respect to any date of incurrence of
additional Indebtedness occurring after October 1, 2000 and (ii) Adjusted
Consolidated Net Tangible Assets would have been equal to or greater than 150%
of Indebtedness of the Company and its Restricted Subsidiaries.
(b) Notwithstanding the foregoing, if no Default or Event of
Default shall have occurred and be continuing at the time or as a consequence
of the incurrence of such Indebtedness, the Company and its Restricted
Subsidiaries may incur Permitted Indebtedness. For the avoidance of doubt,
neither the Company nor any of its Restricted Subsidiaries may incur Permitted
Indebtedness if a Default or Event of Default shall have occurred and is then
continuing or as a consequence of the incurrence of such Indebtedness, a
Default or Event of Default occurs.
(c) Any Indebtedness of a Person existing at the time such Person
becomes a Restricted Subsidiary (whether by merger, consolidation, acquisition
or otherwise) shall be deemed to be incurred by such Restricted Subsidiary at
the time it becomes a Restricted Subsidiary.
(d) Notwithstanding the preceding paragraphs of this Section 4.9,
no Restricted Subsidiary that is not already a Guarantor shall, directly or
indirectly, incur Indebtedness on its behalf or Indebtedness with respect to
any Indebtedness of the Company or any other Restricted Subsidiary unless such
Restricted Subsidiary, the Company and the Trustee execute and deliver a
supplemental indenture to evidence such Restricted Subsidiary's Guarantee of
the Securities and such Restricted Subsidiary and the Company execute and
deliver or cause to be executed and delivered such other instruments and
actions required in connection therewith as provided in this Indenture.
41
<PAGE> 48
SECTION 4.10. LIMITATION ON RESTRICTED PAYMENTS.
(a) The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, make any Restricted
Payment, unless:
(i) no Default or Event of Default shall have occurred
and be continuing at the time of or immediately after giving effect to
such Restricted Payment;
(ii) at the time of and immediately after giving pro forma
effect to such Restricted Payment as if it had been made at the
beginning of the applicable four-quarter period, the Company would
have been permitted to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to Section 4.9(a); and
(iii) immediately after giving effect to such Restricted
Payment, the aggregate of all Restricted Payments declared or made
after the Issue Date does not exceed the sum of
(A) 50% of the Consolidated Net Income of the
Company and its Restricted Subsidiaries (or in the event such
Consolidated Net Income shall be a deficit, minus 100% of such
deficit) during the period (treated as one accounting period)
subsequent to March 31, 1998 and ending on the last day of the
fiscal quarter for which financial information is available
immediately preceding the date of such Restricted Payment
(less the aggregate amount of dividends described in clause
(i) of Section 4.10(b) that are either (x) paid after the last
day of the fiscal quarter for which financial information is
available immediately preceding the date of such Restricted
Payment or (y) declared but not yet paid as of such date);
(B) the aggregate Net Cash Proceeds received by
the Company during such period from any Person other than a
Subsidiary of the Company as a result of the issuance or sale
of Capital Stock of the Company (other than any Disqualified
Stock), other than in connection with the conversion of
Indebtedness or Disqualified Stock;
(C) the aggregate Net Cash Proceeds received by
the Company during such period from any Person other than a
Subsidiary of the Company as a result of the issuance or sale
of any Indebtedness or Disqualified Stock to the extent that
at the time the determination is made such Indebtedness or
Disqualified Stock, as the case may be, has been converted
into or exchanged for Capital Stock of the Company (other than
Disqualified Stock);
(D) (i) in case any Unrestricted Subsidiary has
been redesignated a Restricted Subsidiary, an amount equal to
the lesser of (x) the book value (determined in accordance
with GAAP) at the date of such redesignation of the aggregate
Investments made by the Company and its Restricted
Subsidiaries in such Unrestricted Subsidiary and (y) the fair
market value of such Investments in such Unrestricted
Subsidiary at the time of such redesignation, as determined in
good faith by the Company's Board of Directors, including a
majority of the Company's Disinterested Directors, whose
determination shall be conclusive and evidenced by a Board
Resolution of such Board (less, in the case of each of clauses
(x) and (y), the amount of original Investment (based upon
book value determined in accordance with GAAP at the time of
such Investment) made by the Company or any Restricted
Subsidiary pursuant to clause (x) of the definition of
"Permitted Business Investment" minus the aggregate cash
dividends paid by such
42
<PAGE> 49
Unrestricted Subsidiary to the Company or any other Restricted
Subsidiary since the date of such original Investment,
provided that the result of the foregoing shall not be less
than zero); or (ii) in case any Restricted Subsidiary has been
redesignated an Unrestricted Subsidiary, minus the greater of
(x) the book value (determined in accordance with GAAP) at the
date of redesignation of the aggregate Investments made by the
Company and its Restricted Subsidiaries and (y) the fair
market value of such Investments in such Restricted Subsidiary
at the time of such redesignation, as determined in good faith
by the Company's Board of Directors, including a majority of
the Company's Disinterested Directors, whose determination
shall be conclusive and evidenced by a resolution of such
Board; and
(E) the amount of any writedowns or writeoffs,
other negative revaluations, and other negative extraordinary
charges not otherwise reflected in Consolidated Net Income of
the Company during such period (which amount, for purposes of
this clause (iii), shall be stated as a negative number).
(b) Notwithstanding the foregoing, the above limitations will not
prevent (i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment complied with
the provisions of this Indenture; (ii) any dividend on shares of Capital Stock
of the Company or any Restricted Subsidiary payable solely in shares of Capital
Stock (other than Disqualified Stock); (iii) any dividend or other distribution
payable from a Subsidiary of the Company to the Company or any Wholly Owned
Restricted Subsidiary; (iv) the repurchase, redemption or other acquisition or
retirement of any shares of any class of Capital Stock of the Company or any
Restricted Subsidiary, in exchange for, or out of the aggregate Net Cash
Proceeds of a substantially concurrent issue and sale (other than to a
Restricted Subsidiary) of shares of Capital Stock of the Company (other than
Disqualified Stock), provided that the Net Cash Proceeds expended or utilized
for such repurchase, redemption or other acquisition or retirement shall not be
included in subclause (B) of clause (iii) of Section 4.10(a); and (v) the
repurchase, redemption or other acquisition or retirement for value of Capital
Stock of MHI held by a departing or deceased shareholder of Capital Stock of MHI
pursuant to MHI's shareholders' agreement, as amended and in effect from time to
time, provided that the funds or value expended or incurred, or committed to be
expended or incurred, in each fiscal year of the Company does not exceed in the
aggregate $500,000 and no Default or Event of Default shall have occurred and be
continuing immediately after any such repurchase, redemption or acquisition or
retirement.
(c) The amount of all Restricted Payments (other than cash) shall
be the fair market value on the date of the Restricted Payment of the asset(s)
or securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined in
good faith by the Board of Directors of the Company, whose Board Resolution in
respect thereto shall be delivered to the Trustee (which shall certify that
such valuation has been approved by a majority of the Disinterested Directors).
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by this Section 4.10 were computed.
SECTION 4.11. LIMITATION ON SALE OF ASSETS.
(a) The Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, make any Asset Sale unless:
43
<PAGE> 50
(i) the Company (or its Restricted Subsidiary, as the
case may be) receives consideration at the time of such sale or other
disposition at least equal to the fair market value thereof (as
determined in good faith by the Company, which determination, with
respect to Asset Sales or series of related Asset Sales with proceeds
valued at greater than $5,000,000 shall be evidenced by a Board
Resolution duly adopted by the Company's Board of Directors, including
a majority of the Company's Disinterested Directors);
(ii) at least 75% of the proceeds from such Asset Sale
consist of cash or U.S. dollar denominated Cash Equivalents; and
(iii) the Net Cash Proceeds received by the Company (or its
Restricted Subsidiary, as the case may be) from such Asset Sale are
applied in accordance with Section 4.11(b) and Section 4.11(c).
(b) The Company may apply such Net Cash Proceeds, within 365 days
after receipt of Net Cash Proceeds from any Asset Sale, to: (i) the repayment
of Indebtedness of the Company under a Bank Credit Facility or other Senior
Indebtedness of the Company or Senior Indebtedness of a Guarantor, that results
in a permanent reduction in any revolving credit or other commitment relating
thereto or the maximum principal amount that may be borrowed thereunder in an
amount equal to the principal amount so repaid; (ii) make an Investment in
assets used in the Oil and Gas Business in replacement of the assets that were
the subject of the Asset Sale giving rise to such Net Cash Proceeds; or (iii)
develop by drilling, completing and producing reserves from the oil and gas
properties of the Company and the Restricted Subsidiaries.
(c) If, at the end of the 365-day period, the Net Cash Proceeds of
any Asset Sale less the aggregate amount applied by the Company during such
period as described in Section 4.11(b), together with any Net Cash Proceeds in
excess of amounts similarly applied by the Company from any prior Asset Sale
after the date of receipt of such Net Cash Proceeds (such aggregate
constituting "EXCESS PROCEEDS"), exceeds $5,000,000, then the Company shall be
required to commence, and within 10 Business Days following such occurrence,
shall commence, an offer (the "NET PROCEEDS OFFER") to repurchase the
Securities (and any other Senior Indebtedness in respect of which such an offer
to repurchase also is required to be made concurrently with the Net Proceeds
Offer) having an aggregate principal amount equal to the Excess Proceeds (such
purchase to be made on a pro rata basis if the amount available for such
repurchase is less than the principal amount of the Securities and other Senior
Indebtedness tendered in such Net Proceeds Offer) at a repurchase price of 100%
of the principal amount thereof plus accrued interest and Liquidated Damages,
if any, to the date of repurchase. To the extent that the aggregate principal
amount of Securities tendered pursuant to a Net Proceeds Offer and of such
other Senior Indebtedness is less than the amount that the Company is required
to repurchase, then the Company may use any remaining Excess Proceeds for its
and its Restricted Subsidiaries' general corporate purposes. Upon the
completion of the Net Proceeds Offer, the amount of Excess Proceeds will be
reset to zero.
(d) In the event that pursuant to the above provisions of this
Section 4.11 the Company is required to commence a Net Proceeds Offer, it shall
follow the procedures specified below:
(i) The Net Proceeds Offer shall remain open for a period
of 20 Business Days following its commencement and no longer, except
to the extent that a longer period is required by applicable law (the
"OFFER PERIOD"). No later than five Business Days after the
termination of the Offer Period (the "PURCHASE DATE"), the Company
shall purchase the principal amount of Securities required to be
purchased pursuant to Section 4.11(c) (the "OFFER AMOUNT") or, if less
than the Offer Amount has been tendered, all Securities validly
tendered in response to the Net
44
<PAGE> 51
Proceeds Offer. Payment for any Securities so purchased shall be made
in the same manner as interest payments are made.
(ii) If the Purchase Date is on or after an interest
record date and on or before the related interest payment date, any
accrued and unpaid interest and Liquidated Damages, if any, shall be
paid to the Person in whose name a Security is registered at the close
of business on such record date, and no additional interest or
Liquidated Damages, if any, shall be payable to Holders who tender
Securities pursuant to the Net Proceeds Offer.
(iii) Upon the commencement of a Net Proceeds Offer, the
Company shall send, by first class mail, a notice to each of the
Holders, with a copy to the Trustee. The notice shall contain all
instructions and materials necessary to enable such Holders to tender
Securities pursuant to the Net Proceeds Offer. The Net Proceeds Offer
shall be made to all Holders. The notice, which shall govern the
terms of the Net Proceeds Offer, shall state:
(A) that the Net Proceeds Offer is being made
pursuant to this Section 4.11 and the length of time the Net
Proceeds Offer shall remain open;
(B) the Offer Amount, the purchase price and the
Purchase Date;
(C) that any Security not tendered or accepted
for payment shall continue to accrue interest and Liquidated
Damages, if any;
(D) that, unless the Company defaults in making
such payment, any Security accepted for payment pursuant to
the Net Proceeds Offer shall cease to accrue interest and
Liquidated Damages, if any, after the Purchase Date;
(E) that Holders electing to have a Security
purchased pursuant to a Net Proceeds Offer may only elect to
have all of such Security purchased and may not elect to have
only a portion of such Security purchased;
(F) that Holders electing to have a Security
purchased pursuant to any Net Proceeds Offer shall be required
to surrender the Security, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the Security
completed, to the Company or a Paying Agent at the address
specified in the notice at least three days before the
Purchase Date;
(G) that Holders shall be entitled to withdraw
their election if the Company or the Paying Agent, as the case
may be, receives, not later than the expiration of the Offer
Period, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of
the Security the Holder delivered for purchase and a statement
that such Holder is withdrawing his election to have such
Security purchased;
(H) that, if the aggregate principal amount of
Securities surrendered by Holders exceeds the Offer Amount,
the Trustee shall select the Securities to be purchased as
provided in Section 3.2 (with such adjustments as may be
deemed appropriate by the Trustee so that only Securities in
denominations of $1,000, or integral multiples thereof, shall
be purchased); and
45
<PAGE> 52
(I) that Holders whose Securities were purchased
only in part shall be issued new Securities equal in principal
amount to the unpurchased portion of the Securities
surrendered (or transferred by book-entry transfer).
(iv) If any of the Securities subject to a Net Proceeds
Offer is in the form of a Global Note, then the Company shall modify
such notice to the extent necessary to accord with the procedures of
the Depository applicable to repurchases (including Applicable
Procedures).
(v) On or before the Purchase Date, the Company shall, to
the extent lawful, accept for payment, on a pro rata basis to the
extent necessary, the Offer Amount of Securities or portions thereof
tendered pursuant to the Net Proceeds Offer, or if less than the Offer
Amount has been tendered, all Securities tendered, and shall deliver
to the Trustee an Officers' Certificate stating that such Securities
or portions thereof were accepted for payment by the Company in
accordance with the terms of this Section 4.11. The Company or the
Paying Agent, as the case may be, shall promptly (but in any case not
later than five days after the Purchase Date) mail or deliver to each
tendering Holder an amount equal to the purchase price of the
Securities tendered by such Holder and accepted by the Company for
purchase, and the Company shall promptly issue a new Security, and the
Trustee shall authenticate and mail or deliver such new Security to
such Holder, in a principal amount equal to any unpurchased portion of
the Security surrendered. Any Security not so accepted shall be
promptly mailed or delivered by the Company to the Holder thereof.
The Company shall publicly announce the results of the Net Proceeds
Offer on the Purchase Date.
(vi) Other than as specifically provided in this Section
4.11, any purchase pursuant to this Section 4.11 shall be made pursuant
to the provisions of Section 3.1 through Section 3.6.
(e) The Company will comply with Section 14 of the Exchange Act
and the provisions of Regulation 14E and any other tender offer rules under the
Exchange Act and any other federal and state securities laws, rules and
regulations which may then be applicable to any Net Proceeds Offer.
(f) During the period between any Asset Sale and the application
of the Net Cash Proceeds therefrom in accordance with this Section 4.11, all
Net Cash Proceeds shall be either (i) maintained in a segregated account and
shall be invested in Permitted Financial Investments or (ii) applied to
temporarily reduce borrowings under any revolving credit facility constituting
Senior Indebtedness of the Company or Senior Indebtedness of a Guarantor.
(g) Notwithstanding the foregoing, the Company will not and will
not permit any Restricted Subsidiary to, directly or indirectly, make any Asset
Sale of any of the Capital Stock of a Restricted Subsidiary except pursuant to
an Asset Sale of all of the Capital Stock of such Restricted Subsidiary.
SECTION 4.12. LIMITATION ON LIENS SECURING INDEBTEDNESS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Liens (other than Permitted Liens) upon any of their respective
properties to secure (i) any Indebtedness or trade payable of the Company,
unless the Securities are equally and ratably secured or (ii) any Indebtedness
or trade payable of any Guarantor, unless the Guarantees are equally and
ratably secured; provided, that if such Indebtedness is expressly subordinated
to the Securities or the Guarantees, the Lien securing such Indebtedness will
be subordinated and junior to any Lien securing the Securities or the
Guarantees, with the same relative priority as such
46
<PAGE> 53
Subordinated Indebtedness of the Company or Subordinated Indebtedness of a
Guarantor will have with respect to the Securities or the Guarantees, as the
case may be.
SECTION 4.13. LIMITATION ON SALE/LEASEBACK TRANSACTIONS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into any Sale/Leaseback
Transaction unless (i) the Company or such Restricted Subsidiary, as the case
may be, could have (a) incurred Indebtedness in an amount equal to the
Attributable Indebtedness relating to such Sale/Leaseback Transaction pursuant
to Section 4.9(a) and (b) incurred a Lien to secure such Indebtedness, without
being required to equally and ratably secure the Securities pursuant to Section
4.12, and (ii) the Company or such Restricted Subsidiary receives gross
proceeds from such Sale/Leaseback Transaction at least equal to the fair market
value thereof (as determined in good faith by the Company's Board of Directors,
whose determination in good faith, evidenced by a Board Resolution of such
Board shall be conclusive) and the transfer of assets in such Sale/Leaseback
Transaction is permitted by, and the proceeds of such transaction are applied
in compliance with, Section 4.11.
SECTION 4.14. LIMITATION ON PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions on
its Capital Stock or on any other interest or participation in the Company or a
Restricted Subsidiary; (ii) pay any indebtedness owed to the Company or a
Restricted Subsidiary of the Company; (iii) make loans or advances to the
Company or a Restricted Subsidiary of the Company; or (iv) transfer any of its
properties or assets to the Company or a Restricted Subsidiary of the Company
(each, a "PAYMENT RESTRICTION"), except for (a) encumbrances or restrictions
under a Bank Credit Facility; provided, that no encumbrance or restriction
shall limit the ability of any Restricted Subsidiary to transfer cash to the
Company except upon the occurrence of an event of default under the Bank Credit
Facility; (b) consensual encumbrances or consensual restrictions binding upon
any Person at the time such Person becomes a Restricted Subsidiary of the
Company (unless the agreement creating such consensual encumbrances or
consensual restrictions was entered into in connection with, or in
contemplation of, such entity becoming a Restricted Subsidiary); (c) consensual
encumbrances or consensual restrictions under any agreement that refinances or
replaces any agreement described in clauses (a) and (b) above, provided that
the terms and conditions of any such restrictions are in the aggregate no less
favorable to the Holders of the Securities than those under the agreement so
refinanced or replaced; and (d) customary non-assignment provisions in leases,
purchase money financings and any encumbrance or restriction due to applicable
law.
SECTION 4.15. LIMITATION ON ISSUANCES AND SALES OF RESTRICTED SUBSIDIARY
STOCK.
The Company (i) shall not permit any Restricted Subsidiary, directly
or indirectly, to issue any Disqualified Stock or Preferred Stock (other than
to the Company or a Restricted Subsidiary) and (ii) shall not permit any Person
(other than (y) the Company and/or one or more Restricted Subsidiaries or (z)
MHI, indirectly through its direct ownership of the Capital Stock of the
Company), directly or indirectly, to own any Capital Stock of any Restricted
Subsidiary; provided, however, that this Section 4.15 shall not prohibit (a)
the issuance or sale of all, but not less than all, of the issued and
outstanding Capital Stock of any Restricted Subsidiary owned by the Company or
any of its Restricted Subsidiaries in compliance with the other provisions of
this Indenture, (b) the issuance or sale of (A) not more than 5% in the
aggregate of the issued and outstanding Capital Stock of any Restricted
Subsidiary (calculated on a fully diluted basis) by the Company or any
Restricted Subsidiary or (B) more than 5%
47
<PAGE> 54
of the issued and outstanding Capital Stock of any Restricted Subsidiary if
immediately following such issuance and sale (calculated on a fully diluted
basis) the Company and all Subsidiaries will collectively own 95% or more of
the Consolidated Total Assets of the Company, and in the case of either clause
(A) or (B), immediately following such issuance and sale, the Company or one or
more Restricted Subsidiaries will collectively hold the voting power to elect a
majority of the directors of the Restricted Subsidiary and such power is not
subject to dilution or limitation by the terms of such Capital Stock, by
agreement, by passage of time or the occurrence of any future event or (c) the
ownership by directors of directors' qualifying shares or the ownership by
foreign governments or foreign nationals of Capital Stock of any Restricted
Subsidiary, to the extent mandated by applicable law, and in each case, so long
as such Restricted Subsidiary constitutes a Wholly Owned Restricted Subsidiary.
SECTION 4.16 LIMITATION ON TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into any transaction or series
of transactions (including, without limitation, the sale, purchase, transfer,
lease or other disposition of any assets or properties or the rendering of any
services or the entry into any contract, agreement or arrangement (whether in
writing or otherwise)) with any Affiliate or beneficial owner (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act) of 10% or more of the Company's
common stock (other than with a Wholly Owned Restricted Subsidiary of the
Company) (an "AFFILIATE TRANSACTION"), on terms that are less favorable to the
Company or such Restricted Subsidiary, as the case may be, than would be
available on an arm's-length basis in a comparable transaction with an
unrelated Person. In addition, the Company shall not, and shall not permit any
Restricted Subsidiary of the Company to, directly or indirectly, enter into an
Affiliate Transaction, or any series of related Affiliate Transactions having a
value of (i) more than $1,000,000, unless a majority of the Board of Directors
of the Company (including a majority of the Company's Disinterested Directors)
determines in good faith, as evidenced by a Board Resolution of such Board,
that such Affiliate Transaction or series of related Affiliate Transactions is
fair to the Company and in compliance with the first sentence of this Section
4.16; or (ii) more than $10,000,000, unless the Company receives a written
opinion from a nationally recognized investment banking firm that such
transaction or series of transactions is fair to the Company from a financial
point of view.
SECTION 4.17. CHANGE OF CONTROL.
(a) Upon the occurrence of any Change of Control, the Company
shall offer (a "CHANGE OF CONTROL OFFER") to repurchase all outstanding
Securities at a purchase price equal to 101% of the aggregate principal amount
of the Securities, plus accrued and unpaid interest and Liquidated Damages, if
any, on such Securities to the date fixed for repurchase ("CHANGE OF CONTROL
PAYMENT"). The Change of Control Offer shall be deemed to have commenced upon
mailing of the notice described in the next succeeding paragraph and shall
terminate 20 Business Days after its commencement, unless a longer offering
period is required by law. Promptly after the termination of the Change of
Control Offer, the Company shall repurchase and mail or deliver payment for all
Securities tendered in response to the Change of Control Offer. If the Change
of Control Payment Date is on or after an interest payment record date and on
or before the related interest payment date, any accrued interest and
Liquidated Damages, if any, payable on such interest payment date shall be paid
to the Person in whose name a Security is registered at the close of business
on such record date, and no additional interest or Liquidated Damages, if any,
will be payable to Holders who tender Securities pursuant to the Change of
Control Offer.
48
<PAGE> 55
(b) Within 10 Business Days following a Change of Control, the
Company (with notice to the Trustee and the Paying Agent), or the Trustee at
the Company's request and expense, shall mail or cause to be mailed to all
Holders on the date of the Change of Control a notice prepared by the Company
(the "CHANGE OF CONTROL NOTICE") describing the transaction or transactions
that constitute the Change of Control and offer to repurchase Securities on the
date specified in such notice, which date shall be no earlier than 30 days and
no later than 60 days from the date such notice is mailed (the "CHANGE OF
CONTROL PAYMENT DATE"), pursuant to the procedures required by this Indenture
and described in such notice. The Change of Control Notice shall contain all
instructions and materials necessary to enable Holders to tender their
Securities to the Company. The Change of Control Notice, which shall govern
the terms of the Change of Control Offer, shall state: (1) that the Change of
Control Offer is being made pursuant to this Section 4.17; (2) the repurchase
price and the Change of Control Payment Date; (3) that any Security not
tendered shall continue to accrue interest and Liquidated Damages, if any, at
the respective stated rates; (4) that any Security accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest and
Liquidated Damages, if any, on the Change of Control Payment Date; (5) that
Holders electing to have a Security repurchased pursuant to any Change of
Control Offer shall be required to surrender the Security, with the form
entitled "Option of Holder to Elect Repurchase" on the reverse of the Security
completed, to the Company, a depositary, if appointed by the Company, or a
Paying Agent at the address specified in the notice prior to termination of the
Change of Control Offer; (6) that Holders shall be entitled to withdraw their
election if the Company, such depositary or Paying Agent, as the case may be,
receives, not later than the expiration of the Change of Control Offer, or such
longer period as may be required by law, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Security the Holder delivered for repurchase and a statement that
such Holder is withdrawing his election to have the Security repurchased; and
(7) that Holders whose Securities are repurchased only in part shall be issued
Securities equal in principal amount to the unrepurchased portion of the
Securities surrendered.
(c) On the Change of Control Payment Date, the Company shall, to
the extent lawful, (i) accept for payment Securities or portions thereof
tendered pursuant to the Change of Control Notice, (ii) if the Company appoints
a depositary or Paying Agent, deposit with such depositary or Paying Agent
money sufficient to pay the Change of Control Payment Price in respect of all
Securities or portions thereof so tendered and (iii) deliver to the Trustee the
Securities so accepted together with an Officers' Certificate stating the
aggregate principal amount of the Securities or portions thereof being
purchased by the Company. Such depositary, the Company or the Paying Agent, as
the case may be, shall promptly mail to the Holders of Securities so accepted
payment in an amount equal to the repurchase price, and the Trustee shall
promptly authenticate and mail (or cause to be transferred by book-entry to
each such Holder a new Security equal in principal amount to any unpurchased
portion of the Security surrendered, if any; provided, that each such Security
will be in a principal amount of $1,000 or an integral multiple. The Company
shall publicly announce the results of the Change of Control Offer on or as
soon as practicable after the Change of Control Payment Date. For purposes of
this Section 4.17, the Trustee shall act as the Paying Agent.
(d) The Company shall comply with Section 14 of the Exchange Act
and the provisions of Regulation 14E and any other tender offer rules under the
Exchange Act and any other federal and state securities laws, rules and
regulations which may then be applicable to any Change of Control Offer.
49
<PAGE> 56
(e) The Change of Control provisions described in this Section
4.17 shall be applicable whether or not any other provisions of this Indenture
are applicable.
(f) The Company shall not be required to make a Change of Control
Offer following a Change of Control if a third party makes the Change of
Control Offer in a manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control Offer
made by the Company and purchases all Securities validly tendered and not
withdrawn under such Change of Control.
SECTION 4.18. LIMITATION ON LINE OF BUSINESS.
The Company shall operate in a manner, and shall cause each of its
Subsidiaries to operate in a manner, such that its and their business
activities shall be the Oil and Gas Business or an Investment in a business or
Person engaged in the Oil and Gas Business, which Investment was not made in
violation of any provision of this Indenture.
ARTICLE V
SUCCESSOR CORPORATION
SECTION 5.1. WHEN COMPANY MAY MERGE, ETC.
The Company shall not consolidate with or merge with any Person or
convey, transfer or lease all or substantially all of its assets to any Person,
unless:
(1) the Company survives such merger or the Person formed
by such consolidation or into which the Company is merged or that
acquires by conveyance or transfer, or which leases, all or
substantially all of the assets of the Company is a corporation
organized and existing under the laws of the United States of America,
any state thereof or the District of Columbia and expressly assumes,
by supplemental indenture, the due and punctual payment of the
principal of, premium, if any, interest and Liquidated Damages, if
any, on, all the Securities and the performance of every other
covenant and obligation of the Company under this Indenture;
(2) immediately before and after giving effect to such
transaction no Default or Event of Default exists;
(3) immediately after giving effect to such transaction
on a pro forma basis, the Consolidated Net Worth of the Company (or
the surviving or transferee entity) is equal to or greater than the
Consolidated Net Worth of the Company immediately before such
transaction; and
(4) immediately after giving effect to such transaction
on a pro forma basis as if such transaction had occurred at the
beginning of the applicable four-quarter period, the Company (or the
surviving or transferee entity) would be able to incur $1.00 of
additional Indebtedness under Section 4.9(a).
In connection with any consolidation, merger, conveyance, transfer or
lease contemplated by this Section 5.1, the Company shall deliver to the
Trustee prior to the consummation of the proposed transaction an Officers'
Certificate to the foregoing effect and an Opinion of Counsel stating that all
50
<PAGE> 57
conditions precedent to the proposed transaction and the execution and delivery
of such supplemental indenture have been complied with.
SECTION 5.2. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation, merger, lease, conveyance or transfer in
accordance with Section 5.1, the Trustee shall be notified by the Company and
the successor Person, and the successor Person formed by such consolidation or
into which the Company is merged or to which such lease, conveyance or transfer
is made shall succeed to, and be substituted for, and may exercise every right
and power of, the Company under this Indenture with the same effect as if such
successor had been named as the Company herein, and thereafter (except in the
case of a lease or a transfer pursuant to a Production Payment) the predecessor
corporation shall be relieved of all further obligations and covenants under
this Indenture and the Securities.
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT.
An "EVENT OF DEFAULT" occurs upon:
(1) default by the Company in the payment of principal
of, or premium, if any, on the Securities, when due and payable at
maturity, upon repurchase pursuant to Section 4.11 or 4.17, upon
acceleration or otherwise;
(2) default by the Company in the payment of any interest
on, or Liquidated Damages with respect to, the Securities, when due
and payable, and the continuance of such default for 30 days;
(3) default by the Company or any Guarantor in the
deposit of any optional redemption payment, when and as due and
payable pursuant to Article III;
(4) default by the Company or any Guarantor in the
performance of Section 4.17, Section 4.11 or Article V;
(5) default by the Company or any Restricted Subsidiary
in the performance of any other covenant or agreement in this
Indenture (other than those described in the immediately preceding
clauses (1) through (4)), and the failure to remedy such default
within a period of 30 days after written notice thereof from the
Trustee or Holders of at least 25% in principal amount of the
outstanding Securities;
(6) default on any other Indebtedness (other than
Non-Recourse Indebtedness) of the Company or any Subsidiary of the
Company (other than an Unrestricted Subsidiary) if either (A) such
default results in the acceleration of the maturity of any such
Indebtedness having a principal amount of $5,000,000 or more
individually or, taken together with the principal amount of any other
such Indebtedness in default or the maturity of which has been so
accelerated, in the aggregate, or (B) such default results from the
failure to pay when due principal of, or premium, if any, or interest
on, any such Indebtedness, after giving effect to any applicable grace
period (a "PAYMENT DEFAULT"), having a principal amount of $5,000,000
or more individually or, taken
51
<PAGE> 58
together with the principal amount of any other Indebtedness under
which there has been a Payment Default, in the aggregate;
(7) the commencement of proceedings, or the taking of any
enforcement action (including by way of set-off), by any holder (or
its designee or assign) of at least $5,000,000 in aggregate principal
amount of Indebtedness (including any amounts owed pursuant to a
judgment or order) of the Company or any Subsidiary of the Company
(other than an Unrestricted Subsidiary, provided that neither the
Company nor any Restricted Subsidiary is liable, directly or
indirectly, for such Indebtedness), after a default under such
Indebtedness, to retain in satisfaction of such Indebtedness or to
collect or seize, dispose of or apply in satisfaction of such
Indebtedness, property or assets of the Company or its Restricted
Subsidiaries having a fair market value in excess of $5,000,000
individually or in the aggregate; provided that if any such
proceedings or actions are terminated or rescinded, or such
Indebtedness is repaid or settled, in each case other than as a result
of the enforcement of any right or process pursuant to any such
proceeding or action, such Event of Default under this Indenture and
any consequential acceleration of the Securities shall be
automatically rescinded, so long as (a) such rescission does not
conflict with any judgment or decree and (b) the holder of such
Indebtedness shall not have applied any such property or assets in
satisfaction of such Indebtedness;
(8) the entry by a court of one or more judgments or
orders for the payment in cash or other assets of $5,000,000 or more,
individually or in the aggregate (net of applicable insurance coverage
by a third party insurer which is acknowledged in writing by the
insurance carrier), rendered against the Company or any Subsidiary
(other than an Unrestricted Subsidiary; provided that neither the
Company nor any Restricted Subsidiary is liable, directly or
indirectly, for such judgment or order), and any such judgment or
order shall continue unsatisfied and unstayed for a period of 60 days;
(9) if (i) any material "accumulated funding deficiency"
(as defined in Section 302 of ERISA or Section 412 of the Code), shall
exist with respect to any PBGC Plan (unless a waiver or extension is
obtained under Section 412(d) or (e) of the Code and Sections 303 and
304 of ERISA), if such accumulated funding deficiency is a material
liability of the Company, (ii) a Reportable Event shall occur with
respect to any PBGC Plan, which Reportable Event results in the
non-appealable termination of such PBGC Plan for purposes of Title IV
of ERISA and gives rise to a material liability of the Company, (iii)
proceedings to have a trustee appointed have resulted in a trustee
being appointed to terminate or administer a PBGC Plan which
proceeding results in the non-appealable termination of such PBGC Plan
and gives rise to a material liability of the Company with respect to
such termination, (iv) a PBGC Plan has been terminated in a distress
termination under Section 4041(c) of ERISA and the Company no longer
may appeal such termination, (v) any Multiemployer Plan is in
reorganization or is insolvent and the circumstances are such that
such reorganization or insolvency results in a material liability to
the Company, (vi) there is a complete or partial withdrawal from a
Multiemployer Plan that subjects the Company to material liability, or
(vii) any event or condition described in (i) through (vi)above
(determined without regard to whether the event or condition taken
alone would or could result in a material liability) shall occur or
exist with respect to a PBGC Plan, which in combination with one or
more of any events described in (i) through (vi) above (determined
without regard to whether the event or condition taken alone would or
could result in a material liability) that subjects the Company, any
Guarantor or any other Restricted Subsidiary to any material tax,
penalty or other liability (for purposes of this paragraph (9) the
term "material" and "material liability" shall mean any tax, penalty
or liability in excess of $5,000,000);
52
<PAGE> 59
(10) the failure of a Guarantee by a Guarantor to be in
full force and effect (other than a release of a Guarantee in
accordance with Section 10.4) or any Guarantor shall deny or disaffirm
its obligations with respect thereto;
(11) the Company or any Subsidiary (other than an
Unrestricted Subsidiary) pursuant to or within the meaning of any
Bankruptcy Law:
(A) commences a voluntary case or proceeding,
(B) consents to the entry of an order for relief
against it in an involuntary case or proceeding,
(C) consents to the appointment of a Custodian of
it or for all or substantially all of its property,
(D) makes a general assignment for the benefit of
its creditors, or
(E) generally is not paying its debts as they
become due; or
(12) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
Subsidiary (other than an Unrestricted Subsidiary) in an
involuntary case or proceeding,
(B) appoints a Custodian of the Company or any
Subsidiary (other than an Unrestricted Subsidiary) or for all
or substantially all of the property of the Company or such
Subsidiary, or
(C) orders the liquidation of the Company or any
Subsidiary (other than an Unrestricted Subsidiary),
and the order or decree remains unstayed and in effect for 60 days.
The term "BANKRUPTCY LAW" means Title 11, United States Code, or any
similar foreign, federal or state law for the relief of debtors. The term
"CUSTODIAN" means any receiver, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law.
SECTION 6.2. ACCELERATION.
If an Event of Default (other than an Event of Default specified in
clause (11) or clause (12)) under Section 6.1 occurs and is continuing, then
and in every such case the Trustee or the Holders of not less than 25% in
principal amount of the outstanding Securities may declare the unpaid principal
of, and premium on, (including the Change of Control purchase price if the
Event of Default includes failure to pay the Change of Control purchase price),
and accrued and unpaid interest and Liquidated Damages, if any, on, all the
Securities then outstanding to be due and payable, by a notice in writing to
the Company (and to the Trustee, if given by Holders), and upon any such
declaration, such principal, premium, if any, and accrued and unpaid interest
and Liquidated Damages, if any, shall become and be immediately due and
payable. If an Event of Default specified in clause (11) or clause (12) above
occurs, all unpaid principal of, and premium, if any, accrued interest and
Liquidated Damages, if any, on, the
53
<PAGE> 60
Securities then outstanding shall become and be immediately due and payable,
without any declaration or other act on the part of the Trustee or any Holder.
The Holders of a majority in principal amount of the then outstanding
Securities, by written notice to the Company, the Guarantors and the Trustee,
may rescind and annul a declaration of acceleration and its consequences if:
(1) the Company or any Guarantor has paid or deposited with such Trustee money
sufficient to pay (A) all overdue installments of interest and Liquidated
Damages, if any, on all the Securities, (B) the principal of, and premium, if
any, on, any Securities that have become due otherwise than by such declaration
of acceleration and interest and Liquidated Damages, if any, thereon at the
rate or rates prescribed therefor in the Securities, (C) to the extent that
payment of such interest is lawful, interest on the defaulted interest at the
rate or rates prescribed therefor in the Securities, and (D) all money paid or
advanced by the Trustee thereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel; (2) all
Events of Default, other than the non-payment of the principal of any
Securities that have become due solely by such declaration of acceleration,
have been cured or waived as provided in this Indenture; and (3) the rescission
would not conflict with any judgment or decree of a court of competent
jurisdiction. No such rescission will affect any subsequent Event of Default
or impair any right consequent thereon.
SECTION 6.3. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may, but
is not obligated to, pursue, in its own name and as trustee of an express
trust, any available remedy by proceeding at law or in equity to collect the
payment of principal or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture. If an Event
of Default specified under clause (11) or clause (12) of Section 6.1 occurs
with respect to the Company at a time when the Company is the Paying Agent, the
Trustee shall automatically assume the duties of Paying Agent.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay
or omission by the Trustee or any Holder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.4. WAIVER OF PAST DEFAULTS.
Subject to Sections 6.7 and 9.2, the Holders of at least a majority in
principal amount of Securities then outstanding by notice to the Trustee may
waive an existing Default or Event of Default and its consequences, except a
Default or Event of Default in payment of principal of, or premium, if any,
interest or Liquidated Damages, if any, on the Securities, including any
optional redemption payments or Change of Control or Net Proceeds Offer
payments.
SECTION 6.5. CONTROL BY MAJORITY.
The Holders of a majority in principal amount of the Securities then
outstanding shall have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee or
exercising any trust or power conferred on such Trustee, provided that (1) such
direction is not in conflict with any rule of law or with this Indenture and
(2) the Trustee may take any other action deemed proper by such Trustee that is
not inconsistent with such direction.
54
<PAGE> 61
SECTION 6.6. LIMITATION ON REMEDIES.
No Holder of any of the Securities shall have any right to institute
any proceeding, judicial or otherwise, or for the appointment of a receiver or
trustee or pursue any remedy under this Indenture, unless:
(1) the Trustee has previously received written notice of
a continuing Event of Default from such Holder,
(2) the Trustee has previously received a request from
Holders of at least 25% in principal amount of the outstanding
Securities to institute proceedings in respect of such Event of
Default or to pursue such remedy in its own name as Trustee under the
Indenture,
(3) such Holder or Holders have offered to such Trustee
indemnity against the costs, expenses and liabilities to be incurred
in compliance with such request, which is reasonably satisfactory to
the Trustee,
(4) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any
proceeding or otherwise act as requested, and
(5) no direction inconsistent with such written request
has been given to such Trustee during such 60-day period by the
Holders of a majority in principal amount of the outstanding
Securities.
A Holder may not use this Indenture to prejudice the rights of another
Holder or to obtain a preference or priority over other Holders.
SECTION 6.7. RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the Holder of
any Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of and premium, if any, interest and
Liquidated Damages, if any, on, such Securities on the Stated Maturity therefor
and to institute suit for the enforcement of any such overdue payment, and such
right may not be impaired without the consent of such Holder.
Section 6.8. COLLECTION SUIT BY TRUSTEE.
If an Event of Default in payment of principal, premium, if any,
interest or Liquidated Damages, if any, specified in Section 6.1(1), (2) or (3)
occurs and is continuing, the Trustee may recover judgment in its own name and
as trustee of an express trust against the Company or any Guarantor for the
whole amount of principal, premium, if any, interest and Liquidated Damages, if
any, remaining unpaid with respect to the Securities, and interest on overdue
principal and premium, if any, and, to the extent lawful, interest on overdue
interest and Liquidated Damages, if any, and such further amounts as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation and expenses of the Trustee, its agents and counsel.
55
<PAGE> 62
SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM.
(a) The Trustee is authorized to file such proofs of claim and
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expense, disbursements and advances of the Trustee, its agent and counsel) and
the Holders allowed in any judicial proceedings relative to the Company, the
Guarantors, their creditors or their property and may, and shall be entitled
and empowered to, collect, receive and distribute any money, securities or
other property payable or deliverable on any such claims and to distribute the
same, and any custodian in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Trustee, and in the event that the
Trustee shall consent to the making of such payments directly to the Holders,
to pay to the Trustee any amount due to it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel,
and any other amounts due the Trustee under Section 7.7. To the extent that
the payment of any such compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, and any other amounts due the Trustee
under Section 7.7 hereof out of the estate in any such proceeding, shall be
denied for any reason, payment of the same shall be secured by a Lien on, and
shall be paid out of, any and all distributions, dividends, money, securities
and other properties that the Holders may be entitled to receive in such
proceeding whether in liquidation or under any plan of reorganization or
arrangement or otherwise.
(b) Nothing herein contained shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or composition affecting
the Securities or the rights of any Holder thereof, or to authorize the Trustee
to vote in respect of the claim of any Holder in any such proceeding.
SECTION 6.10. PRIORITIES.
If the Trustee collects any money pursuant to this Article VI, it
shall pay out the money in the following order:
First: to the Trustee, its agents and attorneys, for
amounts due under Section 7.7, including payment of all
compensation, expense and liabilities incurred, and all
advances made, by the Trustee and the Trustee's costs and
expenses of collection;
Second: to Holders for amounts due and unpaid on the
Securities for principal, premium, if any, interest and
Liquidated Damages, if any, ratably, without preference or
priority of any kind, according to the amounts due and payable
on the Securities for principal, premium, if any, interest and
Liquidated Damages, if any, respectively; and
Third: to the Company or to such Person as a court
of competent jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 6.10.
SECTION 6.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in
56
<PAGE> 63
the suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit, having due regard to the merits and
good faith of the claims or defenses made by the party litigant. This Section
6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to
Section 6.7, or a suit by Holders of more than 10% in principal amount of the
then outstanding Securities.
ARTICLE VII
TRUSTEE
SECTION 7.1. DUTIES OF TRUSTEE.
(a) If an Event of Default of which the Trustee has notice (to the
extent the Trustee is deemed to have notice as expressly provided in Section
7.1(g)) has occurred and is continuing, the Trustee shall exercise such rights
and powers vested in it by this Indenture and use the same degree of care and
skill in such exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default of which
the Trustee has notice (to the extent the Trustee is deemed to have notice as
expressly provided in Section 7.1(g)):
(1) The duties of the Trustee shall be determined solely
by the express provisions of this Indenture, and the Trustee need
perform only those duties that are specifically set forth (or
incorporated by reference) in this Indenture and no others, and no
implied covenants or obligations shall be read into this Indenture
against the Trustee.
(2) In the absence of bad faith on its part, the Trustee
may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture. However, the Trustee shall examine such
certificates and opinions to determine whether or not they conform to
the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) This paragraph (c) does not limit the effect of the
preceding Section 7.1(b).
(2) The Trustee shall not be liable for any error of
judgment made in good faith by an officer of the Trustee, unless it is
proved that the Trustee was negligent in ascertaining the pertinent
facts.
(3) The Trustee shall not be liable with respect to
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.5, and the Trustee
shall be entitled from time to time to request such a direction.
(d) Whether or not therein expressly so provided, every provision
of this Indenture that in any way relates to the Trustee is subject to
paragraphs (a), (b) and (c) of this Section 7.1.
57
<PAGE> 64
(e) The Trustee shall be under no obligation and may refuse to
perform any duty or exercise any right or power unless it receives indemnity
satisfactory to it against any loss, liability or expense. No provision of
this Indenture shall require the Trustee to expend or risk its own funds or
otherwise incur financial liability in the performance of any of its duties
hereunder or in the exercise of any of its rights or powers, if it shall have
reasonable grounds to believe that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
(g) Subject to Sections 7.1 and 7.2, the Trustee shall not be
required to inquire as to, to take notice of, and shall not be deemed to have
notice of, any Default or Event of Default hereunder, except Events of Default
described in paragraphs (1), (2) and (3) of Section 6.1, unless the Trustee
shall be notified specifically of the Default or Event of Default in a written
instrument or document delivered to it by the Company or any Guarantor, or by
the Holders of at least ten percent (10%) of the aggregate principal amount of
the Securities then outstanding or it shall have obtained actual knowledge
thereof. In the absence of delivery of a notice satisfying those requirements
or such actual knowledge, the Trustee may assume that there is no Default or
Event of Default, except as noted above.
SECTION 7.2. RIGHTS OF TRUSTEE.
Subject to Section 7.1:
(a) The Trustee may conclusive rely on, and shall be protected in
acting or refraining from acting upon, any document believed by it to be
genuine and to have been signed or presented by the proper person. The Trustee
shall not be bound to make any investigation into the facts or matters stated
in any resolution, certificate, statement, instrument, opinion, report, notice,
request, direction, consent, order, bond, debenture or other paper or document,
but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and, if the Trustee
shall determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records and premises of the Company and the
Guarantors, personally or by agent or attorney, to the extent reasonably
required by such inquiry or investigation.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel, or both. The
Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on such certificate or opinion. The Trustee may consult with
counsel, and the written advice of such counsel or any Opinion of Counsel shall
be full and complete authorization and protection from liability in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon.
(c) The Trustee may act through its agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within the
rights or powers conferred upon it by this Indenture.
58
<PAGE> 65
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or its
Subsidiaries or Affiliates with the same rights it would have if it were not
Trustee. However, in the event that the Trustee acquires any conflicting
interest, it must eliminate such conflict within 90 days, apply to the SEC for
permission to continue as trustee and not be denied such permission, or resign.
Any Agent may do the same with like rights. However, the Trustee must comply
with Sections 7.10 and 7.11.
SECTION 7.4. TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no representation
as to the validity or adequacy of this Indenture or the Securities, it shall
not be accountable for the Company's use of the proceeds from the Securities or
any money paid to the Company or upon the Company's direction under any
provision of this Indenture, it shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement or recital herein or any
statement in the Securities or any other document in connection with the sale
of the Securities or pursuant to this Indenture other than its certificate of
authentication.
SECTION 7.5. NOTICE OF DEFAULTS.
If a Default or an Event of Default occurs and is continuing, and if
it is known to the Trustee pursuant to Section 7.1(g), the Trustee shall mail
to each Holder pursuant to Section 11.2 a notice of the Default or Event of
Default within 90 days after it occurs. Except in the case of a Default or an
Event of Default in any payment on any Security, the Trustee may withhold the
notice if and so long as its Board of Directors, executive committee or a trust
committee of officers in good faith determines that withholding the notice is
in the interests of Holders.
SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS.
Within 60 days after each May 15, beginning with the May 15 following
the date of this Indenture, the Trustee shall mail to each Holder a brief
report dated as of such May 15, that complies with TIA Section 313(a), but
only if such report is required in any year under TIA Section 313(a). The
Trustee also shall comply with TIA Sections 313(b) and 313(c).
A copy of each report at the time of its mailing to Holders shall be
(i) mailed to the Company and (ii) filed with the SEC and each stock exchange
on which the Securities are listed in accordance with TIA Section 313(d). The
Company shall promptly notify the Trustee in writing when the Securities become
listed on any national securities exchange or of any delisting thereof.
SECTION 7.7. COMPENSATION AND INDEMNITY.
The Company and the Guarantors jointly and severally agree to pay the
Trustee from time to time reasonable compensation for its services under this
Indenture (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust). The Company and
the Guarantors jointly and severally agree to reimburse the Trustee promptly
upon request for all reasonable out-of-pocket expenses, disbursements and
advances incurred by it. Such expenses shall include when applicable the
reasonable compensation and expenses of the Trustee's agents and counsel.
59
<PAGE> 66
The Company and the Guarantors jointly and severally agree to
indemnify the Trustee against any loss, liability or expenses incurred by it
arising out of or in connection with the acceptance and administration of the
trust and its duties hereunder as Trustee, Registrar and/or Paying Agent,
including the costs and expenses of enforcing this Indenture against the
Company (including with respect to this Section 7.7) and of defending itself
against any claim or liability in connection with the exercise or performance
of any of its powers or duties hereunder. The Trustee shall notify the Company
and the Guarantors of any claim for which it may seek indemnity; however,
unless the position of the Company is prejudiced by such failure, the failure
of the Trustee to promptly notify the Company shall not limit its right to
indemnification. The Company shall defend each such claim and the Trustee
shall cooperate in the defense. The Trustee may retain separate counsel and
the Company shall reimburse the Trustee for the reasonable fees and expenses of
such counsel if the Company is advised by an Opinion of Counsel that the
Trustee has separate defenses and that separate representation is appropriate.
The Company need not pay for any settlement made without its consent, which
consent shall not be unreasonably withheld.
Neither the Company nor the Guarantors shall be obligated to reimburse
any expense or indemnify against any loss or liability incurred by the Trustee
through the Trustee's breach of the applicable standard of care for its conduct
under Section 7.1.
The obligations of the Company and the Guarantors under this Section
7.7 shall survive the satisfaction and discharge of this Indenture.
To secure the payment obligations of the Company and the Guarantors in
this Section 7.7, the Trustee shall have a Lien prior to the Securities on all
money or property held or collected by the Trustee, except that held in trust
to pay principal of and interest on particular Securities. Such Lien shall
survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after the
occurrence of an Event of Default specified in Section 6.1(11) or (12), the
expenses and the compensation for the services (including the fees and expenses
of its agent and counsel) are intended to constitute expenses of administration
under any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA Section 313(b)(2)
to the extent applicable.
SECTION 7.8. REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 7.8.
The Trustee may resign in writing at any time and be discharged from
the trust hereby created by so notifying the Company. The Holders of a
majority in principal amount of the then outstanding Securities may remove the
Trustee by so notifying the Trustee and the Company, in writing. The Company
may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent or
an order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(3) a Custodian or other public officer takes charge of
the Trustee or its property; or
60
<PAGE> 67
(4) the Trustee becomes incapable of acting as Trustee
hereunder.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office,
the Holders of a majority in principal amount of the then outstanding
Securities may appoint a successor Trustee to replace the successor Trustee
appointed by the Company.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after
that, the retiring Trustee shall transfer all property held by it as Trustee to
the successor Trustee, subject to the Lien provided for in Section 7.7, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. A successor Trustee shall mail notice of its succession
to each Holder.
If a successor Trustee does not take office within 30 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or
the Holders of a majority in principal amount of the then outstanding
Securities may petition any court of competent jurisdiction for the appointment
of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any such Holder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee. Any successor Trustee shall comply
with TIA Section 310(a)(5).
SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust assets to, another corporation, the
successor corporation without any further act shall be the successor Trustee;
provided such corporation or association shall be otherwise eligible and
qualified under this Article. As soon as practicable, the successor Trustee
shall mail a notice of its succession to the Company and the Holders.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
This Indenture shall always have a Trustee which satisfies the
requirements of TIA Section 310(a)(1) and (5). The Trustee shall always have
a combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition. The Trustee shall also comply
with TIA Section 310(b).
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has resigned
or been removed shall be subject to TIA Section 311(a) to the extent indicated
therein.
61
<PAGE> 68
ARTICLE VIII
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.1. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Company may, at the option of its Board of Directors evidenced by
a Board Resolution set forth in an Officers' Certificate, at any time, with
respect to the Securities, elect to exercise its rights pursuant to either
Section 8.2 or 8.3 with respect to all outstanding Securities upon compliance
with the conditions set forth below in this Article VIII.
SECTION 8.2. LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.1 of the option applicable
to this Section 8.2, the Company shall be deemed to have discharged its
obligations with respect to all outstanding Securities, and each Guarantor
shall be deemed to have discharged its obligation with respect to its
Guarantee, on the date all conditions set forth below are satisfied
(hereinafter, "LEGAL DEFEASANCE"). For this purpose, Legal Defeasance means
that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Securities, and each Guarantor
shall be deemed to have paid and discharged its Guarantee (which in each case
shall thereafter be deemed to be "outstanding" only for the purposes of Section
8.5 and the other Sections of this Indenture referred to in clauses (a) and (b)
of this Section 8.2) and to have satisfied all its other obligations under such
Securities or Guarantee and this Indenture (and the Trustee, on demand of and
at the expense of the Company, shall execute proper instruments acknowledging
the same), except for the following which shall survive until otherwise
terminated or discharged hereunder: (a) the rights of Holders of outstanding
Securities to receive solely from the trust fund described in Section 8.4, and
as more fully set forth in such Section, payments in respect of the principal
of, and premium, if any, interest and Liquidated Damages, if any, on, such
Securities when such payments are due, (b) the Company's obligations with
respect to such Securities under Sections 2.3, 2.4, 2.6, 2.7, 2.10 and 4.4, (c)
the rights, powers, trusts, duties and immunities of the Trustee hereunder and
the Company's obligations in connection therewith (including Section 7.7) and
(d) this Article VIII. Subject to compliance with this Article VIII, the
Company may exercise its option under this Section 8.2 notwithstanding the
prior exercise of its option under Section 8.3 with respect to the Securities.
SECTION 8.3. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.1 of the option applicable
to this Section 8.3, the Company shall be released from its obligations under
the covenants contained in Sections 4.7, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13,
4.14, 4.15, 4.16, 4.17 and 4.18 and paragraph (2) of Section 5.1 on and after
the date the conditions set forth below are satisfied (hereinafter, "COVENANT
DEFEASANCE"), and the Securities shall thereafter be deemed not "outstanding"
for the purposes of any direction, waiver, consent or declaration or act of
Holders (and the consequences of any thereof) in connection with such
covenants, but shall continue to be deemed "outstanding" for all other purposes
hereunder (it being understood that such Securities shall not be deemed
outstanding for accounting purposes). For this purpose, such Covenant
Defeasance means that, with respect to the outstanding Securities, the Company
and any Guarantor may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such covenant,
whether directly or indirectly, by reason of any reference elsewhere herein to
any such covenant or by reason of any reference in any such covenant to any
other provision herein or in any other document and such omission to comply
shall not constitute a Default or an Event of Default under Section 6.1(4) (as
applicable) or Section 6.1(5), but, except as specified above,
62
<PAGE> 69
the remainder of this Indenture and such Securities shall be unaffected
thereby. In addition, upon the Company's exercise under Section 8.1 of the
option applicable to this Section 8.3, Sections 6.1(6) through 6.1(10) shall
not constitute Events of Default.
SECTION 8.4. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to application of Section 8.2 or
Section 8.3, as the case may be, to the outstanding Securities:
(a) The Company shall irrevocably have deposited or cause to be
deposited with the Trustee (or another trustee satisfying the requirements of
Section 7.10 who shall agree to comply with the provisions of this Article VIII
applicable to it) as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and dedicated solely
to, the benefit of the Holders of such Securities, (a) cash in U.S. Legal
Tender in an amount, or (b) U.S. Government Securities which through the
scheduled payment of principal and interest in respect thereof in accordance
with their terms will provide, not later than one day before the due date of
any payment, cash in U.S. Legal Tender in an amount, or (c) a combination
thereof, in such amounts, as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, to pay and discharge and which
shall be applied by the Trustee (or other qualifying trustee) to pay and
discharge the principal of, and premium, if any, interest and Liquidated
Damages, if any, on, the outstanding Securities on the Stated Maturity or on
the applicable redemption date, as the case may be, in accordance with the
terms of this Indenture and of such Securities; provided that the Trustee shall
have been irrevocably instructed to apply such money or the proceeds of such
U.S. Government Securities to said payments with respect to the Securities;
(b) In the case of an election under Section 8.2, the Company
shall have delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that (i) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (ii) since the date hereof, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such Opinion of Counsel shall confirm that, the Holders of the outstanding
Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;
(c) In the case of an election under Section 8.3, the Company
shall have delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Securities will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(d) No Default or Event of Default with respect to the Securities
shall have occurred and be continuing on the date of such deposit or, insofar
as Subsection 6.1(11) or 6.1(12) is concerned, at any time in the period ending
on the 91st (or, if such deposit may be subject to set aside or avoidance under
any then applicable Bankruptcy Law for a period of time longer than 90 days,
the one day after the
63
<PAGE> 70
conclusion of such longer period) day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until the
expiration of such period);
(e) Such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under, any other material
agreement or instrument to which the Company is a party or by which the Company
is bound;
(f) In the case of any election under Section 8.2 or 8.3, the
Company shall have delivered to the Trustee an Officers' Certificate stating
that the deposit made by the Company pursuant to its election under Section 8.2
or 8.3 was not made by the Company with the intent of preferring the Holders
over other creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or others; and
(g) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the Legal Defeasance under Section
8.2 or the Covenant Defeasance under Section 8.3 (as the case may be) have been
complied with as contemplated by this Section 8.4.
SECTION 8.5. DEPOSITED MONEY AND U.S. GOVERNMENT SECURITIES TO BE HELD IN
TRUST; OTHER MISCELLANEOUS PROVISIONS.
Subject to Section 8.6, all money and U.S. Government Securities
(including the proceeds thereof) deposited with the Trustee (or other
qualifying trustee, collectively for purposes of this Section 8.5, the
"Trustee") pursuant to Section 8.4 in respect of the outstanding Securities
shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Securities and this Indenture, to the payment, either
directly or through any Paying Agent (including the Company acting as Paying
Agent) as the Trustee may determine, to the Holders of such Securities of all
sums due and to become due thereon in respect of principal, premium, if any,
interest and Liquidated Damages, if any, but such money need not be segregated
from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the cash or U.S. Government
Securities deposited pursuant to Section 8.4 or the principal and interest
received in respect thereof other than any such tax, fee or other charge which
by law is for the account of the Holders of the outstanding Securities.
Anything in this Article VIII to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the
Company's request any money or U.S. Government Securities held by it as
provided in Section 8.4 which, in the opinion of a nationally recognized firm
of independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
8.4(a)), are in excess of the amount thereof which would then be required to be
deposited to effect an equivalent Legal Defeasance or Covenant Defeasance.
SECTION 8.6. REPAYMENT TO COMPANY.
Subject to applicable escheat and abandoned property laws, any money
deposited with the Trustee or any Paying Agent, or then held by the Company, in
trust for the payment of the principal of, or premium, if any, interest or
Liquidated Damages, if any, on, any Security and remaining unclaimed for two
years after such principal, and premium, if any, interest or Liquidated
Damages, if any, has become due and payable shall be paid to the Company on its
request or (if then held by the Company) shall be discharged from such trust;
and the Holder of such Security shall thereafter, as an unsecured general
64
<PAGE> 71
creditor, look only to the Company for payment thereof, and all liability of
the Trustee or such Paying Agent with respect to such trust money, and all
liability of the Company as trustee thereof, shall thereupon cease; provided,
however, that the Trustee or such Paying Agent, before being required to make
any such repayment, may at the expense of the Company cause to be published
once, in The New York Times and The Wall Street Journal (national edition),
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such
notification or publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
SECTION 8.7. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any U.S. Legal
Tender or U.S. Government Securities in accordance with Section 8.5 by reason
of any order or judgment of any court or governmental authority enjoining,
restraining or otherwise prohibiting such application, then the Company's
obligations under this Indenture and the Securities, and each Guarantor's
obligations under its Guarantor, shall be revived and reinstated as though no
deposit had occurred pursuant to Section 8.2 or 8.3 until such time as the
Trustee or Paying Agent is permitted to apply all such money in accordance with
Section 8.5; provided, however, that, if the Company makes any payment of
principal of, or premium, if any, interest or Liquidated Damages, if any, on,
any Security following the reinstatement of its obligations, the Company shall
be subrogated to the rights of the Holders of such Securities to receive such
payment from the money held by the Trustee or Paying Agent.
ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.1. WITHOUT CONSENT OF HOLDERS.
Notwithstanding Section 9.2, the Company, the Guarantors and the
Trustee may amend or supplement this Indenture or the Securities without notice
to or consent of any Holder:
(1) to cure any ambiguity, omission, defect or
inconsistency;
(2) to comply with Section 5.1;
(3) to reflect the addition or release of any Guarantor,
as provided for by this Indenture;
(4) to comply with any requirements of the SEC in order
to effect or maintain the qualification of this Indenture under the
TIA; or
(5) to make any change that would provide any additional
benefit or rights to the Holders or that does not adversely affect the
rights of any Holder in any material respect.
Upon the request of the Company, accompanied by a Board Resolution of
the Company and of each Guarantor authorizing the execution of any such
supplemental indenture, and upon receipt by the Trustee of the documents
described in Section 9.6, the Trustee shall join with the Company and the
Guarantors in the execution of any amended or supplemental indenture authorized
or permitted by the terms of this Indenture and make any further appropriate
agreements and stipulations that may be therein contained, but the Trustee
shall not be obligated to enter into such amended or supplemental Indenture
that affects its own rights, duties or immunities under this Indenture or
otherwise. After an amendment
65
<PAGE> 72
or waiver under this Section becomes effective, the Company shall mail to the
Holders of each Security affected thereby a notice briefly describing the
amendment or waiver. Any failure of the Company to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
any such supplemental indenture.
SECTION 9.2. WITH CONSENT OF HOLDERS.
Except as provided below in this Section 9.2, the Company, the
Guarantors and the Trustee may amend or supplement this Indenture or the
Securities with the written consent (including consents obtained in connection
with a tender offer or exchange offer for Securities or a solicitation of
consents in respect of Securities, provided that in each case such offer or
solicitation is made to all Holders of then outstanding Securities on equal
terms) of the Holders of at least a majority in principal amount of the then
outstanding Securities, and subject to Sections 6.4 and 6.7, any existing
Default or Event of Default or compliance with any provision of this Indenture
or the Securities may be waived with the consent of the Holders of a majority
in principal amount of the then outstanding Securities (including consents
obtained in connection with a tender offer or exchange offer for the
Securities).
Upon the request of the Company accompanied by a Board Resolution of
the Company and each Guarantor authorizing the execution of any such amended or
supplemental indenture, and upon the filing with the Trustee of evidence
satisfactory to the Trustee of the consent of the Holders as aforesaid, and
upon receipt by the Trustee of the documents described in Section 9.6, the
Trustee shall join with the Company and the Guarantors in the execution of such
supplemental indenture unless such amended or supplemental indenture affects
the Trustee's own rights, duties or immunities under this Indenture or
otherwise, in which case the Trustee may in its discretion, but shall not be
obligated to, enter into such amended or supplemental indenture.
It shall not be necessary for the consent of the Holders under this
Section 9.2 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such amended or supplemental Indenture
or waiver. Subject to Sections 6.4 and 6.7, the Holders of a majority in
principal amount of the Securities then outstanding may waive compliance in a
particular instance by the Company with any provision of this Indenture or the
Securities. However, without the consent of each Holder affected, an
amendment, supplement or waiver may not (with respect to any Securities held by
a non-consenting Holder):
(1) reduce the percentage of principal amount of
Securities whose Holders must consent to an amendment, supplement or
waiver of any provision of this Indenture or the Securities;
(2) reduce the rate or change the time for payment of
interest, including defaulted interest, or Liquidated Damages, if any,
on the Securities;
(3) reduce the principal amount of any Security or change
the Maturity Date of the Securities;
66
<PAGE> 73
(4) reduce the redemption price, including premium, if
any, payable upon the redemption of any Security or change the time at
which any Security may or shall be redeemed;
(5) reduce the repurchase price, including premium, if
any, payable upon the repurchase of any Security pursuant to Section
4.11 or 4.17, or change the time at which any Security may or shall be
repurchased thereunder;
(6) waive a continuing Default or Event of Default in the
payment of the principal of, or premium, if any, interest or
Liquidated Damages, if any, on, the Securities;
(7) make any Security payable in money other than that
stated in the Security;
(8) impair the right to institute suit for the
enforcement of any payment of principal of, or premium, if any,
interest or Liquidated Damages, if any, on, any Security pursuant to
Section 6.7 or 6.8, except as limited by Section 6.6; or
(9) make any change in Section 6.4 or Section 6.7 or in
this sentence of this Section 9.2.
The right of any Holder to participate in any consent required or
sought pursuant to any provision of this Indenture (and the obligation of the
Company to obtain any such consent otherwise required from such Holder) may be
subject to the requirement that such Holder shall have been the Holder of
record of any Securities with respect to which such consent is required or
sought as of a date identified by the Trustee in a notice furnished to Holders
in accordance with the terms of this Indenture.
SECTION 9.3. COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment to or supplement of this Indenture or the Securities
shall comply with the TIA as then in effect.
SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a consent
to it by a Holder of a Security shall bind the Holder and every subsequent
Holder of a Security or portion of a Security that evidences the same debt as
the consenting Holder's Security, even if notation of the consent is not made
on any Security. However, any such Holder or subsequent Holder may revoke the
consent as to its Security or portion of a Security if the Trustee receives
written notice of revocation before the date the amendment, supplement or
waiver becomes effective.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver. If the Company elects to fix a record date for such
purpose, the record date shall be fixed at (i) the later of 30 days prior to
the first solicitation of such consent or the date of the most recent list of
Holders furnished to the Trustee prior to such solicitation pursuant to Section
2.5, or (ii) such other date as the Company shall designate. If a record date
is fixed, then notwithstanding the provisions of the immediately preceding
paragraph, those Persons who were Holders at such record date (or their duly
designated proxies), and only those Persons, shall be entitled to consent to
such amendment or waiver or to revoke any consent previously given, whether or
not such Persons continue to be Holders after such record date. No consent
shall be valid or effective for more than 90 days after such record date unless
consent from the Holders of the principal
67
<PAGE> 74
amount of Securities required hereunder for such amendment or waiver to be
effective also shall have been given and not revoked within such 90-day period.
An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter, it shall bind every Holder unless it makes a
subsequent change described in any of clauses (1) through (9) of Section 9.2.
In that case the amendment, supplement or waiver shall bind each Holder of a
Security who has consented to it and every subsequent Holder of a Security or
portion of a Security that evidences the same debt as the consenting Holder's
Security.
SECTION 9.5. NOTATION ON OR EXCHANGE OF SECURITIES.
If an amendment, supplement or waiver changes the terms of a Security,
the Company or the Trustee may require the Holder of the Security to deliver it
to the Trustee. The Trustee may place an appropriate notation on the
re-delivered Security about the changed terms and return it to the Holder and
on any Security thereafter authenticated. If the Company or the Trustee so
determines, the Company in exchange for all Securities may issue and the
Trustee shall authenticate new Securities that reflects the changed terms.
Failure to make the appropriate notation or issue a new Security shall not
affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.6. TRUSTEE PROTECTED.
The Trustee shall sign any amended or supplemental Indenture or waiver
authorized pursuant to this Article IX if the amendment or supplement or waiver
does not adversely affect the rights, duties, liabilities or immunities of the
Trustee. Neither the Company nor any of its Subsidiaries may sign an amended
or supplemental indenture until its respective Board of Directors approves it.
In signing such amendment or supplement or waiver the Trustee shall be entitled
to receive, and (subject to Article VII) shall be fully protected in relying
upon, an Opinion of Counsel stating that such amendment or supplement or waiver
is authorized or permitted by and complies with this Indenture. The Company
may not sign an amendment or supplement until the Boards of Directors of the
Company and the Guarantors approve it.
SECTION 9.7. RESTRICTIONS ON PAYMENTS FOR AMENDMENTS, WAIVERS AND
MODIFICATIONS.
Notwithstanding any provision to the contrary contained or referred to
in this Indenture, the Company shall not, and shall not permit any of its
Subsidiaries directly or indirectly, to pay or cause to be paid any
consideration, whether by way of interest, premium, fee or otherwise, to any
Holder for or as an inducement to any consent, waiver, amendment or supplement
of any terms or provisions of the Security or this Indenture, unless such
consideration is offered to be paid or agreed to be paid to all Holders which
so consent, waive or agree to amend or supplement in the time frame set forth
in any solicitation documents relating to such consent, waiver or agreement.
ARTICLE X
GUARANTEES
SECTION 10.1. UNCONDITIONAL GUARANTEE.
Each Guarantor hereby, jointly and severally, fully, absolutely,
unconditionally and irrevocably guarantees (such guarantee to be referred to
herein as the "GUARANTEE") to each Holder and to the Trustee the due and
punctual payment of the principal of, and premium, if any, interest and
Liquidated Damages, if any, on, on the Securities and all other amounts due and
payable under this Indenture and the Securities by the Company whether at
maturity, by acceleration, redemption, repurchase or otherwise, including
interest on the overdue principal of, and premium, if any, interest and
Liquidated Damages,
68
<PAGE> 75
if any, on, the Securities, to the extent lawful, all in accordance with the
terms hereof and thereof; subject, however, to the limitations set forth in
Section 10.5; and in case of any extension of time of payment or renewal of any
Securities or any of such other Obligations, the same will be promptly paid in
full when due or performed in accordance with the terms of the extension or
renewal, subject to any applicable grace period, whether at stated maturity, by
acceleration, redemption, repurchase or otherwise.
Failing payment when due of any amount so guaranteed for whatever
reason, the Guarantors will be jointly and severally obligated to pay the same
immediately. An Event of Default under this Indenture or the Securities shall
constitute an event of default under this Guarantee, and shall entitle the
Holders to accelerate the obligations of the guarantors hereunder in the same
manner and to the same extent as the Obligations of the Company. Each
Guarantor hereby agrees that its obligations hereunder shall be absolute and
unconditional, irrespective of the validity, regularity or enforceability of
the Securities or this Indenture, the absence of any action to enforce the
same, any waiver or consent by any Holder with respect to any provisions hereof
or thereof, the recovery of any judgment against the Company, any action to
enforce the same or any other event or circumstance (including any statute of
limitations), whether foreseen or unforeseen or whether similar or dissimilar
to the foregoing, which might otherwise constitute a legal or equitable
discharge or defense of a guarantor, and in no event or circumstance, shall its
obligations hereunder be released, discharged, mitigated, waived, impaired or
affected in whole or in part except for its final and complete payment and
performance hereof or pursuant to the express provisions of Section 10.4. To
the fullest extent permitted by law, each Guarantor hereby waives diligence,
presentment, demand of payment, filing of claims with a court in the event of
insolvency or bankruptcy of the Company, any right to require a proceeding
first against the Company, protest, notice (including notice of intent to
accelerate or notice of acceleration) and all demands whatsoever and covenants
that this Guarantee will not be discharged except by complete performance of
the obligations contained in the Securities, this Indenture and in this
Guarantee. If any Holder or the Trustee is required by any court or otherwise
to return to the Company, any Guarantor, any Securities Custodian, any
Custodian or trustee, liquidator or other similar official acting in relation
to either the Company or any Guarantor, any amount paid by the Company or any
Guarantor to the Trustee or such Holder with respect to the Securities, this
Guarantee, to the extent theretofore discharged, shall be reinstated in full
force and effect. Each Guarantor agrees it shall not be entitled to, and
hereby waives, any right of subrogation in relation to the Holders in respect
of any obligations guaranteed hereby until final payment in full of all
obligations guaranteed hereby. Each Guarantor further agrees that, as between
each Guarantor, on the one hand, and the Holders and the Trustee, on the other
hand, (x) the maturity of the obligations guaranteed hereby may be accelerated
as provided in Article VI for the purposes of this Guarantee, notwithstanding
any stay, injunction or other prohibition preventing such acceleration in
respect of the obligations guaranteed hereby, and (y) in the event of any
declaration of acceleration of such obligations as provided in Article VI, such
obligations (whether or not due and payable) shall forthwith become due and
payable by each Guarantor for the purpose of this Guarantee.
The obligations of each Guarantor under its Guarantee are independent
of the obligations of the Company under the Securities and this Indenture, and
a separate action or actions may be brought and prosecuted against such
Guarantor to enforce its Guarantee, irrespective of whether any action is
brought against the Company or any other Guarantor or whether the Company or
any other Guarantor is joined in any such action or actions.
69
<PAGE> 76
SECTION 10.2. GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS.
(a) Subject to paragraph (b) of this Section 10.2, no Guarantor
may consolidate with or merge with or into (whether or not such Guarantor is
the surviving Person) another corporation or Person (whether or not affiliated
with such Guarantor) unless (i) the Person formed by or surviving any such
consolidation or merger (if other than such Guarantor) is a corporation
organized and existing under the laws of the United States of America, any
state thereof, or the District of Columbia and expressly assumes all the
obligations of such Guarantor pursuant to a supplemental indenture, in a form
reasonably satisfactory to the Trustee, under the Securities, the Indenture
and, if applicable, the Registration Rights Agreement, (ii) immediately before
and after giving effect to such transaction, no Default or Event of Default
exists, (iii) such Guarantor or the entity or Person formed by or surviving any
such consolidation or merger on a pro forma basis will have Consolidated Net
Worth (immediately after the transaction) equal to or greater than the
Consolidated Net Worth of such Guarantor immediately preceding the transaction
and (iv) the Company will, at the time of such transaction after giving pro
forma effect thereto as if such transaction had occurred at the beginning of
the applicable Reference Period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to Section 4.9(a). In connection with any
consolidation or merger contemplated by this Section 10.2, the Company shall
deliver to the Trustee prior to the consummation of the proposed transaction an
Officers' Certificate to the foregoing effect and an Opinion of Counsel stating
that all conditions precedent to the proposed transaction and to execution and
delivery of such supplemental indenture have been complied with. This Section
10.2(a) will not prohibit a merger between Guarantors or a merger between the
Company and a Guarantor.
(b) In the event of a sale or other disposition of all or
substantially all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
Capital Stock of such Guarantor, then such Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the Capital Stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all or substantially
all of the assets of such Guarantor) will be released and relieved of any
obligations under its Guarantees; provided that the Net Cash Proceeds of such
sale or other disposition are applied in accordance with the provisions of the
Indenture described under Section 4.11.
SECTION 10.3. ADDITION OF GUARANTORS.
(a) The Company agrees to cause each Person that is or becomes a
Restricted Subsidiary on or after the Issue Date to become a Guarantor to the
full extent as provided by this Article X by executing and delivering to the
Trustee a supplemental indenture pursuant to which such Restricted Subsidiary
shall guarantee the payment of the Securities pursuant to the terms hereof, and
any Person that was not a Guarantor on the Issue Date may so become a Guarantor
by executing and delivering to the Trustee, in each case as to such Restricted
Subsidiary or Person (as applicable), (i) a supplemental indenture in form and
substance satisfactory to the Trustee, which subjects such Restricted
Subsidiary or Person to the provisions (including the representations and
warranties) of this Indenture as a Guarantor and (ii) an Opinion of Counsel and
Officers' Certificate to the effect that such supplemental indenture has been
duly authorized and executed by such Restricted Subsidiary or Person and
constitutes the legal, valid, binding and enforceable obligation of such
Restricted Subsidiary or Person (subject to such customary exceptions
concerning creditors' rights and equitable principles as may be acceptable to
the Trustee in its discretion).
(b) The Company hereby represents and warrants that no Restricted
Subsidiaries and Guarantors are in existence on the Issue Date.
70
<PAGE> 77
SECTION 10.4. RELEASE OF A GUARANTOR.
Upon the sale or disposition of, or with respect to, a Guarantor (or
substantially all of its assets) as expressly provided in Section 10.2(b) or
the designation of a Subsidiary Guarantor as an Unrestricted Subsidiary, which
in each case otherwise is effected in compliance with the terms of this
Indenture, such Guarantor shall be deemed released from all of its Guarantee
and related obligations in this Indenture. The Trustee shall deliver an
appropriate instrument evidencing such release upon receipt of a request by the
Company accompanied by an Officers' Certificate and an Opinion of Counsel
certifying that such sale or other disposition or designation (as applicable)
was made by the Company in accordance with the provisions of this Indenture.
Any Guarantor not so released remains liable for the full amount of the
Securities or other amounts as provided in this Article X.
SECTION 10.5. LIMITATION OF GUARANTOR'S LIABILITY.
Each Guarantor and by its acceptance of Securities under this
Indenture each Holder hereby confirms that it is the intention of all such
parties that the guarantee by such Guarantor pursuant to its Guarantee not
constitute a fraudulent transfer or conveyance for purposes of any federal,
state or foreign law. To effectuate the foregoing intention, the Holders and
each Guarantor hereby irrevocably agree that the obligations of each Guarantor
under the Guarantee shall be limited to the maximum amount as will, after
giving effect to all other contingent and fixed liabilities of such Guarantor
and after giving effect to any collections from or payments made by or on
behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its Guarantee or pursuant to Section 10.6, result in the
obligations of such Guarantor under the Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal, state or foreign law. This
Section 10.5 is for the benefit of the creditors of each Guarantor, and, for
purposes of applicable fraudulent transfer and fraudulent conveyance law, any
Indebtedness of a Guarantor pursuant to a Bank Credit Facility shall be deemed
to have been incurred prior to the incurrence by such Guarantor of its
liability under the Guarantee.
SECTION 10.6. CONTRIBUTION.
In order to provide for just and equitable contribution among the
Guarantors, the Guarantors agree, inter se, that in the event any payment or
distribution is made by any Guarantor (a "FUNDING GUARANTOR") under the
Guarantee, such Funding Guarantor shall be entitled to a contribution from each
other Guarantor in a pro rata amount based on the Adjusted Net Assets of each
Guarantor (including the Funding Guarantor) for all payments, damages and
expenses incurred by the Funding Guarantor in discharging the Company's
obligations with respect to the Securities or any other Guarantor's obligations
with respect to the Guarantee.
SECTION 10.7. EXECUTION AND DELIVERY OF GUARANTEE.
To further evidence its Guarantee set forth in Section 10.1, each
Guarantor hereby agrees that a notation relating to such Guarantee, in
substantially the form of Exhibit D, shall be endorsed on each Security
authenticated and delivered by the Trustee and executed by either manual or
facsimile signature of one Officer of each Guarantor.
Each of the Guarantors hereby agrees that its Guarantee shall remain
in full force and effect notwithstanding any failure to endorse on each
Security a notation of such Guarantee.
If an Officer of a Guarantor whose signature is on this Indenture, a
Guarantee or a Security, or a supplemental indenture or notation with respect
to any of them, no longer holds that office at the time
71
<PAGE> 78
the Trustee authenticates such Security or at any time thereafter, such
Guarantor's Guarantee of such Security shall be valid nevertheless.
The delivery of any Security by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of any Guarantee on behalf of
the Guarantor.
SECTION 10.8. "TRUSTEE" TO INCLUDE PAYING AGENT.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article 10 shall in each case (unless the context shall
otherwise require) be construed as extending to and including such Paying Agent
within its meaning as fully and for all intents and purposes as if such Paying
Agent were named in this Article X in place of the Trustee.
SECTION 10.9. SEVERABILITY.
In case any provision of this Guarantee shall be invalid, illegal or
unenforceable, that portion of such provision that is not invalid, illegal or
unenforceable shall remain in effect, and the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. TRUST INDENTURE ACT CONTROLS.
Whether prior to or following the qualification of this Indenture
under the TIA, if any provision of this Indenture limits, qualifies, or
conflicts with the duties imposed by operation of TIA Section 318(c) upon an
Indenture qualified under the TIA, the imposed duties shall control under this
Indenture.
SECTION 11.2. NOTICES.
Any notice or communication shall be sufficiently given if in writing
and delivered in person or mailed by certified or registered mail (return
receipt requested), facsimile, telecopier or overnight air courier guaranteeing
next day delivery, addressed as follows:
If to the Company or any Guarantor:
Michael Petroleum Corporation
13101 Northwest Freeway
Suite 320
Houston, Texas 77040
Facsimile No.: (713) 895-0320
Attention: Chief Financial Officer
72
<PAGE> 79
If to the Trustee:
State Street Bank and Trust Company
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
Facsimile No.: (860) 244-1889
Attention: Corporate Trust Administration
The Company, any Guarantor or the Trustee, by notice to the other, may
designate additional or different addresses for subsequent notices or
communications.
All notices and communications (other than those sent to Holders)
shall be deemed to have been duly given: at the time delivered by hand, if
personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when receipt acknowledged, if faxed or telecopied;
and the next Business Day after timely delivery to the courier, if sent by
overnight air courier guaranteeing next Business Day delivery.
Any notice or communication mailed to a Holder shall be mailed by
first-class mail, certified or registered, return receipt requested, or by
overnight air courier guaranteeing next day delivery to the address for such
Holder appearing on the registration books of the Registrar. Any notice of
communication shall also be so mailed to any Person described in TIA Section
313(c), to the extent required by the TIA. Failure to mail a notice or
communication to a Holder or any defect in it shall not affect its sufficiency
with respect to other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it. If the Company mails a notice or communications to Holders, it
shall mail a copy to the Trustee and each Agent at the same time.
SECTION 11.3. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Securities.
The Company, the Guarantors, the Trustee, the Registrar and anyone else shall
have the protection of TIA Section 312(c).
SECTION 11.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company, upon request, shall furnish to
the Trustee:
(1) an Officers' Certificate in form and substance
reasonably satisfactory to the Trustee (which shall include the
statements set forth in Section 11.5) stating that, in the opinion of
the signers, the conditions precedent and covenants, if any, provided
for in this Indenture relating to the proposed action have been
satisfied; and
(2) an Opinion of Counsel in form and substance
reasonably satisfactory to the Trustee (which shall include the
statements set forth in Section 11.5) stating that, in the opinion of
such counsel, such conditions precedent and covenants have been
satisfied.
73
<PAGE> 80
SECTION 11.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions
of TIA Section 314(e) and include:
(1) a statement that each Person making such certificate
or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such Person,
he or she has made such examination or investigation as is necessary
to enable him or her to express an informed opinion as to whether or
not such covenant or condition has been satisfied; and
(4) a statement as to whether or not, in the opinion of
each such Person, such covenant or condition has been complied with.
SECTION 11.6. RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
SECTION 11.7. LEGAL HOLIDAYS.
A "LEGAL HOLIDAY" is a Saturday, a Sunday, or a day on which banks and
trust companies in The City of New York or in the city of the Corporate Trust
Office are not required by law or executive order to be open. If a payment
date is a Legal Holiday at a place of payment, payment may be made at the place
on the next succeeding day that is not a Legal Holiday, without additional
interest.
SECTION 11.8. GOVERNING LAW.
THIS INDENTURE AND THE SECURITIES AND THE GUARANTEES SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS TO THE EXTENT THAT
THE APPLICATION OF THE LAW OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
SECTION 11.9. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company, any Guarantor or any other Subsidiary of the
Company. Any such indenture, loan or debt agreement may not be used to
interpret this Indenture.
SECTION 11.10. NO PERSONAL LIABILITY OF DIRECTORS, ADVISORS, MANAGERS,
OFFICERS, EMPLOYEES, INCORPORATORS, MEMBERS AND STOCKHOLDERS.
No past, present or future director, advisor, manager, officer,
employee, incorporator, member or stockholder of the Company or any Guarantor,
as such, shall have any liability for any obligations of
74
<PAGE> 81
the Company or any Guarantor under the Securities, the Guarantees, this
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder by accepting a Security waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Securities.
SECTION 11.11. SUCCESSORS.
All agreements of the Company and the Guarantors in this Indenture,
the Securities and the Guarantees shall bind their respective successors. All
agreements of the Trustee in this Indenture shall bind its successor.
SECTION 11.12. DUPLICATE ORIGINALS.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
instrument.
SECTION 11.13. SEVERABILITY.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby,
and a Holder shall have no claim therefor against any party hereto.
SECTION 11.14 TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, as of the date first written above.
MICHAEL PETROLEUM CORPORATION
By /s/ MICHAEL G. FARMAR
---------------------------------
Michael G. Farmar, President
and Chief Operating Officer
STATE STREET BANK AND
TRUST COMPANY, as Trustee
By /s/ MICHAEL M. HOPKINS
--------------------------------
Michael M. Hopkins
Vice President
75
<PAGE> 1
EXHIBIT 4.3
$135,000,000
Michael Petroleum Corporation
11 1/2% Senior Notes due 2005
REGISTRATION RIGHTS AGREEMENT
March 30, 1998
BEAR, STEARNS & CO. INC.
JEFFERIES & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
c/o Bear, Stearns & Co. Inc.
245 Park Ave.
New York, New York 10167
Ladies and Gentlemen:
Michael Petroleum Corporation, a Texas corporation (the
"Company"), proposes to issue and sell to you (the "Initial Purchasers"), upon
the terms set forth in a purchase agreement of even date herewith (the "Purchase
Agreement"), $135,000,000 principal amount of the Company's 11 1/2% Senior Notes
due 2005 (the "Notes"). The Notes will be issued pursuant to an indenture, to be
dated as of April 2, 1998 (the "Indenture") by and between the Company and State
Street Bank and Trust Company, as trustee (the "Trustee"), substantially in the
form previously furnished to you.
Capitalized terms used but not specifically defined herein are
defined in the Purchase Agreement and used herein as so defined. As used herein,
"Registrable Notes" shall mean each Note, until the earliest to occur of (a) the
date on which an Exchange Offer is completed for the Notes pursuant to which
such Note may be exchanged in the Exchange Offer for an Exchange Note (each as
defined below) and entitled to be resold to the public by the holder thereof
without complying with the prospectus delivery requirements of the Securities
Act of 1933, as amended (the "Securities Act"), (b) the date on which such Note
has been effectively registered under the Securities Act and disposed of
pursuant to a Notes Shelf Registration (as defined below), (c) the date on which
such Note is distributed to the public pursuant to Rule 144 under the Securities
Act or by a Broker-Dealer (as defined below) pursuant to the "Plan of
Distribution" contemplated by the registration statement relating to the
Exchange Offer (including delivery of the prospectus contained therein) or (d)
the date such Note ceases to be outstanding.
In consideration of the premises, and the mutual covenants,
representations, warranties and agreements herein contained, the parties hereby
agree as follows:
1. Exchange Offer.
(a) Promptly (and in any event not more than 45 days)
following the Closing Date, the Company shall file with the Commission a
registration statement on an appropriate form under the Securities Act with
respect to a proposed offer (the "Exchange Offer") to the holders of the
Registrable Notes to issue and deliver to such holders, in exchange for the
Registrable Notes, a like principal amount of debt securities of the Company
identical in all material respects to the Registrable Notes (the "Exchange
Notes"), shall use its best efforts to cause such registration statement to
become effective under the Securities Act no later than 120 days after the
Closing Date and, upon the effectiveness of that registration statement, shall
commence
<PAGE> 2
the Exchange Offer and shall cause the same to remain open for such period of
time to be determined by the Company (but not less than 30 nor more than 60 days
after the commencement of the Exchange Offer), and to be conducted in accordance
with such procedures as may be required by the applicable provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), it being the
objective of such Exchange Offer to enable each holder of Registrable Notes
electing to exchange Registrable Notes for Exchange Notes (assuming that such
holder is not an affiliate of the Company within the meaning of the Securities
Act, acquires the Exchange Notes in the ordinary course of such holder's
business and has no arrangements with any person to participate in the
distribution of the Exchange Notes) to trade such Registrable Notes for Exchange
Notes from and after their receipt without any limitations or restrictions under
the Securities Act, subject as to a Broker-Dealer to the provisions of Section
1(b) hereof, or the Exchange Act and without material restrictions under the
securities laws of a substantial proportion of the several states of the United
States. Each holder of Registrable Notes who participates in the Exchange Offer
and who desires to receive Exchange Notes that will not be subject to any
limitations or restrictions on resale under the Securities Act will be required
to represent in writing to the Company that any Exchange Notes received by it
will be acquired in the ordinary course of its business, that at the time of
consummation of the Exchange Offer such holder of Registrable Notes will have no
arrangement or understanding with any person to participate in the distribution
of the Exchange Notes and that such holder of the Registrable Notes is not an
affiliate of the Company within the meaning of the Securities Act. Upon
consummation of the Exchange Offer in accordance with this Section 1, the
Company shall have no further obligation to register Registrable Notes pursuant
to Section 2 of this Agreement.
(b) The Company shall indicate in a "Plan of
Distribution" section contained in the final prospectus constituting a part of
the registration statement relating to the Exchange Offer that any broker or
dealer registered under the Exchange Act (each a "Broker-Dealer") who holds
Registrable Notes that were acquired for its own account as a result of
market-making activities or other trading activities (other than Registrable
Notes acquired directly from the Company), may exchange such Registrable Notes
for Exchange Notes pursuant to the Exchange Offer; however, such Broker-Dealer
may be deemed an "underwriter" within the meaning of the Securities Act and,
therefore, must deliver a prospectus meeting the requirements of the Securities
Act in connection with any resales of the Exchange Notes received by it in the
Exchange Offer, which prospectus delivery requirement may be satisfied by the
delivery by such Broker-Dealer of the final prospectus contained in the
registration statement relating to the Exchange Offer. Such "Plan of
Distribution" section also shall state that the delivery by a Broker-Dealer of
the final prospectus relating to the Exchange Offer in connection with resales
of Exchange Notes shall not be deemed to be an admission by such Broker- Dealer
that it is an "underwriter" within the meaning of the Securities Act, and shall
contain all other information with respect to resales of the Exchange Notes by
Broker-Dealers that the Commission may require in connection therewith, but such
"Plan of Distribution" shall not name any such Broker-Dealer or disclose the
amount of Exchange Notes held by any such Broker-Dealer except to the extent
required by the Commission as a result of a change in policy after the date of
this Agreement.
(c) In connection with such Exchange Offer and the offer
and sale of Exchange Notes by Broker-Dealers as contemplated above, the Company
shall take such other and further action, including making appropriate filings
under state securities laws and delivering such number of final prospectuses
relating to the Exchange Offer as any Broker-Dealer proposing to deliver the
same in connection with its resales of Exchange Notes may reasonably request, as
may be necessary to realize the foregoing objectives. The Company shall cause
the registration statement relating to the Exchange Offer to remain continuously
effective for a period of one year from the date on which such registration
statement is first declared effective, and shall supplement or amend the
prospectus contained therein, in each case, to the extent necessary to
-2-
<PAGE> 3
permit such prospectus (as supplemented or amended) to be delivered by
Broker-Dealers in connection with their resales of Exchange Notes as aforesaid.
2. Notes Shelf Registration. The following provisions
shall apply, only if, because of any change in currently prevailing
interpretations of the Commission's staff, the Company is not permitted to
effect an Exchange Offer, as contemplated by Section 1 hereof:
(a) Promptly (and in any event not more than 45 days)
following the Closing Date, the Company shall file with the Commission, and
thereafter use its best efforts to have declared effective not later than 120
days after the Closing Date, a registration statement on an appropriate form
under the Securities Act relating to the offer and sale of the Registrable Notes
by the holders thereof, from time to time in accordance with the methods of
distribution set forth in such registration statement and Rule 415 under the
Securities Act (the "Notes Shelf Registration").
(b) The Company agrees to use its best efforts to keep
the registration statement relating to the Notes Shelf Registration continuously
effective in order to permit the prospectus included therein to be usable by the
holders of the Registrable Notes for a period of two years from the Closing Date
or such shorter period that will terminate when all the Registrable Notes
covered by the registration statement have been sold pursuant to such
registration statement; provided, that the Company shall be deemed not to have
used its best efforts to keep the registration statement effective during the
requisite period if it voluntarily takes any action that would result in holders
of the Registrable Notes covered thereby not being able to offer and sell such
Registrable Notes during that period, unless such action is required by
applicable law, and provided, further, that the foregoing shall not apply if the
Company determines, in its reasonable judgment, upon advice of counsel, as
authorized by a resolution of its Board of Directors, that the continued
effectiveness and usability of such registration statement would (i) require the
disclosure of material information, which the Company has a bona fide business
reason for preserving as confidential, or (ii) impede the consummation of any
financing, acquisition, corporate reorganization or other material transaction
involving the Company or any of its Affiliates (as defined in the rules and
regulations adopted under the Exchange Act); provided, however, that the failure
to keep the registration statement effective and usable for offers and sales of
Registrable Notes for such reasons shall last no longer than 30 days in any
12-month period, so long as the Company promptly thereafter complies with the
requirements of Section 3(h) hereof, if applicable. Any such period during which
the Company fails to keep the registration statement effective and usable for
offers and sales of Registrable Notes is referred to as a "Suspension Period." A
Suspension Period shall commence on and include the date that the Company gives
notice that the registration statement is no longer effective or the prospectus
included therein is no longer usable for offers and sales of Registrable Notes
and shall end on the date when each seller of Registrable Notes covered by such
registration statement either receives the copies of the supplemented or amended
prospectus contemplated by Section 3(h) hereof or is advised in writing by the
Company that use of the prospectus may be resumed.
(c) Notwithstanding any other provisions of this
Agreement to the contrary, the Company will cause the Notes Shelf Registration
and the related prospectus and any amendment or supplement thereto, as of the
effective date of such registration statement, amendment or supplement, (i) to
comply in all material respects with the applicable requirements of the
Securities Act and the rules and regulations of the Commission and (ii) not to
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
-3-
<PAGE> 4
3. Registration Procedures. In connection with, to the
extent applicable, any Exchange Offer pursuant to Section 1 hereof, or any Notes
Shelf Registration pursuant to Section 2 hereof, the following provisions shall
apply:
(a) If requested by any holder of Registrable Notes or
the managing underwriter, if any, with respect to the Notes Shelf Registration,
the Company shall furnish to each such holder of Registrable Notes or such
managing underwriter, prior to the filing thereof with the Commission, a copy of
the applicable registration statement and each amendment thereof and each
supplement, if any, to the prospectus included therein. The Company shall use
its best efforts to reflect in each such document, when so filed with the
Commission, such comments as such holder or managing underwriter reasonably may
propose.
(b) The Company shall advise the holders of Registrable
Notes or the Exchange Notes, and the managing underwriter, if any, and, if
requested by any such person, confirm such advice in writing:
(i) when the applicable registration statement and any
amendment thereto has been filed with the Commission and when the
registration statement or any post-effective amendment thereto has
become effective;
(ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the applicable registration statement
or the initiation of any proceedings for that purpose;
(iii) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Registrable
Notes or the Exchange Notes for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose; and
(iv) of the happening of any event that requires the
making of any changes in the registration statement or the prospectus
in order to make the statements therein not misleading (which advice
shall be accompanied by an instruction to suspend the use of the
prospectus until the requisite changes have been made).
(c) The Company will make every reasonable effort to
obtain the withdrawal of any order suspending the effectiveness of the
registration statement at the earliest possible time.
(d) The Company will furnish to each holder of the
Registrable Notes or the Exchange Notes included within the coverage of the
Exchange Offer or the Notes Shelf Registration, as appropriate, without charge,
at least one copy of the registration statement in the form in which it was
declared effective by the Commission and any post-effective amendment thereto,
including financial statements and schedules, and, if the holder so requests in
writing, all exhibits (including those incorporated by reference).
(e) The Company will deliver to each holder of the
Registrable Notes or the Exchange Notes included within the coverage of the
Exchange Offer or the Notes Shelf Registration, as appropriate, without charge,
as many copies of the prospectus (including each preliminary prospectus)
included in the registration statement and any amendment or supplement thereto
as such persons may reasonably request; the Company consents to the use of the
prospectus or any amendment or supplement thereto by each of the selling holders
of the Registrable Notes or the Exchange Notes in connection with the offering
and sale of the Registrable Notes or the Exchange Notes covered by the
prospectus or any amendment or supplement thereto.
-4-
<PAGE> 5
(f) Prior to any public offering of the Registrable Notes
or the Exchange Notes pursuant to the Exchange Offer or the Notes Shelf
Registration, as the case may be, the Company will use its best efforts to
register or qualify, or cooperate with the holders of the Registrable Notes or
the Exchange Notes covered thereby and their respective counsel in connection
with the registration or qualification of, such Registrable Notes or Exchange
Notes for offer and sale under the securities or blue sky laws of such
jurisdictions as any seller reasonably requests in writing and do any and all
other acts or things necessary or advisable to enable the offer and sale in such
jurisdictions, of the Registrable Notes or the Exchange Notes covered by the
Exchange Offer or the Notes Shelf Registration, as the case may be; provided,
that the Company will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which would
subject it to general service of process or to taxation in any such jurisdiction
where it is not then so subject.
(g) The Company will cooperate with the holders of the
Registrable Notes and the Exchange Notes to facilitate the timely preparation
and delivery of certificates representing the Registrable Notes and the Exchange
Notes to be sold in the Exchange Offer or the Notes Shelf Registration, as the
case may be, free of any restrictive legends and in such denominations and
registered in such names as the holders may request provided such request
complies with the Indenture, prior to sales of the Registrable Notes or the
Exchange Notes, pursuant to the Exchange Offer or the Notes Shelf Registration,
as the case may be.
(h) Upon the occurrence of any event contemplated by
paragraph (b)(iv) above, the Company will prepare a post-effective amendment to
the registration statement or a supplement to the related prospectus or file any
other required document so that, as thereafter delivered to purchasers of the
Registrable Notes or the Exchange Notes, the prospectus will not contain an
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein not misleading.
(i) Not later than the effective date of the applicable
registration statement, the Company will provide a CUSIP number for the
Registrable Notes or the Exchange Notes, as the case may be, and provide the
Trustee with printed certificates for the Registrable Notes or the Exchange
Notes, as the case may be, in a form eligible for deposit with The Depository
Trust Company.
(j) The Company will use its best efforts to comply with
all applicable rules and regulations of the Commission and will make generally
available to its security holders an earnings statement satisfying the
provisions of Section 11(a) of the Securities Act, no later than 45 days after
the end of the 12- month period (or 90 days, if such period is a fiscal year)
beginning with the first month of the Company's first fiscal quarter commencing
after the effective date of each of the Registered Exchange Offer and the Notes
Shelf Registration, which statements shall cover such 12-month period.
(k) The Company will cause the Indenture to be qualified
under the Trust Indenture Act of 1939, as amended, upon effectiveness of the
registration statement contemplated by Section 1(a) or Section 2(a).
(l) The Company may require each holder of Registrable
Notes to be sold pursuant to the Notes Shelf Registration to furnish to the
Company such information regarding the holder and the distribution of such
Registrable Notes as the Company may from time to time reasonably require for
inclusion in the registration statement. The Company may exclude from such
registration the Registrable Notes of any holder who unreasonably fails to
furnish such information in writing to the Company within ten business days (or
longer time period if agreed by the Company in writing) after receiving such
request. Each holder of
-5-
<PAGE> 6
Registrable Notes included within the coverage of any Registration Statement
shall furnish promptly to the Company all information required by applicable law
to be disclosed by such party in order to make the information previously
furnished to the Company not materially misleading.
(m) Each holder of Registrable Notes agrees by
acquisition of such Registrable Notes or Exchange Notes to be sold that, upon
receipt of any notice from the Company of the happening of any Suspension Period
of the kind described in Section 2(b) or an event of the kind described in
Section 3(b)(ii)-(iv), such holder will forthwith discontinue disposition of
such Registrable Notes or Exchange Notes covered by such Registration Statement
or Prospectus until such holder's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(h) hereof or is advised in writing
by the Company that use of the prospectus may be resumed.
4. Registration Expenses. The Company will bear all
expenses incurred in connection with the performance of its obligations under
Sections 1 through 3 hereof and will bear or reimburse the holders of the
Registrable Notes for the reasonable fees and disbursements of one firm of
counsel designated by the holders of a majority in principal amount of the
Registrable Notes to act as counsel for the holders of the Registrable Notes in
connection therewith; provided that in any underwritten offering the Company
shall not be obligated to pay any underwriters' discounts and commissions nor
any transfer tax related to such offering.
5. Indemnification.
(a) Indemnification by the Company. The Company shall
indemnify and hold harmless (i) each Initial Purchaser, (ii) in the case of the
Notes Shelf Registration, each holder of Registrable Notes, and (iii) in the
case of the Exchange Offer, each Broker-Dealer who holds Exchange Notes acquired
for its own account pursuant to the Exchange Offer, and, in any such case, each
Initial Purchaser's and such holder's officers, directors, employees and agents
and each person who controls each such Initial Purchaser, now or hereafter, and
each such holder within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act (each such person being sometimes hereinafter
referred to as an "Indemnified Person") from and against any and all losses,
claims, damages, awards, liabilities and judgments ("Losses") arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or prospectus or in any amendment or
supplement thereto relating to the Notes Shelf Registration or the Exchange
Offer, as the case may be, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except insofar as such Losses are caused by any such
untrue statement or omission or allegation thereof based upon information
relating to such Indemnified Person furnished in writing to the Company by such
Indemnified Person expressly for use therein and used in conformity therewith;
provided, however, that in the event an Initial Purchaser or a Broker-Dealer is
required by law to deliver a final prospectus in connection with an Exchange
Offer or a Note Shelf Registration and the indemnity obligations arising under
this Section 5(a) arise with respect to untrue statements or omissions or untrue
alleged statements or omissions made in a preliminary prospectus, such indemnity
obligations arising under this Section 5(a) shall not inure to the benefit of
any Initial Purchaser or Broker-Dealer and its controlling persons and their
respective directors, officers and employees if the person asserting any such
Losses purchased the Notes from such Initial Purchaser or Broker-Dealer and if a
copy of the final prospectus (as then amended or supplemented if the Company
shall have timely furnished any amendments thereof or supplements thereto), was
not sent or given by such Initial Purchaser or Broker-Dealer or on its behalf to
such person at or prior to the time such delivery was required by law, and if
the final prospectus (as then amended or supplemented if the Company shall have
timely furnished any amendments
-6-
<PAGE> 7
thereof or supplements thereto) would have cured the defect giving rise to such
Losses. The indemnity will be in addition to any liability that the Company
otherwise may have.
If any action or proceeding (including any governmental
investigation or inquiry) shall be brought or asserted against an Indemnified
Person, or notice of any such claim is received, in respect of which indemnity
may be sought from the Company, such Indemnified Person shall promptly notify
the Company in writing, and the Company shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to such Indemnified
Person and the payment of all reasonable fees and expenses of such defense;
provided that the failure by any such Indemnified Person to so notify the
Company shall not relieve the Company of its indemnification obligations under
Section 5(a) hereof, except to the extent that the Company is materially
prejudiced or forfeits substantive rights and defenses by reason of such
failure. Such Indemnified Person shall have the right to employ separate counsel
in any such action and to participate in the defense thereof, but the fees and
expenses of such counsel shall be the expense of such Indemnified Person unless
(a) the Company shall have agreed in writing to pay such fees and expenses or
(b) the Company shall have failed to assume the defense of such action or
proceeding and to employ counsel reasonably satisfactory to such Indemnified
Person in any such action or proceeding within a reasonable time after notice of
commencement of such action or proceeding or (c) the named parties to any such
action or proceeding (including any impleaded parties) include such Indemnified
Person and the Company, and such Indemnified Person shall have been advised in
writing by counsel that there may be one or more legal defenses available to
such Indemnified Person that are different from or additional to those available
to the Company and in the reasonable judgment of such counsel it is advisable
for such Indemnified Party to employ separate counsel (in which case, if such
Indemnified Person notifies the Company in writing that it elects to employ
separate counsel at the expense of the Company, the Company shall not have the
right to assume the defense of such action or proceeding on behalf of such
Indemnified Person, it being understood, however, that the Company shall not, in
connection with any one such action or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (in addition to local
counsel) at any time for such Indemnified Person and any other Indemnified
Persons, which firm shall be designated in writing by such Indemnified Persons
(which shall be reasonably satisfactory to the Company), and that all such fees
and expenses shall be reimbursed as they are billed). The Company shall not be
liable for any settlement of any such action or proceeding effected without its
written consent (not to be unreasonably withheld), but if settled with its
written consent, or if there be a final, unappealable judgment for the plaintiff
in any such action or proceeding, the Company agrees to indemnify and hold
harmless such Indemnified Persons from and against any loss or liability by
reason of such settlement or judgment. The Company shall not, without the prior
written consent of the Indemnified Person (which consent shall not be
unreasonably withheld), effect any settlement of any pending or threatened
proceeding in respect of which any Indemnified Person is a party and indemnity
has been sought hereunder by such Indemnified Person; provided however, that the
Company may effect such a settlement without the consent of such Indemnified
Person if such settlement includes an unconditional release of such Indemnified
Person from all liability for claims that are the subject matter of such
proceeding or the Company indemnifies such Indemnified Person in writing and
posts a bond for an amount equal to the maximum liability for all such claims as
contemplated above or provide other security for such indemnity as shall be
reasonably satisfactory to such Indemnified Person.
(b) Indemnification by Holders. Each holder of
Registrable Notes agrees to indemnify and hold harmless the Company, its
directors and officers, employees and agents and each person, if any,
controlling the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to such holder, but only with respect to
-7-
<PAGE> 8
information relating to such holder or the distribution furnished in writing by
such holder expressly for use in any registration statement or prospectus or any
amendment or supplement thereto or any preliminary prospectus relating thereto,
provided, however, that no such holder shall be liable for any indemnity claims
hereunder in excess of the amount of net proceeds received by such holder from
the sale of Registrable Notes pursuant to the Notes Shelf Registration. If any
action or proceeding shall be brought against the Company or its directors,
officers, employees or agents or any such controlling person, in respect of
which indemnity may be sought against a holder of Registrable Notes, such holder
shall have the rights and duties given the Company and the Company or its
directors, officers, employees or agents or such controlling person shall have
the rights and duties given to each holder by Section 5(a) hereof. The Company
shall be entitled to receive indemnities from underwriters, selling brokers,
dealer managers and similar securities industry professionals participating in
the distribution, to the same extent as provided above with respect to
information so furnished in writing by such persons specifically for inclusion
in any prospectus or registration statement or any amendment or supplement
thereto.
(c) Contribution. If the indemnification provided for in
this Section 5 is unavailable to an indemnified party under Section 5(a) or
Section 5(b) hereof (other than by reason of exceptions provided in those
Sections) in respect of any Losses referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such Losses in such proportion as is appropriate to reflect not only the
relative benefits but also the relative fault of the Company and of the
Indemnified Person in connection with the statements or omissions which resulted
in such Losses, as well as any other relevant equitable considerations. The
relative fault of the Company and of the Indemnified Person shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or by the
Indemnified Person and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the Losses referred to
above shall be deemed to include, subject to the limitations set forth in the
second paragraph of Section 5(a), any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim.
The Company and the holders of the Registrable Notes and
Exchange Notes agree that it would not be just and equitable if contribution
pursuant to this Section 5(c) were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
6. Additional Interest Under Certain Circumstances;
Remedies.
If the Company fails to file within 45 days, or cause to
become effective within 120 days, after the Closing Date, the registration
statement relating to the Exchange Offer or the Notes Shelf Registration, as
applicable, or (subject to Section 2(b)) the Notes Shelf Registration is
declared effective but thereafter ceases to be effective in connection with
resales of the Registrable Notes (each such event, a "Registration Default"),
then the Company agrees to pay to each holder of Registrable Notes, accruing
from the date of the first such Registration Default, liquidated damages in an
amount equal to one-half of one percent (0.5%) per annum of the principal amount
of Registrable Notes held by such holder during the first 180-day period
immediately following the occurrence of the first such Registration Default,
increasing by
-8-
<PAGE> 9
an additional one-half of one percent (0.5%) per annum of the principal amount
of such Registrable Notes during each subsequent 180-day period, up to a maximum
amount of liquidated damages equal to two percent (2.0%) per annum of the
principal amount of such Registrable Notes ("Liquidated Damages"), and ceasing
to accrue on the date such Registration Default has been cured by, as
applicable, the filing or declaration of effectiveness of the applicable
registration statement. The Company shall notify the Trustee within one business
day after (i) each and every Registration Default and (ii) the date the
Registration Default has been so cured. Until the Trustee and the Paying Agent
have received an Officers' Certificate from the Company to the effect that all
Liquidated Damages then due have been paid in full, the Company (in respect of
any payment date) shall pay Liquidated Damages then due by depositing with the
Trustee, in trust, for the benefit of the affected holders of Registrable Notes,
on or before the applicable semi-annual interest payment date, immediately
available funds in sums sufficient to pay the Liquidated Damages then due and
provide to the Trustee and the Paying Agent a list of holders entitled to
Liquidated Damages together with the amount of cash such holder is due. The
Liquidated Damages amount due shall be payable as additional interest (from
funds received pursuant to such deposit) on each interest payment date to the
record holder of Registrable Notes entitled to receive the interest payment to
be made on such date as set forth in the Indenture.
7. Miscellaneous.
(a) Amendments and Waivers. The provisions of this
Agreement may not be amended, modified or supplemented, and waivers or consents
to departures from the provisions hereof may not be given, unless the Company
has obtained the written consent of holders of a majority in aggregate principal
amount of the Registrable Notes (insofar as such matters relate to the
Registrable Notes) or the Exchange Notes (insofar as such matters relate to the
Exchange Notes).
(b) Notices. All notices and other communications
provided for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail, telex, telecopier, or air courier guaranteeing overnight
delivery:
(1) if to a holder of Registrable Notes or Exchange
Notes, at the most current address given by such holder to the Company
in accordance with the provisions of this Section 7(b), which address
initially is, with respect to each holder, the address of such holder
to which confirmation of the sale of the Notes was first sent by an
Initial Purchaser, with a copy in like manner to Bear, Stearns & Co.
Inc., 245 Park Avenue, New York, New York 10167, Attention: Corporate
Finance Department, Jefferies & Company, Inc., 11100 Santa Monica
Boulevard, Los Angeles, California 90025, Attention: Jerry Gluck, and
Raymond James & Associates, Inc., 880 Carillon Parkway, St. Petersburg,
Florida 33716, Attention: Corporate Finance Department;
(2) if to an Initial Purchaser, to the addresses set
forth in clause (b)(1) above; and
(3) if to the Company, initially at its respective
address set forth in the Purchase Agreement.
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged by recipient's
telecopy operator, if telecopied; and on the day delivered, if sent by overnight
air courier guaranteeing next day delivery.
-9-
<PAGE> 10
(a) Successors and Assigns. This Agreement shall inure to
the benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent holders of the Registrable Notes.
(b) Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
(c) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(d) Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York, without
giving effect to principles of conflicts of laws to the extent the application
of the law of another jurisdiction would be required thereby.
(e) Severability. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
-10-
<PAGE> 11
REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above:
Very truly yours,
MICHAEL PETROLEUM CORPORATION
By: /s/ MICHAEL FARMAR
--------------------------------
Name: Michael Farmar
--------------------------------
Title: President
--------------------------------
-11-
<PAGE> 12
REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE
Accepted and agreed to as of
the first date written above
BEAR, STEARNS & CO. INC.
By: /s/ T. ANDREW BUGAS
--------------------------------
Name: T. Andrew Bugas
--------------------------------
Title: Senior Managing Director
-------------------------------
JEFFERIES & COMPANY, INC.
By: /s/ JOE MALY
--------------------------------
Name: Joe Maly
--------------------------------
Title: Managing Director
-------------------------------
RAYMOND JAMES & ASSOCIATES, INC.
By: /s/ JAMES A. MCDANIEL
--------------------------------
Name: James A. McDaniel
--------------------------------
Title: Managing Director
-------------------------------
-12-
<PAGE> 1
EXHIBIT 5.1
[HAYNES AND BOONE, LLP LETTERHEAD]
May 8, 1998
Michael Petroleum Corporation
13101 Northwest Freeway
Suite 320
Houston, Texas 77040
Re: Registration Statement on Form S-4; $135,000,000 Aggregate
Principal Amount of 11-1/2% Senior Notes due 2005.
Ladies and Gentlemen:
We have acted as special counsel for Michael Petroleum Corporation, a Texas
corporation (the "Company"), in connection with the proposed issuance by the
Company of $135,000,000 aggregate principal amount of 11-1/2% Senior Notes due
2005 (the "Notes") in exchange for an equivalent amount of the Company's
outstanding 11-1/2% Senior Notes due 2005 (the "Old Notes"). The terms of the
offer to exchange are described in the Registration Statement on Form S-4 (the
"Registration Statement") filed with the Securities and Exchange Commission for
the registration of the Notes under the Securities Act of 1933, as amended (the
"Act"). The Old Notes have been, and the Notes will be, issued pursuant to an
indenture dated as of April 2, 1998 (the "Indenture"), between the Company and
State Street Bank and Trust Company, as Trustee (the "Trustee").
In connection with the foregoing, we have examined the Indenture, the
Registration Statement and such corporate records and instruments of the
Company as we have deemed necessary or appropriate for purposes of this
opinion.
We are opining herein as to the effect on the proposed issuance of the Notes of
the federal laws of the United States, the laws of the State of Texas and the
laws of the State of New York.
Specific Limitations and Qualifications on
Opinions Regarding Enforceability of the Notes
The enforceability of the Notes is subject to the effects of (i) applicable
bankruptcy, insolvency, reorganization, moratorium, rearrangement, liquidation,
conservatorship or similar laws of general application now or hereafter in
effect relating to or affecting the rights or remedies of creditors generally,
and (ii) general equity principles (regardless of whether enforcement is sought
in a proceeding in equity or law).
We express no opinion as to the enforceability of provisions of the Notes to
the extent that such provisions: (i) state that any party's failure or delay in
exercising rights, powers, privileges or remedies under the Notes shall not
operate as a waiver thereof; (ii) purport to preclude the amendment, waiver,
release or discharge of obligations except by an instrument in writing; (iii)
purport to indemnify any person for (A) such person's
<PAGE> 2
Michael Petroleum Corporation
May 8, 1998
Page 2
violations of federal or state securities laws or environmental laws, or (B)
any obligation to the extent such obligation arises from or is a result of such
person's own negligence; (iv) purport to establish or satisfy certain factual
standards or conditions; (v) purport to sever unenforceable provisions from the
Notes, to the extent that the enforcement of remaining provisions would
frustrate the fundamental intent of the parties to such instrument; (vi)
restrict access to legal or equitable remedies; or (vii) purport to waive any
claim arising out of, or in any way related to, the Notes.
We express no opinion as to: (i) whether a court would grant specific
performance or any other equitable remedy with respect to enforcement of any
provision contained in the Notes; or (ii) the enforceability of any provision
contained in the Indenture relating to the appointment of a receiver, to the
extent that appointment of a receiver is governed by applicable statutory
requirements, and to the extent that such provision may not be in compliance
with such requirements.
Based upon the foregoing and subject to the qualifications stated herein, it is
our opinion that, when (i) the Registration Statement has been declared
effective under the Act, (ii) the Old Notes have been validly exchanged by the
Company, and (iii) the Notes have been executed and delivered by the Company
and authenticated by the Trustee, all in accordance with the terms of the
Indenture and the Registration Statement, the Notes will constitute valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, and entitled to the benefits of the Indenture.
To the extent that the obligations of the Company under the Indenture may be
dependent upon such matters, we assume for purposes of this opinion that the
Trustee is duly organized, validly existing and in good standing under the laws
of its jurisdiction of organization; that the Trustee is duly qualified to
engage in the activities contemplated by the Indenture; that the Indenture has
been duly authorized, executed and delivered by the Trustee and constitutes the
legally valid and binding obligation of the Trustee, enforceable against the
Trustee in accordance with its terms; that the Trustee is in compliance,
generally and with respect to acting as a trustee under the Indenture, with all
applicable laws and regulations; and that the Trustee has the requisite
organizational and legal power and authority to perform its obligations under
the Indenture.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained therein under
the heading "Legal Matters."
Very truly yours,
/s/ HAYNES AND BOONE, L.L.P.
-----------------------------------
Haynes and Boone, L.L.P.
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into by and between Michael
Petroleum Corporation (the "Company"), having a business address at 13101
Northwest Freeway, Suite 320, Houston, Texas 77040, and Glenn D. Hart
("Executive"), having a mailing address at 115 Shasta Drive, Houston, Texas
77024.
WHEREAS, the Company wishes to assure itself of the services of the
Executive for the period provided in this Agreement and the Executive wishes to
serve in the employ of the Company on the terms and conditions hereinafter
provided.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. EMPLOYMENT. Upon the terms and subject to the conditions contained
in this Agreement, the Executive agrees to provide full-time services for the
Company and its parent corporation, Michael Holdings, Inc. ("MHI") during the
term of this Agreement. The Executive agrees to devote his best efforts to the
business of the Company and MHI, and shall perform his duties in a diligent,
trustworthy, and business-like manner, all for the purpose of advancing the
business of the Company and MHI.
2. DUTIES. The duties of the Executive shall be those duties which can
reasonably be expected to be performed by a person with the title of Chief
Executive Officer of an oil and gas exploration and production company. The
Executive shall report directly to the Board of Directors of the Company and MHI
(collectively, the "Board"). The Executive's duties may, from time to time, be
changed or modified at the discretion of the Board.
3. EMPLOYMENT TERM. Subject to the terms and conditions hereof, the
Company agrees to employ the Executive for a term commencing as of April 1, 1998
(the "Effective Date") and continuing for two years thereafter, unless renewed
under this Section 3.
Commencing with the calendar quarter beginning on July 1, 1998, this
Agreement shall be automatically renewed for two-year terms on the first day of
each calendar quarter, unless either the Company or the Executive provides
written notice of election not to renew, at least 30 days before the applicable
renewal date.
4. SALARY AND BENEFITS.
(a) Base Salary. The Company shall pay the Executive an
initial annual base salary of $270,000 beginning on the Effective Date, pro
rated for
<PAGE> 2
periods of less than 12 months. Such salary shall be paid in bi-monthly
installments less applicable withholding and salary deductions. The
Executive's base salary shall be subject to review and may be increased
from time to time. The Company may not, however, reduce the Executive's
base salary in effect at any time during the term of this Agreement.
(b) Bonus. The Company shall pay the Executive an annual bonus
for each year during the term of this Agreement. Such bonus shall be
paid by January 31 of each subsequent year, following the year in which
a bonus is payable, (with the first bonus payable by January 31, 1999,
relating to the 1998 year) during the term of this Agreement, and on or
before the January 15 immediately following termination of this
Agreement under Section 3 above if the Agreement terminates as a result
of the failure to renew the Agreement by either the Company or the
Executive. Such annual bonus shall be an amount to be determined by the
Compensation Committee of the Board (the "Compensation Committee"), in
its sole discretion, provided, however, that such annual bonus shall be
not less than 50% and not greater than 100% of the Executive's base
salary for the applicable year.
(c) Stock Options. In accordance with a Stock Option Plan to
be established by MHI, the Executive shall receive options to purchase
shares of the capital stock of MHI upon the terms and conditions and in
such amounts as shall be determined in the sole discretion of the
Compensation Committee.
(d) Vacation. The Executive shall be entitled to paid vacation
during each full year of his employment hereunder in accordance with
the vacation policy adopted by the Company. Such vacations shall be
taken at such times as are consistent with the reasonable business
needs of the Company.
(e) Automobile. The Company will provide the Executive with an
automobile allowance for use by the Executive in connection with the
performance of his duties under this Agreement. The initial automobile
allowance shall be $1,200 per month.
(f) Reimbursement of Expenses. The Company shall reimburse the
Executive for all reasonable out-of-pocket expenses incurred by the
Executive in the course of his duties, in accordance with normal
policies.
(g) Employee Benefits. The Executive shall be entitled to
participate in the employee benefit programs generally available to
employees of the Company, and to all normal perquisites provided to
senior executive officers of the Company.
- 2 -
<PAGE> 3
(h) Benefits Not in Lieu of Compensation. No benefit or
perquisite provided to the Executive shall be deemed to be in lieu of
base salary, bonus, or other compensation.
5. TERMINATION OF EMPLOYMENT. The Board may terminate the employment of
the Executive at any time as it deems appropriate.
(a) Disability or Death. If, during the term of this
Agreement, the Executive's employment terminates due to total
disability (as such term is defined in Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended) or death, the Company shall pay to
the Executive all amounts payable under Section 4(a) above during the
remaining term of this Agreement (as provided in Section 3 above), as
well as any bonus already accrued but unpaid to the Executive under
Section 4(b) above, and the Company shall have no further obligation to
make any payment under this Agreement, except as may otherwise be
provided under the terms of any employee benefit programs in which the
Executive is participating. The amount of base salary payable under
this Section 5(a) shall be paid in bi-monthly installments, less
applicable withholdings and salary deductions, and any bonus payable
shall be paid in a lump sum, less applicable withholdings and salary
deductions. Any amount payable under this Section 5(a) shall be paid,
or commence to be paid, to the Executive or, in the event of the
Executive's death, his designee under Section 16(b), as soon as
practicable following the Executive's termination of employment. The
Company may terminate the Executive's employment for disability if the
Executive is incapacitated and absent from his duties hereunder on a
full-time basis for four consecutive months or for at least 180 days
during any 12 month period.
(b) Voluntary Resignation or Termination for Cause. If the
Executive shall voluntarily terminate his employment for any reason
other than Good Reason, as defined hereafter, or if the Company shall
discharge the Executive for Cause, as defined hereafter, this Agreement
shall terminate immediately and the Company shall have no further
obligation to make any payment under this Agreement which has not
already become payable, but has not yet been paid, except as may
otherwise be provided under the terms of any employee benefit program
in which the Executive is participating.
For the purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon (A) the
willful and continued failure by the Executive to perform his duties
with the Company (other than any such failure resulting from incapacity
due to physical or mental illness), after a demand for substantial
performance is delivered to the Executive by the Board which
specifically identifies the manner in which the Board believes that he
has not substantially performed his duties, or (B) the
- 3 -
<PAGE> 4
willful engaging by the Executive in gross misconduct materially and
demonstrably injurious to the Company. For purposes of this paragraph,
no act, or failure to act, on the Executive's part shall be considered
"willful" unless done, or omitted to be done, by him not in good faith
and without reasonable belief that his action or omission was not in
the best interest of the Company. Notwithstanding the foregoing, the
Executive shall not be deemed to have been terminated for Cause unless
and until there shall have been delivered to him a copy of a resolution
duly adopted by the affirmative vote of not less than two-thirds (2/3)
of the entire authorized membership of the Board at a meeting of the
Board called and held for the purpose (after reasonable notice and an
opportunity for the Executive, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board
he was guilty of conduct set forth above in clauses (A) or (B) of the
first sentence of this paragraph and specifying the particulars thereof
in detail.
(c) Termination Without Cause; Resignation for Good Reason. If
during the term of the Agreement, the Executive's employment is
terminated by the Company without Cause or the Executive voluntarily
terminates his employment for Good Reason:
(i) The Company shall continue to pay the Executive a
base salary as provided in Section 4(a) until the end of the
term of this Agreement as provided in Section 3 above;
(ii) The Company shall pay to the Executive in a lump
sum an amount equal to the value of any bonus already accrued
but unpaid to the Executive under Section 4(b);
(iii) The Executive shall have no further right to
receive any other compensation, or to participate in any other
plan, arrangement, or benefit, after such termination or
resignation of employment, except as may otherwise be provided
under the terms of any employee benefit programs in which the
Executive is participating.
For purposes of this Agreement, "Good Reason" shall mean:
(u) Without his express written consent, the
assignment to the Executive of any duties inconsistent with
his positions, duties, responsibilities and status with the
Company, or a change in his reporting responsibilities, titles
or offices, or any removal of the Executive from or any
failure to re-elect the Executive to any of such positions,
except in connection with the termination of his employment
for Cause, disability or retirement or as a result of his
death or by the Executive other than for Good Reason;
- 4 -
<PAGE> 5
(v) A reduction by the Company in the Executive's
base salary as in effect on the date hereof or as the same may
be increased from time to time;
(w) The Company's requiring the Executive to be based
anywhere other than Houston, Texas, except for required travel
on the Company's business to an extent substantially
consistent with his present business travel obligations, or,
in the event the Executive consents to any relocation, the
failure by the Company to pay (or reimburse the Executive) for
all reasonable moving expenses incurred by him relating to a
change of his principal residence in connection with such
relocation and to indemnify the Executive against any loss
(defined as the difference between the actual sale price of
such residence and the higher of (a) his aggregate investment
in such residence of (b) the fair market value of such
residence as determined by a real estate appraiser designated
by the Executive and reasonably satisfactory to the Company)
realized on the sale of the Executive's principal residence in
connection with any such change of residence;
(x) The failure by the Company to continue in effect
any benefit or compensation plan (including but not limited to
any stock option plan, pension plan, life insurance plan,
health and accident plan or disability plan) in which the
Executive is participating (or plans providing substantially
similar benefits), the taking of any action by the Company
which would adversely affect the Executive's participation in
or materially reduce his benefits under any of such plans or
deprive him of any material fringe benefit enjoyed by him, or
the failure by the Company to provide the Executive with the
number of paid vacation days to which he is then entitled on
the basis of years of service with the Company in accordance
with the Company's normal vacation policy in effect on the
date hereof;
(y) Any failure of the Company to obtain the
assumption of, or the agreement to perform, this Agreement by
any successor as contemplated in Section 16(a) hereof; or
(z) Any purported termination of the Executive's
employment which is not effected pursuant to a notice of
termination satisfying the requirements of Section 5(b) above
(and, if applicable, Section 3 above); and for purposes of
this Agreement, no such purported termination shall be
effective.
- 5 -
<PAGE> 6
(d) Mitigation of Amounts Payable Hereunder. The Executive
shall not be required to mitigate the amount of any payment provided
for in this Section 5 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 5 be
reduced by any compensation earned by the Executive as the result of
employment by another employer after the date of termination, or
otherwise.
6. CONFIDENTIAL INFORMATION. The Company shall provide to the Executive
initial and ongoing information of members of the Company Group, as defined
hereinafter, which information is confidential and constitutes valuable, special
and unique property of such members of the Company Group. In return, the
Executive agrees that he shall not at any time, either during or subsequent to
the term of this Agreement, disclose to others, use, copy or permit to be
copied, except in pursuance of his duties for and on behalf of the Company, it
successors, assigns or nominees, any Confidential Information, as defined
hereinafter, of any member of the Company Group (regardless of whether developed
by the Executive) without the prior written consent of the Company.
As used herein, "Company Group" means the Company, and any entity that
directly or indirectly controls, is controlled by, or is under common control
with, the Company, and for purposes of this definition "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such entity, whether through the
ownership of voting securities, by contract or otherwise.
The term "Confidential Information" with respect to any person means
any secret or confidential information or know-how and shall include, but shall
not be limited to, the plans, customers, costs, prices, uses, and applications
of products and services, results of investigations, studies or experiments
owned or used by such person, and all apparatus, products, processes,
compositions, samples, formulas, computer programs, computer hardware designs,
computer firmware designs, and servicing, marketing or manufacturing methods and
techniques at any time used, developed, investigated, made or sold by such
person, before or during the term of this Agreement, that are not readily
available to the public or that are maintained as confidential by such person.
The Executive shall maintain in confidence any Confidential Information of third
parties received as a result of his employment with the Company in accordance
with the Company's obligations to such third parties and the policies
established by the Company.
7. DELIVERY OF DOCUMENTS UPON TERMINATION. The Executive shall deliver
to the Company or its designee at the termination of his employment all
correspondence, memoranda, notes, records, drawings, sketches, plans, customer
lists, product compositions, and other documents and all copies thereof, made,
composed or received by the Executive, solely or jointly with others, that are
in the Executive's
- 6 -
<PAGE> 7
possession, custody, or control at termination and that are related in any
manner to the past, present, or anticipated business or any member of the
Company Group. In this regard, the Executive hereby grants and conveys to the
Company all right, title and interest in and to, including without limitation,
the right to possess, print, copy, and sell or otherwise dispose of, any
reports, records, papers, summaries, photographs, drawings or other documents,
and writings, and copies, abstracts or summaries thereof, that may be prepared
by the Executive or under his direction or that may come into his possession in
any way during the term of his employment with the Company that relate in any
manner to the past, present or anticipated business of any member of the Company
Group.
8. DISCLOSURE AND RECEIPT OF CONFIDENTIAL INFORMATION. The Executive
shall not, at any time during his employment, receive from persons not employed
by the Company, any Confidential Information, as described in Section 6 above,
not belonging to the Company, unless a valid agreement is authorized by the
Company and is signed by both the Company and by the disclosing party. The
Executive shall not use or disclose to other employees of the Company, during
his employment with the Company, Confidential Information belonging to his
former employers, former business associates, or any other third parties unless
written permission has been given by such third parties to the Company and
accepted by the Company to allow the Company to use and/or disclose such
information. The Executive shall defend and indemnify the Company Group for any
breach of the covenant contained in the preceding sentence.
9. INTELLECTUAL PROPERTY. The Executive shall hold in trust for the
benefit of the Company, and shall disclose promptly and fully to the Company in
writing, and hereby assigns, and binds his heirs, executors, and administrators
to assign, to the Company any and all inventions, discoveries, ideas, concepts,
improvements, copyrightable works, and other developments (the "Developments")
conceived, made, discovered or developed by him, solely or jointly with others,
during the term of his employment by the Company, whether during or outside of
usual working hours and whether on the Company's premises or not, that relate in
any manner to the past, present or anticipated business of any member of the
Company Group. All works of authorship created by the Executive, solely or
jointly with others, shall be considered works made for hire under the Copyright
Act of 1976, as amended, and shall be owned entirely by the Company. Any and all
such Developments shall be the sole and exclusive property of the Company,
whether patentable, copyrightable, or neither, and the Executive shall assist
and fully cooperate in every way, at the Company's expense, in securing,
maintaining, and enforcing, for the benefit of the Company or its designee,
patents, copyrights or other types of proprietary or intellectual property
protection for such Developments in any and all countries. Within one year
following the end of the term of this Agreement and without limiting the
generality of the foregoing, any Development of the Executive relating to any
subject matter on which the Executive worked or was informed during his
employment by the Company shall
- 7 -
<PAGE> 8
be conclusively presumed to have been conceived and made prior to the
termination of his employment (unless the Executive clearly proves that such
Development was conceived and made following the termination of his employment),
and shall accordingly belong and be assigned to the Company and shall be subject
to this Agreement.
10. FURTHER ACTS. At the request of the Company (but without additional
compensation from the Company during his employment by the Company) the
Executive shall execute any and all papers and perform all lawful acts that the
Company may deem necessary or appropriate to further evidence or carry out the
transactions contemplated in this Agreement including, without limitation, such
acts as may be necessary for the preparation, filing, prosecution, and
maintenance of applications for United States letters patent and foreign letters
patent, or for United States and foreign copyright, on the Developments.
11. NO TAMPERING. Throughout the term of the Agreement and through the
second anniversary of the expiration thereof, the Executive shall not request,
induce or attempt to influence any employee of any member of the Company Group,
as defined in Section 6, to terminate his or her employment with such member of
the Company Group.
12. PUBLICITY AND ADVERTISING. The Executive agrees that the Company
may use his name, picture, or likeness for any advertising, publicity, or other
business purpose at any time, during the term of the Agreement by the Company
and may continue to use materials generated during the term of the Agreement for
a period of six months thereafter. Such use of the Executive's name, picture, or
likeness shall not be deemed to result in any invasion of the Executive's
privacy or in a violation of any property right the Executive may have; and the
Executive shall receive no additional consideration if his name, picture or
likeness is so used. The Executive further agrees that any negatives, prints or
other material for printing or reproduction purposes prepared in connection with
the use of his name, picture or likeness by the Company shall be and are the
sole property of the Company.
13. REMEDIES. The Executive acknowledges that a remedy at law for any
breach or attempted breach of the Executive's obligations under Sections 6
through 12 may be inadequate, agrees that the Company may be entitled to
specific performance and injunctive and other equitable remedies in case of any
such breach or attempted breach, and further agrees to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
injunctive or other equitable relief. The Company shall have the right to offset
against amounts to be paid to the Executive pursuant to the terms hereof any
amounts from time to time owing by the Executive to the Company. The termination
of the Agreement pursuant to Section 3, 5(a) or 5(b) shall not be deemed to be a
waiver by the Company of any breach by the Executive of this Agreement or any
other obligation
- 8 -
<PAGE> 9
owed the Company, and notwithstanding such a termination the Executive shall be
liable for all damages attributable to such a breach.
14. DISPUTE RESOLUTION. Subject to the Company's right to seek
injunctive relief in court as provided in Section 13 of this Agreement, any
dispute, controversy or claim arising out of or in relation to or connection to
this Agreement, including without limitation any dispute as to the construction,
validity, interpretation, enforceability or breach of this Agreement, shall be
exclusively and finally settled by arbitration, and any party may submit such
dispute, controversy or claim, including a claim for indemnification under this
Section 14, to arbitration.
(a) Arbitrators. The arbitration shall be heard and determined
by one arbitrator, who shall be impartial and who shall be selected by
mutual agreement of the parties; provided, however, that if the dispute
involves more than $500,000, then the arbitration shall be heard and
determined by three (3) arbitrators. If three (3) arbitrators are
necessary as provided above, then (i) each side shall appoint an
arbitrator of its choice within thirty (30) days of the submission of a
notice of arbitration and (ii) the party-appointed arbitrators shall in
turn appoint a presiding arbitrator of the tribunal within thirty (30)
days following the appointment of the last party-appointed arbitrator.
If (x) the parties cannot agree on the sole arbitrator, (y) one party
refuses to appoint its party-appointed arbitrator within said thirty
(30) day period or (z) the party-appointed arbitrators cannot reach
agreement on a presiding arbitrator of the tribunal, then the
appointing authority for the implementation of such procedure shall be
the Senior United States District Judge for the Northern District of
Texas, who shall appoint an independent arbitrator who does not have
any financial interest in the dispute, controversy or claim. If the
Senior United States District Judge for the Northern District of Texas
refuses or fails to act as the appointing authority within ninety (90)
days after being requested to do so, then the appointing authority
shall be the Chief Executive Officer of the American Arbitration
Association, who shall appoint an independent arbitrator who does not
have any financial interest in the dispute, controversy or claim. All
decisions and awards by the arbitration tribunal shall be made by
majority vote.
(b) Proceedings. Unless otherwise expressly agreed in writing
by the parties to the arbitration proceedings:
(i) The arbitration proceedings shall be held in
Dallas, Texas, at a site chosen by mutual agreement of the
parties, or if the parties cannot reach agreement on a
location within thirty (30) days of the appointment of the
last arbitrator, then at a site chosen by the arbitrators;
- 9 -
<PAGE> 10
(ii) The arbitrators shall be and remain at all times
wholly independent and impartial;
(iii) The arbitration proceedings shall be conducted
in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, as amended from time to
time;
(iv) Any procedural issues not determined under the
arbitral rules selected pursuant to item (iii) above shall be
determined by the law of the place of arbitration, other than
those laws which would refer the matter to another
jurisdiction;
(v) The costs of the arbitration proceedings
(including attorneys' fees and costs) shall be borne in the
manner determined by the arbitrators;
(vi) The decision of the arbitrators shall be reduced
to writing; final and binding without the right of appeal; the
sole and exclusive remedy regarding any claims, counterclaims,
issues or accounting presented to the arbitrators; made and
promptly paid in United States dollars free of any deduction
or offset; and any costs or fees incident to enforcing the
award shall, to the maximum extent permitted by law, be
charged against the party resisting such enforcement;
(vii) The award shall include interest from the date
of any breach or violation of this Agreement, as determined by
the arbitral award, and from the date of the award until paid
in full, at the prime rate of Wells Fargo Bank, N.A. plus 2%
per annum; and
(viii) Judgment upon the award may be entered in any
court having jurisdiction over the person or the assets of the
party owing the judgment or application may be made to such
court for a judicial acceptance of the award and an order of
enforcement, as the case may be.
(c) Acknowledgment Of Parties. Each party acknowledges that he
or she or it has voluntarily and knowingly entered into an agreement to
arbitration under this Section by executing this Agreement.
15. GUARANTEE.
Michael Holdings, Inc., a Texas corporation and the direct
parent of the Company, by its execution hereof, guarantees the
Company's obligations under
- 10 -
<PAGE> 11
this Agreement and agrees perform the Company's obligations hereunder
in the event the Company fails or is unable to do so.
16. MISCELLANEOUS PROVISIONS.
(a) Successors of the Company. The Company will require any
successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company, by agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken
place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the
Company in the same amount and on the same terms as the Executive would
be entitled hereunder if the Executive terminated his employment for
Good Reason, except that for purposes of implementing the foregoing,
the date on which any such succession becomes effective shall be deemed
the date of termination. As used in this Agreement, "Company" shall
mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 16 or which otherwise becomes
bound by all the terms and provisions of this Agreement by operation of
law.
(b) Executive's Heirs, etc. The Executive may not assign his
rights or delegate his duties or obligations hereunder without the
written consent of the Company. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while
any amounts would still be payable to him hereunder as if he had
continued to live, all such amounts, unless other provided herein,
shall be paid in accordance with the terms of this Agreement to his
designee or, if there be no such designee, to his estate.
(c) Notice. For the purposes of this Agreement, notices and
all other communications provide for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the respective addresses set
forth on the first page of this Agreement, provided that all notices to
the Company shall be directed to the attention of the Chief Executive
Officer of the Company with a copy to the Secretary of the Company, or
to such other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
- 11 -
<PAGE> 12
(d) Amendment; Waiver. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and such
officer as may be specifically designated by the Board. No waiver by
either party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not set forth expressly in this
Agreement.
(e) Invalid Provisions. Should any portion of this Agreement
be adjudged or held to be invalid, unenforceable or void, such holding
shall not have the effect of invalidating or voiding the remainder of
this Agreement and the parties hereby agree that the portion so held
invalid, unenforceable or void shall, if possible, be deemed amended or
reduced in scope, or otherwise be stricken from this Agreement to the
extent required for the purposes of validity and enforcement thereof.
(f) Survival of the Executive's Obligations. The Executive's
obligations under this Agreement shall survive regardless of whether
the Executive's employment by the Company is terminated, voluntarily or
involuntarily, by the Company or the Executive, with or without Cause.
(g) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
(h) Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Texas.
(i) Captions and Gender. The use of captions and Section
headings herein is for purposes of convenience only and shall not
effect the interpretation or substance of any provisions contained
herein. Similarly, the use of the masculine gender with respect to
pronouns in this Agreement is for purposes of convenience and includes
either sex who may be a signatory.
- 12 -
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the 1st day of April, 1998.
COMPANY:
MICHAEL PETROLEUM CORPORATION
By: /s/ MICHAEL G. FARMAR
-------------------------------
Name: Michael G. Farmar
-----------------------------
Title: President
----------------------------
GUARANTOR:
MICHAEL HOLDINGS, INC.
By: /s/ MICHAEL G. FARMAR
-------------------------------
Name: Michael G. Farmar
-----------------------------
Title: President
----------------------------
EXECUTIVE:
/s/ GLENN D. HART
---------------------------------
GLENN D. HART
- 13 -
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into by and between Michael
Petroleum Corporation (the "Company"), having a business address at 13101
Northwest Freeway, Suite 320, Houston, Texas 77040, and Michael G. Farmar
("Executive"), having a mailing address at 6605 Mimosa Lane, Dallas, Texas
75230.
WHEREAS, the Company wishes to assure itself of the services of the
Executive for the period provided in this Agreement and the Executive wishes to
serve in the employ of the Company on the terms and conditions hereinafter
provided.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. EMPLOYMENT. Upon the terms and subject to the conditions contained
in this Agreement, the Executive agrees to provide full-time services for the
Company and its parent corporation, Michael Holdings, Inc. ("MHI") during the
term of this Agreement. The Executive agrees to devote his best efforts to the
business of the Company and MHI, and shall perform his duties in a diligent,
trustworthy, and business-like manner, all for the purpose of advancing the
business of the Company and MHI.
2. DUTIES. The duties of the Executive shall be those duties which can
reasonably be expected to be performed by a person with the title of President
of an oil and gas exploration and production company. The Executive shall report
directly to the Board of Directors of the Company and MHI (collectively, the
"Board"). The Executive's duties may, from time to time, be changed or modified
at the discretion of the Board.
3. EMPLOYMENT TERM. Subject to the terms and conditions hereof, the
Company agrees to employ the Executive for a term commencing as of April 1, 1998
(the "Effective Date") and continuing for two years thereafter, unless renewed
under this Section 3.
Commencing with the calendar quarter beginning on July 1, 1998, this
Agreement shall be automatically renewed for two-year terms on the first day of
each calendar quarter, unless either the Company or the Executive provides
written notice of election not to renew, at least 30 days before the applicable
renewal date.
4. SALARY AND BENEFITS.
(a) Base Salary. The Company shall pay the Executive an
initial annual base salary of $180,000 beginning on the Effective
Date, pro rated for
<PAGE> 2
periods of less than 12 months. Such salary shall be paid in bi-monthly
installments less applicable withholding and salary deductions. The
Executive's base salary shall be subject to review and may be increased
from time to time. The Company may not, however, reduce the Executive's
base salary in effect at any time during the term of this Agreement.
(b) Bonus. The Company shall pay the Executive an annual bonus
for each year during the term of this Agreement. Such bonus shall be
paid by January 31 of each subsequent year, following the year in which
a bonus is payable, (with the first bonus payable by January 31, 1999,
relating to the 1998 year) during the term of this Agreement, and on or
before the January 15 immediately following termination of this
Agreement under Section 3 above if the Agreement terminates as a result
of the failure to renew the Agreement by either the Company or the
Executive. Such annual bonus shall be an amount to be determined by the
Compensation Committee of the Board (the "Compensation Committee"), in
its sole discretion, provided, however, that such annual bonus shall be
not less than 50% and not greater than 100% of the Executive's base
salary for the applicable year.
(c) Stock Options. In accordance with a Stock Option Plan to
be established by MHI, the Executive shall receive options to purchase
shares of the capital stock of MHI upon the terms and conditions and in
such amounts as shall be determined in the sole discretion of the
Compensation Committee.
(d) Vacation. The Executive shall be entitled to paid vacation
during each full year of his employment hereunder in accordance with
the vacation policy adopted by the Company. Such vacations shall be
taken at such times as are consistent with the reasonable business
needs of the Company.
(e) Automobile. The Company will provide the Executive with an
automobile allowance for use by the Executive in connection with the
performance of his duties under this Agreement. The initial automobile
allowance shall be $1,000 per month.
(f) Reimbursement of Expenses. The Company shall reimburse the
Executive for all reasonable out-of-pocket expenses incurred by the
Executive in the course of his duties, in accordance with normal
policies.
(g) Employee Benefits. The Executive shall be entitled to
participate in the employee benefit programs generally available to
employees of the Company, and to all normal perquisites provided to
senior executive officers of the Company.
- 2 -
<PAGE> 3
(h) Benefits Not in Lieu of Compensation. No benefit or
perquisite provided to the Executive shall be deemed to be in lieu of
base salary, bonus, or other compensation.
5. TERMINATION OF EMPLOYMENT. The Board may terminate the employment of
the Executive at any time as it deems appropriate.
(a) Disability or Death. If, during the term of this
Agreement, the Executive's employment terminates due to total
disability (as such term is defined in Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended) or death, the Company shall pay to
the Executive all amounts payable under Section 4(a) above during the
remaining term of this Agreement (as provided in Section 3 above), as
well as any bonus already accrued but unpaid to the Executive under
Section 4(b) above, and the Company shall have no further obligation to
make any payment under this Agreement, except as may otherwise be
provided under the terms of any employee benefit programs in which the
Executive is participating. The amount of base salary payable under
this Section 5(a) shall be paid in bi-monthly installments, less
applicable withholdings and salary deductions, and any bonus payable
shall be paid in a lump sum, less applicable withholdings and salary
deductions. Any amount payable under this Section 5(a) shall be paid,
or commence to be paid, to the Executive or, in the event of the
Executive's death, his designee under Section 16(b), as soon as
practicable following the Executive's termination of employment. The
Company may terminate the Executive's employment for disability if the
Executive is incapacitated and absent from his duties hereunder on a
full-time basis for four consecutive months or for at least 180 days
during any 12 month period.
(b) Voluntary Resignation or Termination for Cause. If the
Executive shall voluntarily terminate his employment for any reason
other than Good Reason, as defined hereafter, or if the Company shall
discharge the Executive for Cause, as defined hereafter, this Agreement
shall terminate immediately and the Company shall have no further
obligation to make any payment under this Agreement which has not
already become payable, but has not yet been paid, except as may
otherwise be provided under the terms of any employee benefit program
in which the Executive is participating.
For the purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon (A) the
willful and continued failure by the Executive to perform his duties
with the Company (other than any such failure resulting from incapacity
due to physical or mental illness), after a demand for substantial
performance is delivered to the Executive by the Board which
specifically identifies the manner in which the Board believes that he
has not substantially performed his duties, or (B) the
- 3 -
<PAGE> 4
willful engaging by the Executive in gross misconduct materially and
demonstrably injurious to the Company. For purposes of this paragraph,
no act, or failure to act, on the Executive's part shall be considered
"willful" unless done, or omitted to be done, by him not in good faith
and without reasonable belief that his action or omission was not in
the best interest of the Company. Notwithstanding the foregoing, the
Executive shall not be deemed to have been terminated for Cause unless
and until there shall have been delivered to him a copy of a resolution
duly adopted by the affirmative vote of not less than two-thirds (2/3)
of the entire authorized membership of the Board at a meeting of the
Board called and held for the purpose (after reasonable notice and an
opportunity for the Executive, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board
he was guilty of conduct set forth above in clauses (A) or (B) of the
first sentence of this paragraph and specifying the particulars thereof
in detail.
(c) Termination Without Cause; Resignation for Good Reason. If
during the term of the Agreement, the Executive's employment is
terminated by the Company without Cause or the Executive voluntarily
terminates his employment for Good Reason:
(i) The Company shall continue to pay the Executive a
base salary as provided in Section 4(a) until the end of the
term of this Agreement as provided in Section 3 above;
(ii) The Company shall pay to the Executive in a lump
sum an amount equal to the value of any bonus already accrued
but unpaid to the Executive under Section 4(b);
(iii) The Executive shall have no further right to
receive any other compensation, or to participate in any other
plan, arrangement, or benefit, after such termination or
resignation of employment, except as may otherwise be provided
under the terms of any employee benefit programs in which the
Executive is participating.
For purposes of this Agreement, "Good Reason" shall mean:
(u) Without his express written consent, the
assignment to the Executive of any duties inconsistent with
his positions, duties, responsibilities and status with the
Company, or a change in his reporting responsibilities, titles
or offices, or any removal of the Executive from or any
failure to re-elect the Executive to any of such positions,
except in connection with the termination of his employment
for Cause, disability or retirement or as a result of his
death or by the Executive other than for Good Reason;
- 4 -
<PAGE> 5
(v) A reduction by the Company in the Executive's
base salary as in effect on the date hereof or as the same may
be increased from time to time;
(w) The Company's requiring the Executive to be based
anywhere other than Dallas, Texas, except for required travel
on the Company's business to an extent substantially
consistent with his present business travel obligations, or,
in the event the Executive consents to any relocation, the
failure by the Company to pay (or reimburse the Executive) for
all reasonable moving expenses incurred by him relating to a
change of his principal residence in connection with such
relocation and to indemnify the Executive against any loss
(defined as the difference between the actual sale price of
such residence and the higher of (a) his aggregate investment
in such residence of (b) the fair market value of such
residence as determined by a real estate appraiser designated
by the Executive and reasonably satisfactory to the Company)
realized on the sale of the Executive's principal residence in
connection with any such change of residence;
(x) The failure by the Company to continue in effect
any benefit or compensation plan (including but not limited to
any stock option plan, pension plan, life insurance plan,
health and accident plan or disability plan) in which the
Executive is participating (or plans providing substantially
similar benefits), the taking of any action by the Company
which would adversely affect the Executive's participation in
or materially reduce his benefits under any of such plans or
deprive him of any material fringe benefit enjoyed by him, or
the failure by the Company to provide the Executive with the
number of paid vacation days to which he is then entitled on
the basis of years of service with the Company in accordance
with the Company's normal vacation policy in effect on the
date hereof;
(y) Any failure of the Company to obtain the
assumption of, or the agreement to perform, this Agreement by
any successor as contemplated in Section 16(a) hereof; or
(z) Any purported termination of the Executive's
employment which is not effected pursuant to a notice of
termination satisfying the requirements of Section 5(b) above
(and, if applicable, Section 3 above); and for purposes of
this Agreement, no such purported termination shall be
effective.
- 5 -
<PAGE> 6
(d) Mitigation of Amounts Payable Hereunder. The Executive
shall not be required to mitigate the amount of any payment provided
for in this Section 5 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 5 be
reduced by any compensation earned by the Executive as the result of
employment by another employer after the date of termination, or
otherwise.
6. CONFIDENTIAL INFORMATION. The Company shall provide to the Executive
initial and ongoing information of members of the Company Group, as defined
hereinafter, which information is confidential and constitutes valuable, special
and unique property of such members of the Company Group. In return, the
Executive agrees that he shall not at any time, either during or subsequent to
the term of this Agreement, disclose to others, use, copy or permit to be
copied, except in pursuance of his duties for and on behalf of the Company, it
successors, assigns or nominees, any Confidential Information, as defined
hereinafter, of any member of the Company Group (regardless of whether developed
by the Executive) without the prior written consent of the Company.
As used herein, "Company Group" means the Company, and any entity that
directly or indirectly controls, is controlled by, or is under common control
with, the Company, and for purposes of this definition "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such entity, whether through the
ownership of voting securities, by contract or otherwise.
The term "Confidential Information" with respect to any person means
any secret or confidential information or know-how and shall include, but shall
not be limited to, the plans, customers, costs, prices, uses, and applications
of products and services, results of investigations, studies or experiments
owned or used by such person, and all apparatus, products, processes,
compositions, samples, formulas, computer programs, computer hardware designs,
computer firmware designs, and servicing, marketing or manufacturing methods and
techniques at any time used, developed, investigated, made or sold by such
person, before or during the term of this Agreement, that are not readily
available to the public or that are maintained as confidential by such person.
The Executive shall maintain in confidence any Confidential Information of third
parties received as a result of his employment with the Company in accordance
with the Company's obligations to such third parties and the policies
established by the Company.
7. DELIVERY OF DOCUMENTS UPON TERMINATION. The Executive shall deliver
to the Company or its designee at the termination of his employment all
correspondence, memoranda, notes, records, drawings, sketches, plans, customer
lists, product compositions, and other documents and all copies thereof, made,
composed or received by the Executive, solely or jointly with others, that are
in the Executive's
- 6 -
<PAGE> 7
possession, custody, or control at termination and that are related in any
manner to the past, present, or anticipated business or any member of the
Company Group. In this regard, the Executive hereby grants and conveys to the
Company all right, title and interest in and to, including without limitation,
the right to possess, print, copy, and sell or otherwise dispose of, any
reports, records, papers, summaries, photographs, drawings or other documents,
and writings, and copies, abstracts or summaries thereof, that may be prepared
by the Executive or under his direction or that may come into his possession in
any way during the term of his employment with the Company that relate in any
manner to the past, present or anticipated business of any member of the Company
Group.
8. DISCLOSURE AND RECEIPT OF CONFIDENTIAL INFORMATION. The Executive
shall not, at any time during his employment, receive from persons not employed
by the Company, any Confidential Information, as described in Section 6 above,
not belonging to the Company, unless a valid agreement is authorized by the
Company and is signed by both the Company and by the disclosing party. The
Executive shall not use or disclose to other employees of the Company, during
his employment with the Company, Confidential Information belonging to his
former employers, former business associates, or any other third parties unless
written permission has been given by such third parties to the Company and
accepted by the Company to allow the Company to use and/or disclose such
information. The Executive shall defend and indemnify the Company Group for any
breach of the covenant contained in the preceding sentence.
9. INTELLECTUAL PROPERTY. The Executive shall hold in trust for the
benefit of the Company, and shall disclose promptly and fully to the Company in
writing, and hereby assigns, and binds his heirs, executors, and administrators
to assign, to the Company any and all inventions, discoveries, ideas, concepts,
improvements, copyrightable works, and other developments (the "Developments")
conceived, made, discovered or developed by him, solely or jointly with others,
during the term of his employment by the Company, whether during or outside of
usual working hours and whether on the Company's premises or not, that relate in
any manner to the past, present or anticipated business of any member of the
Company Group. All works of authorship created by the Executive, solely or
jointly with others, shall be considered works made for hire under the Copyright
Act of 1976, as amended, and shall be owned entirely by the Company. Any and all
such Developments shall be the sole and exclusive property of the Company,
whether patentable, copyrightable, or neither, and the Executive shall assist
and fully cooperate in every way, at the Company's expense, in securing,
maintaining, and enforcing, for the benefit of the Company or its designee,
patents, copyrights or other types of proprietary or intellectual property
protection for such Developments in any and all countries. Within one year
following the end of the term of this Agreement and without limiting the
generality of the foregoing, any Development of the Executive relating to any
subject matter on which the Executive worked or was informed during his
employment by the Company shall
- 7 -
<PAGE> 8
be conclusively presumed to have been conceived and made prior to the
termination of his employment (unless the Executive clearly proves that such
Development was conceived and made following the termination of his employment),
and shall accordingly belong and be assigned to the Company and shall be subject
to this Agreement.
10. FURTHER ACTS. At the request of the Company (but without additional
compensation from the Company during his employment by the Company) the
Executive shall execute any and all papers and perform all lawful acts that the
Company may deem necessary or appropriate to further evidence or carry out the
transactions contemplated in this Agreement including, without limitation, such
acts as may be necessary for the preparation, filing, prosecution, and
maintenance of applications for United States letters patent and foreign letters
patent, or for United States and foreign copyright, on the Developments.
11. NO TAMPERING. Throughout the term of the Agreement and through the
second anniversary of the expiration thereof, the Executive shall not request,
induce or attempt to influence any employee of any member of the Company Group,
as defined in Section 6, to terminate his or her employment with such member of
the Company Group.
12. PUBLICITY AND ADVERTISING. The Executive agrees that the Company
may use his name, picture, or likeness for any advertising, publicity, or other
business purpose at any time, during the term of the Agreement by the Company
and may continue to use materials generated during the term of the Agreement for
a period of six months thereafter. Such use of the Executive's name, picture, or
likeness shall not be deemed to result in any invasion of the Executive's
privacy or in a violation of any property right the Executive may have; and the
Executive shall receive no additional consideration if his name, picture or
likeness is so used. The Executive further agrees that any negatives, prints or
other material for printing or reproduction purposes prepared in connection with
the use of his name, picture or likeness by the Company shall be and are the
sole property of the Company.
13. REMEDIES. The Executive acknowledges that a remedy at law for any
breach or attempted breach of the Executive's obligations under Sections 6
through 12 may be inadequate, agrees that the Company may be entitled to
specific performance and injunctive and other equitable remedies in case of any
such breach or attempted breach, and further agrees to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
injunctive or other equitable relief. The Company shall have the right to offset
against amounts to be paid to the Executive pursuant to the terms hereof any
amounts from time to time owing by the Executive to the Company. The termination
of the Agreement pursuant to Section 3, 5(a) or 5(b) shall not be deemed to be a
waiver by the Company of any breach by the Executive of this Agreement or any
other obligation
- 8 -
<PAGE> 9
owed the Company, and notwithstanding such a termination the Executive shall be
liable for all damages attributable to such a breach.
14. DISPUTE RESOLUTION. Subject to the Company's right to seek
injunctive relief in court as provided in Section 13 of this Agreement, any
dispute, controversy or claim arising out of or in relation to or connection to
this Agreement, including without limitation any dispute as to the construction,
validity, interpretation, enforceability or breach of this Agreement, shall be
exclusively and finally settled by arbitration, and any party may submit such
dispute, controversy or claim, including a claim for indemnification under this
Section 14, to arbitration.
(a) Arbitrators. The arbitration shall be heard and determined
by one arbitrator, who shall be impartial and who shall be selected by
mutual agreement of the parties; provided, however, that if the dispute
involves more than $500,000, then the arbitration shall be heard and
determined by three (3) arbitrators. If three (3) arbitrators are
necessary as provided above, then (i) each side shall appoint an
arbitrator of its choice within thirty (30) days of the submission of a
notice of arbitration and (ii) the party-appointed arbitrators shall in
turn appoint a presiding arbitrator of the tribunal within thirty (30)
days following the appointment of the last party-appointed arbitrator.
If (x) the parties cannot agree on the sole arbitrator, (y) one party
refuses to appoint its party-appointed arbitrator within said thirty
(30) day period or (z) the party-appointed arbitrators cannot reach
agreement on a presiding arbitrator of the tribunal, then the
appointing authority for the implementation of such procedure shall be
the Senior United States District Judge for the Northern District of
Texas, who shall appoint an independent arbitrator who does not have
any financial interest in the dispute, controversy or claim. If the
Senior United States District Judge for the Northern District of Texas
refuses or fails to act as the appointing authority within ninety (90)
days after being requested to do so, then the appointing authority
shall be the Chief Executive Officer of the American Arbitration
Association, who shall appoint an independent arbitrator who does not
have any financial interest in the dispute, controversy or claim. All
decisions and awards by the arbitration tribunal shall be made by
majority vote.
(b) Proceedings. Unless otherwise expressly agreed in writing
by the parties to the arbitration proceedings:
(i) The arbitration proceedings shall be held in
Dallas, Texas, at a site chosen by mutual agreement of the
parties, or if the parties cannot reach agreement on a
location within thirty (30) days of the appointment of the
last arbitrator, then at a site chosen by the arbitrators;
- 9 -
<PAGE> 10
(ii) The arbitrators shall be and remain at all times
wholly independent and impartial;
(iii) The arbitration proceedings shall be conducted
in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, as amended from time to
time;
(iv) Any procedural issues not determined under the
arbitral rules selected pursuant to item (iii) above shall be
determined by the law of the place of arbitration, other than
those laws which would refer the matter to another
jurisdiction;
(v) The costs of the arbitration proceedings
(including attorneys' fees and costs) shall be borne in the
manner determined by the arbitrators;
(vi) The decision of the arbitrators shall be reduced
to writing; final and binding without the right of appeal; the
sole and exclusive remedy regarding any claims, counterclaims,
issues or accounting presented to the arbitrators; made and
promptly paid in United States dollars free of any deduction
or offset; and any costs or fees incident to enforcing the
award shall, to the maximum extent permitted by law, be
charged against the party resisting such enforcement;
(vii) The award shall include interest from the date
of any breach or violation of this Agreement, as determined by
the arbitral award, and from the date of the award until paid
in full, at the prime rate of Wells Fargo Bank, N.A. plus 2%
per annum; and
(viii) Judgment upon the award may be entered in any
court having jurisdiction over the person or the assets of the
party owing the judgment or application may be made to such
court for a judicial acceptance of the award and an order of
enforcement, as the case may be.
(c) Acknowledgment Of Parties. Each party acknowledges that he
or she or it has voluntarily and knowingly entered into an agreement to
arbitration under this Section by executing this Agreement.
15. GUARANTEE.
Michael Holdings, Inc., a Texas corporation and the direct
parent of the Company, by its execution hereof, guarantees the
Company's obligations under
- 10 -
<PAGE> 11
this Agreement and agrees perform the Company's obligations hereunder
in the event the Company fails or is unable to do so.
16. MISCELLANEOUS PROVISIONS.
(a) Successors of the Company. The Company will require any
successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company, by agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken
place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the
Company in the same amount and on the same terms as the Executive would
be entitled hereunder if the Executive terminated his employment for
Good Reason, except that for purposes of implementing the foregoing,
the date on which any such succession becomes effective shall be deemed
the date of termination. As used in this Agreement, "Company" shall
mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 16 or which otherwise becomes
bound by all the terms and provisions of this Agreement by operation of
law.
(b) Executive's Heirs, etc. The Executive may not assign his
rights or delegate his duties or obligations hereunder without the
written consent of the Company. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while
any amounts would still be payable to him hereunder as if he had
continued to live, all such amounts, unless other provided herein,
shall be paid in accordance with the terms of this Agreement to his
designee or, if there be no such designee, to his estate.
(c) Notice. For the purposes of this Agreement, notices and
all other communications provide for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the respective addresses set
forth on the first page of this Agreement, provided that all notices to
the Company shall be directed to the attention of the Chief Executive
Officer of the Company with a copy to the Secretary of the Company, or
to such other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
- 11 -
<PAGE> 12
(d) Amendment; Waiver. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and such
officer as may be specifically designated by the Board. No waiver by
either party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not set forth expressly in this
Agreement.
(e) Invalid Provisions. Should any portion of this Agreement
be adjudged or held to be invalid, unenforceable or void, such holding
shall not have the effect of invalidating or voiding the remainder of
this Agreement and the parties hereby agree that the portion so held
invalid, unenforceable or void shall, if possible, be deemed amended or
reduced in scope, or otherwise be stricken from this Agreement to the
extent required for the purposes of validity and enforcement thereof.
(f) Survival of the Executive's Obligations. The Executive's
obligations under this Agreement shall survive regardless of whether
the Executive's employment by the Company is terminated, voluntarily or
involuntarily, by the Company or the Executive, with or without Cause.
(g) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
(h) Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Texas.
(i) Captions and Gender. The use of captions and Section
headings herein is for purposes of convenience only and shall not
effect the interpretation or substance of any provisions contained
herein. Similarly, the use of the masculine gender with respect to
pronouns in this Agreement is for purposes of convenience and includes
either sex who may be a signatory.
- 12 -
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the 1st day of April, 1998.
COMPANY:
MICHAEL PETROLEUM CORPORATION
By: /s/ GLENN D. HART
-------------------------------
Name: Glenn D. Hart
-----------------------------
Title: Chief Executive Officer
----------------------------
GUARANTOR:
MICHAEL HOLDINGS, INC.
By: /s/ GLENN D. HART
-------------------------------
Name: Glenn D. Hart
-----------------------------
Title: Chief Executive Officer
----------------------------
EXECUTIVE:
/s/ MICHAEL G. FARMAR
---------------------------------
MICHAEL G. FARMAR
- 13 -
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into by and between Michael
Petroleum Corporation (the "Company"), having a business address at 13101
Northwest Freeway, Suite 320, Houston, Texas 77040, and Jerry F. Holditch (the
"Executive"), having a mailing address at 18911 Heron Lane, Tomball, Texas
77375.
WHEREAS, the Company wishes to assure itself of the services of the
Executive for the period provided in this Agreement and the Executive wishes to
serve in the employ of the Company on the terms and conditions hereinafter
provided.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. EMPLOYMENT. Upon the terms and subject to the conditions contained
in this Agreement, the Executive agrees to provide full-time services for the
Company during the term of this Agreement. The Executive agrees to devote his
best efforts to the business of the Company, and shall perform his duties in a
diligent, trustworthy, and business-like manner, all for the purpose of
advancing the business of the Company.
2. DUTIES. The duties of the Executive shall be those duties which can
reasonably be expected to be performed by a person with the title of Vice
President of Exploration of an oil and gas exploration and production company.
The Executive shall report directly to the Chief Executive Officer of the
Company. The Executive's duties may, from time to time, be changed or modified
at the discretion of the Chief Executive Officer.
3. EMPLOYMENT TERM. Subject to the terms and conditions hereof, the
Company agrees to employ the Executive for a term commencing as of April 1, 1998
(the "Effective Date") and continuing for two years thereafter, unless renewed
under this Section 3.
Commencing with the calendar quarter beginning on July 1, 1998, this
Agreement shall be automatically renewed for two-year terms on the first day of
each calendar quarter, unless either the Company or the Executive provides
written notice of election not to renew, at least 30 days before the applicable
renewal date.
4. SALARY AND BENEFITS.
(a) Base Salary. The Company shall pay the Executive an
initial annual base salary of $100,000 beginning on the Effective Date,
pro rated for periods of less than 12 months. Such salary shall be paid
in bi-monthly
<PAGE> 2
installments less applicable withholding and salary deductions. The
Executive's base salary shall be subject to review and may be increased
from time to time. The Company may not, however, reduce the Executive's
base salary in effect at any time during the term of this Agreement.
(b) Bonus. The Company shall pay the Executive an annual bonus
for each year during the term of this Agreement. Such bonus shall be
paid by January 31 of each subsequent year, following the year in which
a bonus is payable, (with the first bonus payable by January 31, 1999,
relating to the 1998 year) during the term of this Agreement, and on or
before the January 15 immediately following termination of this
Agreement under Section 3 above if the Agreement terminates as a result
of the failure to renew the Agreement by either the Company or the
Executive. Such annual bonus shall be an amount to be determined by the
Compensation Committee of the Board of Directors of the Company (the
"Compensation Committee"), in its sole discretion, provided, however,
that such annual bonus shall be not less than 50% and not greater than
100% of the Executive's base salary for the applicable year.
(c) Stock Options. In accordance with a stock option plan to
be established by Michael Holdings, Inc. ("MHI"), the Executive shall
receive options to purchase shares of the capital stock of MHI upon the
terms and conditions and in such amounts as shall be determined in the
sole discretion of the Compensation Committee.
(d) Vacation. The Executive shall be entitled to paid vacation
during each full year of his employment hereunder in accordance with
the vacation policy adopted by the Company. Such vacations shall be
taken at such times as are consistent with the reasonable business
needs of the Company.
(e) Automobile. The Company will provide the Executive with an
automobile allowance for use by the Executive in connection with the
performance of his duties under this Agreement. The initial automobile
allowance shall be $1,000 per month.
(f) Reimbursement of Expenses. The Company shall reimburse the
Executive for all reasonable out-of-pocket expenses incurred by the
Executive in the course of his duties, in accordance with normal
policies.
(g) Employee Benefits. The Executive shall be entitled to
participate in the employee benefit programs generally available to
employees of the Company, and to all normal perquisites provided to
senior executive officers of the Company.
- 2 -
<PAGE> 3
(h) Benefits Not in Lieu of Compensation. No benefit or
perquisite provided to the Executive shall be deemed to be in lieu of
base salary, bonus, or other compensation.
5. TERMINATION OF EMPLOYMENT. The Board of Directors of the
Company (the "Board") may terminate the employment of the Executive at any time
as it deems appropriate.
(a) Disability or Death. If, during the term of this
Agreement, the Executive's employment terminates due to total
disability (as such term is defined in Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended) or death, the Company shall pay to
the Executive all amounts payable under Section 4(a) above during the
remaining term of this Agreement (as provided in Section 3 above), as
well as any bonus already accrued but unpaid to the Executive under
Section 4(b) above, and the Company shall have no further obligation to
make any payment under this Agreement, except as may otherwise be
provided under the terms of any employee benefit programs in which the
Executive is participating. The amount of base salary payable under
this Section 5(a) shall be paid in bi-monthly installments, less
applicable withholdings and salary deductions, and any bonus payable
shall be paid in a lump sum, less applicable withholdings and salary
deductions. Any amount payable under this Section 5(a) shall be paid,
or commence to be paid, to the Executive or, in the event of the
Executive's death, his designee under Section 16(b), as soon as
practicable following the Executive's termination of employment. The
Company may terminate the Executive's employment for disability if the
Executive is incapacitated and absent from his duties hereunder on a
full-time basis for four consecutive months or for at least 180 days
during any 12 month period.
(b) Voluntary Resignation or Termination for Cause. If the
Executive shall voluntarily terminate his employment for any reason
other than Good Reason, as defined hereafter, or if the Company shall
discharge the Executive for Cause, as defined hereafter, this Agreement
shall terminate immediately and the Company shall have no further
obligation to make any payment under this Agreement which has not
already become payable, but has not yet been paid, except as may
otherwise be provided under the terms of any employee benefit program
in which the Executive is participating.
For the purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon (A) the
willful and continued failure by the Executive to perform his duties
with the Company (other than any such failure resulting from incapacity
due to physical or mental illness), after a demand for substantial
performance is delivered to the Executive by the Board which
specifically identifies the manner in which the
- 3 -
<PAGE> 4
Board believes that he has not substantially performed his duties, or
(B) the willful engaging by the Executive in gross misconduct
materially and demonstrably injurious to the Company. For purposes of
this paragraph, no act, or failure to act, on the Executive's part
shall be considered "willful" unless done, or omitted to be done, by
him not in good faith and without reasonable belief that his action or
omission was not in the best interest of the Company. Notwithstanding
the foregoing, the Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered
to him a copy of a resolution duly adopted by the affirmative vote of
not less than two-thirds (2/3) of the entire authorized membership of
the Board at a meeting of the Board called and held for the purpose
(after reasonable notice and an opportunity for the Executive, together
with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board he was guilty of conduct set forth above in
clauses (A) or (B) of the first sentence of this paragraph and
specifying the particulars thereof in detail.
(c) Termination Without Cause; Resignation for Good Reason. If
during the term of the Agreement, the Executive's employment is
terminated by the Company without Cause or the Executive voluntarily
terminates his employment for Good Reason:
(i) The Company shall continue to pay the Executive a
base salary as provided in Section 4(a) until the end of the
term of this Agreement as provided in Section 3 above;
(ii) The Company shall pay to the Executive in a lump
sum an amount equal to the value of any bonus already accrued
but unpaid to the Executive under Section 4(b);
(iii) The Executive shall have no further right to
receive any other compensation, or to participate in any other
plan, arrangement, or benefit, after such termination or
resignation of employment, except as may otherwise be provided
under the terms of any employee benefit programs in which the
Executive is participating.
For purposes of this Agreement, "Good Reason" shall mean:
(u) Without his express written consent, the
assignment to the Executive of any duties inconsistent with
his positions, duties, responsibilities and status with the
Company, or a change in his reporting responsibilities, titles
or offices, or any removal of the Executive from or any
failure to re-elect the Executive to any of such positions,
except in connection with the termination of his employment
- 4 -
<PAGE> 5
for Cause, disability or retirement or as a result of his
death or by the Executive other than for Good Reason;
(v) A reduction by the Company in the Executive's
base salary as in effect on the date hereof or as the same may
be increased from time to time;
(w) The Company's requiring the Executive to be based
anywhere other than Houston, Texas, except for required travel
on the Company's business to an extent substantially
consistent with his present business travel obligations, or,
in the event the Executive consents to any relocation, the
failure by the Company to pay (or reimburse the Executive) for
all reasonable moving expenses incurred by him relating to a
change of his principal residence in connection with such
relocation and to indemnify the Executive against any loss
(defined as the difference between the actual sale price of
such residence and the higher of (a) his aggregate investment
in such residence of (b) the fair market value of such
residence as determined by a real estate appraiser designated
by the Executive and reasonably satisfactory to the Company)
realized on the sale of the Executive's principal residence in
connection with any such change of residence;
(x) The failure by the Company to continue in effect
any benefit or compensation plan (including but not limited to
any stock option plan, pension plan, life insurance plan,
health and accident plan or disability plan) in which the
Executive is participating (or plans providing substantially
similar benefits), the taking of any action by the Company
which would adversely affect the Executive's participation in
or materially reduce his benefits under any of such plans or
deprive him of any material fringe benefit enjoyed by him, or
the failure by the Company to provide the Executive with the
number of paid vacation days to which he is then entitled on
the basis of years of service with the Company in accordance
with the Company's normal vacation policy in effect on the
date hereof;
(y) Any failure of the Company to obtain the
assumption of, or the agreement to perform, this Agreement by
any successor as contemplated in Section 16(a) hereof; or
(z) Any purported termination of the Executive's
employment which is not effected pursuant to a notice of
termination satisfying the requirements of Section 5(b) above
(and, if applicable, Section 3 above); and for purposes of
this Agreement, no such purported termination shall be
effective.
- 5 -
<PAGE> 6
(d) Mitigation of Amounts Payable Hereunder. The Executive
shall not be required to mitigate the amount of any payment provided
for in this Section 5 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 5 be
reduced by any compensation earned by the Executive as the result of
employment by another employer after the date of termination, or
otherwise.
6. CONFIDENTIAL INFORMATION. The Company shall provide to the Executive
initial and ongoing information of members of the Company Group, as defined
hereinafter, which information is confidential and constitutes valuable, special
and unique property of such members of the Company Group. In return, the
Executive agrees that he shall not at any time, either during or subsequent to
the term of this Agreement, disclose to others, use, copy or permit to be
copied, except in pursuance of his duties for and on behalf of the Company, it
successors, assigns or nominees, any Confidential Information, as defined
hereinafter, of any member of the Company Group (regardless of whether developed
by the Executive) without the prior written consent of the Company.
As used herein, "Company Group" means the Company, and any entity that
directly or indirectly controls, is controlled by, or is under common control
with, the Company, and for purposes of this definition "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such entity, whether through the
ownership of voting securities, by contract or otherwise.
The term "Confidential Information" with respect to any person means
any secret or confidential information or know-how and shall include, but shall
not be limited to, the plans, customers, costs, prices, uses, and applications
of products and services, results of investigations, studies or experiments
owned or used by such person, and all apparatus, products, processes,
compositions, samples, formulas, computer programs, computer hardware designs,
computer firmware designs, and servicing, marketing or manufacturing methods and
techniques at any time used, developed, investigated, made or sold by such
person, before or during the term of this Agreement, that are not readily
available to the public or that are maintained as confidential by such person.
The Executive shall maintain in confidence any Confidential Information of third
parties received as a result of his employment with the Company in accordance
with the Company's obligations to such third parties and the policies
established by the Company.
7. DELIVERY OF DOCUMENTS UPON TERMINATION. The Executive shall deliver
to the Company or its designee at the termination of his employment all
correspondence, memoranda, notes, records, drawings, sketches, plans, customer
lists, product compositions, and other documents and all copies thereof, made,
composed or received by the Executive, solely or jointly with others, that are
in the Executive's
- 6 -
<PAGE> 7
possession, custody, or control at termination and that are related in any
manner to the past, present, or anticipated business or any member of the
Company Group. In this regard, the Executive hereby grants and conveys to the
Company all right, title and interest in and to, including without limitation,
the right to possess, print, copy, and sell or otherwise dispose of, any
reports, records, papers, summaries, photographs, drawings or other documents,
and writings, and copies, abstracts or summaries thereof, that may be prepared
by the Executive or under his direction or that may come into his possession in
any way during the term of his employment with the Company that relate in any
manner to the past, present or anticipated business of any member of the Company
Group.
8. DISCLOSURE AND RECEIPT OF CONFIDENTIAL INFORMATION. The Executive
shall not, at any time during his employment, receive from persons not employed
by the Company, any Confidential Information, as described in Section 6 above,
not belonging to the Company, unless a valid agreement is authorized by the
Company and is signed by both the Company and by the disclosing party. The
Executive shall not use or disclose to other employees of the Company, during
his employment with the Company, Confidential Information belonging to his
former employers, former business associates, or any other third parties unless
written permission has been given by such third parties to the Company and
accepted by the Company to allow the Company to use and/or disclose such
information. The Executive shall defend and indemnify the Company Group for any
breach of the covenant contained in the preceding sentence.
9. INTELLECTUAL PROPERTY. The Executive shall hold in trust for the
benefit of the Company, and shall disclose promptly and fully to the Company in
writing, and hereby assigns, and binds his heirs, executors, and administrators
to assign, to the Company any and all inventions, discoveries, ideas, concepts,
improvements, copyrightable works, and other developments (the "Developments")
conceived, made, discovered or developed by him, solely or jointly with others,
during the term of his employment by the Company, whether during or outside of
usual working hours and whether on the Company's premises or not, that relate in
any manner to the past, present or anticipated business of any member of the
Company Group. All works of authorship created by the Executive, solely or
jointly with others, shall be considered works made for hire under the Copyright
Act of 1976, as amended, and shall be owned entirely by the Company. Any and all
such Developments shall be the sole and exclusive property of the Company,
whether patentable, copyrightable, or neither, and the Executive shall assist
and fully cooperate in every way, at the Company's expense, in securing,
maintaining, and enforcing, for the benefit of the Company or its designee,
patents, copyrights or other types of proprietary or intellectual property
protection for such Developments in any and all countries. Within one year
following the end of the term of this Agreement and without limiting the
generality of the foregoing, any Development of the Executive relating to any
subject matter on which the Executive worked or was informed during his
employment by the Company shall
- 7 -
<PAGE> 8
be conclusively presumed to have been conceived and made prior to the
termination of his employment (unless the Executive clearly proves that such
Development was conceived and made following the termination of his employment),
and shall accordingly belong and be assigned to the Company and shall be subject
to this Agreement.
10. FURTHER ACTS. At the request of the Company (but without additional
compensation from the Company during his employment by the Company) the
Executive shall execute any and all papers and perform all lawful acts that the
Company may deem necessary or appropriate to further evidence or carry out the
transactions contemplated in this Agreement including, without limitation, such
acts as may be necessary for the preparation, filing, prosecution, and
maintenance of applications for United States letters patent and foreign letters
patent, or for United States and foreign copyright, on the Developments.
11. NO TAMPERING. Throughout the term of the Agreement and through the
second anniversary of the expiration thereof, the Executive shall not request,
induce or attempt to influence any employee of any member of the Company Group,
as defined in Section 6, to terminate his or her employment with such member of
the Company Group.
12. PUBLICITY AND ADVERTISING. The Executive agrees that the Company
may use his name, picture, or likeness for any advertising, publicity, or other
business purpose at any time, during the term of the Agreement by the Company
and may continue to use materials generated during the term of the Agreement for
a period of six months thereafter. Such use of the Executive's name, picture, or
likeness shall not be deemed to result in any invasion of the Executive's
privacy or in a violation of any property right the Executive may have; and the
Executive shall receive no additional consideration if his name, picture or
likeness is so used. The Executive further agrees that any negatives, prints or
other material for printing or reproduction purposes prepared in connection with
the use of his name, picture or likeness by the Company shall be and are the
sole property of the Company.
13. REMEDIES. The Executive acknowledges that a remedy at law for any
breach or attempted breach of the Executive's obligations under Sections 6
through 12 may be inadequate, agrees that the Company may be entitled to
specific performance and injunctive and other equitable remedies in case of any
such breach or attempted breach, and further agrees to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
injunctive or other equitable relief. The Company shall have the right to offset
against amounts to be paid to the Executive pursuant to the terms hereof any
amounts from time to time owing by the Executive to the Company. The termination
of the Agreement pursuant to Section 3, 5(a) or 5(b) shall not be deemed to be a
waiver by the Company of any breach by the Executive of this Agreement or any
other obligation
- 8 -
<PAGE> 9
owed the Company, and notwithstanding such a termination the Executive shall be
liable for all damages attributable to such a breach.
14. DISPUTE RESOLUTION. Subject to the Company's right to seek
injunctive relief in court as provided in Section 13 of this Agreement, any
dispute, controversy or claim arising out of or in relation to or connection to
this Agreement, including without limitation any dispute as to the construction,
validity, interpretation, enforceability or breach of this Agreement, shall be
exclusively and finally settled by arbitration, and any party may submit such
dispute, controversy or claim, including a claim for indemnification under this
Section 14, to arbitration.
(a) Arbitrators. The arbitration shall be heard and determined
by one arbitrator, who shall be impartial and who shall be selected by
mutual agreement of the parties; provided, however, that if the dispute
involves more than $500,000, then the arbitration shall be heard and
determined by three (3) arbitrators. If three (3) arbitrators are
necessary as provided above, then (i) each side shall appoint an
arbitrator of its choice within thirty (30) days of the submission of a
notice of arbitration and (ii) the party-appointed arbitrators shall in
turn appoint a presiding arbitrator of the tribunal within thirty (30)
days following the appointment of the last party-appointed arbitrator.
If (x) the parties cannot agree on the sole arbitrator, (y) one party
refuses to appoint its party-appointed arbitrator within said thirty
(30) day period or (z) the party-appointed arbitrators cannot reach
agreement on a presiding arbitrator of the tribunal, then the
appointing authority for the implementation of such procedure shall be
the Senior United States District Judge for the Northern District of
Texas, who shall appoint an independent arbitrator who does not have
any financial interest in the dispute, controversy or claim. If the
Senior United States District Judge for the Northern District of Texas
refuses or fails to act as the appointing authority within ninety (90)
days after being requested to do so, then the appointing authority
shall be the Chief Executive Officer of the American Arbitration
Association, who shall appoint an independent arbitrator who does not
have any financial interest in the dispute, controversy or claim. All
decisions and awards by the arbitration tribunal shall be made by
majority vote.
(b) Proceedings. Unless otherwise expressly agreed in writing
by the parties to the arbitration proceedings:
(i) The arbitration proceedings shall be held in
Dallas, Texas, at a site chosen by mutual agreement of the
parties, or if the parties cannot reach agreement on a
location within thirty (30) days of the appointment of the
last arbitrator, then at a site chosen by the arbitrators;
- 9 -
<PAGE> 10
(ii) The arbitrators shall be and remain at all times
wholly independent and impartial;
(iii) The arbitration proceedings shall be conducted
in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, as amended from time to
time;
(iv) Any procedural issues not determined under the
arbitral rules selected pursuant to item (iii) above shall be
determined by the law of the place of arbitration, other than
those laws which would refer the matter to another
jurisdiction;
(v) The costs of the arbitration proceedings
(including attorneys' fees and costs) shall be borne in the
manner determined by the arbitrators;
(vi) The decision of the arbitrators shall be reduced
to writing; final and binding without the right of appeal; the
sole and exclusive remedy regarding any claims, counterclaims,
issues or accounting presented to the arbitrators; made and
promptly paid in United States dollars free of any deduction
or offset; and any costs or fees incident to enforcing the
award shall, to the maximum extent permitted by law, be
charged against the party resisting such enforcement;
(vii) The award shall include interest from the date
of any breach or violation of this Agreement, as determined by
the arbitral award, and from the date of the award until paid
in full, at the prime rate of Wells Fargo Bank, N.A. plus 2%
per annum; and
(viii) Judgment upon the award may be entered in any
court having jurisdiction over the person or the assets of the
party owing the judgment or application may be made to such
court for a judicial acceptance of the award and an order of
enforcement, as the case may be.
(c) Acknowledgment Of Parties. Each party acknowledges that he
or she or it has voluntarily and knowingly entered into an agreement to
arbitration under this Section by executing this Agreement.
15. GUARANTEE.
Michael Holdings, Inc., a Texas corporation and the direct
parent of the Company, by its execution hereof, guarantees the Company's
obligations under
- 10 -
<PAGE> 11
this Agreement and agrees perform the Company's obligations hereunder
in the event the Company fails or is unable to do so.
16. MISCELLANEOUS PROVISIONS.
(a) Successors of the Company. The Company will require any
successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company, by agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken
place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the
Company in the same amount and on the same terms as the Executive would
be entitled hereunder if the Executive terminated his employment for
Good Reason, except that for purposes of implementing the foregoing,
the date on which any such succession becomes effective shall be deemed
the date of termination. As used in this Agreement, "Company" shall
mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 16 or which otherwise becomes
bound by all the terms and provisions of this Agreement by operation of
law.
(b) Executive's Heirs, etc. The Executive may not assign his
rights or delegate his duties or obligations hereunder without the
written consent of the Company. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while
any amounts would still be payable to him hereunder as if he had
continued to live, all such amounts, unless other provided herein,
shall be paid in accordance with the terms of this Agreement to his
designee or, if there be no such designee, to his estate.
(c) Notice. For the purposes of this Agreement, notices and
all other communications provide for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the respective addresses set
forth on the first page of this Agreement, provided that all notices to
the Company shall be directed to the attention of the Chief Executive
Officer of the Company with a copy to the Secretary of the Company, or
to such other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
- 11 -
<PAGE> 12
(d) Amendment; Waiver. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and such
officer as may be specifically designated by the Board. No waiver by
either party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not set forth expressly in this
Agreement.
(e) Invalid Provisions. Should any portion of this Agreement
be adjudged or held to be invalid, unenforceable or void, such holding
shall not have the effect of invalidating or voiding the remainder of
this Agreement and the parties hereby agree that the portion so held
invalid, unenforceable or void shall, if possible, be deemed amended or
reduced in scope, or otherwise be stricken from this Agreement to the
extent required for the purposes of validity and enforcement thereof.
(f) Survival of the Executive's Obligations. The Executive's
obligations under this Agreement shall survive regardless of whether
the Executive's employment by the Company is terminated, voluntarily or
involuntarily, by the Company or the Executive, with or without Cause.
(g) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
(h) Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Texas.
(i) Captions and Gender. The use of captions and Section
headings herein is for purposes of convenience only and shall not
effect the interpretation or substance of any provisions contained
herein. Similarly, the use of the masculine gender with respect to
pronouns in this Agreement is for purposes of convenience and includes
either sex who may be a signatory.
- 12 -
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the 1st day of April, 1998.
COMPANY:
MICHAEL PETROLEUM CORPORATION
By: /s/ GLENN D. HART
------------------------------
Name: Glenn D. Hart
----------------------------
Title: Chief Executive Officer
---------------------------
GUARANTOR:
MICHAEL HOLDINGS, INC.
By: /s/ GLENN D. HART
------------------------------
Name: Glenn D. Hart
----------------------------
Title: Chief Executive Officer
---------------------------
EXECUTIVE:
/s/ JERRY F. HOLDITCH
--------------------------------
JERRY F. HOLDITCH
- 13 -
<PAGE> 1
EXHIBIT 10.5
PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
CONOCO INC.
AND
MICHAEL PETROLEUM CORPORATION
SOUTH CALLAGHAN RANCH AREA
WEBB COUNTY, TEXAS
<PAGE> 2
PURCHASE AND SALE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEX OF DEFINED TERMS ............................................... - iii -
LIST OF EXHIBITS ..................................................... - iv -
1. PROPERTY ......................................................... - 1 -
2. EXCLUSIONS FROM THE PROPERTY ..................................... - 2 -
3. CONSIDERATION .................................................... - 3 -
4. MICHAEL PRE-ACQUISITION REVIEW ................................... - 3 -
5. TITLE DEFECTS IN CONOCO PROPERTY ................................. - 4 -
6. REMEDIES FOR TITLE DEFECTS ....................................... - 5 -
7. GAS IMBALANCES FOR CONOCO PROPERTY ............................... - 5 -
8. REPRESENTATIONS BY CONOCO ......................................... - 6 -
9. REPRESENTATIONS BY MICHAEL ....................................... - 6 -
10. CLOSING CONDITIONS ............................................... - 7 -
11. CLOSING .......................................................... - 8 -
12. FURTHER ASSURANCES ............................................... - 9 -
13. EFFECTIVE TIME ................................................... - 9 -
14. RESERVATIONS AND EXCEPTIONS, ..................................... - 9 -
15. ASSUMPTION OF LIABILITIES AND INDEMNITIES FOR CONOCO PROPERTY..... - 10 -
16. OWNERSHIP OF PRODUCTION AND HYDROCARBON INVENTORIES .............. - 11 -
17. CLOSING ADJUSTMENTS TO THE PURCHASE PRICE ........................ - 11 -
18. POST-CLOSING ACCOUNTING ON CONOCO PROPERTY ....................... - 12 -
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
19. TAXES AND EXPENSES .......................................... - 13 -
20. CASUALTY LOSS ON CONOCO PROPERTY ............................ - 15 -
21. NOTICES ..................................................... - 15 -
22. DISCLAIMERS/ACKNOWLEDGMENTS FOR CONOCO PROPERTY.............. - 16 -
23. INDEPENDENT EVALUATION ...................................... - 17 -
24. ENVIRONMENTAL ASSESSMENT AND INDEMNIFICATION ................ - 17 -
25. WAIVER OF CONSEQUENTIAL AND PUNITIVE DAMAGES................. - 19 -
26. PRESS RELEASE ............................................... - 20 -
27. SURVIVAL .................................................... - 20 -
28. INTERPRETATION .............................................. - 20 -
29. GOVERNING LAW ............................................... - 21 -
30. DISPUTE RESOLUTION .......................................... - 21 -
31. ENTIRE AGREEMENT; AMENDMENT ................................. - 24 -
32. BINDING EFFECT; ASSIGNMENT .................................. - 24 -
33. COMPLIANCE AND ENFORCEMENT WAIVERS .......................... - 24 -
34. THIRD-PARTY BENEFICIARIES ................................... - 24 -
35. SUCCESSORS AND ASSIGNS ...................................... - 24 -
36. SEVERABILITY ................................................ - 24 -
37. COUNTERPARTS ................................................ - 24 -
38. EXHIBITS .................................................... - 25 -
</TABLE>
-ii-
<PAGE> 4
PURCHASE AND SALE AGREEMENT
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Adverse Environmental Conditions....................... - 17 -
Agreement ............................................. - 1 -
Assumed Obligations ................................... - 10 -
Business Day .......................................... - 12 -
Casualty Defect........................................ - 15 -
Claims ................................................ - 10 -
Closing................................................ - 8 -
Closing Date .......................................... - 8 -
Code .................................................. - 3 -
Conoco ................................................ - 1 -
Conoco Property........................................ - 1 -
Effective Time ........................................ - 9 -
Environmental Laws .................................... - 17 -
Excluded Property ..................................... - 2 -
FAA ................................................... - 22 -
Final Purchase Price .................................. - 13 -
Final Settlement Date ................................. - 13 -
Final Settlement Statement ............................ - 13 -
Intermediate Settlement Statement ..................... - 12 -
Leases ................................................ - 1 -
Michael ............................................... - 1 -
NGL's ................................................. - 11 -
NORM .................................................. - 16 -
Parties ............................................... - 1 -
Party ................................................. - 1 -
Preliminary Settlement Statement ...................... - 11 -
Property Taxes ........................................ - 14 -
Purchase Price ........................................ - 3 -
Retained Obligations .................................. - 10 -
South Callaghan Ranch Lands ........................... - 1 -
South Callaghan Ranch Lease ........................... - 1 -
Stock Tank Oil ........................................ - 11 -
Title Defect .......................................... - 4 -
</TABLE>
-iii-
<PAGE> 5
PURCHASE AND SALE AGREEMENT
LIST OF EXHIBITS
EXHIBIT A-1 Oil and Gas Leases
EXHIBIT A-2 Ownership Interests
EXHIBIT A-3 Purchase Price Allocation
EXHIBIT B Plat of South Callaghan Ranch Lands
EXHIBIT C-1 Assignment and Bill of Sale
EXHIBIT C-2 South Callaghan Ranch Lease
EXHIBIT D Contracts
EXHIBIT E Pending Litigation
EXHIBIT F Seller's Assignment Notice (Section 1031 Exchange)
EXHIBIT G Nonforeign Affidavit
EXHIBIT H AMI Letter Agreement
-iv-
<PAGE> 6
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT (this "Agreement"), dated February 20, 1998, is by and
between CONOCO INC., a Delaware corporation ("Conoco"), and MICHAEL PETROLEUM
CORPORATION, a Texas corporation ("Michael"), and is in consideration of
Conoco's agreement to sell, and Michael's agreement to buy, certain property
described in this Agreement, all pursuant to the terms and conditions of this
Agreement. Conoco and Michael may also be referred to herein individually as a
"Party" or, collectively, as the "Parties."
1. PROPERTY. Subject to the terms and conditions set forth hereinafter, and
except for the "Excluded Property" as defined in Section 2 below, Conoco agrees
to grant or convey to Michael (whichever is applicable as provided for below)
the Conoco Property (as defined hereinafter) and Michael agrees to accept the
Conoco Property, and tender consideration therefor, in the manner and of the
type and amount as hereinafter required. For purposes of this Agreement, "Conoco
Property" shall mean, collectively:
(a) all of Conoco's right, title and interest in, to and under or derived
from the oil and gas leases, surface estate, and other interests therein
referred to in Exhibit A-1, attached hereto and made a part hereof for all
purposes (the "Leases"), insofar and only insofar as the Leases apply to the
lands, depths, formations, wellbore rights and/or other rights specified on
Exhibit A-1 together with identical interests in and to all property and rights
incident thereto, including, without limitation, all wells (whether producing,
non-producing or abandoned), water source, water injection and other injection
or disposal wells and systems, gathering systems, materials, equipment, personal
property, fixtures and facilities located on the Leases or used in connection
with the Leases and all of Conoco's rights in, to and under all agreements,
unitization agreements, operating agreements, processing agreements,
transportation agreements, production sale agreements, leases, permits,
rights-of-way, easements, licenses, options and orders identified in Exhibit D,
insofar as they pertain to the interests in the Leases transferred to Michael
hereunder; and
(b) a leasehold interest in all of Conoco's right, title and interest in,
to and under or derived from the lands depicted on the plat attached hereto as
Exhibit B (the "South Callaghan Ranch Lands"), insofar and only insofar as the
South Callaghan Ranch Lands cover the interval from the surface of the ground
down to 100 feet below the stratigraphic equivalent of the base of the Lobo 6
sand, together with all of Conoco's right, title and interest in and to all
wells (whether producing, non-producing or abandoned), water source, water
injection and other injection or disposal wells and systems, gathering systems,
materials, equipment, personal property, fixtures and facilities located on the
South Callaghan Ranch Lands and used in connection with hydrocarbon production
from such lands and the above-described depths and all agreements, unitization
agreements, operating agreements, processing agreements, transportation
agreements, production sale agreements, leases, permits, rights-of-way,
easements, licenses, options and orders relating to such lands and
above-described depths and identified in Exhibit D, all pursuant to an Oil and
Gas Lease from Conoco to Michael in substantially the form of lease attached
hereto as Exhibit C-2 (the "South Callaghan Ranch Lease").
-1-
<PAGE> 7
2. EXCLUSIONS FROM THE PROPERTY. The Conoco Property to be conveyed and
assigned under this Agreement does not include the following property
(collectively, the "Excluded Property"):
(a) unless the parties otherwise agree in writing and enter into a separate
data license agreement, (i) seismic, geological, geochemical, or geophysical
data (including cores and other physical samples or materials from wells or
tests) belonging to Conoco or licensed from third parties, and (ii)
interpretations of seismic, geological, geochemical or geophysical data
belonging to Conoco or licensed from third parties;
(b) Conoco's right, title and interest in any agreements, unitization
agreements, operating agreements, processing agreements, transportation
agreements, production sale agreements, leases, permits, rights-of-way,
easements, licenses, options and orders related to the Conoco Property, to the
extent (i) they are attributable and allocable to rights and interests retained
by Conoco, (ii) they are non-transferrable, or (iii) they are listed as excluded
from the Conoco Property in Exhibit D;
(c) Conoco's corporate, financial and tax records, legal files and any
other records or information that Conoco considers proprietary or confidential,
except that Conoco will provide Michael with copies of any tax records that are
necessary for Michael's ownership, administration or operation of the Conoco
Property after the Effective Time;
(d) claims of Conoco for refund of or loss carry forwards with respect to
(i) production, windfall profit, severance, ad valorem or any other taxes
attributable to any period prior to the Effective Time, (ii) income or franchise
taxes, or (iii) any taxes attributable to the excluded items described in this
Section 2;
(e) all proceeds (including proceeds held in suspense or escrow), benefits,
income or revenues attributable to (i) the sale of hydrocarbon production from
the Conoco Property prior to the Effective Time, (ii) the sale of natural gas
liquids extracted from hydrocarbons produced and saved from the Conoco Property
prior to the Effective Time, or (iii) the other excluded items described in
this Section 2;
(f) claims and causes of action arising from acts, omissions or events, or
damage or destruction of the Conoco Property before the Effective Time, and all
rights, titles, claims and interests of Conoco (i) under any policy or agreement
of insurance or indemnity, (ii) under any bond or letter of credit, or (iii) to
any insurance or condemnation proceeds or awards;
(g) all rights, obligations, benefits, awards, judgments, and settlements,
if any, applicable to the pending and potential litigation, claims and
proceedings listed in Exhibit E for which Conoco retains responsibility after
Closing; and
(h) any pipelines, facilities and equipment located on the Leases or South
Callaghan Ranch Lands that are not used or held for use in connection with the
development or operation of the Conoco Property or the production of
hydrocarbons from the Conoco Property.
-2-
<PAGE> 8
3. CONSIDERATION.
(a) Purchase Price. As consideration for the Conoco Property, Michael shall
pay to Conoco at Closing (as defined hereinafter), the cash sum of TWENTY-THREE
MILLION THREE HUNDRED THOUSAND AND NO/100 DOLLARS ($23,300,000) (the "Purchase
Price"). The Purchase Price will be subject to the upward and downward
adjustments hereafter provided in this Agreement. The Purchase Price will be
allocated among the various portions of the Conoco Property and among
depreciable assets and nondepreciable assets as provided in Exhibit A-3.
(b) Reporting Value. Neither Party will take any position in preparing
financial statements, tax returns, reports to shareholders or governmental
authorities, or otherwise, that is inconsistent with the value assigned to each
portion of the Conoco Property in Exhibit A-3, unless the Parties otherwise
agree in writing.
(c) Section 1031 Exchange. Conoco and Michael hereby agree that Conoco will
have the right at any time prior to Closing to assign all or a portion of its
rights under this Agreement to a Qualified Intermediary (as that term is defined
in Section 1.1031(k)- 1(g)(4)(v) of the Treasury Regulations) in order to
accomplish the transaction in a manner that will comply, either in whole or in
part, with the requirements of a like-kind exchange pursuant to Section 1031 of
the Internal Revenue Code of 1986, as amended, (the "Code"). If Conoco assigns
all or part of its rights under this Agreement pursuant to this Section 3(c),
Conoco will notify Michael in writing of such assignment at or before Closing,
and Michael agrees to (i) consent to Conoco's assignment of its rights in this
Agreement in form attached hereto as Exhibit F, and (ii) pay the Purchase Price
into a qualified escrow or qualified trust account at Closing as directed in
writing. Conoco and Michael acknowledge and agree that any assignment of this
Agreement to a Qualified Intermediary shall not release Conoco from any of
Conoco's liabilities and obligations to Michael under this Agreement.
4. MICHAEL PRE-ACQUISITION REVIEW. Conoco shall make a good-faith effort to
give Michael and Michael's authorized representatives, at any reasonable time(s)
before Closing, (a) physical access to the wells and other equipment included in
the Conoco Property, at Michael's sole risk, cost and expense, for the purpose
of inspecting the same, and conducting witnessed tests of production from the
wells thereon, (b) access to all production, engineering and other technical
data and records, and to all contract, land and lease records, to the extent
such data and records are in Conoco's possession and relate to the Conoco
Property, and (c) access to all Conoco accounting records pertaining to the
Conoco Property for the past three (3) years such that Michael can perform an
audit of such records for such three (3) year period prior to the Closing Date;
provided, however, Conoco shall have no obligation to provide Michael such
access to any data or information which Conoco considers proprietary or
confidential, which is not in Conoco's possession, or which access Conoco cannot
legally provide Michael because of third-party restrictions.
-3-
<PAGE> 9
5. TITLE DEFECTS IN CONOCO PROPERTY.
(a) Definition of Title Defect. As used in this Agreement, the term "Title
Defect" shall mean a material deficiency in one (or more) of the following
respects:
(i) Conoco's title, as of the Effective Time (as defined hereinafter),
as to all or any portion of the Conoco Property, is subject to an outstanding
mortgage, deed of trust, lien or encumbrance or other adverse claim which would
interfere materially with the ownership, operation, use or value of the Conoco
Property;
(ii) Conoco owns less than the net revenue interest described on
Exhibit A-2 or more than the working interest described on Exhibit A-2 without a
corresponding increase in net revenue interest;
(iii) Conoco's rights and interests are subject to being reduced by
virtue of the exercise by a third party of any preferential right, reversionary,
back-in or other similar right not reflected on Exhibit A-2; and
(iv) Conoco is in material default under some material provision of a
lease, farmout agreement, operating agreement, or other agreement affecting the
Conoco Property.
(b) Notice of Title Defects. Michael shall give Conoco written notice of
each Title Defect on or before five (5) days prior to the Closing Date, together
with full particulars relating thereto. MICHAEL SHALL BE DEEMED TO HAVE WAIVED
ALL TITLE DEFECTS OF WHICH CONOCO HAS NOT BEEN GIVEN TIMELY WRITTEN NOTICE AS
PROVIDED IN THIS SECTION 5, SAVE AND EXCEPT CLAIMS BASED UPON A BREACH OF THE
LIMITED WARRANTY OF TITLE PROVIDED IN THE ASSIGNMENT AND BILL OF SALE ATTACHED
HERETO AS EXHIBIT C-1 AND THE SOUTH CALLAGHAN RANCH LEASE ATTACHED HERETO AS
EXHIBIT C-2. HOWEVER, SUCH LIMITED WARRANTY OF TITLE WILL EXTEND ONLY TO TITLE
DEFECTS THAT BECOME KNOWN TO MICHAEL AFTER THE CLOSING DATE.
(c) Interest Additions. Conoco may, by delivery of written notice to
Michael on or before five (5) days prior to Closing, request an increase in the
Purchase Price for the value of any net revenue interest owned by Conoco in the
Conoco Property that is greater than that shown on Exhibit A-2. Any such notice
by Conoco shall include all appropriate evidence to substantiate its position.
If Conoco and Michael are unable to agree on the amount of the Purchase Price
increase for any such increase in Conoco's net revenue interest in the Conoco
Property, Conoco at its sole option may either (i) waive any Purchase Price
increase for the additional interest, or (ii) terminate this Agreement by giving
written notice to Michael prior to the Closing Date, in which event this
Agreement shall be of no further force and effect and neither Party shall have
any further liability or obligation to the other Party under this Agreement. If
any such notice is not timely delivered, Conoco shall have no right to request a
Purchase Price increase in connection with the additional interest claimed in
the notice.
-4-
<PAGE> 10
6. REMEDIES FOR TITLE DEFECTS.
(a) Remedies of Title Defects. Upon timely delivery of a notice by Michael
of a Title Defect in the Conoco Property under Section 5, Michael and Conoco
shall meet, within the period between the date of receipt of such notice and the
Closing Date, and may mutually agree to one of the following remedies with
respect to the Title Defect: (i) that Conoco shall cure or agree to cure such
Title Defect, to the extent agreed upon prior to Closing (provided, however,
Conoco shall have no obligation to perform such cure), (ii) that Michael shall
accept the interest subject to the Title Defect "AS IS," and release Conoco from
all claims related to such Title Defect, (iii) that Conoco shall indemnify
Michael against all losses, costs, expenses and liabilities with respect to such
Title Defect, or (iv) that Conoco and Michael shall adjust the Purchase Price by
an amount equal to the value of such Title Defect, as agreed by Conoco and
Michael.
(b) Termination Rights. Either Party, by written notice to the other Party
prior to the Closing Date, shall have the right to terminate this Agreement upon
the occurrence of one or more of the following events: (i) if Conoco and Michael
are unable to agree prior to the Closing Date on the remedy (including the
amount of any Purchase Price adjustment) for any Title Defect of which Conoco
has been properly notified as provided in Section 5, or (ii) if the net amount
of the Purchase Price adjustments hereunder for Title Defects exceeds ten
percent (10%) of the Purchase Price. If either Party exercises its right to
terminate this Agreement due to one of the foregoing events, this Agreement will
be of no further force and effect and neither Party will have any further
liability or obligation to the other Party under this Agreement.
(c) Post-Closing Reimbursement of Purchase Price Adjustments. If Michael
receives a Purchase Price adjustment at Closing on account of a Title Defect,
Conoco shall have until June 30, 1998 to cure such Title Defect at Conoco's
cost. If by such date Conoco can demonstrate to Michael's reasonable
satisfaction that such Title Defect has been cured, then Conoco shall be
entitled to reimbursement from Michael for the amount of the Purchase Price
adjustment for such Title Defect. Michael shall pay such amount to Conoco within
fifteen (15) Business Days of the date Conoco demonstrates to Michael's
reasonable satisfaction that such Title Defect has been cured.
(d) Exclusive Remedy. The remedies set forth in this Section 6 are the
exclusive remedies under this Agreement for all Title Defect matters known to
Michael on or before the Closing Date, and, except as provided in this Section
6, Conoco shall have no liability to Michael with respect to such Title Defects
in the Conoco Property. Conoco's limited warranty of title in the conveyance
instruments for the Conoco Property will be the exclusive remedy for any Title
Defects in the Conoco Property that become known to Michael after the Closing
Date.
7. GAS IMBALANCES FOR CONOCO PROPERTY. Michael shall assume all gas
imbalances that may exist with respect to production from the Conoco Property,
regardless of whether any such gas imbalances are attributable to production
from the Conoco Property before or after the Effective Time. There will be no
increase or decrease in the Purchase Price for any
-5-
<PAGE> 11
such gas imbalances. On and after Closing, all rights and obligations with
respect to all such gas imbalances will be an Assumed Obligation of Michael.
8. REPRESENTATIONS BY CONOCO. Conoco represents to Michael, each of which
representations shall survive Closing, that as of the date of this Agreement and
as of Closing:
(a) Due Organization. Conoco is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Delaware and is
duly qualified to do business in the State of Texas and has satisfied all state
bonding requirements, if any.
(b) Corporate Power. Conoco has all requisite corporate power and authority
to carry on its business as presently conducted, to enter into this Agreement,
and to perform its obligations under this Agreement. The consummation of the
transactions contemplated by this Agreement will not violate, nor be in conflict
with, (i) any provision of its charter or bylaws or (ii) any agreement or
instrument to which it is a party or is bound (except for preferential rights to
purchase, maintenance of uniform interests, and required third party consents to
assignment, if any).
(c) Duly Executed. This Agreement has been duly executed and delivered on
behalf of Conoco, and at Closing all documents and instruments required
hereunder to be executed and delivered by it shall have been duly executed and
delivered and the transactions contemplated hereby shall have been duly and
validly authorized by all requisite corporate action.
(d) No Restraining Litigation. There are no pending or, to the best of
Conoco's knowledge without further investigation, threatened claims, lawsuits,
administrative proceedings, or governmental investigations or inquiries
involving Conoco's right to consummate the sale contemplated hereunder.
(e) Broker's Fees. Conoco has incurred no liability, contingent or
otherwise, for broker's or finder's fees in respect of this Agreement or the
transactions contemplated hereby for which Michael shall have any responsibility
whatsoever.
9. REPRESENTATIONS BY MICHAEL. Michael represents to Conoco, each of which
representations shall survive Closing, that as of the date of this Agreement and
as of Closing:
(a) Due Organization. Michael is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Texas and is duly
qualified to do business in the State of Texas and has satisfied all state
bonding requirements, if any.
(b) Corporate Power. Michael has all requisite corporate power and
authority to carry on its business as presently conducted, to enter into this
Agreement, and to perform its obligations under this Agreement. The consummation
of the transactions contemplated by this
-6-
<PAGE> 12
Agreement will not violate, nor be in conflict with, (i) any provision of its
charter or bylaws or (ii) any agreement or instrument to which it is a party or
is bound.
(c) Duly Executed. This Agreement has been duly executed and delivered on
behalf of Michael, and at Closing, all documents and instruments required
hereunder to be executed and delivered by it shall have been duly executed and
delivered and the transactions contemplated hereby shall have been duly and
validly authorized by all requisite corporate action.
(d) No Restraining Litigation. There are no pending or, to the best of
Michael's knowledge without further investigation, threatened claims, lawsuits,
administrative proceedings, or governmental investigations or inquiries
involving Michael's right to consummate the sale contemplated hereunder.
(e) Broker's Fees. Michael has incurred no liability, contingent or
otherwise, for broker's or finder's fees in respect of this Agreement or the
transactions contemplated hereby for which Conoco shall have any responsibility
whatsoever.
(f) Securities Laws and Other Dealings. Michael has complied with all
federal and state securities laws applicable to the sale of the Conoco Property
and will comply with such laws if it subsequently disposes of all or any part of
the Conoco Property. Michael is acquiring the Conoco Property for its own
account and not with a view to, or for offer of resale in connection with, a
distribution thereof, within the meaning of the Securities Act of 1933, 15
U.S.C. Section 77a et seq., and any other rules, regulations, and laws
pertaining to the distribution of securities. Except for traditional mortgage
financing from reputable financial institutions or corporate debt securities
offerings, Michael has not sought or solicited, nor is Michael participating
with, investors, partners or other third parties in order to fund the Purchase
Price and to close this transaction, and all funds used by Michael in
connection with this transaction are Michael's own funds.
10. CLOSING CONDITIONS. Conoco and Michael will not be obligated to close the
transaction described in this Agreement, and will each have the right to
terminate this Agreement, unless each of the conditions to its performance set
forth in this Section 10 is satisfied as of the Closing Date, or it waives in
whole or part any such condition to its performance that is unsatisfied as of
the Closing Date. If a Party elects to terminate this Agreement because a
condition to its performance is not satisfied, the terminating Party must give
the other Party written notice of termination on or before the Closing Date,
after which this Agreement will be of no further force and effect and neither
Party will have any further obligation to conclude the transfer of the Conoco
Property under this Agreement. The inclusion in this Agreement of conditions to
Conoco's and Michael's obligations at Closing shall not, in and of itself,
constitute a covenant of either Conoco or Michael to satisfy the conditions to
the other Party's obligations at Closing.
(a) Representations and Warranties. Prior to Closing, Conoco and Michael
will each give the other prompt written notice of any matter known to them that
materially affects
-7-
<PAGE> 13
any of the representations or warranties under this Agreement, or renders any
such warranty or representation untrue or inaccurate. Conoco will not be
obligated to close if, as of the Closing Date, any matter represented or
warranted in this Agreement by Michael is untrue, inaccurate or is misleading
in any material respect. Michael will not be obligated to close if, as of the
Closing Date, any matter represented or warranted in this Agreement by Conoco
is untrue, inaccurate or is misleading in any material respect.
(b) Performance of Obligations. Conoco will not be obligated to close if,
as of the Closing Date, Michael has not performed all obligations under this
Agreement that Michael is required to perform on or before Closing. Michael will
not be obligated to close if, as of the Closing Date, Conoco has not performed
all obligations under this Agreement that Conoco is required to perform on or
before Closing.
(c) Legal Proceedings. Neither Party will be obligated to close if, as of
the Closing Date, any suit or other proceeding is pending or threatened before
any court or governmental agency seeking substantial damages in connection with
or seeking to restrain, materially impair or prohibit, the transaction that is
the subject of this Agreement.
(d) Termination of Agreement. Neither Party will be obligated to close if,
as of the Closing Date, either Party has exercised a right to terminate this
Agreement under any provision of this Agreement.
11. CLOSING. Closing shall occur on or before March 31, 1998, or at such
other date as may be agreed by the Parties or as provided by this Agreement (the
"Closing Date"), at the offices of Conoco in Houston, Texas, or at such other
place as Michael and Conoco may agree. "Closing" shall mean (a) the granting or
conveyance of the Conoco Property to Michael; (b) the complete satisfaction by
the Parties of the obligations of consideration under Section 3 above, and (c)
the transfer of the possession of the Conoco Property to Michael. At Closing,
the following will occur:
(a) Consideration. Michael shall make payment of the Purchase Price, as
adjusted, by wire transfer in immediately available funds to an account or
accounts to be designated by Conoco. Prior to Closing, Conoco will notify
Michael of the amounts to be deposited in each designated account.
(b) Grant or Conveyance. Conoco will grant or convey, as the case may be,
the Conoco Property to Michael by executing and delivering the Assignment and
Bill of Sale in substantially the form attached hereto as Exhibit C-1 and the
South Callaghan Ranch Lease in substantially the form attached hereto as Exhibit
C-2.
(c) Non-foreign Affidavits. Conoco shall execute and deliver to Michael a
Non-Foreign Affidavit, in substantially the form attached hereto as Exhibit G.
-8-
<PAGE> 14
(d) Possession. Conoco shall (subject to the terms of any applicable
agreements and to the other provisions hereof) deliver to Michael exclusive
possession of the Conoco Property, effective as of the Effective Time.
(e) Records of Conoco Property. Originals (or copies with respect to the
South Callaghan Ranch Lands) of all books, records and files in the possession
of Conoco pertaining to the Conoco Property, including, without limitation, all
well files, correspondence, geological and engineering information (other than
those constituting part of the Excluded Property), shall be made available for
delivery to Michael at Conoco's offices where currently maintained, within
thirty (30) days after the Closing. Conoco shall have the right to retain
copies (or originals with respect to the South Callaghan Ranch Lands) of any or
all of such books, records and files. Conoco reserves the right to later
examine the records and information delivered to Michael pursuant to this
Section 11(e) to the extent such examination is necessary for any relevant
business purpose. All information and data shall be furnished as a matter of
convenience only to Michael and Michael's reliance on same shall be at
Michael's sole risk.
(f) Other Documents and Actions. Conoco and Michael shall execute and
deliver to each other the letter agreement attached hereto as Exhibit H. In
addition, Conoco and Michael shall execute and deliver such other instruments
and take such other actions as may be required pursuant to the terms of this
Agreement.
12. FURTHER ASSURANCES. After the Closing, each of the Parties shall execute,
acknowledge and deliver to the other such further instruments, and take such
other actions as may be reasonably necessary to carry out the provisions of this
Agreement, including, without limitation, all division orders, transfer orders
and all other documents necessary to fully vest in the Parties the rights,
obligations and benefits acquired pursuant to this Agreement. To the extent that
Conoco's production sale contracts are transferrable, Michael shall assume all
responsibility for notifying the purchasers of oil and gas production, and such
other designated persons who may be responsible for disbursing payments for the
purchase of such production, of the transfer of ownership of the Conoco
Property. In connection therewith, Conoco shall provide Michael with a complete
list of all purchasers of oil, gas and condensate production from the Conoco
Property no later than five (5) days prior to the Closing. Michael shall take
all actions necessary to effectuate the transfer of such payments to Michael as
of the Effective Time.
13. EFFECTIVE TIME. The grant and conveyance of the Conoco Property from
Conoco to Michael shall be effective as of January 1, 1998, at 7:00 a.m. Central
Standard Time (the "Effective Time").
14. RESERVATIONS AND EXCEPTIONS. Conoco and Michael each agree that the
transfer of the Conoco Property is made subject to all reservations, exceptions,
limitations, contracts and other burdens or instruments which are of record or
of which the Parties had actual or constructive notice affecting such
properties, including any matter included or referenced in the materials made
available by each Party to the other.
-9-
<PAGE> 15
15. ASSUMPTION OF LIABILITIES AND INDEMNITIES FOR CONOCO PROPERTY. As used
in this Section 15 and the other provisions of this Agreement, "Claims" shall
mean claims, demands, causes of action, liabilities, damages, penalties and
judgments of any kind or character and all costs and fees (including reasonable
attorneys' fees) paid or incurred in connection therewith.
(A) ON AND AFTER CLOSING, MICHAEL SHALL (I) ASSUME, AND BE RESPONSIBLE FOR
AND COMPLY WITH, ALL DUTIES AND OBLIGATIONS OF CONOCO, EXPRESS OR IMPLIED, WITH
RESPECT TO THE CONOCO PROPERTY ARISING ON OR AFTER THE EFFECTIVE TIME,
INCLUDING, WITHOUT LIMITATION, THOSE ARISING UNDER OR BY VIRTUE OF ANY LEASE,
CONTRACT, AGREEMENT, DOCUMENT, PERMIT, APPLICABLE STATUTE OR RULE, REGULATION OR
ORDER OF ANY GOVERNMENTAL AUTHORITY (SPECIFICALLY INCLUDING, WITHOUT LIMITATION,
ANY GOVERNMENTAL REQUEST OR REQUIREMENT TO PLUG, RE-PLUG AND/OR ABANDON ANY WELL
OF WHATSOEVER TYPE, STATUS OR CLASSIFICATION, WHETHER NOW EXISTING OR HEREAFTER
ARISING OR ACCRUING AND WHETHER SUCH WELLS ARE ACTIVE, INACTIVE, IDLE, OR HAVE
BEEN PREVIOUSLY ABANDONED AS OF THE EFFECTIVE TIME, AND/OR TAKE ANY CLEAN-UP OR
OTHER ACTION WITH RESPECT TO THE CONOCO PROPERTY), (II) PAY AND DISCHARGE ALL
COSTS, EXPENSES AND OBLIGATIONS RELATING TO THE CONOCO PROPERTY THAT ACCRUE ON
AND AFTER THE EFFECTIVE TIME, SUBJECT TO THE POST-CLOSING ADJUSTMENTS PROVIDED
FOR IN SECTIONS 17 AND 18 HEREOF, (III) BE RESPONSIBLE FOR ANY AND ALL CLAIMS
ARISING OUT OF THE PRODUCTION OR SALE OF HYDROCARBONS FROM THE CONOCO PROPERTY
(INCLUDING WITHOUT LIMITATION THE PROPER ACCOUNTING AND PAYMENT TO PARTIES FOR
THEIR INTERESTS THEREIN), INSOFAR AS SUCH CLAIMS RELATE TO PERIODS OF TIME AFTER
THE EFFECTIVE TIME, (IV) ASSUME THE LIABILITIES AND OBLIGATIONS WITH RESPECT TO
THE OWNERSHIP OR OPERATION OF THE CONOCO PROPERTIES PRIOR TO THE EFFECTIVE TIME
SPECIFICALLY SET FORTH IN SECTIONS 22 AND 24 OF THIS AGREEMENT OR ANY OTHER
PROVISION OF THIS AGREEMENT AS BEING ASSUMED BY MICHAEL (THE MATTERS IN
SUBSECTIONS (I) THROUGH (IV) COLLECTIVELY BEING THE "ASSUMED OBLIGATIONS").
MICHAEL SHALL DEFEND, INDEMNIFY AND HOLD CONOCO AND ITS PREDECESSORS IN INTEREST
HARMLESS FROM ANY AND ALL CLAIMS TO OR BY THIRD PARTIES RELATING TO OR ARISING
OUT OF MICHAEL's "ASSUMED OBLIGATIONS" UNDER THIS AGREEMENT.
(B) ON AND AFTER CLOSING, CONOCO SHALL CONTINUE TO BE RESPONSIBLE FOR ALL
DUTIES, OBLIGATIONS, COSTS, AND EXPENSES RELATING TO CONOCO'S OWNERSHIP OF THE
CONOCO PROPERTY PRIOR TO THE EFFECTIVE TIME (INCLUDING WITHOUT LIMITATION THE
MATTERS DESCRIBED IN SUBSECTIONS (A)(I) THROUGH (A)(III) ABOVE INSOFAR AS THEY
RELATE TO PERIODS PRIOR To THE EFFECTIVE TIME), TO THE EXTENT THEY ARE NOT
EXPRESSLY ASSUMED BY MICHAEL UNDER SUBSECTION (A)(IV) ABOVE (THE "RETAINED
OBLIGATIONS"). CONOCO SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS MICHAEL FROM ANY
AND ALL CLAIMS TO OR BY THIRD PARTIES RELATING TO OR ARISING OUT OF CONOCO'S
"RETAINED OBLIGATIONS" UNDER THIS AGREEMENT.
(C) UNLESS THIS AGREEMENT EXPRESSLY PROVIDES TO THE CONTRARY, THE
INDEMNITIES SET FORTH IN THIS AGREEMENT APPLY REGARDLESS OF WHETHER: (I) THE
INDEMNIFIED PARTY (OR ANY EMPLOYEE, AGENT, CONTRACTOR, SUCCESSOR OR ASSIGN OF
THE
-10-
<PAGE> 16
INDEMNIFIED PARTY) CAUSES, IN WHOLE OR PART, AN INDEMNIFIED CLAIM; (II) AN
INDEMNIFIED CLAIM ARISES OUT OF OR RESULTS FROM THE INDEMNIFIED PARTY'S (OR AN
EMPLOYEE'S, AGENT'S, CONTRACTOR'S, SUCCESSOR'S OR ASSIGN'S) SOLE OR CONCURRENT
NEGLIGENCE; (III) THE INDEMNIFIED PARTY (OR ANY EMPLOYEE, AGENT, CONTRACTOR,
SUCCESSOR OR ASSIGN OF THE INDEMNIFIED PARTY) IS DEEMED TO BE STRICTLY LIABLE,
IN WHOLE OR PART, FOR AN INDEMNIFIED CLAIM; OR (IV) ANY PART OF AN INDEMNIFIED
CLAIM IS THE RESULT OF THE IMPOSITION OF PUNITIVE DAMAGES. ALL INDEMNITIES SET
FORTH IN THIS AGREEMENT EXTEND TO THE OFFICERS, DIRECTORS, EMPLOYEES AND
AFFILIATES OF THE PARTY INDEMNIFIED, AND COVER THE ACTS AND OMISSIONS OF THE
OFFICERS, DIRECTORS, EMPLOYEES, CONTRACTORS, SUCCESSORS AND ASSIGNS OF THE
INDEMNIFYING PARTY.
(D) EACH INDEMNIFIED PARTY HEREUNDER AGREES THAT UPON ITS DISCOVERY OF
FACTS GIVING RISE TO A CLAIM FOR INDEMNITY UNDER THE PROVISIONS OF THIS
AGREEMENT, INCLUDING RECEIPT BY IT OF ANY CLAIM, JUDICIAL OR OTHERWISE, BY ANY
THIRD PARTY WITH RESPECT TO ANY MATTER AS TO WHICH IT IS ENTITLED TO INDEMNITY
UNDER THE PROVISIONS OF THIS AGREEMENT, IT WILL GIVE PROMPT NOTICE THEREOF IN
WRITING TO THE INDEMNIFYING PARTY, TOGETHER WITH A STATEMENT OF SUCH INFORMATION
RESPECTING ANY OF THE FOREGOING AS IT SHALL THEN HAVE. SUCH NOTICE SHALL INCLUDE
A FORMAL DEMAND FOR INDEMNIFICATION UNDER THIS AGREEMENT. THE INDEMNIFIED PARTY
SHALL AFFORD THE INDEMNIFYING PARTY A REASONABLE OPPORTUNITY TO PAY, SETTLE OR
CONTEST THE CLAIM AT THE INDEMNIFYING PARTY'S EXPENSE. HOWEVER, IF THE
INDEMNIFYING PARTY FAILS TO PROMPTLY ASSUME THE DEFENSE OF THE CLAIM AFTER
RECEIVING NOTICE OF THE CLAIM FROM THE INDEMNIFIED PARTY, THE INDEMNIFIED PARTY
SHALL BE ENTITLED TO PAY, SETTLE OR CONTEST THE CLAIM WITHOUT WAIVING ITS RIGHT
TO INDEMNIFICATION UNDER THIS AGREEMENT.
16. OWNERSHIP OF PRODUCTION AND HYDROCARBON INVENTORIES. All proceeds
(including proceeds held in suspense or escrow) from the sale of production
actually sold and delivered by Conoco prior to the Effective Time and
attributable to the Conoco Property shall belong to Conoco, and all proceeds
from the sale of production actually sold and delivered after the Effective Time
and attributable to the Conoco Property shall belong to Michael. In addition,
all unsold oil, condensate or liquid hydrocarbons (collectively, the "Stock Tank
Oil") in storage on the Conoco Property at the Effective Time shall belong to
Michael, and there shall be no increase in the Purchase Price for the value of
the Stock Tank Oil. Proceeds from the sale of natural gas liquids ("NGL's")
extracted from production from the Conoco Property before the Effective Time
will belong to Conoco, and proceeds from the sale of NGL's extracted from
production from the Conoco Property after the Effective Time will belong to
Michael.
17. CLOSING ADJUSTMENTS TO THE PURCHASE PRICE
(a) Preliminary Settlement Statement. At Closing, the Purchase Price will
be adjusted as set forth in this Section 17. No later than three (3) Business
Days prior to Closing, Conoco will provide Michael a preliminary settlement
statement identifying all adjustments to the Purchase Price to be made at
Closing (the "Preliminary Settlement Statement "). Conoco and
-11-
<PAGE> 17
Michael acknowledge that some items in the Preliminary Settlement Statement may
be estimates or otherwise subject to change in the final settlement statement
for the Property to be prepared pursuant to Section 18. The term "Business Day"
means any day which is not a Saturday, Sunday or legal holiday recognized by
banking institutions in the State of Texas.
(b) Upward Adjustments. The Purchase Price will be increased by the
following expenses and revenues related to the Conoco Property:
(i) to the extent paid or incurred by Conoco, all actual production
expenses, operating expenses, overhead charges under applicable operating
agreements, capital expenditures, and other costs and expenses relating to the
ownership or operation of the Conoco Property (including royalties, minimum
royalties, rentals, and prepaid charges), to the extent they are attributable to
the period from and after the Effective Time;
(ii) any proceeds from the sale of hydrocarbon production and other
income from the Conoco Property received by Michael, to the extent attributable
to the period before the Effective Time;
(iii) any other increases in the Purchase Price specified in this
Agreement or otherwise agreed in writing between Conoco and Michael prior to or
at Closing.
(c) Downward Adjustments. The Purchase Price will be decreased by the
following expenses and revenues related to the Conoco Property:
(i) to the extent paid or incurred by Michael, all actual production
expenses, operating expenses, overhead charges under applicable operating
agreements, capital expenditures, and other costs and expenses relating to the
ownership or operation of the Conoco Property (including royalties, minimum
royalties, rentals, and prepaid charges), to the extent they are attributable to
the period before the Effective Time; provided, that, Michael shall not pay any
such costs exceeding $5,000 without Conoco's prior written consent;
(ii) any proceeds from the sale of hydrocarbon production (before
deduction of any royalties under the applicable pricing provisions on any oil,
gas and gas plant liquids sales and processing agreements) and other income
received by Conoco, to the extent attributable to the Conoco Property and the
period from and after the Effective Time;
(iii) any other decreases in the Purchase Price specified in this
Agreement or otherwise agreed in writing between Conoco and Michael prior to or
at Closing.
18. POST-CLOSING ACCOUNTING ON CONOCO PROPERTY.
(a) Determination of Final Purchase Price. As soon as practicable after the
Closing, Conoco shall prepare and deliver to Michael, in accordance with this
Agreement and generally accepted accounting principles, a statement (the
"Intermediate Settlement Statement") setting forth for the Conoco Property each
adjustment or payment that was not finally determined
-12-
<PAGE> 18
as of the Closing in connection with the Conoco Property and showing the
calculation of such adjustments to the Purchase Price. As soon as practicable
after receipt of the Intermediate Settlement Statement, Michael shall deliver to
Conoco a written report containing any changes that Michael proposes be made to
such Intermediate Settlement Statement. The Parties undertake to agree with
respect to such Intermediate Settlement Statement no later than 90 days after
the Closing Date, such agreement constituting and to be embodied in a "Final
Settlement Statement" and to establish the "Final Purchase Price," and the date
upon which the Final Purchase Price is established to be the "Final Settlement
Date." In the event Michael and Conoco are unable to mutually agree upon the
amount of the Final Settlement Statement in connection with the Conoco Property,
an audit shall be conducted by a mutually agreed upon accounting firm. Michael
and Conoco agree to be bound by the findings of such audit, insofar as the Final
Settlement Statement amount is concerned, and each shall bear one half of all
expenses associated with such audit. In the event that (a) the Final Purchase
Price is more than the amount paid at Closing, Michael shall pay to Conoco the
amount of such difference, or (b) the Final Purchase Price is less than the
amount paid at Closing, Conoco shall pay to Michael the amount of such
difference, in either event by wire transfer in immediately available funds, or,
if the amount of such difference is less than $25,000, by corporate check,
within 10 Business Days after the amount due is finally determined.
(b) Post-Closing Joint Interest Audit Adjustments. In connection with the
Conoco Property, Conoco shall be responsible for the settlement of all joint
billing audits which relate to accounting periods prior to the Effective Time
and Michael shall be responsible for the settlement of all joint billing audits
which relate to accounting periods after the Effective Time. Any credits
received by Michael after the Effective Time attributable to expenses paid by
Conoco for periods prior to the Effective Time on behalf of the Conoco Property
shall be promptly reimbursed to Conoco by Michael. Any credits received by
Conoco after the Effective Time attributable to expenses paid by Michael for
periods after the Effective Time on behalf of the Conoco Property shall be
promptly reimbursed to Michael by Conoco.
(c) Other Post-Closing Revenues and Expenses. After the determination of
the Final Purchase Price under this Section 18, (i) if either Party receives
revenues that belong to the other Party under this Agreement, the Party
receiving the revenues agrees to promptly remit those revenues to the other
Party, and (ii) if either Party pays expenses that are the responsibility of the
other Party under this Agreement, the Party on whose behalf the expenses were
paid agrees to promptly reimburse the other Party for the expenses paid on its
behalf upon receiving satisfactory evidence of such payment. However, neither
Party will be obligated to reimburse the other Party for any such expense in
excess of $5,000 unless it has been consulted about that expense prior to
payment and has authorized such payment, unless that payment was required by a
government agency or other government entity.
19. TAXES AND EXPENSES.
(a) Recording Expenses. Michael shall pay for all recording, filing and
transfer fees, stamps and taxes in connection with the recording of the
conveyance documents and the transfer of the Conoco Property pursuant to this
Agreement, all other state and federal transfer
-13-
<PAGE> 19
documents, and any other instruments that must be filed to effectuate the
transfer of the Property.
(b) Ad Valorem, Real Property and Personal Property Taxes. All Ad Valorem
Taxes, Real Property Taxes, Personal Property Taxes, and similar obligations
("Property Taxes") on the Conoco Property are Conoco's obligation for periods
before the Effective Time and Michael's obligation for periods after the
Effective Time. If Property Taxes for the current tax year have not been
assessed and paid as of the Closing Date, Michael shall file all required
reports and returns incident to the Property Taxes and pay the Property Taxes
for the current tax year and subsequent periods. Conoco will reimburse Michael
promptly for Conoco's proportionate share of these taxes, prorated as of the
Effective Time, upon receipt of evidence of Michael's payment of the taxes. If
Property Taxes for the current tax year have been assessed and paid as of the
Closing Date, Michael will reimburse Conoco for its proportionate share of these
taxes, prorated as of the Effective Time, as a closing adjustment to the
Purchase Price, as provided in Section 17 of this Agreement.
(c) Severance Taxes. Conoco shall bear and pay all severance, production,
excise or other taxes measured by hydrocarbon production from the Conoco
Property, or the receipt of proceeds therefrom, to the extent attributable to
production from the Conoco Property before the Effective Time. Michael shall
bear and pay all such taxes on production from the Conoco Property on and after
the Effective Time. Conoco shall withhold and pay on behalf of Michael all such
taxes on production from the Conoco Property between the Effective Time and the
Closing Date, and the amount of any such payment shall be reimbursed to Conoco
as a closing adjustment to the Purchase Price pursuant to Section 17. If either
Party pays taxes owed by the other Party, upon receipt of evidence of payment
the non-paying Party will reimburse the paying Party promptly for its
proportionate share of such taxes.
(d) Tax and Financial Reporting.
(i) IRS Form 8594. If the parties mutually agree that a filing of Form
8594 is required, the parties will confer and cooperate in the preparation and
filing of their respective forms to reflect a consistent reporting of the agreed
upon allocation of the value of the Conoco Property.
(ii) Financial Reporting. Conoco and Michael agree to furnish to each
other at Closing or as soon thereafter as practicable any and all information
and documents reasonably required to comply with tax and financial reporting
requirements and audits.
(iii) Intangible Drilling Cost Recapture. Conoco and Michael agree to
furnish to each other, at Closing or as soon as practicable thereafter, data
relative to deductions claimed, pursuant to Section 263(c) of the Internal
Revenue Code of 1986, for intangible drilling costs related to the Conoco
Property, and any other relevant data to allow each Party to calculate the
carryover intangible drilling costs associated with the Conoco Property that is
subject to potential recapture under Section 1254(a) of the Internal Revenue
Code of 1986.
-14-
<PAGE> 20
(e) Sales and Use Taxes. The Purchase Price excludes any sales taxes or
other taxes in connection with the sale of the Conoco Property. Michael shall be
responsible for and pay all federal, state, or local sales, transfer, gross
proceeds, use and similar taxes incident or applicable to or caused by the
transfer of the Conoco Property to Michael under this Agreement. If Conoco is
required to pay such sales, use or similar taxes on behalf of Michael, Michael
will reimburse Conoco at Closing for all sales and use taxes due and payable on
the transfer of the Conoco Property to Michael.
(f) Income Taxes. Each Party shall be responsible for its own state and
federal income taxes, if any, as may result from this transaction.
(g) Incidental Expenses. Each party shall bear its own respective expenses
incurred in connection with the negotiation and Closing of this transaction,
including its own consultants' fees, attorneys' fees, accountants' fees, and
other similar costs and expenses.
20. CASUALTY LOSS ON CONOCO PROPERTY. If prior to the Closing all or any
portion of the Conoco Property is substantially damaged or destroyed by fire or
other casualty ("Casualty Defect"), Conoco shall notify Michael promptly after
Conoco learns of such event. Conoco shall have the right, but not the
obligation, to cure the Casualty Defect by repairing such damage or, in the case
of personal property or fixtures, replacing them with equivalent items, no later
than Closing, all to Michael's reasonable satisfaction. If any uncured Casualty
Defect exists at the Closing, the Purchase Price shall be reduced by the
aggregate reduction in the value of the Conoco Property on account of such
uncured Casualty Defect as determined by the mutual agreement of the Parties. If
(i) the Parties fail for any reason to agree prior to the Closing as to the
amount of any Purchase Price adjustment on account of any uncured Casualty
Defects, or (ii) the amount of such downward adjustment of the Purchase Price at
Closing exceeds twenty percent (20%) of the Purchase Price, then either Party
upon written notice to the other Party shall have the right to terminate this
Agreement, in which event this Agreement shall be of no further force and effect
and neither Party shall have any further liability or obligation to the other
Party under this Agreement.
21. NOTICES. All communications required or permitted under this Agreement
shall be in writing and any communication or delivery hereunder shall be deemed
to have been fully made if actually delivered, or if mailed by registered or
certified mail, postage prepaid, or if sent by telecopy to the address as set
forth below:
CONOCO MICHAEL
------ -------
Conoco Inc. Michael Petroleum Corporation
600 North Dairy Ashford 13101 Northwest Freeway
P.0. Box 2197 Suite 320
Houston, Texas 77079 Houston, Texas 77040
Attn: Don DeLozier Attn: Glenn D. Hart
Telecopy: (281) 293-5088 Telecopy: (713) 895-0320
-15-
<PAGE> 21
Any Party, by written notice to the other, may change the address or the
individual to which or to whom notices are to be sent under this Agreement.
22. DISCLAIMERS/ACKNOWLEDGMENTS FOR CONOCO PROPERTY.
(a) NO WARRANTY, EXPRESS OR IMPLIED. CONVEYANCE OF THE CONOCO PROPERTY
SHALL BE WITHOUT WARRANTY OF TITLE OF ANY KIND, EXPRESS OR IMPLIED, EXCEPT BY,
THROUGH OR UNDER CONOCO, BUT NOT OTHERWISE. CONVEYANCE OF THE CONOCO PROPERTY
SHALL BE WITHOUT WARRANTY WHATSOEVER, EXPRESS, STATUTORY, OR IMPLIED, AS TO
DESCRIPTION, PHYSICAL CONDITION OF THE CONOCO PROPERTY (INCLUDING, WITHOUT
LIMITATION, THE ENVIRONMENTAL CONDITION OF THE CONOCO PROPERTY), QUALITY, VALUE,
FITNESS FOR PURPOSE, MERCHANTABILITY, OR OTHERWISE. Michael shall satisfy
itself, prior to the Closing, as to the type, condition, quality and extent of
the property and property interests which comprise the Conoco Property they are
receiving pursuant to this Agreement and under this sale. Michael shall have the
right of full substitution and subrogation to any and all rights and actions of
which Conoco has or may have against any and all preceding owners or vendors of
the Conoco Property other than affiliates of Conoco.
(b) Acknowledgments of Michael at Closing. By closing on the transaction
provided for in this Agreement, Michael shall be deemed to have acknowledged and
does hereby acknowledge and admit that: (i) Michael has been given the
opportunity to adequately inspect the Conoco Property for all purposes prior to
Closing; (ii) Michael is aware that the Conoco Property has been used for the
exploration, development, production, treating and transporting of oil, gas and
other hydrocarbon products and that physical changes may have occurred as a
result of such use and that Conoco has disclosed, and Michael is further aware,
that there exists the possibility that there could exist on the Conoco Property
as a result of such use or uses one or more detrimental environmental conditions
(including without limitation naturally occurring radioactive material or
"NORM"), or that there could have occurred from such use or uses one or more
releases of hazardous substances (as defined in CERCLA or RCRA) or releases of
chemical substances into, or other pollution or contamination of or into, the
ambient air, surface water, ground water, or land surface and subsurface strata
of any real property included in the Conoco Property and of contiguous, or a
series of contiguous, real properties not associated with the Conoco Property;
(iii) Michael has entered into this Agreement on the basis of its own
investigation of the physical condition of the Conoco Property and the land
related thereto (including the environmental condition of the Conoco Property);
and (iv) MICHAEL, WITH FULL KNOWLEDGE OF THE FOREGOING AFTER CONDUCTING THE
ABOVE DESCRIBED INVESTIGATION AND EVALUATION, IS ACQUIRING THE CONOCO PROPERTY
ON A "WHERE IS" AND "AS IS" BASIS; AND MICHAEL, BY ACQUIRING THE CONOCO PROPERTY
ON A "WHERE IS" AND "AS IS" BASIS WAIVES ANY CLAIMS OR OTHER RIGHTS OF
INDEMNIFICATION, CONTRIBUTION OR RECOURSE IT MAY HAVE AGAINST OR FROM CONOCO
WITH RESPECT TO THE CONDITION OF THE CONOCO PROPERTY, INCLUDING, WITHOUT
LIMITATION, THE ENVIRONMENTAL CONDITION OF THE CONOCO PROPERTY AND DAMAGE TO
NATURAL RESOURCES ASSOCIATED WITH THE CONOCO PROPERTY (INCLUDING ANY LIABILITY
UNDER CERCLA OR OTHER ENVIRONMENTAL LAWS), WHETHER CONTRACT, TORT OR STATUTORY
IN
-16-
<PAGE> 22
NATURE, REGARDLESS OF THE NEGLIGENCE, FAULT OR STRICT (STATUTORY) LIABILITY OF
CONOCO.
23. INDEPENDENT EVALUATION. Michael represents that it has made an
independent evaluation of the Conoco Property, and acknowledges that Conoco has
made no statements or representations concerning the present or future value of
the anticipated income, costs, or profits, if any, to be derived from such
property, the physical or environmental condition of such property, the quantity
and quality of any oil and gas or other minerals that may be produced from such
property, or any other matter with respect to such property and THAT CONOCO
NEITHER IMPLIEDLY NOR EXPRESSLY WARRANTS THE DESCRIPTION, TITLE, VALUE, QUALITY,
PHYSICAL CONDITION OF SUCH PROPERTY (INCLUDING, WITHOUT LIMITATION, THE
ENVIRONMENTAL CONDITION OF SUCH PROPERTY), MERCHANTABILITY, OR FITNESS FOR
PURPOSE OF ANY OF SUCH PROPERTIES OR THE WELLS, EQUIPMENT, PIPELINE FACILITIES,
OR OTHER PROPERTY LOCATED THEREON OR USED IN CONNECTION THEREWITH. Michael
further acknowledges that, in entering into this Agreement, they have relied
solely upon its independent examination of the Conoco Property and public
records relating to such property and its independent estimates, computations,
evaluations, reports and studies based thereon and has not relied on any
representation or statement made by Conoco. All information and data furnished
to Michael is believed by Conoco to be accurate and correct to the best of its
knowledge without investigation; however, CONOCO MAKES NO WARRANTY OR
REPRESENTATION AS TO THE ACCURACY, COMPLETENESS, MATERIALITY OR CORRECTNESS OF
ANY INFORMATION FURNISHED TO MICHAEL. ANY RELIANCE BY MICHAEL ON SUCH
INFORMATION IS AT MICHAEL'S SOLE RISK AND CONOCO SHALL HAVE NO LIABILITY
WHATSOEVER TO MICHAEL IN CONNECTION THEREWITH.
24. ENVIRONMENTAL ASSESSMENT AND INDEMNIFICATION.
(a) Definition of Adverse Environmental Condition. "Adverse Environmental
Conditions" shall mean any individual contamination or condition that would
require $50,000 or more of out-of-pocket costs and expenses to remedy and that
is in violation of the Environmental Laws (as hereafter defined), resulting from
any discharge, release, disposal, production, storage, treatment, or any other
activities on, in or from the Conoco Property, or the migration or
transportation from other lands to the Conoco Property, prior to the Closing
Date, of any wastes, pollutants, contaminants, hazardous materials or other
materials or substances that are subject to regulation under any laws, rules or
regulations relating to the protection of health or the environment, including,
without limitation, the Clean Air Act, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Federal Water Pollution Control Act,
the Safe Drinking Water Act, the Toxic Substance Control Act, the Hazardous and
Solid Waste Amendments Act of 1984, the Superfund Amendments and Reauthorization
Act of 1986, the Hazardous Materials Transportation Act, the Clean Water Act,
the National Environmental Policy Act, the Endangered Species Act, the Fish and
Wildlife Coordination Act, the National Historic Preservation Act and the Oil
Pollution Act of 1990, as well as any state and local regulation or law
governing the same, similar or related matters, all as may have been or be
amended from time to time (collectively, "Environmental Laws"). The term
"Adverse Environmental Conditions" also shall include any such individual
contamination
-17-
<PAGE> 23
or condition Of the Conoco Property that would require $50,000 or more of
out-of-pocket costs and expenses to remedy that is only temporarily authorized
by law, permit, fee agreement or other arrangement.
(b) Pre-Closing Remedies. Michael shall promptly notify Conoco in writing
of any Adverse Environmental Condition that becomes known to Michael prior to
Closing as a result of Michael's investigation of the Conoco Property and the
estimated costs for remediating any such conditions which are located on the
Conoco Property. Michael will be deemed to have waived any claim against Conoco
with respect to any Adverse Environmental Condition known to Michael prior to
Closing and about which Michael fails to notify Conoco in writing prior to
Closing. Michael shall provide such information regarding any such Adverse
Environmental Conditions as Conoco may reasonably request. If Conoco receives
notice from Michael prior to Closing of any Adverse Environmental Condition,
Michael shall have the right to request a reduction in the Purchase Price equal
to the cost and expense of remediating the Adverse Environmental Condition to
Michael's reasonable satisfaction, the amount of which shall be mutually agreed
to by Conoco and Michael. If Conoco and Michael agree on the amount of a
Purchase Price reduction for an Adverse Environmental Condition, such reduction
shall be made at Closing. Any Adverse Environmental Condition for which Michael
receives a Purchase Price reduction shall become an Assumed Obligation of
Michael at Closing and Conoco shall have no further liability or obligation in
connection with such Adverse Environmental Condition. However, if (i) the
Parties are unable to agree on a Purchase Price reduction for any such Adverse
Environmental Condition, or (ii) the agreed cost of remedying all such Adverse
Environmental Conditions exceeds 3% of the Purchase Price, either Conoco or
Michael shall have the right to terminate this Agreement, in which event this
Agreement shall be of no further force and effect and neither Party shall have
any further liability or obligation to the other Party under this Agreement.
(c) Post-Closing Remedies. If Michael notifies Conoco after Closing but on
or before one hundred and eighty (180) days following the Closing Date regarding
any Adverse Environmental Condition that became known to Michael after Closing,
Conoco shall reimburse Michael for all costs and expenses incurred by Michael in
remediating Such Adverse Environmental Condition, the amount of which shall be
mutually agreed to by Conoco and Michael. Upon receiving the agreed payment from
Conoco in connection with any such Adverse Environmental Condition, such Adverse
Environmental Condition shall become an Assumed Obligation of Michael and Conoco
shall have no further liability or obligation to Michael in connection with such
Adverse Environmental Condition. If Conoco and Michael are unable to agree on
the extent of any such Adverse Environmental Condition or on the remediation
costs associated with any such Adverse Environmental Condition, then the extent
of such Adverse Environmental Condition (if disputed) and/or the remediation
costs and expenses for which Conoco shall be responsible shall be determined by
binding arbitration in accordance with Section 30 of this Agreement. Conoco
shall have no liability or obligation to Michael under this Agreement (i) for
any Adverse Environmental Condition regarding which Conoco does not receive
timely written notice on or before one hundred and eighty (180) days following
the Closing Date (and all such Adverse Environmental Conditions shall become
Assumed Obligations of Michael), or (ii) for any costs and expenses of
remediating Adverse
-18-
<PAGE> 24
Environmental Conditions of which Conoco has been properly notified pursuant to
this Section 24(c) in excess of $1,000,000.
(d) Indemnity. Except for any costs or expenses for which Michael is
entitled to a Purchase Price reduction under Sections 24(b) or for which Michael
is entitled to reimbursement under Section 24(c), if the Closing hereunder
occurs, Michael shall indemnify, defend and hold Conoco harmless from and
against any and all Claims arising out of or relating to any discharge, release,
disposal, production, storage, treatment or any other activities on, in or from
the Conoco Property, or the migration or transportation from any other lands to
the Conoco Property, whether before or after the Effective Time, of any wastes,
pollutants, contaminants, hazardous materials, or materials or substances that
are presently, or become in the future, subject to regulation under
Environmental Laws, whether such Environmental Laws are presently existing or
are hereafter enacted, INCLUDING, WITHOUT LIMITATION, ANY SUCH CLAIMS ARISING IN
WHOLE OR IN PART FROM THE SOLE OR CONCURRENT NEGLIGENCE OR GROSS NEGLIGENCE OR
STRICT LIABILITY OF CONOCO. The foregoing indemnity shall not be applicable to
Claims arising out of or relating to activities on the South Callaghan Ranch
Lands after the date such lands have reverted back to Conoco pursuant to the
South Callaghan Ranch Lease.
(e) Exclusive Remedy. The remedies set forth in this Section 24 are the
exclusive remedies between the Parties with respect to the environmental
condition of the Conoco Property, and Conoco will have no liability or
obligation to Michael with respect to the environmental condition of the Conoco
Property except as set forth in this Section 24.
(f) Proportionate Reduction. If Conoco is the owner of less than 100% of
the mineral interest or working interest in any portion of the Conoco Property
that may be subject to an Adverse Environmental Condition for which a Purchase
Price reduction or cost and expense reimbursement is due under this Agreement,
the Parties shall proportionately reduce the amount due under this Agreement in
connection with any such Adverse Environmental Condition to reflect Conoco's
proportionate ownership interest in the affected property.
25. WAIVER OF CONSEQUENTIAL AND PUNITIVE DAMAGES. NEITHER MICHAEL NOR
CONOCO SHALL BE ENTITLED TO RECOVER FROM THE OTHER, RESPECTIVELY, AND EACH PARTY
RELEASES THE OTHER PARTY FROM, ANY LOSSES, COSTS, EXPENSES, OR DAMAGES ARISING
UNDER THIS AGREEMENT OR IN CONNECTION WITH OR WITH RESPECT TO THE TRANSACTIONS
CONTEMPLATED IN THIS AGREEMENT ANY AMOUNT IN EXCESS OF THE ACTUAL COMPENSATORY
DAMAGES SUFFERED BY SUCH PARTY. MICHAEL AND CONOCO BOTH WAIVE, AND RELEASE THE
OTHER FROM ANY RIGHT TO RECOVER PUNITIVE, SPECIAL, EXEMPLARY AND CONSEQUENTIAL
DAMAGES ARISING IN CONNECTION WITH OR WITH RESPECT TO THE TRANSACTIONS
CONTEMPLATED IN THIS AGREEMENT; PROVIDED, HOWEVER, ANY SUCH DAMAGES RECOVERED BY
A THIRD PARTY (OTHER THAN SUBSIDIARIES, AFFILIATES OR PARENTS OR A PARTY) FOR
WHICH A PARTY OWES THE OTHER PARTY AN INDEMNITY UNDER THIS AGREEMENT SHALL NOT
BE WAIVED.
-19-
<PAGE> 25
26. PRESS RELEASE. There shall be no press release or public communication
concerning this purchase and sale by either Party except with the written
consent of the Party not originating said release or communication, with the
exception being those reports reasonably required by applicable state or federal
law or regulations.
27. SURVIVAL. The representations, warranties and agreements contained in
this Agreement and in any certificate or other instrument delivered by or on
behalf of either Party pursuant to this Agreement shall survive the Closing and
shall be unaffected by any investigation made by the other Party. All
representations and warranties contained in this Agreement (including without
limitation those in Sections 8 and 9) are exclusive, and are given in lieu of
all other representations and warranties, express, implied, or statutory.
28. INTERPRETATION. The Parties stipulate and agree that this Agreement
shall be deemed and considered for all purposes to have been jointly prepared by
the Parties, and shall not be construed against any one Party (nor shall any
inference or presumption be made) on the basis of who drafted this Agreement or
any particular provision hereof, who supplied the form of Agreement, or any
other event of the negotiation, drafting or execution of this Agreement. Each
Party agrees that this Agreement has been purposefully drawn and correctly
reflects its understanding of the transaction that it contemplates. In
construing this Agreement, the following principles will apply.
(a) Examples shall not be construed to limit, expressly or by implication,
the matter they illustrate.
(b) The word "includes" and its derivatives means "includes, but is not
limited to" and corresponding derivative expressions.
(c) Defined terms in this Agreement are denoted by quotation marks and
underlining. A defined term has its defined meaning throughout this Agreement
and each Appendix, Exhibit and Schedule to this Agreement, regardless of whether
it appears before or after the place where it is defined.
(d) If there is any conflict or inconsistency between the provisions of the
main body of this Agreement and the provisions of any Appendix, Exhibit,
Schedule or executed conveyance document, the provisions of this Agreement shall
take precedence. If there is any conflict between the provisions of any pro
forma conveyance document or other transaction documents attached to this
Agreement as an Appendix, Exhibit or Schedule and the provisions of any
conveyance documents and other transaction documents actually executed by the
parties, the provisions of the executed conveyance documents and other executed
transaction documents shall take precedence.
(e) The omission of certain provisions of this Agreement from the
conveyance documents does not constitute a conflict or inconsistency between
this Agreement and the conveyance documents, and will not effect a merger of the
omitted provisions. To the fullest
-20-
<PAGE> 26
extent permitted by law, all provisions of this Agreement are hereby deemed
incorporated into the conveyance documents by reference.
(f) Unless otherwise indicated, all references to Sections or Exhibits in
this Agreement refer to the Sections and Exhibits of this Agreement. The
headings and titles in this Agreement are for convenience only and shall have no
significance in interpreting or otherwise affect the meaning of this Agreement.
(g) The plural shall be deemed to include the singular, and vice versa.
29. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS-OF-LAW RULE THAT MIGHT
APPLY THE LAW OF ANOTHER JURISDICTION. TO THE EXTENT APPLICABLE, THE PARTIES
WAIVE THE PROVISIONS OF THE "TEXAS DECEPTIVE PRACTICES ACT," OTHER THAN SECTION
17.555 THEREOF WHICH MAY NOT BE WAIVED.
30. DISPUTE RESOLUTION.
(a) CONOCO AND MICHAEL SHALL ATTEMPT IN GOOD FAITH TO RESOLVE ANY
CONTROVERSY OR DISPUTE ARISING OUT OF OR RELATING TO THIS AGREEMENT PROMPTLY BY
NEGOTIATIONS BETWEEN THEMSELVES. THE NEGOTIATION PROCESS MAY BE STARTED BY THE
GIVING OF WRITTEN NOTICE BY EITHER PARTY TO THE OTHER PARTY IN ACCORDANCE WITH
THE TERMS OF SECTION 21 HEREOF. IN THE EVENT THAT EITHER PARTY DESIRES THE
INVOLVEMENT OF A MEDIATOR TO FACILITATE THE NEGOTIATIONS, THEN IT SHALL GIVE
WRITTEN NOTICE THEREOF, AND THE PARTIES AGREE, ADDITIONALLY, TO NEGOTIATE IN
GOOD FAITH TO SELECT AN INDEPENDENT MEDIATOR TO FACILITATE THE NEGOTIATIONS AND
TO CONDUCT UP TO EIGHT CONSECUTIVE HOURS OF NON-BINDING MEDIATED NEGOTIATIONS IN
HOUSTON, TEXAS WITHIN 30 DAYS AFTER THE NOTICE REQUESTING INVOLVEMENT OF A
MEDIATOR IS FIRST SENT. IF, WITHIN 10 DAYS AFTER THE NOTICE REQUESTING A
MEDIATOR, THE PARTIES ARE NOT ABLE TO AGREE UPON A MEDIATOR, THEN EITHER PARTY
MAY SEEK THE APPOINTMENT OF A MEDIATOR UNDER SUB-PARAGRAPH 30(D).
(b) NO ARBITRATION MAY BE COMMENCED BY EITHER PARTY UNLESS AND UNTIL A GOOD
FAITH EFFORT HAS BEEN MADE TO CONDUCT NEGOTIATIONS AND, IF REQUESTED BY A PARTY,
A MEDIATION IN COMPLIANCE WITH THE FOREGOING PARAGRAPH. IF A CONTROVERSY OR
DISPUTE IS NOT RESOLVED AFTER GOOD FAITH EFFORTS TO CONDUCT THE NEGOTIATION AND
MEDIATION PROCESS DESCRIBED ABOVE, THEN, UPON NOTICE BY EITHER PARTY TO THE
OTHER PARTY (AN "ARBITRATION NOTICE"), THE CONTROVERSY OR DISPUTE SHALL BE
SUBMITTED TO FINAL, BINDING ARBITRATION UNDER THE FOLLOWING PROVISIONS.
(c) AN ARBITRATION NOTICE SHALL DESCRIBE THE CONTROVERSY OR DISPUTE TO BE
SUBMITTED TO ARBITRATION AND SHALL NAME ONE ARBITRATOR. WITHIN THIRTY (30) DAYS
AFTER THE RECEIPT OF SUCH NOTICE, THE OTHER PARTY SHALL BY WRITTEN RESPONSE
DESCRIBE ANY ADDITIONAL CONTROVERSY OR DISPUTE TO BE SUBMITTED AND SHALL NAME A
SECOND ARBITRATOR. IF SUCH PARTY FAILS TO TIMELY NAME A SECOND ARBITRATOR, THE
PARTY FIRST GIVING THE ARBITRATION NOTICE MAY BY FURTHER WRITTEN NOTICE NAME THE
SECOND. THE TWO ARBITRATORS SO APPOINTED SHALL NAME
-21-
<PAGE> 27
A THIRD ARBITRATOR, WHO SHALL BE INDEPENDENT AND IMPARTIAL AND WHO, LIKE THE
TWO ARBITRATORS SO APPOINTED, SHALL BE QUALIFIED, BY KNOWLEDGE AND EXPERIENCE
(WITH EACH HAVING A MINIMUM OF 10 YEARS OIL AND GAS EXPERIENCE), TO DETERMINE
THE CONTROVERSY OR DISPUTE SUBMITTED. IF THE TWO APPOINTED ARBITRATORS FAIL TO
TIMELY NAME A THIRD ARBITRATOR, THEN EITHER PARTY MAY SEEK THE APPOINTMENT OF A
THIRD UNDER SUB-PARAGRAPH 30(D).
(d) IF THE PARTIES ARE UNABLE TO AGREE UPON A MEDIATOR OR THE PARTIES'
APPOINTED ARBITRATORS ARE UNABLE TO SELECT A THIRD ARBITRATOR, THEN EITHER PARTY
MAY SEEK THE APPOINTMENT OF A MEDIATOR OR A THIRD ARBITRATOR AS FOLLOWS. EITHER
PARTY MAY REQUEST THE JUDGE OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF TEXAS, HOUSTON DIVISION, HAVING GREATEST TENURE BUT NOT ON SENIOR
STATUS TO APPOINT A MEDIATOR OR THIRD ARBITRATOR, WHO SHALL BE INDEPENDENT AND
IMPARTIAL AND QUALIFIED TO DETERMINE THE MATTERS SUBMITTED IN THAT JUDGE'S SOLE
OPINION. IF THAT JUDGE FAILS, WITHIN THIRTY (30) DAYS OF SUBMISSION OF THE
REQUEST, TO APPOINT A MEDIATOR OR THIRD ARBITRATOR, THEN EITHER PARTY MAY MAKE
THE SAME REQUEST TO THE JUDGE OF THAT COURT WITH THE NEXT GREATEST TENURE, AND
SO ON, UNTIL THE MEDIATOR IS APPOINTED AND THE PANEL OF ARBITRATORS IS
CONSTITUTED. IF, PRIOR TO RENDERING A DECISION, AN ARBITRATOR RESIGNS OR BECOMES
UNABLE TO SERVE, HE SHALL BE REPLACED AS FOLLOWS. IF HE WAS ONE OF THE TWO
ARBITRATORS APPOINTED BY THE PARTIES, THE PARTY THAT NAMED HIM SHALL NAME HIS
REPLACEMENT; PROVIDED, HOWEVER, THAT IF HIS REPLACEMENT IS NOT NAMED WITHIN
FIFTEEN (15) DAYS, THE OTHER PARTY SHALL NAME HIS REPLACEMENT. IF HE WAS THE
THIRD ARBITRATOR SELECTED BY THE TWO ARBITRATORS NAMED BY THE PARTIES, THOSE TWO
ARBITRATORS SHALL NAME HIS REPLACEMENT; PROVIDED, HOWEVER, THAT IF THEY FALL TO
AGREE ON HIS REPLACEMENT WITHIN FIFTEEN (15) DAYS, EITHER PARTY MAY FOLLOW THE
PROCEDURE SPECIFIED IN THIS SUBPARAGRAPH (d).
(e) THE ARBITRATION SHALL OCCUR IN HOUSTON, TEXAS AND SHALL BE CONDUCTED IN
ACCORDANCE WITH THE AMERICAN ARBITRATION ASSOCIATION'S COMMERCIAL ARBITRATION
RULES IN EFFECT AT THE TIME OF THE ARBITRATION NOTICE (THE "RULES"). THE PARTIES
AGREE THAT THEY WILL FAITHFULLY OBSERVE THIS AGREEMENT AND THE RULES AND THAT
THEY WILL ABIDE BY AND PERFORM ANY FINAL AWARD RENDERED BY THE ARBITRATORS.
ADDITIONALLY, THE ARBITRATION SHALL BE CONDUCTED IN A MANNER CONSISTENT WITH THE
FEDERAL ARBITRATION ACT, 9 U.S.C. SECTIONS 1 ET SEQ. (THE "FAA") OR CONSISTENT
WITH THE SAME PRINCIPLES ENUNCIATED IN THE FAA IN THE EVENT IT MAY NOT BE
TECHNICALLY APPLICABLE; PROVIDED, HOWEVER, THAT RULES ESTABLISHED UNDER THE FAA
THAT THE PARTIES CANNOT ELECT AS APPLICABLE IF THE FAA IS NOT TECHNICALLY
APPLICABLE, SUCH AS PROCEDURAL RULES CONCERNING ENFORCEMENT OF AWARDS, ACCESS TO
THE COURTS, PROCEDURES FOR REVIEW, AND MATTERS CONCERNING SUBJECT MATTER
JURISDICTION, SHALL NOT BE BINDING IF THE FAA IS NOT TECHNICALLY APPLICABLE. THE
CONTROVERSY OR DISPUTE SUBMITTED SHALL BE RESOLVED BY THE DECISION OF A MAJORITY
OF THE PANEL OF ARBITRATORS. THE AWARD OR JUDGMENT OF THE PANEL SHALL BE FINAL
AND BINDING ON THE PARTIES AND JUDGMENT UPON THE AWARD OR JUDGMENT OF THE PANEL
MAY BE ENTERED AND ENFORCED IN ANY COURT HAVING JURISDICTION. NO LITIGATION OR
OTHER JUDICIAL PROCEEDING MAY EVER BE INITIATED AT ANY TIME IN ANY COURT FOR THE
PURPOSE OF ADJUDICATING, INTERPRETING, OR ENFORCING THE RIGHTS OR OBLIGATIONS OF
THE PARTIES TO THIS AGREEMENT, OR TO DETERMINE THE VALIDITY OF OR ADJUDICATE A
CLAIM OF BREACH OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT THIS PROHIBITION
SHALL NOT APPLY TO LITIGATION OR OTHER JUDICIAL PROCEEDINGS UNDERTAKEN TO SEEK
ENFORCEMENT OF THE PARTIES' AGREEMENT TO ARBITRATE
-22-
<PAGE> 28
OR TO ENFORCE ANY ARBITRATION AWARD OR SEEK REVIEW OR ANY ARBITRATION AWARD.
REVIEW OF SUCH ARBITRATION AWARD SHALL BE PERMITTED ONLY ON GROUNDS THAT (i)
THE AWARD WAS PROCURED BY CORRUPTION, FRAUD, OR UNDUE MEANS; (ii) THERE WAS
EVIDENT PARTIALITY OR CORRUPTION IN THE THIRD APPOINTED ARBITRATOR; (iii) THE
PANEL WAS GUILTY OF MISCONDUCT IN REFUSING TO HEAR EVIDENCE PERTINENT AND
MATERIAL TO THE CONTROVERSY; (iv) THE PANEL EXCEEDED THEIR POWERS; OR (v) THERE
WAS NO AGREEMENT TO ARBITRATE THE MATTER SUBMITTED AND RULED UPON AND THE PARTY
AFFECTED DID NOT PARTICIPATE IN THE ARBITRATION HEARING WITHOUT RAISING THE
OBJECTION. THE PARTIES EXPRESSLY AGREE THAT AN AWARD SHALL IN NO OTHER RESPECT
BE APPEALABLE OR SUBJECT TO REVIEW. IF EITHER PARTY BECOMES THE SUBJECT OF A
BANKRUPTCY, RECEIVERSHIP OR OTHER SIMILAR PROCEEDING UNDER THE LAWS OF THE
UNITED STATES OF AMERICA, ANY STATE OR COMMONWEALTH OR ANY OTHER NATION OR
POLITICAL SUBDIVISION THEREOF, THEN, TO THE EXTENT PERMITTED OR NOT PROHIBITED
BY APPLICABLE LAW, ANY FACTUAL OR SUBSTANTIVE LEGAL ISSUES ARISING IN OR DURING
THE PENDENCY OF ANY SUCH PROCEEDING SHALL BE SUBJECT TO ALL OF THE FOREGOING
MEDIATION AND ARBITRATION PROVISIONS AND SHALL BE RESOLVED, TO THE EXTENT
PERMITTED, IN ACCORDANCE THEREWITH. THE AGREEMENTS CONTAINED HEREIN HAVE BEEN
GIVEN FOR VALUABLE CONSIDERATION, ARE COUPLED WITH AN INTEREST AND ARE NOT
INTENDED TO BE EXECUTORY CONTRACTS. THE FEES AND EXPENSES OF THE MEDIATOR WILL
BE SHARED EQUALLY BY THE PARTIES AND THE FEES AND EXPENSES OF THE THIRD
ARBITRATOR WILL BE SHARED BY THE PARTIES ON A BASIS DETERMINED TO BE FAIR AND
EQUITABLE BY THE PANEL, TAKING INTO ACCOUNT THE RELATIVE FAULT OF EACH PARTY,
THE RELATIVE CREDIBILITY AND MERIT OF ALL CLAIMS AND DEFENSES MADE BY EACH
PARTY AND THE COOPERATION, SPEED AND EFFICIENCY OF EACH PARTY IN CONDUCTING THE
ARBITRATION PROCEEDINGS AND COMPLYING WITH THE RULES AND WITH THE ORDERS AND
REQUESTS OF THE PANEL.
(f) WITHIN 10 DAYS AFTER THE SELECTION OF THE THIRD ARBITRATOR, THE PARTIES
AND THEIR COUNSEL WILL APPEAR BEFORE THE PANEL AT A PLACE AND TIME IN HOUSTON,
TEXAS AS MAY BE DESIGNATED BY THE PANEL FOR THE PURPOSE OF EACH PARTY MAKING A
ONE HOUR OR LESS PRESENTATION AND SUMMARY OF THE CASE. THEREAFTER, THE PANEL
WILL SET DATES AND TIMES FOR ADDITIONAL HEARINGS UNTIL THE PROCEEDING IS
CONCLUDED. THE DESIRE AND GOAL OF THE PARTIES IS, AND THE PANEL WILL BE ADVISED
THAT THEIR GOAL SHOULD BE, TO CONDUCT AND CONCLUDE THE ARBITRATION PROCEEDING AS
EXPEDITIOUSLY AS POSSIBLE. IF ANY PARTY OR HIS COUNSEL FAILS, WITHOUT GOOD
CAUSE, TO APPEAR AT ANY HEARING, THE PANEL SHALL BE ENTITLED TO REACH A DECISION
BASED ON THE EVIDENCE WHICH HAS BEEN PRESENTED TO HIM BY THE OTHER PARTY WHO DID
APPEAR.
(g) ANY ARBITRAL AWARD MAY BE ENFORCED IN THE COURTS OF THE STATE OF TEXAS
OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE PARTIES HEREBY ACCEPT FOR
THEMSELVES AND IN RESPECT OF THEIR PROPERTY, GENERALLY AND UNCONDITIONALLY, THE
NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS FOR SAID PURPOSE AND THE
PARTIES HEREBY IRREVOCABLY WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY
OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH THEY MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS.
-23-
<PAGE> 29
(h) THE PANEL WILL HAVE NO AUTHORITY TO AWARD PUNITIVE OR OTHER DAMAGES NOT
MEASURED BY THE PREVAILING PARTY'S ACTUAL DAMAGES.
31. ENTIRE AGREEMENT, AMENDMENT. This Agreement constitutes the entire
agreement between the Parties with respect to the subject hereof and shall
supersede any prior agreement between the parties, whether written or oral,
relating to the subject hereof. This Agreement may be supplemented, altered,
amended, modified or revoked by writing only, signed by both Parties.
32. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective successors and assigns.
Except as provided in Section 3(c), prior to the Closing Date neither Party may
assign its rights or obligations under this Agreement without the prior written
consent of the other Party, which may be withheld for any reason including
convenience.
33. COMPLIANCE AND ENFORCEMENT WAIVERS. Any of the terms, provisions,
covenants, representations, warranties or conditions hereof may be waived only
by a written instrument executed by the Party waiving compliance. Except as
otherwise expressly provided in this Agreement, the failure of any Party at any
time or times to require performance of any provision hereof shall in no manner
affect such Party's right to enforce the same. No waiver by any Party of any
condition, or of the breach of any term, provision, covenant, representation or
warranty contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such condition or breach or a waiver of any other
condition or of the breach of any other term, provision, covenant,
representation or warranty.
34. THIRD-PARTY BENEFICIARIES. It is understood and agreed that there shall
be no third-party beneficiary of this Agreement, and that the provisions hereof
do not impart enforceable rights, benefits, or remedies in anyone who is not a
Party or a successor or assignee of a Party hereto.
35. SUCCESSORS AND ASSIGNS. This Agreement binds and inures to the benefit
of the Parties hereto their respective permitted successors and assigns, and all
the terms, provisions, covenants, obligations, indemnities, representations,
warranties and conditions of this Agreement shall be enforceable by the Parties
hereto and their respective permitted successors and assigns.
36. SEVERABILITY. If any provision of this Agreement is found by a court of
competent jurisdiction to be invalid or unenforceable, that provision will be
deemed modified to the extent necessary to make it valid and enforceable and if
it cannot be so modified, it shall be deemed deleted and the remainder of the
Agreement shall continue and remain in full force and effect.
37. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall constitute an original and all of which shall constitute one
document.
-24-
<PAGE> 30
38. EXHIBITS. The Appendices, Exhibits and Schedules attached to this
Agreement are incorporated into and made a part of this Agreement.
IN WITNESS WHEREOF, the authorized representatives of Conoco and Michael
execute this Agreement on the dates stated below.
CONOCO INC.
By: /s/ S. DON DELOZIER
-----------------------------
S. Don DeLozier
Attorney-in-Fact
MICHAEL PETROLEUM CORPORATION
By: /s/ GLENN D. HART
-----------------------------
Glenn D. Hart
Chief Executive Officer
-25-
<PAGE> 31
ACKNOWLEDGEMENTS
STATE OF TEXAS )
)
COUNTY OF HARRIS )
The foregoing instrument was acknowledged before me this 20th day of
February, 1998, by S. Don DeLozier, Attorney-in-Fact of CONOCO INC., a Delaware
corporation, on behalf of said corporation.
My commission expires: /s/ RICHARD B. HEMINGWAY, JR.
4-22-2000 --------------------------------
- ---------------------- Notary Public
RICHARD B. HEMINGWAY, JR.
MY COMMISSION EXPIRES
[SEAL] April 22, 2000
STATE OF TEXAS )
)
COUNTY OF HARRIS )
The foregoing instrument was acknowledged before me this 20th day of
February, 1998, by Glenn D. Hart, Chief Executive Officer of MICHAEL PETROLEUM
CORPORATION, a Texas corporation, on behalf of said corporation.
MY COMMISSION
EXPIRES
My commission expires: /s/ RICHARD B. HEMINGWAY, JR.
4-22-2000 --------------------------------
- ---------------------- Notary Public
RICHARD B. HEMINGWAY, JR.
MY COMMISSION EXPIRES
[SEAL] April 22, 2000
-26-
<PAGE> 1
EXHIBIT 10.6
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT (this "Agreement"), dated February 5, 1998, is by and
between ENRON OIL & GAS COMPANY, a Delaware corporation ("EOG"), and MICHAEL
PETROLEUM CORPORATION, a Texas corporation ("Michael"), and is in consideration
of EOG's agreement to sell, and Michael's agreement to buy, certain property
described in this Agreement, all pursuant to the terms and conditions of this
Agreement. EOG and Michael may also be referred to herein individually as a
"Party" or, collectively, as the "Parties."
1. PROPERTY. Subject to the terms and conditions set forth hereinafter, EOG
agrees to grant or convey to Michael (whichever is applicable as provided for
below) the EOG Property (as defined hereinafter) and Michael agrees to accept
the EOG Property, and tender consideration therefor, in the manner and of the
type and amount as hereinafter required. For purposes of this Agreement, "EOG
Property" shall mean, collectively:
(a) all of EOG's right, title and interest in, to and under or derived
from the oil and gas leases, oil, gas and mineral leases, surface estate, and
other interests therein referred to in Exhibit "A," attached hereto and made a
part hereof for all purposes (the "Leases"), insofar and only insofar as the
Leases apply to the lands, depths, formations, wellbore rights and/or other
rights specified on Exhibit "A," together with identical interests in and to all
property and rights incident thereto, including, without limitation, all wells,
gathering systems, materials, equipment, personal property, fixtures and
facilities located thereon or used in connection therewith and all of EOG's
rights in, to and under all agreements, unitization agreements, operating
agreements, leases, permits, rights-of-way, easements, licenses, options and
orders in any way relating thereto;
(b) a leasehold interest in all of EOG's right, title and interest in,
to and under or derived from the lands depicted on the plat attached hereto as
Exhibit "B" (the "South Callaghan Ranch Lands"), insofar and only insofar as
the South Callaghan Ranch Lands cover the interval from the surface of the
ground down to 100 feet below the stratigraphic equivalent of the
1
<PAGE> 2
base of the Lobo 6 sand, together with all of EOG's right, title and interest in
and to all wells, gathering systems, materials, equipment, personal property,
fixtures and facilities located on the South Callaghan Ranch Lands and used in
connection with such lands and above-described depths and all agreements,
unitization agreements, operating agreements, leases, permits, rights-of-way,
easements, licenses, options and orders in any way relating to such lands and
above-described depths, all pursuant to an Oil and Gas Lease from EOG to Michael
in substantially the form of Lease attached hereto as Exhibit "C" (the "South
Callaghan Ranch Lease");
(c) a term assignment of all of EOG's interests in and to a 2.67%
nonparticipating royalty interest in and to the South Callaghan Ranch Lands,
insofar and only insofar as such lands cover the interval covered by the South
Callaghan Ranch Lease and terminating simultaneously with and as to that portion
of the South Callaghan Ranch Lease which has terminated; and
(d) All three-dimensional and two-dimensional seismic data owned by EOG
insofar, but only insofar, as such data covers the lands referred to or
described in Exhibit "A" or the lands depicted in Exhibit "B," plus that portion
of the surrounding lands necessary to obtain full fold coverage of the lands
referred to or described in Exhibit "A" or the lands depicted in Exhibit "B," if
available, to the extent any of the above is assignable or transferable,
including all supporting survey information necessary to post and locate all
surveys on Michael's map(s), including a tape copy in a SEG-P1 format of all
surveys and well information in X-Y coordinates necessary to load the 3-D
seismic surveys on a geophysical workstation and a printed survey map showing
all source and receiver locations of any 3-D seismic survey pertaining to the
lands referred to, or described or depicted in Exhibits "A" and "B," and subject
to any consents to assignment or transfer to which any of the above may be
subject (the "Seismic Data").
2. CONSIDERATION. As consideration for the EOG Property, Michael shall pay
to EOG at Closing (as defined hereinafter), the cash sum of FORTY-EIGHT MILLION
FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($48,500,000.00) (the "Purchase
Price"). As additional consideration for the EOG Property, Michael shall convey
to EOG all of Michael's
2
<PAGE> 3
right, title and interest in and to the Rottersmann 250 #1 Well, including,
without limitation, all rights and interests of Michael therein arising out of
or derived from the contracts and agreements described in Exhibit "D," attached
hereto and made a part hereof for all purposes, together with identical
interests in and to all property and rights incident thereto, including, without
limitation, all gathering systems, materials, equipment, personal property and
fixtures located thereon or used in connection therewith and all of Michael's
rights in, to and under all agreements, operating agreements, permits,
rights-of-way, easements, licenses, options and orders in any way relating
thereto. The foregoing properties, rights and interests being hereinafter called
the "MICHAEL Property." In addition, Michael shall grant to EOG a non-exclusive
license to use the Seismic Data pursuant to a Seismic License Agreement
substantially in the form of Exhibit "E" attached hereto (the "License"), to the
extent the Seismic Data may be licensed to ENRON by Michael under the terms of
applicable agreements covering such Seismic Data and subject to the obtaining of
any necessary consents.
3. MICHAEL PRE-ACQUISITION REVIEW. EOG shall make a good-faith effort, to
give Michael and Michael's authorized representatives, at any reasonable time(s)
before Closing, (a) physical access to the wells and other equipment included in
the EOG Property, at Michael's sole risk, cost and expense, for the purpose of
inspecting the same, and conducting witnessed tests of production from the wells
thereon, (b) access to all production, engineering and other technical data and
records, and to all contract, land and lease records, to the extent such data
and records are in EOG's possession and relate to the EOG Property, and (c)
access to all accounting records pertaining to the EOG Property for the past
three (3) years such that Michael can perform an audit of such records for such
three (3) year period prior to the Closing Date; provided, however, EOG shall
have no obligation to provide Michael such access to any data or information
which EOG considers proprietary or confidential or which access EOG cannot
legally provide Michael because of third-party restrictions.
3
<PAGE> 4
4. EOG PRE-ACQUISITION REVIEW. Michael shall make a good-faith effort to
give EOG and EOG's authorized representatives, at any reasonable time(s) before
Closing, (a) physical access to the MICHAEL Property, at EOG's sole risk, cost
and expense for the purpose of inspecting the same, and (b) access to all
contract, land and lease records, to the extent such data and records are in
Michael's possession and relate to the MICHAEL Property; provided, however,
Michael shall have no obligation to provide EOG such access to any data or
information which Michael considers proprietary or confidential or which access
Michael cannot legally provide EOG because of third-party restrictions.
5. TITLE DEFECTS ON EOG PROPERTY. As used in this Agreement, the term "EOG
Title Defect" shall mean a material deficiency in one (or more) of the following
respects:
(a) EOG's title, as of the Effective Time (as defined hereinafter), as
to all or any portion of the EOG Property, is subject to an outstanding
mortgage, deed of trust, lien or encumbrance or other adverse claim which would
interfere materially with the ownership, operation, use or value of the EOG
Property;
(b) EOG owns less than the net revenue interest described on Exhibit
"A-1" or more than the working interest described on Exhibit "A-1" without a
corresponding increase in net revenue interest;
(c) EOG's rights and interests are subject to being reduced by virtue
of the exercise by a third party of any preferential right, reversionary,
back-in or other similar right not reflected on Exhibit "A-1;" and
(d) EOG is in default under some material provision of a lease, farmout
agreement, operating agreement, or other agreement affecting the EOG Property.
Michael shall give EOG written notice of each EOG Title Defect on or
before five (5) days prior to the Closing Date, together with full particulars
relating thereto. MICHAEL SHALL BE DEEMED TO HAVE WAIVED ALL EOG TITLE DEFECTS
OF WHICH EOG HAS NOT BEEN GIVEN TIMELY WRITTEN NOTICE, SAVE AND EXCEPT CLAIMS
4
<PAGE> 5
BASED UPON A BREACH OF THE LIMITED WARRANTY OF TITLE PROVIDED IN THE ASSIGNMENT
AND BILL OF SALE ATTACHED HERETO AS EXHIBIT "F."
6. PURCHASE PRICE ADJUSTMENTS ON EOG PROPERTY.
Michael may, by delivery of written notice to EOG of the existence of an
EOG Title Defect, request a reduction of the Purchase Price. Conversely, EOG
may, by delivery of written notice to Michael, request an increase in the
Purchase Price because the net revenue interest owned by EOG in the EOG Property
is greater than that shown on Exhibit "A-1."
Any such notice by Michael or EOG shall include appropriate evidence to
substantiate its position and shall be delivered to the other Party on or before
five (5) days prior to the Closing. In the event any such notice is not timely
delivered, Michael shall thereafter have no right to assert an EOG Title Defect
and EOG shall thereafter have no right to assert a larger net revenue interest.
Upon timely delivery of a notice either by Michael of an EOG Title
Defect or by EOG of a larger net revenue interest, Michael and EOG shall meet,
within the period between the date of receipt of such notice and the Closing
Date, and may mutually agree as follows with respect to any EOG Title Defect:
(i) EOG shall cure or agree to cure such EOG Title Defect, to a degree agreed
upon prior to Closing (provided, however, EOG shall have no obligation to
perform such cure), (ii) Michael shall agree to accept the interest "AS IS," and
release EOG from all claims related thereto, (iii) EOG shall agree to indemnify
Michael against all losses, costs, expenses and liabilities with respect to such
EOG Title Defect, or (iv) EOG and Michael shall agree as to the amount of a
Purchase Price adjustment in connection with such EOG Title Defect. If no
agreement can otherwise be reached as to the disposition of an interest burdened
by an EOG Title Defect or with respect to EOG's larger net revenue interest
prior to the Closing Date, either Party may give written notice to the other
Party on or before the Closing Date to terminate this Agreement and upon the
giving of such notice, this Agreement shall be of no further force and effect.
5
<PAGE> 6
In the event the net amount of the Purchase Price adjustments hereunder
exceeds ten percent (10%) of the Purchase Price, then either Michael or EOG
may, upon written notice to the other Party, cancel this Agreement and the same
shall be of no further force and effect.
If Michael receives a Purchase Price adjustment at Closing on account of
an EOG Title Defect, EOG shall have until June 30, 1998 to cure such EOG Title
Defect at its cost. If by such date it can demonstrate to Michael's reasonable
satisfaction that such EOG Title Defect has been cured, then EOG shall be
entitled to reimbursement from Michael for the amount of such Purchase Price
adjustment. Michael shall pay such amount to EOG within fifteen (15) business
days of the date EOG demonstrates to Michael's reasonable satisfaction that such
EOG Title Defect has been cured.
7. TITLE DEFECTS ON MICHAEL PROPERTY. As used in this Agreement, the term
"MICHAEL Title Defect" shall mean a material deficiency in one (or more) of the
following respects:
(a) Michael's title, as of the Effective Time, as to all or any portion
of the MICHAEL Property, is subject to an outstanding mortgage, deed or trust,
lien or encumbrance or other adverse claim which would interfere materially with
the ownership, operation, use or value of the MICHAEL Property;
(b) Michael owns less than the net revenue interest described on Exhibit
"D" or more than the working interest described on Exhibit "D" without a
corresponding increase in net revenue interest;
(c) Michael's rights and interests are subject to being reduced by
virtue of the exercise by a third party of any preferential right, reversionary,
back-in or other similar right not reflected on Exhibit "D;" and
(d) Michael is in default under some material provision of a lease,
farmout agreement or agreement affecting the MICHAEL Property.
EOG shall give Michael written notice of each MICHAEL Title Defect on or
before five (5) days prior to the Closing Date, together with full particulars
relating thereto. EOG
6
<PAGE> 7
SHALL BE DEEMED TO HAVE WAIVED ALL MICHAEL TITLE DEFECTS OF WHICH MICHAEL HAS
NOT BEEN GIVEN TIMELY WRITTEN NOTICE, SAVE AND EXCEPT CLAIM BASED UPON A BREACH
OF THE LIMITED WARRANTY OF TITLE PROVIDED IN THE ASSIGNMENT ATTACHED HERETO AS
EXHIBIT "I." EOG and Michael hereby agree that the allocated value of the
MICHAEL Property, for purposes of notice to preferential rights holders only, is
$1,500,000.00.
8. PURCHASE PRICE ADJUSTMENTS ON MICHAEL PROPERTY. EOG may, by delivery of
written notice to Michael of the existence of a MICHAEL Title Defect, request an
increase in the Purchase Price.
Any such notice by EOG shall include appropriate evidence to
substantiate its position and shall be delivered to Michael on or before five
(5) days prior to the Closing. In the event any such notice is not timely
delivered, EOG shall thereafter have no right to assert a MICHAEL Title Defect.
Upon timely delivery of a notice by EOG of a MICHAEL Title Defect, EOG
and Michael shall meet, within the period between the date of receipt of such
notice and the Closing Date, and may mutually agree as follows: (i) Michael
shall cure or agree to cure such MICHAEL Title Defect, to a degree agreed upon
prior to Closing (provided, however, Michael shall have no obligation to perform
such cure), (ii) EOG shall agree to accept the interest "AS IS," and release
Michael from all claims related thereto, (iii) Michael shall agree to indemnify
EOG against all losses, costs, expenses and liabilities with respect to such
MICHAEL Title Defect, or (iv) Michael and EOG shall agree as to the amount of a
Purchase Price adjustment in connection with such MICHAEL Title Defect. If no
agreement can otherwise be reached as to the disposition of an interest burdened
by a MICHAEL Title Defect prior to the Closing Date, either Party may give
written notice to the other Party on or before the Closing Date to terminate
this Agreement and, upon the giving of such notice, this Agreement shall be of
no further force and effect.
If EOG receives a Purchase Price adjustment at Closing on account of a
MICHAEL Title Defect, Michael shall have until June 30, 1998 to cure such
MICHAEL Title Defect at its
7
<PAGE> 8
cost. If by such date it can demonstrate to EOG's reasonable satisfaction that
such MICHAEL Title Defect has been cured, then Michael shall be entitled to
reimbursement from EOG for the amount of such Purchase Price adjustment. EOG
shall pay such amount to Michael within fifteen (15) business days of the date
Michael demonstrates to EOG's reasonable satisfaction that such MICHAEL Title
Defect has been cured.
9. GAS IMBALANCES FOR EOG PROPERTY. In the event it is determined that a
net gas imbalance exists with respect to operations relating to the EOG
Property, the Purchase Price shall be adjusted upward or downward, as the case
may be, to reflect the effect of such net gas imbalance for the EOG Property as
of the Effective Time. Such adjustment shall be calculated by multiplying the
per Mcf amount of the gas imbalance, as of the Effective Time, by $2.25 per Mcf.
10. GAS IMBALANCES FOR MICHAEL PROPERTY. In the event it is determined that
a net gas imbalance exists with respect to operations relating to the MICHAEL
Property, the Purchase Price shall be adjusted upward or downward, as the case
may be, to reflect the effect of such net gas imbalance for the MICHAEL Property
as of the Effective Time. Such adjustment shall be calculated by multiplying the
per Mcf amount of the gas imbalance, as of the Effective Time, by $2.25 per Mcf.
11. REPRESENTATIONS BY EOG. EOG represents to Michael, each of which
representations shall survive Closing, that as of the date of this Agreement and
as of Closing:
(a) Due Organization. EOG is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Delaware and is
duly qualified to do business in the State of Texas and has satisfied all state
bonding requirements, if any.
(b) Corporate Power. EOG has all requisite corporate power and authority
to carry on its business as presently conducted, to enter into this Agreement,
and to perform its obligations under this Agreement. The consummation of the
transactions contemplated by this
8
<PAGE> 9
Agreement will not violate, nor be in conflict with, (i) any provision of its
charter or bylaws or (ii) any agreement or instrument to which it is a party or
is bound (except for preferential rights to purchase, maintenance of uniform
interests, and required third party consents to assignment, if any).
(c) Duly Executed. This Agreement has been duly executed and delivered
on behalf of EOG, and at Closing all documents and instruments required
hereunder to be executed and delivered by it shall have been duly executed and
delivered and the transactions contemplated hereby shall have been duly and
validly authorized by all requisite corporate action.
(d) No Litigation. There are no pending or, to the best of EOG's
knowledge without further investigation, threatened claims, lawsuits,
administrative proceedings, or governmental investigations or inquiries
involving EOG's right to consummate the sale contemplated hereunder.
12. REPRESENTATIONS BY MICHAEL. Michael represents to EOG, each of which
representations shall survive Closing, that as of the date of this Agreement and
as of Closing:
(a) Due Organization. Michael is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Texas and is duly
qualified to do business in the State of Texas and has satisfied all state
bonding requirements, if any.
(b) Corporate Power. Michael has all requisite corporate power and
authority to carry on its business as presently conducted, to enter into this
Agreement, and to perform its obligations under this Agreement. The consummation
of the transactions contemplated by this Agreement will not violate, nor be in
conflict with, (i) any provision of its charter or bylaws or (ii) any agreement
or instrument to which it is a party or is bound (except for preferential rights
of purchase, if any).
(c) Duly Executed. This Agreement has been duly executed and delivered
on behalf of Michael, and at Closing, all documents and instruments required
hereunder to be executed and delivered by it shall have been duly executed and
delivered and the transactions contemplated hereby shall have been duly and
validly authorized by all requisite corporate action.
9
<PAGE> 10
(d) No Litigation. There are no pending or, to the best of Michael's
knowledge without further investigation, threatened claims, lawsuits,
administrative proceedings, or governmental investigations or inquiries
involving Michael's right to consummate the sale contemplated hereunder.
13. CLOSING. Closing shall occur on or before March 31, 1998, or at such
date as may be agreed by the Parties or as provided by this Agreement (the
"Closing Date"), at the offices of Enron Oil & Gas Company in Houston, Texas, or
at such other place as Michael and EOG may agree. "Closing" shall mean (a) the
granting or conveyance of the EOG Property to Michael and the conveyance of the
MICHAEL Property to EOG; (b) the complete satisfaction by the Parties of the
obligations of consideration under Section 2 above, and (c) the transfer of the
operation and possession of the EOG Property to Michael. At Closing, the
following will occur:
(a) Consideration. Michael shall make payment of the Purchase Price, as
adjusted, by wire transfer to an account or accounts to be designated by EOG.
Prior to Closing, EOG will notify Michael of the amounts to be deposited in each
designated account.
(b) Grant or Conveyance. EOG will grant or convey, as the case may be,
the EOG Property to Michael by executing and delivering (i) an Assignment and a
Bill of Sale, in substantially the form attached hereto as Exhibit "F," (ii) a
Deed, in substantially the form attached hereto as Exhibit "G," (iii) the South
Callaghan Ranch Lease, and (iv) a Term Assignment, in substantially the form
attached hereto as Exhibit "H." Michael will convey the MICHAEL Property to EOG
by executing and delivering an Assignment, in substantially the form attached
hereto as Exhibit "I" and will execute and deliver the License.
(c) Non-Foreign Affidavits. EOG shall execute and deliver to Michael a
Non-Foreign Affidavit, in substantially the form attached hereto as Exhibit "J,"
and Michael shall execute and deliver to EOG a Non-Foreign Affidavit, in
substantially the form attached hereto as Exhibit "K."
10
<PAGE> 11
(d) Operatorship. EOG and Michael shall execute any necessary forms
required by governmental agencies for the transfer of operatorship of the EOG
Property (in those instances where EOG is the Operator) to a person or entity
designated by Michael and Michael shall file same immediately following Closing.
(e) Possession. EOG shall (subject to the terms of any applicable
agreements and to the other provisions hereof) deliver to Michael exclusive
possession of the EOG Property and grant the Lease to Michael, effective as of
the Effective Time and Michael shall (subject to the terms of any applicable
agreements and to the other provisions hereof) deliver to EOG exclusive
possession of the MICHAEL Property and grant the License, effective as of the
Effective Time.
(f) Records of EOG Property. Originals (or copies with respect to the
South Callaghan Ranch Lands) of all books, records and files in the possession
of EOG pertaining to the EOG Property, including, without limitation, all well
files, correspondence, geological and engineering information, shall be made
available for delivery to Michael at EOG's offices where currently maintained,
within five (5) days after the Closing. EOG shall have the right to retain
copies (or originals with respect to the South Callaghan Ranch Lands) of any or
all of such books, records and files and to retain canceled checks and general
ledger, purchasing and other general accounting records of EOG. EOG reserves the
right to later examine the records and information delivered to Michael pursuant
to this subsection (f) to the extent such examination is necessary for any
relevant business purpose. All information and data shall be furnished as a
matter of convenience only to Michael and Michael's reliance on same shall be
at Michael's sole risk.
(g) Records of MICHAEL Property. Originals of all books, records and
files in the possession of Michael pertaining to the MICHAEL Property,
including, without limitation, all well files, correspondence, geological and
engineering information, shall be made available for delivery to EOG at
Michael's offices where currently maintained, within five (5) days after the
Closing. Michael shall have the right to retain copies of any or all of such
books, records and files and to retain canceled checks and general ledger,
purchasing and other general accounting records of Michael. Michael reserves the
right to later examine the records and information delivered to
11
<PAGE> 12
EOG pursuant to this subsection (g) to the extent such examination is necessary
for any relevant business purpose. All information and data shall be furnished
as a matter of convenience only to EOG and EOG's reliance on same shall be at
EOG sole risk.
(h) Other Documents and Actions. EOG and MICHAEL shall execute and
deliver to each other the letter agreements attached hereto as Exhibits "L" and
"M." In addition, EOG and Michael shall execute and deliver such other
instruments and take such other actions as may be required pursuant to the terms
of this Agreement.
14. FURTHER ASSURANCES.
After the Closing, each of the Parties shall execute, acknowledge and
deliver to the other such further instruments, and take such other actions as
may be reasonably necessary to carry out the provisions of this Agreement,
including, without limitation, all division orders, transfer orders and all
other documents necessary to fully vest in the Parties the rights, obligations
and benefits acquired pursuant to this Agreement. With regard to the EOG
Property, however, Michael shall assume all responsibility for notifying the
purchasers of oil and gas production, and such other designated persons who may
be responsible for disbursing payments for the purchase of such production, of
the transfer of ownership of the EOG Property. In connection therewith, EOG
shall provide Michael with a complete list of all purchasers of oil, gas and
condensate production from the EOG Property no later than five (5) days prior to
the Closing. Michael shall take all actions necessary to effectuate the transfer
of such payments to Michael as of the Effective Time. With regard to the MICHAEL
Property, however, EOG shall assume all responsibility for notifying the
purchasers of oil and gas production, and such other designated persons who may
be responsible for disbursing payments for the purchase of such production, of
the transfer of ownership of the MICHAEL Property. EOG shall take all actions
necessary to effectuate the transfer of such payments to EOG as of the Effective
Time.
12
<PAGE> 13
15. EFFECTIVE TIME. The grant and conveyance of the EOG Property from EOG
to Michael and the conveyance of the MICHAEL Property from Michael to EOG shall
be effective as of January 1, 1998, at 7:00 a.m. Central Standard Time (the
"Effective Time").
16. RESERVATIONS AND EXCEPTIONS. EOG and Michael each agree that the
transfer of the EOG Property and the MICHAEL Property are both made subject to
all reservations, exceptions, limitations, contracts and other burdens or
instruments which are of record or of which the Parties had actual or
constructive notice affecting such properties, including any matter included or
referenced in the materials made available by each Party to the other.
17. ASSUMPTION OF LIABILITIES AND INDEMNITIES FOR EOG PROPERTY. As used in
this Section 17 and the subparagraphs hereunder, "claims" shall include claims,
demands, causes of action, liabilities, damages, penalties and judgments of any
kind or character and all costs and fees in connection therewith.
(A) MICHAEL SHALL, (I) AT THE EFFECTIVE TIME, ASSUME, AND BE RESPONSIBLE
FOR AND COMPLY WITH, ALL DUTIES AND OBLIGATIONS OF EOG, EXPRESS OR IMPLIED, WITH
RESPECT TO THE EOG PROPERTY, INCLUDING, WITHOUT LIMITATION, THOSE ARISING UNDER
OR BY VIRTUE OF ANY LEASE, CONTRACT, AGREEMENT, DOCUMENT, PERMIT, APPLICABLE
STATUTE OR RULE, REGULATION OR ORDER OF ANY GOVERNMENTAL AUTHORITY (SPECIFICALLY
INCLUDING, WITHOUT LIMITATION, ANY GOVERNMENTAL REQUEST OR REQUIREMENT TO PLUG,
RE-PLUG AND/OR ABANDON ANY WELL OF WHATSOEVER TYPE, STATUS OR CLASSIFICATION,
WHETHER NOW EXISTING OR HEREAFTER ARISING OR ACCRUING AND WHETHER SUCH WELLS ARE
ACTIVE, INACTIVE, IDLE, OR HAVE BEEN PREVIOUSLY ABANDONED AS OF THE EFFECTIVE
TIME, AND/OR TAKE ANY CLEAN-UP OR OTHER ACTION WITH RESPECT TO THE EOG
PROPERTY). AND (II) DEFEND, INDEMNIFY AND HOLD EOG AND ITS PREDECESSORS IN
INTEREST HARMLESS FROM ANY AND ALL CLAIMS IN CONNECTION THEREWITH, EXCEPT ANY
SUCH CLAIMS ARISING DIRECTLY OR INDIRECTLY FROM, OR INCIDENT TO, EOG'S OWNERSHIP
OR OPERATION OF THE EOG PROPERTY PRIOR TO THE EFFECTIVE TIME, OTHER
13
<PAGE> 14
THAN CLEAN-UP AND PLUGGING AND ABANDONMENT LIABILITIES ASSUMED BY MICHAEL
PURSUANT TO SUBSECTION (I).
(B) OTHER THAN AS SET FORTH IN SUBSECTION (A)(II) ABOVE AND SECTIONS 30
AND 33 BELOW, EOG SHALL INDEMNIFY AND HOLD HARMLESS MICHAEL FROM ANY AND ALL
CLAIMS TO OR BY THIRD PARTIES RELATING TO OR ARISING OUT OF EOG's OWNERSHIP OR
OPERATION OF THE EOG PROPERTY PRIOR TO THE EFFECTIVE TIME. MICHAEL SHALL
INDEMNIFY AND HOLD HARMLESS EOG FROM ANY AND ALL CLAIMS TO OR BY THIRD PARTIES
RELATING TO OR ARISING OUT OF MICHAEL'S OWNERSHIP OR OPERATION OF THE EOG
PROPERTY AFTER THE EFFECTIVE TIME. EACH INDEMNIFIED PARTY HEREUNDER AGREES THAT
UPON ITS DISCOVERY OF FACTS GIVING RISE TO A CLAIM FOR INDEMNITY UNDER THE
PROVISIONS OF THIS AGREEMENT, INCLUDING RECEIPT BY IT OF ANY CLAIM, JUDICIAL OR
OTHERWISE, BY ANY THIRD PARTY WITH RESPECT TO ANY MATTER AS TO WHICH IT IS
ENTITLED TO INDEMNITY UNDER THE PROVISIONS OF THIS AGREEMENT, IT WILL GIVE
PROMPT NOTICE THEREOF IN WRITING TO THE INDEMNIFYING PARTY, TOGETHER WITH A
STATEMENT OF SUCH INFORMATION RESPECTING ANY OF THE FOREGOING AS IT SHALL THEN
HAVE. SUCH NOTICE SHALL INCLUDE A FORMAL DEMAND FOR INDEMNIFICATION UNDER THIS
AGREEMENT. THE INDEMNIFIED PARTY SHALL AFFORD THE INDEMNIFYING PARTY A
REASONABLE OPPORTUNITY TO PAY, SETTLE OR CONTEST THE CLAIM AT ITS EXPENSE.
(C) EXCEPT AS SET FORTH IN SUBSECTION (A)(II) ABOVE AND SECTIONS 30 AND
33 BELOW, EOG SHALL (I) BE RESPONSIBLE FOR ANY AND ALL CLAIMS ARISING OUT OF THE
PRODUCTION OR SALE OF HYDROCARBONS FROM THE EOG PROPERTY - OR THE PROPER
ACCOUNTING OR PAYMENT TO PARTIES FOR THEIR INTERESTS THEREIN - INSOFAR AS SUCH
CLAIMS RELATE TO PERIODS OF TIME PRIOR TO THE EFFECTIVE TIME, AND (II) DEFEND,
INDEMNIFY AND HOLD MICHAEL HARMLESS FROM ANY AND ALL SUCH CLAIMS. MICHAEL SHALL
BE RESPONSIBLE FOR ALL OF SAID TYPES OF CLAIMS INSOFAR AS THEY RELATE TO PERIODS
OF TIME FROM AND AFTER THE EFFECTIVE TIME AND SHALL DEFEND, INDEMNIFY AND HOLD
EOG AND ITS PREDECESSORS IN INTEREST HARMLESS THEREFROM.
14
<PAGE> 15
(D) UNLESS THIS AGREEMENT EXPRESSLY PROVIDES TO THE CONTRARY, THE
INDEMNITIES SET FORTH IN THIS AGREEMENT APPLY REGARDLESS OF WHETHER: (I) THE
INDEMNIFIED PARTY (OR ANY EMPLOYEE, AGENT, CONTRACTOR, SUCCESSOR OR ASSIGN OF
THE INDEMNIFIED PARTY) CAUSES, IN WHOLE OR PART, AN INDEMNIFIED CLAIM; (II) AN
INDEMNIFIED CLAIM ARISES OUT OF OR RESULTS FROM THE INDEMNIFIED PARTY'S (OR AN
EMPLOYEE'S, AGENT'S, CONTRACTOR'S, SUCCESSOR'S OR ASSIGN'S) SOLE OR CONCURRENT
NEGLIGENCE; (III) THE INDEMNIFIED PARTY (OR ANY EMPLOYEE, AGENT, CONTRACTOR,
SUCCESSOR OR ASSIGN OF THE INDEMNIFIED PARTY) IS DEEMED TO BE STRICTLY LIABLE,
IN WHOLE OR PART, FOR AN INDEMNIFIED CLAIM; OR (IV) ANY PART OF AN INDEMNIFIED
CLAIM IS THE RESULT OF THE IMPOSITION OF PUNITIVE DAMAGES. ALL INDEMNITIES SET
FORTH IN THIS AGREEMENT EXTEND TO THE OFFICERS, DIRECTORS, EMPLOYEES AND
AFFILIATES OF THE PARTY INDEMNIFIED, AND COVER THE ACTS AND OMISSIONS OF THE
OFFICERS, DIRECTORS, EMPLOYEES, CONTRACTORS, SUCCESSORS AND ASSIGNS OF THE
INDEMNIFYING PARTY.
18. ASSUMPTION OF LIABILITIES AND INDEMNITIES FOR MICHAEL PROPERTY. As used
in this Section 18 and the subparagraphs hereunder, "claims" shall include
claims, demands, causes of action, liabilities, damages, penalties and judgments
of any kind or character and all costs and fees in connection therewith.
(A) EOG SHALL, (I) AT THE EFFECTIVE TIME, ASSUME, AND BE RESPONSIBLE FOR
AND COMPLY WITH, ALL DUTIES AND OBLIGATIONS OF MICHAEL, EXPRESS OR IMPLIED, WITH
RESPECT TO THE MICHAEL PROPERTY, INCLUDING, WITHOUT LIMITATION, THOSE ARISING
UNDER OR BY VIRTUE OF ANY LEASE, CONTRACT, AGREEMENT, DOCUMENT, PERMIT,
APPLICABLE STATUTE OR RULE, REGULATION OR ORDER OF ANY GOVERNMENTAL AUTHORITY
(SPECIFICALLY INCLUDING, WITHOUT LIMITATION, ANY GOVERNMENTAL REQUEST OR
REQUIREMENT TO PLUG, RE-PLUG AND/OR ABANDON ANY WELL OF WHATSOEVER TYPE, STATUS
OR CLASSIFICATION, WHETHER NOW EXISTING OR HEREAFTER ARISING OR ACCRUING AND
WHETHER SUCH WELLS ARE ACTIVE, INACTIVE, IDLE OR
15
<PAGE> 16
HAVE BEEN PREVIOUSLY ABANDONED AS OF THE EFFECTIVE TIME, AND/OR TAKE ANY
CLEAN-UP OR OTHER ACTION WITH RESPECT TO THE MICHAEL PROPERTY), AND (II) DEFEND,
INDEMNIFY AND HOLD MICHAEL HARMLESS FROM ANY AND ALL CLAIMS IN CONNECTION
THEREWITH, EXCEPT ANY SUCH CLAIMS ARISING DIRECTLY OR INDIRECTLY FROM, OR
INCIDENT TO, MICHAEL'S OWNERSHIP OR OPERATION OF THE MICHAEL PROPERTY PRIOR TO
THE EFFECTIVE TIME, OTHER THAN CLEAN-UP AND PLUGGING AND ABANDONMENT LIABILITIES
ASSUMED BY EOG PURSUANT TO SUBSECTION (I).
(B) OTHER THAN AS SET FORTH IN SUBSECTION (A)(II) ABOVE AND SECTIONS 31
AND 34 BELOW, MICHAEL SHALL INDEMNIFY AND HOLD HARMLESS EOG FROM ANY AND ALL
CLAIMS TO OR BY THIRD PARTIES RELATING TO OR ARISING OUT OF MICHAEL'S OWNERSHIP
OR OPERATION OF THE MICHAEL PROPERTY PRIOR TO THE EFFECTIVE TIME. EOG SHALL
INDEMNIFY AND HOLD HARMLESS MICHAEL FROM ANY AND ALL CLAIMS TO OR BY THIRD
PARTIES RELATING TO OR ARISING OUT OF EOG'S OWNERSHIP OR OPERATION OF THE
MICHAEL PROPERTY AFTER THE EFFECTIVE TIME. EACH INDEMNIFIED PARTY HEREUNDER
AGREES THAT UPON ITS DISCOVERY OF FACTS GIVING RISE TO A CLAIM FOR INDEMNITY
UNDER THE PROVISIONS OF THIS AGREEMENT, INCLUDING RECEIPT BY IT OF ANY CLAIM,
JUDICIAL OR OTHERWISE, BY ANY THIRD PARTY WITH RESPECT TO ANY MATTER AS TO WHICH
IT IS ENTITLED TO INDEMNITY UNDER THE PROVISIONS OF THIS AGREEMENT, IT WILL GIVE
PROMPT NOTICE THEREOF IN WRITING To THE INDEMNIFYING PARTY, TOGETHER WITH A
STATEMENT OF SUCH INFORMATION RESPECTING ANY OF THE FOREGOING AS IT SHALL THEN
HAVE. SUCH NOTICE SHALL INCLUDE A FORMAL DEMAND FOR INDEMNIFICATION UNDER THIS
AGREEMENT. THE INDEMNIFIED PARTY SHALL AFFORD THE INDEMNIFYING PARTY A
REASONABLE OPPORTUNITY TO PAY, SETTLE OR CONTEST THE CLAIM AT ITS EXPENSE.
(C) EXCEPT AS SET FORTH IN SUBSECTION (A)(II) ABOVE AND SECTIONS 31 AND
34 BELOW, MICHAEL SHALL (I) BE RESPONSIBLE FOR ANY AND ALL CLAIMS ARISING OUT OF
THE PRODUCTION OR SALE OF HYDROCARBONS FROM THE MICHAEL PROPERTY -- OR THE
PROPER ACCOUNTING OR PAYMENT TO PARTIES FOR THEIR INTERESTS THEREIN -- INSOFAR
AS SUCH CLAIMS
16
<PAGE> 17
RELATE TO PERIODS OF TIME PRIOR TO THE EFFECTIVE TIME, AND (II) DEFEND,
INDEMNIFY AND HOLD EOG HARMLESS FROM ANY AND ALL SUCH CLAIMS. EOG SHALL BE
RESPONSIBLE FOR ALL OF SAID TYPES OF CLAIMS INSOFAR AS THEY RELATE TO PERIODS OF
TIME FROM AND AFTER THE EFFECTIVE TIME AND SHALL DEFEND, INDEMNIFY AND HOLD
MICHAEL HARMLESS THEREFROM.
(D) UNLESS THIS AGREEMENT EXPRESSLY PROVIDES TO THE CONTRARY, THE
INDEMNITIES SET FORTH IN THIS AGREEMENT APPLY REGARDLESS OF WHETHER: (I) THE
INDEMNIFIED PARTY (OR ANY EMPLOYEE, AGENT, CONTRACTOR, SUCCESSOR OR ASSIGN OF
THE INDEMNIFIED PARTY) CAUSES, IN WHOLE OR PART, AN INDEMNIFIED CLAIM; (II) AN
INDEMNIFIED CLAIM ARISES OUT OF OR RESULTS FROM THE INDEMNIFIED PARTY'S (OR AN
EMPLOYEE'S AGENT'S, CONTRACTOR'S, SUCCESSOR'S OR ASSIGN'S) SOLE OR CONCURRENT
NEGLIGENCE; (III) THE INDEMNIFIED PARTY (OR ANY EMPLOYEE, AGENT, CONTRACTOR,
SUCCESSOR OR ASSIGN OF THE INDEMNIFIED PARTY) IS DEEMED TO BE STRICTLY LIABLE,
IN WHOLE OR PART, FOR AN INDEMNIFIED CLAIM; OR (IV) ANY PART OF AN INDEMNIFIED
CLAIM IS THE RESULT OF THE IMPOSITION OF PUNITIVE DAMAGES. ALL INDEMNITIES SET
FORTH IN THIS AGREEMENT EXTEND TO THE OFFICERS, DIRECTORS, EMPLOYEES AND
AFFILIATES OF THE PARTY INDEMNIFIED, AND COVER THE ACTS AND OMISSIONS OF THE
OFFICERS, DIRECTORS, EMPLOYEES, CONTRACTORS, SUCCESSORS AND ASSIGNS OF THE
INDEMNIFYING PARTY.
19. CLOSING ADJUSTMENTS ON EOG PROPERTY. All ad valorem taxes, real
property taxes and similar obligations ("Property Taxes") attributable to the
EOG Property for the year 1998 shall be paid by Michael. All proceeds (including
proceeds held in suspense or escrow) from the sale of production actually sold
and delivered by EOG prior to the Effective Time and attributable to the EOG
Property shall belong to EOG and all proceeds from the sale of production
actually sold and delivered after the Effective Time attributable to the EOG
Property shall belong to Michael. In addition, all oil, condensate or liquid
hydrocarbons (collectively, "Oil") in storage above the pipeline connection have
been gauged and all gas meter charts were replaced at the
17
<PAGE> 18
Effective Time. Michael shall pay EOG for such Oil at the actual price being
paid to EOG as of the Effective Time for sales of Oil from such EOG Property.
Except as otherwise specifically provided in this Agreement, all costs, expenses
and obligations relating to the EOG Property which accrue prior to the Effective
Time shall be paid and discharged by EOG; and all costs, expenses and
obligations relating to the EOG Property which accrue after the Effective Time
shall be paid and discharged by Michael.
20. CLOSING ADJUSTMENTS ON MICHAEL PROPERTY. All Property Taxes
attributable to the MICHAEL Property for the year 1998 shall be paid by EOG. All
proceeds (including proceeds held in suspense or escrow) from the sale of
production actually sold and delivered by Michael prior to the Effective Time
and attributable to the MICHAEL Property shall belong to Michael and all
proceeds from the sale of production actually sold and delivered after the
Effective Time attributable to the MICHAEL Property shall belong to EOG. In
addition, all Oil in storage above the pipeline connection have been gauged and
all gas meter charts were replaced at the Effective Time. EOG shall pay Michael
for such Oil at the actual price paid to EOG, as operator, at the Effective Time
for sales of Oil from the MICHAEL Property.
Except as otherwise specifically provided in this Agreement, all costs, expenses
and obligations relating to the MICHAEL Property which accrue prior to the
Effective Time shall be paid and discharged by MICHAEL; and all costs,
expenses and obligations relating to the MICHAEL Property which accrue after the
Effective Time shall be paid and discharged by EOG.
21. POST-CLOSING ACCOUNTING ON EOG PROPERTY. As soon as practicable after
the Closing, EOG shall prepare and deliver to Michael, in accordance with this
Agreement and generally accepted accounting principles, a statement (the
"Intermediate Settlement Statement") setting forth for the EOG Property each
adjustment or payment that was not finally determined as of the Closing in
connection with the EOG Property and showing the calculation
18
<PAGE> 19
of such adjustments to the Purchase Price. As soon as practicable after receipt
of the Intermediate Settlement Statement, Michael shall deliver to EOG a written
report containing any changes that Michael proposes be made to such Intermediate
Settlement Statement. The Parties undertake to agree with respect to such
Intermediate Settlement Statement no later than 60 days after the Closing Date;
such agreement constituting and to be embodied in a "Final Settlement Statement"
and to establish the "Final Purchase Price," and the date upon which the Final
Purchase Price is established to be the "Final Settlement Date." In the event
Michael and EOG are unable to mutually agree upon the amount of the Final
Settlement Statement in connection with the EOG Property, an audit shall be
conducted by a mutually agreed upon accounting firm. Michael and EOG agree to be
bound by the findings of such audit, insofar as the Final Settlement Statement
amount is concerned, and each shall bear one half of all expenses associated
with such audit. In the event that (a) the Final Purchase Price is more than the
amount paid at Closing, Michael shall pay to EOG the amount of such difference,
or (b) the Final Purchase Price is less than the amount paid at Closing, EOG
shall pay to Michael the amount of such difference, in either event by wire
transfer in immediately available funds, or, if the amount of such difference is
less than $25,000, by corporate check.
In connection with the EOG Property, EOG shall be responsible for the settlement
of all joint billing audits which relate to accounting periods prior to the
Effective Time and Michael shall be responsible for the settlement of all joint
billing audits which relate to accounting periods after the Effective Time. Any
credits received by Michael after the Effective Time attributable to expenses
paid prior to the Effective Time on behalf of the EOG Property shall be promptly
reimbursed to EOG by Michael.
22. POST-CLOSING ACCOUNTING ON MICHAEL PROPERTY. As soon as practicable
after the Closing, EOG, as operator of the MICHAEL Property, shall prepare and
deliver to Michael, in accordance with this Agreement and generally accepted
accounting principles, the Intermediate Settlement Statement setting forth for
the MICHAEL Property each
19
<PAGE> 20
adjustment or payment that was not finally determined as of the Closing in
connection with the MICHAEL Property and showing the calculation of such
adjustments to the Purchase Price. As soon as practicable after receipt of the
Intermediate Settlement Statement, Michael shall deliver to EOG a written report
containing any changes that Michael proposes be made to such Intermediate
Settlement Statement. The Parties undertake to agree with respect to such
Intermediate Settlement Statement no later thin 60 days after the Closing Date;
such agreement constituting and to be embodied in a "Final Settlement Statement"
and to establish the "Final Purchase Price," and the date upon which the Final
Purchase Price is established to be the "Final Settlement Date." In the event
EOG and Michael are unable to mutually agree upon the amount of the Final
Settlement Statement in connection with the MICHAEL Property, an audit shall be
conducted by a mutually agreed upon accounting firm. EOG and MICHAEL agree to be
bound by the findings of such audit, insofar as the Final Settlement Statement
amount is concerned, and each shall bear one half of all expenses associated
with such audit. In the event that (a) the Final Purchase Price is more than the
amount paid at Closing, EOG shall pay to Michael the amount of such difference,
or (b) the Final Purchase Price is less than the amount paid at Closing, Michael
shall pay to EOG the amount of such difference, in either event by wire
transfer in immediately available funds, or, if the amount of such difference is
less than $25,000, by corporate check.
In connection with the MICHAEL Property, Michael shall be responsible for the
settlement of all joint billing audits which relate to accounting periods prior
to the Effective Time and EOG shall be responsible for the settlement of all
joint billing audits which relate to accounting periods after the Effective
Time. Any credits received by EOG after the Effective Time attributable to
expenses paid prior to the Effective Time on behalf of the MICHAEL Property
shall be promptly reimbursed to Michael by EOG.
23. TAXES ON EOG PROPERTY. The Purchase Price excludes any sales taxes or
other taxes in connection with the sale of the EOG Property because the parties
believe that this sale is exempt from sales tax. If a determination is ever made
that a sales tax or other transfer tax
20
<PAGE> 21
applies, Michael shall be liable for such tax as well as any applicable
conveyance, transfer and recording fees, and real estate transfer stamps or
taxes imposed on any transfer of the EOG property pursuant to this Agreement.
Michael shall defend and hold EOG harmless with respect to the payment of all
such taxes, if any, including any interest or penalties assessed thereon.
All taxes (other than ad valorem and income taxes) which are imposed on or with
respect to the production of oil, natural gas or other hydrocarbons or minerals
from the EOG Property or the receipt of proceeds therefrom (including but not
limited to severance, production, excise and windfall profit taxes) shall be
apportioned between the Parties based upon the respective shares of production
taken by the Parties. Payment or withholding of all such taxes which have
accrued prior to the Effective Time and filing of all statements, returns and
documents pertinent thereto shall be the responsibility of EOG. Payment or
withholding of all such taxes which have accrued from and after the Effective
Time and the filing of all statements, returns and documents incident thereto
shall be the responsibility of Michael.
24. TAXES ON MICHAEL PROPERTY. The Purchase Price excludes any sales taxes
or other taxes in connection with the sale of the MICHAEL Property because the
parties believe that this sale is exempt from sales tax. If a determination is
ever made that a sales tax or other transfer tax applies, EOG shall be liable
for such tax as well as any applicable conveyance, transfer and recording fees,
and real estate transfer stamps or taxes imposed on any transfer of the MICHAEL
Property pursuant to this Agreement. EOG shall defend and hold Michael harmless,
with respect to the payment of all such taxes, if any, including any interest or
penalties assessed thereon.
All taxes (other than ad valorem and income taxes) which are imposed on or with
respect to the production of oil, natural gas or other hydrocarbons or minerals
from the MICHAEL Property or the receipt of proceeds therefrom (including but
not limited to severance, production, excise and windfall profit taxes) shall be
apportioned between the Parties based upon the respective shares
21
<PAGE> 22
of production taken by the Parties. Payment or withholding of all such taxes
which have accrued prior to the Effective Time and filing of all statements,
returns and documents pertinent thereto shall be the responsibility of Michael.
Payment or withholding of all such taxes which have accrued from and after the
Effective Time and the filing of all statements, returns and documents incident
thereto shall be the responsibility of EOG.
25. FURTHER OPERATION OF EOG PROPERTY. EOG shall, as to the EOG Property it
now operates, continue to operate the same until the Closing, when such
operation shall be turned over to Michael: such operation from and after the
Effective Time shall be conducted by EOG for and on behalf of Michael; and for
any such services performed by EOG from and after the Effective Time, Michael
shall pay EOG for all reasonable and necessary expenses incurred by EOG in such
operation, protection or maintenance of the EOG Property, excluding overhead
charges as to the EOG Property operated by EOG. Such expenses may be recovered
by EOG as part of the closing, or post-closing adjustments, as appropriate.
In its operation of the EOG Property after full execution of this Agreement, EOG
shall continue to exercise the standard of care of an ordinary prudent operator
in the operation of the EOG Property and shall notify Michael of any material
adverse change in the productive capability of any well included in the EOG
Property.
26. CASUALTY LOSS ON EOG PROPERTY. If prior to the Closing all or any
portion of the EOG Property is substantially damaged or destroyed by fire or
other casualty ("EOG Casualty Defect"), EOG shall notify Michael promptly after
EOG learns of such event. EOG shall have the right, but not the obligation, to
cure the EOG Casualty Defect by repairing such damage or, in the case of
personal property or fixtures, replacing them with equivalent items, no later
than Closing, all to Michael's reasonable satisfaction. If any uncured EOG
Casualty Defect exists at the Closing, the Purchase Price shall be reduced by
the aggregate reduction in the value of the EOG Property on account of such EOG
Casualty Defect as determined by the mutual
22
<PAGE> 23
agreement of the Parties. If the Parties fail for any reason to agree prior to
the Closing as to the amount of any Purchase Price adjustment on account of EOG
Casualty Defects, either Party shall have the right to terminate this Agreement
and the same shall be of no further force and effect. In the event the amount of
such downward adjustment of the Purchase Price exceeds twenty percent (20%) of
the Purchase Price, then EOG or Michael may, upon written notice to the other
Party, cancel this Agreement and the same shall be of no further force and
effect.
27. CASUALTY LOSS ON MICHAEL PROPERTY. If prior to the Closing all or any
portion of the MICHAEL Property is substantially damaged or destroyed by fire or
other casualty ("MICHAEL Casualty Defect"), Michael shall notify EOG promptly
after Michael learns of such event. MICHAEL shall have the right, but not the
obligation, to cure the MICHAEL Casualty Defect by repairing such damage or, in
the case of personal property or fixtures, replacing them with equivalent items,
no later than Closing, all, to EOG's reasonable satisfaction. If any uncured
MICHAEL Casualty Defect exists at the Closing, the Purchase Price shall be
increased by the aggregate reduction in the value of the MICHAEL Property on
account of such MICHAEL Casualty Defect as determined by the mutual agreement of
the Parties. If the Parties fail for any reason to agree prior to the Closing as
to the amount of any Purchase Price adjustment on account of MICHAEL Casualty
Defects, either Party shall have the right to terminate this Agreement and the
same shall be of no further force and effect.
28. BROKER'S FEE. EOG represents and warrants to Michael that EOG has
incurred no liability, contingent or otherwise, for broker's or finder's fees in
respect of this Agreement or the transactions contemplated hereby for which
Michael shall have any responsibility whatsoever; and Michael represents and
warrants to EOG that Michael has incurred no liability, contingent or otherwise,
for broker's or finder's fees in respect of this Agreement or the transactions
contemplated hereby for which EOG shall have any responsibility whatsoever.
23
<PAGE> 24
29. NOTICES. All communications required or permitted under this Agreement
shall be in writing and any communication or delivery hereunder shall be deemed
to have been fully made if actually delivered, or if mailed by registered or
certified mail, postage prepaid, or if sent by telecopy to the address as set
forth below:
EOG MICHAEL
--- -------
Enron Oil & Gas Company Michael Petroleum Corporation
539 North Carancahua 13101 Northwest Freeway
Suite 1000 Suite 320
Corpus Christi, Texas 78401 Houston, Texas 77040
Attn: Donald D. Davis Attn. Glenn D. Hart
Telecopy: (512) 902-2814 Telecopy: (713) 895-0320
30. DISCLAIMERS/ACKNOWLEDGMENTS REGARDING EOG PROPERTY.
(a) NO WARRANTY, EXPRESS OR IMPLIED. CONVEYANCE OF THE EOG PROPERTY
SHALL BE WITHOUT WARRANTY OF TITLE OF ANY KIND, EXPRESS OR IMPLIED, EXCEPT BY,
THROUGH OR UNDER EOG, BUT NOT OTHERWISE. CONVEYANCE OF THE EOG PROPERTY SHALL BE
WITHOUT WARRANTY WHATSOEVER, EXPRESS, STATUTORY, OR IMPLIED, AS TO DESCRIPTION,
PHYSICAL CONDITION OF THE EOG PROPERTY (INCLUDING, WITHOUT LIMITATION, THE
ENVIRONMENTAL CONDITION OF THE EOG PROPERTY), QUALITY, VALUE, FITNESS FOR
PURPOSE, MERCHANTABILITY OR OTHERWISE. Michael shall satisfy itself, prior to
the Closing, as to the type, condition, quality and extent of the property and
property interests which comprise the EOG Property they are receiving pursuant
to this Agreement and under this sale and exchange. Michael shall have the right
of full substitution and subrogation to any and all rights and actions of which
EOG has or may have against any and all preceding owners or vendors of the EOG
Property other than Affiliates of EOG.
(b) Acknowledgments of Michael at Closing. By closing on the
transaction provided for in this Agreement, Michael shall be deemed to have
acknowledged and does hereby
24
<PAGE> 25
acknowledge and admit that: (i) Michael his been given the opportunity to
adequately inspect the EOG Property for all purposes prior to Closing; (ii)
Michael is aware that the EOG Property has been used for the exploration,
development, production, treating and transporting of oil, gas and other
hydrocarbon products and that physical changes may have occurred as a result of
such use and that EOG has disclosed, and Michael is further aware, that there
exists the possibility that there could exist on the EOG Property as a result of
such use or uses one or more detrimental environmental conditions, or that there
could have occurred from such use or uses one or more releases of hazardous
substances (as defined in CERCLA or RCRA) or releases of chemical substances
into, or other pollution or contamination of or into, the ambient air, surface
water, ground water, or land surface and subsurface strata of any real property
included in the EOG Property and of contiguous, or a series of contiguous, real
properties not associated with the EOG Property; (iii) Michael has entered into
this Agreement on the basis of its own investigation of the physical condition
of the EOG Property and the land related thereto (including the environmental
condition of the EOG Property); and (iv) MICHAEL, WITH FULL KNOWLEDGE OF THE
FOREGOING AND AFTER CONDUCTING THE ABOVE DESCRIBED INVESTIGATION AND EVALUATION,
IS ACQUIRING THE EOG PROPERTY ON A "WHERE IS" AND "AS IS" BASIS; AND MICHAEL, BY
ACQUIRING THE EOG PROPERTY ON A "WHERE IS" AND "AS IS" BASIS WAIVES ANY CLAMS OR
OTHER RIGHTS OF INDEMNIFICATION, CONTRIBUTION OR RECOURSE IT MAY HAVE AGAINST OR
FROM EOG WITH RESPECT TO THE CONDITION OF THE EOG PROPERTY, INCLUDING, WITHOUT
LIMITATION, THE ENVIRONMENTAL CONDITION OF THE EOG PROPERTY AND DAMAGE TO
NATURAL RESOURCES ASSOCIATED WITH THE EOG PROPERTY (INCLUDING ANY LIABILITY
UNDER CERCLA OR OTHER ENVIRONMENTAL LAWS), WHETHER CONTRACT, TORT OR STATUTORY
IN NATURE, REGARDLESS OF THE NEGLIGENCE, FAULT OR STRICT (STATUTORY) LIABILITY
OF EOG.
31. DISCLAIMERS/ACKNOWLEDGMENTS REGARDING MICHAEL PROPERTY. (a) NO
WARRANTY, EXPRESS OR IMPLIED. CONVEYANCE OF THE MICHAEL PROPERTY SHALL BE
WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, EXCEPT BY, THROUGH OR UNDER
MICHAEL, BUT NOT OTHERWISE. CONVEYANCE OF THE MICHAEL
25
<PAGE> 26
PROPERTY SHALL HE WITHOUT WARRANTY WHATSOEVER, EXPRESS, STATUTORY, OR IMPLIED AS
TO DESCRIPTION, PHYSICAL CONDITION OF THE MICHAEL PROPERTY (INCLUDING, WITHOUT
LIMITATION, THE ENVIRONMENTAL CONDITION OF THE MICHAEL PROPERTY), QUALITY,
VALUE, FITNESS FOR PURPOSE, MERCHANTABILITY, OR OTHERWISE. EOG shall satisfy
itself, prior to the Closing, as to the type, condition, quality and extent of
the property and property interests which comprise the MICHAEL Property it is
receiving pursuant to this Agreement and under this sale and exchange. EOG shall
have the right of full substitution and subrogation to any and all rights and
actions of which Michael has or may have against any and all preceding owners or
vendors of the MICHAEL Property other than Affiliates of Michael.
(b) Acknowledgments of EOG at Closing. By closing on the transaction
provided for in this Agreement, EOG shall be deemed to have acknowledged and
does acknowledge and admit that: (i) EOG has been given the opportunity to
adequately inspect the MICHAEL Property for all purposes prior to Closing; (ii)
EOG is aware that the MICHAEL Property has been used for the exploration,
development, production, treating and transporting of oil, gas and other
hydrocarbon products and that physical changes may have occurred as a result of
such use and that Michael has disclosed, and EOG is further aware, that there
exists the possibility that there could exist on the MICHAEL Property as a
result of such use or uses one or more detrimental environmental conditions, or
that there could have occurred from such use or uses one or more releases of
hazardous substances (as defined in CERCLA or RCRA) or releases of chemical
substances into, or other pollution or contamination of or into, the ambient
air, surface water, ground water, or land surface and subsurface strata of any
real property included in the MICHAEL Property and of contiguous, or a series
of contiguous, real properties not associated with the MICHAEL Property; (iii)
EOG has entered into this Agreement on the basis of its own investigation of
the physical condition of the MICHAEL Property and the land related thereto
(including the environmental condition of the MICHAEL Property); and (iv) EOG,
WITH FULL KNOWLEDGE OF THE FOREGOING AND AFTER CONDUCTING THE ABOVE DESCRIBED
INVESTIGATION AND EVALUATION, IS ACQUIRING THE MICHAEL PROPERTY ON A "WHERE IS"
AND "AS IS" BASIS; AND EOG, BY ACQUIRING THE MICHAEL PROPERTY ON A "WHERE IS"
AND
26
<PAGE> 27
"AS IS" BASIS WAIVES ANY CLAIMS OR OTHER RIGHTS OF INDEMNIFICATION, CONTRIBUTION
OR RECOURSE IT MAY HAVE AGAINST OR FROM MICHAEL WITH RESPECT TO THE CONDITION OF
THE MICHAEL PROPERTY, INCLUDING, WITHOUT LIMITATION, THE ENVIRONMENTAL CONDITION
OF THE MICHAEL PROPERTY AND DAMAGE TO NATURAL RESOURCES ASSOCIATED WITH THE
MICHAEL PROPERTY (INCLUDING ANY LIABILITY UNDER CERCLA OR OTHER ENVIRONMENTAL
LAWS), WHETHER CONTRACT, TORT OR STATUTORY IN NATURE, REGARDLESS OF THE
NEGLIGENCE, FAULT OR STRICT (STATUTORY) LIABILITY OF MICHAEL.
32. INDEPENDENT EVALUATION. Michael and EOG have made an independent
evaluation of the EOG Property and the MICHAEL Property, respectively, and
acknowledge that the other Party has made no statements or representations
concerning the present or future value of the anticipated income, costs, or
profits, if any, to be derived from such property, the physical or environmental
condition of such property, the quantity and quality of any oil and gas or other
minerals that may be produced from such property, or any other matter with
respect to such property and THAT, NEITHER EOG NOR MICHAEL IMPLIEDLY OR
EXPRESSLY WARRANTS DESCRIPTION, TITLE, VALUE, QUALITY, PHYSICAL CONDITION OF
SUCH PROPERTY (INCLUDING, WITHOUT LIMITATION, THE ENVIRONMENTAL CONDITION OF
SUCH PROPERTY), MERCHANTABILITY, OR FITNESS FOR PURPOSE OF ANY OF SUCH
PROPERTIES OR THE WELLS, EQUIPMENT, PIPELINE FACILITIES, OR OTHER PROPERTY
LOCATED THEREON OR USED IN CONNECTION THEREWITH. Michael and EOG further
acknowledge that, in entering into this Agreement, they have relied solely upon
their independent examination of the EOG Property and the MICHAEL Property,
respectively, and public records relating to such property and its independent
estimates, computations, evaluations, reports and studies based thereon and has
not relied on any representation or statement made by the other Party. All
information and data furnished to the other Party is believed by EOG and Michael
to be accurate and correct to the best of its knowledge without investigation,
however, NEITHER PARTY MAKES ANY WARRANTY OR REPRESENTATION AS TO THE ACCURACY,
COMPLETENESS OR CORRECTNESS OF ANY INFORMATION FURNISHED TO THE OTHER PARTY. ANY
RELIANCE THE OTHER PARTY MAKES ON
27
<PAGE> 28
SUCH INFORMATION IS AT SUCH PARTY'S SOLE RISK AND THE DISCLOSING PARTY SHALL
HAVE NO LIABILITY WHATSOEVER TO THE OTHER PARTY IN CONNECTION THEREWITH.
33. ENVIRONMENTAL ASSESSMENT AND INDEMNIFICATION - EOG PROPERTY. (a) "EOG
Adverse Environmental Conditions" shall mean any individual contamination or
condition that would require $50,000 or more of out-of-pocket costs and expenses
to remedy and that is not otherwise permanently authorized by permit or law,
resulting from any discharge, release, disposal, production, storage, treatment,
or any other activities on, in or from the EOG Property, or the migration or
transportation from other lands to the EOG Property, prior to the Closing Date,
of any wastes, pollutants, contaminants, hazardous materials or other materials
or substances that are subject to regulation under any laws, rules or
regulations relating to the protection of health or the environment, including,
without limitation, the Clean Air Act, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Federal Water Pollution
Control Act, the Safe Drinking Water Act, the Toxic Substance Control Act, the
Hazardous and Solid Waste Amendments Act of 1984, the Superfund Amendments and
Reauthorization Act of 1986, the Hazardous Materials Transportation Act, the
Clean Water Act, the National Environmental Policy Act, the Endangered Species
Act, the Fish and Wildlife Coordination Act, the National Historic Preservation
Act and the Oil Pollution Act of 1990, as well as any state and local
regulation or law governing the same, similar or related matters, all as may
have been or be amended from time to time (collectively, "Environmental Laws").
The term "EOG Adverse Environmental Conditions" shall include any such
individual contamination or condition of the EOG Property that would require
$50,000 or more of out-of-pocket costs and expenses to remedy that is
temporarily authorized by permit, fee agreement or other arrangement.
(b) Michael shall advise EOG promptly of any EOG Adverse Environmental
Condition discovered after the date hereof as a result of its investigation of
the EOG Property and the estimated costs for remediating such conditions which
are located on the EOG Property. Michael shall provide such information
regarding such EOG Adverse Environmental Conditions as EOG may reasonably
request. If EOG receives notice from Michael prior to Closing of any
28
<PAGE> 29
EOG Adverse Environmental Condition, (i) EOG shall have the right (A) to agree
to remedy the EOG Adverse Environmental Condition to Michael's reasonable
satisfaction, all at EOG's sole cost and expense, in which case there shall be
no adjustment to the Purchase Price in respect of such EOG Adverse Environmental
Condition, or (B) if the Parties have agreed upon an adjustment to the Purchase
Price in respect of such EOG Adverse Environmental Condition, to reduce the
Purchase Price by the amount of such adjustment, in which event EOG shall have
no obligation or liability in respect of such EOG Adverse Environmental
Condition, and (ii) if the reasonable cost of remedying the EOG Adverse
Environmental Condition exceeds 3% of the Purchase Price, EOG shall have the
right to terminate this Agreement. If EOG receives notice from Michael of any
EOG Adverse Environmental Condition after Closing but on or before one hundred
and eighty (180) days following the Closing Date, EOG shall remedy the EOG
Adverse Environmental Condition to Michael's reasonable satisfaction, all at
EOG's sole cost and expense. EOG shall have no liability or obligation to
Michael under this Section 33(b) for any EOG Adverse Environmental Condition
for which EOG did not receive timely written notice of such condition on or
before one hundred and eighty (180) days following the Closing Date. If EOG
elects or is obligated to remedy an EOG Adverse Environmental Condition
hereunder, EOG agrees that it will exercise all reasonable efforts and diligence
to complete any required remediation within six (6) months, but any failure to
complete such effort by such time shall not relieve EOG of its duty to fully and
completely satisfy its obligation hereunder. Michael shall grant EOG and its
representatives such access to the EOG Property as may be reasonably necessary
provided such access does not interfere with Michael's operations. EOG shall
indemnify, defend and hold Michael harmless from and against any and all claims
for personal injuries, death or property damage arising from EOG's remediation
activities hereunder, including, without limitation, any claims by EOG's
employees, representatives or agents. Notwithstanding the foregoing, if EOG
elects to remedy an EOG Adverse Environmental Condition and the Parties agree in
writing on the cost of such remediation, Michael shall have the right to remedy
the EOG Adverse Environmental Condition by giving written notice to EOG within
10 days after the Parties agree on the cost of the remediation, in which event
Michael shall have assumed EOG's obligation to
29
<PAGE> 30
remedy the EOG Adverse Environmental Condition, and EOG shall reimburse Michael
for all costs and expenses incurred by Michael in effecting such remediation,
but not to exceed the agreed upon cost of such remediation.
(c) Except for any costs or expenses incurred by EOG in discharging any
remediation obligations under Section 33(b) or for which Michael is entitled to
reimbursement under the last sentence of Section 33(b), if the Closing hereunder
occurs, Michael shall indemnify, defend and hold EOG harmless from and against
any and all claims, demands, causes of action, liabilities and obligations, and
all costs and expenses (including, without limitation, reasonable attorneys'
fees) associated therewith (collectively, "Claims"), arising out of or relating
to any discharge, release, disposal, production, storage, treatment or any
activities on, in or from the EOG Property, or the migration or transportation
from any other lands to the EOG Property, whether before or after the Effective
Time, of materials or substances that are presently, or become in the future,
subject to regulation under Environmental Laws, whether such Environmental Laws
are presently existing or are hereafter enacted, INCLUDING, WITHOUT LIMITATION,
ANY SUCH CLAIMS ARISING IN WHOLE OR IN PART FROM THE SOLE OR CONCURRENT
NEGLIGENCE OR GROSS NEGLIGENCE OF EOG. The foregoing indemnity shall not be
applicable to Claims arising out of or relating to activities on the South
Callaghan Ranch Lands after the date such lands have reverted back to EOG
pursuant to the South Callaghan Ranch Lease.
34. ENVIRONMENTAL ASSESSMENT AND INDEMNIFICATION - MICHAEL PROPERTY. (a)
"MICHAEL Adverse Environmental Conditions" shall mean any individual
contamination or condition that would require $50,000 or more of out-of-pocket
costs and expenses to remedy and that is not otherwise permanently authorized by
permit or law, resulting from any discharge, release, disposal, production,
storage, treatment, or any other activities on, in or from the MICHAEL Property,
or the migration or transportation from other lands to the MICHAEL Property,
prior to the Closing Date, of any wastes, pollutants, contaminants, hazardous
materials or other materials or substances that are subject to regulation under
30
<PAGE> 31
Environmental Laws. The term "MICHAEL Adverse Environmental Conditions" shall
include any such individual contamination or condition of the MICHAEL Property
that would require $50,000 or more of out-of-pocket costs and expenses to remedy
that is temporarily authorized by permit, fee agreement or other arrangement.
(b) EOG shall advise Michael promptly of any MICHAEL Adverse
Environmental Condition discovered after the date hereof as a result of its
investigation of the MICHAEL Property and the estimated costs for remediating
such conditions which are located on the MICHAEL Property. EOG shall provide
such information regarding such MICHAEL Adverse Environmental Conditions as
Michael may reasonably request. If Michael receives notice from EOG prior to
Closing of any MICHAEL Adverse Environmental Condition, (i) Michael shall have
the right (A) to agree to remedy the MICHAEL Adverse Environmental Condition to
EOG's reasonable satisfaction, all at Michael's sole cost and expense, in which
case there shall be no adjustment to the Purchase Price in respect of such
MICHAEL Adverse Environmental Condition, or (B) if the Parties have agreed upon
an adjustment to the Purchase Price in respect of such Michael Adverse
Environmental Condition, to reduce the Purchase Price by the amount of such
adjustment, in which event Michael shall have no obligation or liability in
respect of such MICHAEL Adverse Environmental Condition, and (ii) if the
reasonable cost of remedying the MICHAEL Adverse Environmental Condition exceeds
3% of the Purchase Price, Michael shall have the right to terminate this
Agreement. If Michael receives notice from EOG of any MICHAEL Adverse
Environmental Condition after Closing but on or before one hundred and eighty
(180) days following the Closing Date, Michael shall remedy the MICHAEL Adverse
Environmental Condition to EOG's reasonable satisfaction, all at Michael's sole
cost and expense. Michael shall have no liability or obligation to EOG under
this Section 34(b) for any MICHAEL Adverse Environmental Condition for which
Michael did not receive timely written notice of such condition on or before one
hundred and eighty (180) days following the Closing Date. If Michael elects or
is obligated to remedy a MICHAEL Adverse Environmental Condition hereunder,
Michael agrees that it will exercise all reasonable efforts and diligence to
complete any required remediation within six (6) months, but any failure to
complete such effort by such time shall not
31
<PAGE> 32
relieve Michael of their duty to fully and completely satisfy their obligation
hereunder. EOG shall grant Michael and its representatives such access to the
MICHAEL Property as may be reasonably necessary provided such access does not
interfere with EOG's operations. Michael shall indemnify, defend and hold EOG
harmless from and against any and all claims for personal injuries, death or
property damage arising from Michael's remediation activities hereunder,
including, without limitation, any claims by Michael's employees,
representatives or agents. Notwithstanding the foregoing, if Michael elects to
remedy a MICHAEL Adverse Environmental Condition and the Parties agree in
writing on the cost of such remediation, EOG shall have the right to remedy the
MICHAEL Adverse Environmental Condition by giving written notice to Michael
within 10 days after the Parties agree on the cost of the remediation, in which
event EOG shall have assumed Michael's obligation to remedy the MICHAEL Adverse
Environmental Condition, and Michael shall reimburse EOG for all costs and
expenses incurred by EOG in effecting such remediation, but not to exceed the
agreed upon cost of such remediation.
(c) Except for any costs or expenses incurred by Michael in discharging
any remediation obligations under Section 34(b) or for which EOG is entitled to
reimbursement under the last sentence of Section 34(b), if the Closing hereunder
occurs, EOG shall indemnify, defend and hold Michael harmless from and against
any and all claims, demands, causes of action, liabilities and obligations, and
all costs and expenses (including, without limitation, reasonable attorneys'
fees) associated therewith, arising out of or relating to any discharge,
release, disposal, production, storage, treatment or any activities on, in or
from the MICHAEL Property, or the migration or transportation from any other
lands to the MICHAEL Property, whether before or after the Effective Time, of
materials or substances that are presently, or become in the future, subject to
regulation under Environmental Laws, whether such Environmental Laws are
presently existing or are hereafter enacted, INCLUDING, WITHOUT LIMITATION, ANY
CLAIMS, DEMANDS, CAUSES OF ACTION, LIABILITIES OR OBLIGATIONS ARISING IN WHOLE
OR IN PART FROM THE SOLE OR CONCURRENT NEGLIGENCE OR GROSS NEGLIGENCE OF
MICHAEL.
32
<PAGE> 33
35. PRESS RELEASE. There shall be no press release or public communication
concerning this purchase and sale by either Party except with the written
consent of the Party not originating said release or communication, with the
exception being those reports reasonably required by applicable state or federal
law or regulations.
36. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject hereof and shall supersede any
Prior agreement between the parties, whether written or oral, relating to the
subject hereof, including, without limitation, the Offer Letter Agreement dated
December 29, 1997, from EOG and accepted and agreed to by Michael on January 5,
1998. This Agreement May be supplemented, altered, amended, modified or revoked
by writing only, signed by both parties.
37. SURVIVAL. The representations, warranties and agreements contained in
this Agreement and in any certificate or other instrument delivered by or on
behalf of either Party pursuant to this Agreement shall survive the Closing and
shall be unaffected by any investigation made by the other Party.
38. HEADINGS. The headings are for guidance only and shall have no
significance in the interpretations of this Agreement.
39. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS Of THE STATE OF TEXAS. THE PARTIES AGREE THAT ANY LITIGATION RELATING
DIRECTLY OR INDIRECTLY TO THIS AGREEMENT MUST BE BROUGHT BEFORE AND DETERMINED
BY A COURT OF COMPETENT JURISDICTION WITHIN THE STATE OF TEXAS.
40. DISPUTE RESOLUTION. (a) EOG AND MICHAEL SHALL ATTEMPT IN GOOD FAITH TO
RESOLVE ANY CONTROVERSY OR DISPUTE ARISING OUT OF OR RELATING TO THIS AGREEMENT
PROMPTLY
33
<PAGE> 34
BY NEGOTIATIONS BETWEEN THEMSELVES. THE NEGOTIATION PROCESS MAY BE STARTED BY
THE GIVING OF WRITTEN NOTICE BY EITHER PARTY TO THE OTHER PARTY IN ACCORDANCE
WITH THE TERMS OF SECTION 29 HEREOF. IN THE EVENT THAT EITHER PARTY DESIRES THE
INVOLVEMENT OF A MEDIATOR TO FACILITATE THE NEGOTIATIONS, THEN IT SHALL GIVE
WRITTEN NOTICE THEREOF, AND THE PARTIES AGREE, ADDITIONALLY, TO NEGOTIATE IN
GOOD FAITH TO SELECT AN INDEPENDENT MEDIATOR TO FACILITATE THE NEGOTIATIONS AND
TO CONDUCT UP TO EIGHT CONSECUTIVE HOURS OF NON-BINDING MEDIATED NEGOTIATIONS IN
HOUSTON, TEXAS WITHIN 30 DAYS AFTER THE NOTICE REQUESTING INVOLVEMENT OF A
MEDIATOR IS FIRST SENT. IF, WITHIN 10 DAYS AFTER THE NOTICE REQUESTING A
MEDIATOR, THE PARTIES ARE NOT ABLE TO AGREE UPON A MEDIATOR, THEN EITHER PARTY
MAY SEEK THE APPOINTMENT OF A MEDIATOR UNDER SUB-PARAGRAPH 40(d).
(b) NO ARBITRATION MAY BE COMMENCED BY EITHER PARTY UNLESS AND UNTIL A
GOOD FAITH EFFORT HAS BEEN MADE TO CONDUCT NEGOTIATIONS AND, IF REQUESTED BY A
PARTY, A MEDIATION IN COMPLIANCE WITH THE FOREGOING PARAGRAPH. IF A CONTROVERSY
OR DISPUTE IS NOT RESOLVED AFTER GOOD FAITH EFFORTS TO CONDUCT THE NEGOTIATION
AND MEDIATION PROCESS DESCRIBED ABOVE, THEN, UPON NOTICE BY EITHER PARTY TO THE
OTHER PARTY (AN "ARBITRATION NOTICE"), THE CONTROVERSY OR DISPUTE SHALL BE
SUBMITTED TO FINAL, BINDING ARBITRATION UNDER THE FOLLOWING PROVISIONS.
(c) AN ARBITRATION NOTICE SHALL DESCRIBE THE CONTROVERSY OR DISPUTE TO
BE SUBMITTED TO ARBITRATION AND SHALL NAME ONE ARBITRATOR. WITHIN THIRTY (30)
DAYS AFTER THE RECEIPT OF SUCH NOTICE, THE OTHER PARTY SHALL BY WRITTEN RESPONSE
DESCRIBE ANY ADDITIONAL CONTROVERSY OR DISPUTE TO BE SUBMITTED AND SHALL NAME A
SECOND ARBITRATOR. IF SUCH PARTY FAILS TO TIMELY NAME A SECOND ARBITRATOR, THE
PARTY FIRST GIVING THE ARBITRATION NOTICE MAY BY FURTHER WRITTEN NOTICE NAME THE
SECOND. THE TWO ARBITRATORS SO APPOINTED SHALL NAME A THIRD ARBITRATOR, WHO
SHALL BE INDEPENDENT AND IMPARTIAL AND WHO, LIKE THE TWO ARBITRATORS SO
APPOINTED, SHALL BE QUALIFIED, BY KNOWLEDGE AND EXPERIENCE (WITH EACH HAVING A
MINIMUM OF 10 YEARS OIL AND GAS EXPERIENCE), TO DETERMINE THE CONTROVERSY OR
DISPUTE SUBMITTED. IF THE TWO APPOINTED ARBITRATORS FAIL TO TIMELY NAME A THIRD
ARBITRATOR, THEN EITHER PARTY MAY SEEK THE APPOINTMENT OF A THIRD UNDER
SUB-PARAGRAPH 40(d).
34
<PAGE> 35
(d) IF THE PARTIES ARE UNABLE TO AGREE UPON A MEDIATOR OR THE PARTIES'
APPOINTED ARBITRATORS ARE UNABLE TO SELECT A THIRD ARBITRATOR, THEN EITHER PARTY
MAY SEEK THE APPOINTMENT OF A MEDIATOR OR A THIRD ARBITRATOR AS FOLLOWS. EITHER
PARTY MAY REQUEST THE JUDGE OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF TEXAS, HOUSTON DIVISION, HAVING GREATEST TENURE BUT NOT ON SENIOR
STATUS TO APPOINT A MEDIATOR OR THIRD ARBITRATOR, WHO SHALL BE INDEPENDENT AND
IMPARTIAL AND QUALIFIED TO DETERMINE THE MATTERS SUBMITTED IN THAT JUDGE'S SOLE
OPINION. IF THAT JUDGE FAILS, WITHIN THIRTY (30) DAYS OF SUBMISSION OF THE
REQUEST, TO APPOINT A MEDIATOR OR THIRD ARBITRATOR, THEN EITHER PARTY MAY MAKE
THE SAME REQUEST TO THE JUDGE OF THAT COURT WITH THE NEXT GREATEST TENURE, AND
SO ON, UNTIL THE MEDIATOR IS APPOINTED AND THE PANEL OF ARBITRATORS IS
CONSTITUTED. IF, PRIOR TO RENDERING A DECISION, AN ARBITRATOR RESIGNS OR BECOMES
UNABLE TO SERVE, HE SHALL BE REPLACED AS FOLLOWS. IF HE WAS ONE OF THE TWO
ARBITRATORS APPOINTED BY THE PARTIES, THE PARTY THAT NAMED HIM SHALL NAME HIS
REPLACEMENT; PROVIDED, HOWEVER, THAT IF HIS REPLACEMENT IS NOT NAMED WITHIN
FIFTEEN (15) DAYS, THE OTHER PARTY SHALL NAME HIS REPLACEMENT. IF HE WAS THE
THIRD ARBITRATOR SELECTED BY THE TWO ARBITRATORS NAMED BY THE PARTIES, THOSE
TWO ARBITRATORS SHALL NAME HIS REPLACEMENT; PROVIDED, HOWEVER, THAT IF THEY FAIL
TO AGREE ON HIS REPLACEMENT WITHIN FIFTEEN (15) DAYS, EITHER PARTY MAY FOLLOW
THE PROCEDURE SPECIFIED IN THIS SUBPARAGRAPH (D).
(e) THE ARBITRATION SHALL OCCUR IN HOUSTON, TEXAS AND SHALL BE CONDUCTED
IN ACCORDANCE WITH THE AMERICAN ARBITRATION ASSOCIATION'S COMMERCIAL ARBITRATION
RULES IN EFFECT AT THE TIME OF THE ARBITRATION NOTICE (THE "RULES"). THE PARTIES
AGREE THAT THEY WILL FAITHFULLY OBSERVE THIS AGREEMENT AND THE RULES AND THAT
THEY WILL ABIDE BY AND PERFORM ANY FINAL AWARD RENDERED BY THE ARBITRATORS.
ADDITIONALLY, THE ARBITRATION SHALL BE CONDUCTED IN A MANNER CONSISTENT WITH THE
FEDERAL ARBITRATION ACT, 9 U.S.C. SECTION 1 ET SEQ. (THE "FAA") OR CONSISTENT
WITH THE SAME PRINCIPLES ENUNCIATED IN THE FAA IN THE EVENT IT MAY NOT BE
TECHNICALLY APPLICABLE; PROVIDED, HOWEVER, THAT RULES ESTABLISHED UNDER THE FAA
THAT THE PARTIES CANNOT ELECT AS APPLICABLE IF THE FAA IS NOT TECHNICALLY
APPLICABLE, SUCH AS PROCEDURAL RULES CONCERNING ENFORCEMENT OF AWARDS, ACCESS TO
THE COURTS, PROCEDURES FOR REVIEW, AND
35
<PAGE> 36
MATTERS CONCERNING SUBJECT MATTER JURISDICTION, SHALL NOT BE BINDING IF THE FAA
IS NOT TECHNICALLY APPLICABLE. THE CONTROVERSY OR DISPUTE SUBMITTED SHALL BE
RESOLVED BY THE DECISION OF A MAJORITY OF THE PANEL OF ARBITRATORS. THE AWARD OR
JUDGMENT OF THE PANEL SHALL BE FINAL AND BINDING ON THE PARTIES AND JUDGMENT
UPON THE AWARD OR JUDGMENT OF THE PANEL MAY BE ENTERED AND ENFORCED IN ANY COURT
HAVING JURISDICTION. NO LITIGATION OR OTHER JUDICIAL PROCEEDING MAY EVER BE
INITIATED AT ANY TIME IN ANY COURT FOR THE PURPOSE OF ADJUDICATING,
INTERPRETING, OR ENFORCING THE RIGHTS OR OBLIGATIONS OF THE PARTIES TO THIS
AGREEMENT, OR TO DETERMINE THE VALIDITY OF OR ADJUDICATE A CLAIM OF BREACH OF
THIS AGREEMENT; PROVIDED, HOWEVER, THAT THIS PROHIBITION SHALL NOT APPLY TO
LITIGATION OR OTHER JUDICIAL PROCEEDINGS UNDERTAKEN TO SEEK ENFORCEMENT OF THE
PARTIES' AGREEMENT TO ARBITRATE OR TO ENFORCE ANY ARBITRATION AWARD OR SEEK
REVIEW OF ANY ARBITRATION AWARD. REVIEW OF SUCH ARBITRATION AWARD SHALL BE
PERMITTED ONLY ON GROUNDS THAT (I) THE AWARD WAS PROCURED BY CORRUPTION, FRAUD,
OR UNDUE MEANS; (II) THERE WAS EVIDENT PARTIALITY OR CORRUPTION IN THE THIRD
APPOINTED ARBITRATOR; (III) THE PANEL WAS GUILTY OF MISCONDUCT IN REFUSING TO
HEAR EVIDENCE PERTINENT AND MATERIAL TO THE CONTROVERSY; (IV) THE PANEL EXCEEDED
THEIR POWERS; OR (V) THERE WAS NO AGREEMENT TO ARBITRATE THE MATTER SUBMITTED
AND RULED UPON AND THE PARTY AFFECTED DID NOT PARTICIPATE IN THE ARBITRATION
HEARING WITHOUT RAISING THE OBJECTION. THE PARTIES' EXPRESSLY AGREE THAT AN
AWARD SHALL IN NO OTHER RESPECT BE APPEALABLE OR SUBJECT TO REVIEW. IF EITHER
PARTY BECOMES THE SUBJECT OF A BANKRUPTCY, RECEIVERSHIP OR OTHER SIMILAR
PROCEEDING UNDER THE LAWS OF THE UNITED STATES OF AMERICA, ANY STATE OR
COMMONWEALTH OR ANY OTHER NATION OR POLITICAL SUBDIVISION THEREOF, THEN, TO THE
EXTENT PERMITTED OR NOT PROHIBITED BY APPLICABLE LAW, ANY FACTUAL OR SUBSTANTIVE
LEGAL ISSUES ARISING IN OR DURING THE PENDENCY OF ANY SUCH PROCEEDING SHALL BE
SUBJECT TO ALL OF THE FOREGOING MEDIATION AND ARBITRATION PROVISIONS AND SHALL
BE RESOLVED, TO THE EXTENT PERMITTED, IN ACCORDANCE THEREWITH. THE AGREEMENTS
CONTAINED HEREIN HAVE BEEN GIVEN FOR VALUABLE CONSIDERATION, ARE COUPLED WITH AN
INTEREST AND ARE NOT INTENDED TO BE EXECUTORY CONTRACTS. THE FEES AND EXPENSES
OF THE MEDIATOR WILL BE SHARED EQUALLY BY THE PARTIES AND THE FEES AND EXPENSES
OF THE THIRD ARBITRATOR WILL BE SHARED BY THE PARTIES ON A BASIS DETERMINED TO
BE FAIR AND EQUITABLE BY THE PANEL, TAKING INTO ACCOUNT THE RELATIVE FAULT
36
<PAGE> 37
OF EACH PARTY, THE RELATIVE CREDIBILITY AND MERIT OF ALL CLAIMS AND DEFENSES
MADE BY EACH PARTY AND THE COOPERATION, SPEED AND EFFICIENCY OF EACH PARTY IN
CONDUCTING THE ARBITRATION PROCEEDINGS AND COMPLYING WITH THE RULES AND WITH THE
ORDERS AND REQUESTS OF THE PANEL.
(f) WITHIN 10 DAYS AFTER THE SELECTION OF THE THIRD ARBITRATOR, THE
PARTIES AND THEIR COUNSEL WILL APPEAR BEFORE THE PANEL AT A PLACE AND TIME IN
HOUSTON, TEXAS AS MAY BE DESIGNATED BY THE PANEL FOR THE PURPOSE OF EACH PARTY
MAKING A ONE HOUR OR LESS PRESENTATION AND SUMMARY OF THE CASE. THEREAFTER, THE
PANEL WILL SET DATES AND TIMES FOR ADDITIONAL HEARINGS UNTIL THE PROCEEDING IS
CONCLUDED. THE DESIRE AND GOAL OF THE PARTIES IS, AND THE PANEL WILL BE ADVISED
THAT THEIR GOAL SHOULD BE, TO CONDUCT AND CONCLUDE THE ARBITRATION PROCEEDING AS
EXPEDITIOUSLY AS POSSIBLE. IF ANY PARTY OR HIS COUNSEL FAILS, WITHOUT GOOD
CAUSE, TO APPEAR AT ANY HEARING, THE PANEL SHALL BE ENTITLED TO REACH A
DECISION BASED ON THE EVIDENCE WHICH HAS BEEN PRESENTED TO HIM BY THE OTHER
PARTY WHO DID APPEAR.
(g) ANY ARBITRAL AWARD MAY BE ENFORCED IN THE COURTS OF THE STATE OF
TEXAS OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS AND,
BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE PARTIES HEREBY ACCEPT FOR
THEMSELVES AND IN RESPECT OF THEIR PROPERTY, GENERALLY AND UNCONDITIONALLY, THE
NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS FOR SAID PURPOSE AND THE
PARTIES HEREBY IRREVOCABLY WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY
OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH THEY MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS.
(h) THE PANEL WILL HAVE NO AUTHORITY TO AWARD PUNITIVE OR OTHER DAMAGES
NOT MEASURED BY THE PREVAILING PARTY'S ACTUAL DAMAGES.
41. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the Parties and their respective successors and assigns.
37
<PAGE> 38
ENRON OIL & GAS COMPANY
By: /s/ LEWIS P. CHANDLER, JR.
---------------------------------
Name: Lewis P. Chandler, Jr.
--------------------------------
Title: Senior Vice President - LAW
-------------------------------
MICHAEL PETROLEUM CORPORATION
By: /s/ GLENN D. HART
----------------------------------
Glenn D. Hart
Chief Executive Officer
38
<PAGE> 39
STATE OF TEXAS )
)
COUNTY OF HARRIS )
The foregoing instrument was acknowledged before me this 5th day of
February, 1998, by LEWIS P. CHANDLER, JR., SR. VICE PRESIDENT - LAW of ENRON OIL
& GAS COMPANY, a Delaware corporation, on behalf of said corporation.
My commission expires: /s/ DEBRA K. HICKS
------------------------
October 15, 2000 Notary Public
- ---------------------
[DEBRA K. HICKS NOTARY SEAL]
STATE OF TEXAS )
)
COUNTY OF HARRIS )
The foregoing instrument was acknowledged before me this 5th day of
February 1998, by Glenn D. Hart, Chief Executive Officer of MICHAEL PETROLEUM
CORPORATION, a Texas corporation, on behalf of said corporation.
My commission expires:
/s/ GAIL J. VAN ROOYAN
July 18, 1998 ----------------------------
- ---------------------------- Notary Public
[GAIL J. VAN ROOYAN NOTARY SEAL]
39
<PAGE> 1
EXHIBIT 10.7
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.
Warrant No. 2 Void after
August 12, 2001
MICHAEL HOLDINGS, INC.
STOCK PURCHASE WARRANT
This Warrant is issued, for good and valuable consideration, receipt
of which is hereby acknowledged, to Cambrian Capital Partners, L.P., a Delaware
limited partnership (the "Holder") by Michael Holdings, Inc., a Texas
corporation (the "Company").
1. Purchase of Shares. Subject to the terms and conditions
hereinafter set forth, the Holder is entitled, upon surrender of this Warrant
at the principal office of the Company (or at such other place as the Company
shall notify the Holder hereof in writing), to purchase from the Company 38,671
shares of its common stock (the "Common Stock").
2. Exercise Period. This Warrant is exercisable at any time and
from time to time and, except as provided below, shall remain so exercisable
from the date hereof until August 12, 2001 (the "Exercise Period") on which
date this Warrant shall terminate and no longer be exercisable.
3. Exercise Price. The exercise price (the "Exercise Price") for
the Warrants exercised shall be $8.00 per share of the Common Stock purchased
by the Holders.
4. Method of Exercise. While this Warrant remains outstanding and
exercisable in accordance with Sections 1 and 2 above, the Holder may exercise,
in whole or in part, the purchase rights evidenced hereby. Such exercise shall
be effected by:
(i) the surrender of the Warrant, together with a duly
executed copy of a subscription notice in substantially the form of Exhibit A
attached hereto, to the Secretary of the Company at its principal offices; and
(ii) the payment to the Company of an amount equal to the
aggregate Exercise Price in cash or in a certified cashier's check for the
number of shares of Common Stock being purchased.
<PAGE> 2
Upon any such exercise, the number of shares of Common Stock
purchasable upon exercise of the Warrant shall be reduced by such designated
number of shares of Common Stock, and, if a balance of purchasable shares of
Common Stock remains after such exercise, the Company shall execute and deliver
to the Holder hereof a new Warrant for such balance of shares of Common Stock.
5. Exercise by Exchange of Warrant.
(a) In addition to and without limiting the rights of the Holder
under the terms hereof, at any time after the Common Stock is traded on a
national securities exchange the Warrant (or any subdivision thereof) may be
exercised by being exchanged in whole or in part at any time or from time to
time prior to its expiration for a number of shares of Common Stock having an
aggregate fair market value on the date of such exercise equal to the
difference between (x) the fair market value of the number of shares of Common
Stock subject to the Warrant designated by the Holder hereon on the date of the
exercise and (y) the aggregate Exercise Price of the Warrant otherwise payable
by the Holder hereof for such designated shares of Common Stock. Upon any such
exercise, the number of shares of Common Stock purchasable upon exercise of the
Warrant shall be reduced by such designated number of shares of Common Stock,
and, if a balance of purchasable shares of Common Stock remains after such
exercise, the Company shall execute and deliver to the Holder hereof a new
Warrant for such balance of shares of Common Stock. No payment of any cash or
other consideration shall be required or permitted. Such exchange shall be
effective upon the date of receipt by the Company of the original Warrant
surrendered for cancellation and a duly executed subscription notice
substantially in the form of Exhibit A attached hereto from the Holder hereof
that the exchange pursuant to this section be made. No fractional shares
arising out of the above formula for determining the number of shares issuable
in such exchange shall be issued, and the Company shall in lieu thereof make
payment to the Holder hereof of cash in the amount of such fraction multiplied
by the fair market value of the Shares on the date of exchange. Any tax
liability related to such transaction shall be paid by the Holder.
(b) The "fair market value" of Common Stock, as used in the
immediately preceding paragraph, shall mean, as to any exercise date, (i) the
last sale price of the Common Stock reported on a national securities exchange
or the Nasdaq National Market, (ii) the last sale price regular way for the
Common Stock as reported in the consolidated transaction reporting system on
which the Common Stock may then be listed for trading, (iii) if the Common
Stock is not quoted on the Nasdaq National Market or is not listed for trading
on a national securities exchange, the closing bid price as published by Nasdaq
(or, if such price is not so published by Nasdaq, the average of the high and
low bid prices for the Common Stock on such exercise date, as furnished by any
National Association of Securities Dealers, Inc. ("NASD") member firm selected
from time to time by the Company for such purpose) or (iv) if the Common Stock
is not quoted on the Nasdaq National Market, is not listed for trading on a
national securities exchange or neither Nasdaq nor an NASD member firm
publishes a bid price for the Common Stock, the fair market value of the Common
Stock shall be determined in good faith by the Company as of the exercise date.
- 2 -
<PAGE> 3
If the exercise date is not a business day, then the "fair market
value" shall be calculated using the next day immediately following the
exercise date on which the national securities system, the Nasdaq National
Market or any other quotation system used to determine the "fair market value"
of the Common Stock is open for business.
6. Certificates for Shares. Upon the exercise of the purchase
rights evidenced by this Warrant, one or more certificates for the number of
shares of Common Stock so purchased shall be issued as soon as practicable
thereafter, and in any event within thirty (30) days of the delivery of the
subscription notice.
7. Representations and Covenants of Company.
(a) Reservation of Shares. The Company covenants that it will at
all times keep available such number of authorized shares of its Common Stock,
free from all preemptive rights with respect thereto, which will be sufficient
to permit the exercise of this Warrant for the full number of shares of Common
Stock specified herein. The Company further covenants that such shares of
Common Stock, when issued pursuant to the exercise of this Warrant, will be
duly and validly issued, fully paid and non-assessable shares of Common Stock
and free from all taxes, liens and charges with respect to the issuance
thereof.
(b) Authorized, Issued and Outstanding Shares. The authorized
capital stock of the Company consists solely of 100,000,000 shares of Common
Stock, $0.01 par value, of which 773,425 shares are issued and outstanding and
226,575 shares are held in its treasury, and 50,000,000 shares of preferred
stock of which -0- shares are issued and outstanding. There are no outstanding
or authorized options, warrants (other than this Warrant and that certain
Warrant to Purchase Shares of Common Stock granted to Dale L. Schwarzhoff for
15,000 shares of Common Stock, subject to adjustment as provided therein),
subscriptions, calls, conversions or other rights, contracts, agreements or
commitments or undertakings of any kind (except for options which may be
granted under the Company's 1998 Stock Option Plan) obligating the Company to
issue, sell, purchase, or redeem any shares of capital stock of the Company or
any other securities convertible into, exchangeable for or evidencing the right
to subscribe to any shares of capital stock or other ownership interest in the
Company.
(c) Issuance of Stock Options. The Company hereby covenants that
any stock options granted by the Company pursuant to the Company's 1998 Stock
Option Plan (the "Plan") to purchase any of the shares of Common Stock reserved
for issuance under the Plan, shall have an exercise price which shall not be
less than the fair market value of the Common Stock on the date of grant of
such stock options.
8. Anti-Dilution. The number of and kind of shares of Common
Stock purchasable upon exercise of this Warrant (with respect to subsection (c)
below) and the Exercise Price shall be subject to adjustment from time to time
as follows:
- 3 -
<PAGE> 4
(a) Subdivisions, Combinations and Issuance of Additional Shares.
If the Company shall at any time prior to the expiration of this Warrant (i)
subdivide its Common Stock by split-up or otherwise, (ii) combine its Common
Stock or (iii) issue additional shares of authorized but unissued Common Stock
for cash or non-cash consideration less than the Exercise Price, the number of
shares of Common Stock available upon the exercise of the Warrant shall be
proportionately increased in the case of any subdivision or issuance of
additional shares or proportionately decreased in the case of a contribution.
Appropriate adjustments shall also be made to the purchase price payable per
share, but the aggregate purchase price payable for the total number of shares
of Common Stock purchasable under this Warrant (as adjusted) shall remain the
same. Any adjustment under this Section 8(a) shall become effective at the
close of business on the date the subdivision or combination becomes effective.
(b) Stock Dividends and Distributions. In case the Company shall
at any time while this Warrant is outstanding and unexpired pay a dividend with
respect to Common Stock payable in shares of such stock, or make any other
distribution of securities or property with respect to such stock (except any
distribution provided for in Section 8(a) or 8(c) herein), then (A) the
Exercise Price in effect immediately prior to the record date for distribution
of such dividend or in the event that no record date is fixed, upon the making
of such dividend shall be adjusted to that price determined by multiplying the
Exercise Price in effect immediately prior to such record date by a fraction
(i) the numerator of which shall be the total number of shares of such stock
outstanding immediately prior to such dividend and (ii) the denominator of
which shall be the total number of shares of such stock outstanding immediately
after such dividend and (B) the number of shares of Common Stock purchasable
under this Warrant in effect immediately prior to the record date for
distribution of such dividend or in the event no record date is fixed, upon the
making of such dividend shall be adjusted to that number of shares determined
by multiplying the number of shares of Common Stock purchasable under this
Warrant immediately prior to such record date by a fraction, (i) the numerator
of which shall be the total number of shares of Common Stock outstanding
immediately after such dividend and (ii) the denominator of which shall be the
total number of shares of Common Stock outstanding immediately prior to such
dividend; provided, however, that in no event shall any adjustment to the
Exercise Price or number of shares of Common Stock purchasable under this
Warrant be made upon the payment of a cash dividend or cash distribution or
interest payment by the Company on any of its securities.
(c) Reclassification, Reorganization and Consolidation. In case of
any reclassification, conversion, capital reorganization, consolidation or
merger with or into any other entity (including, without limitation, any
transaction or series of transactions whereby the Company becomes a subsidiary
of another entity), transfer of all or substantially all of the properties or
assets of the Company or its Subsidiaries, or change in the Common Stock (other
than as provided for in Sections 8(a) and (b) above), then, as a condition of
such reclassification, conversion, reorganization, consolidation, merger,
transfer or change, as the case may be, lawful provision shall be made, and
duly executed documents evidencing the same from the Company or its successor
shall be delivered to the Holder of this Warrant, so that such Holder shall
have the right at any time prior to the expiration of this Warrant to purchase,
at a total price equal to that payable upon the exercise of this Warrant, the
kind and amount of shares of stock and other securities and property receivable
in
- 4 -
<PAGE> 5
connection with such reclassification, conversion, reorganization,
consolidation, merger, transfer or change, as the case may be, by a holder of
the same number of shares of Common Stock as were purchasable by the Holder of
this Warrant immediately prior to such reclassification, conversion,
reorganization, consolidation, merger, transfer or change, as the case may be.
In any such case appropriate provisions shall be made with respect to the
rights and interest of the Holder of this Warrant so that the provisions hereof
shall thereafter be applicable with respect to any shares of stock or other
securities and property deliverable upon exercise hereof, and appropriate
adjustments shall be made to the purchase price per share payable hereunder,
provided the aggregate purchase price shall remain the same. Upon any
reorganization, consolidation, merger or transfer referred to in this Section
8(c), this Warrant shall continue in full force and effect and the terms hereof
shall be applicable to the shares of stock, other securities and property
receivable on the exercise of this Warrant after the consummation of such
reorganization, consolidation, merger or transfer, as the case may be and shall
be binding upon the issuer of any such stock or other securities including, in
the case of any such transfer, the person acquiring all or substantially all of
the properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant.
(d) No Dilution or Impairment. The Company covenants that it will
not, by amendment of its articles of incorporation, or through any
reorganization, transfer of assets, consolidation, merger, dissolution, or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the holder of
this Warrant against dilution or other impairment. Without limiting the
generality of the foregoing, the Company covenants that it (i) will not
increase the par value of any shares of stock receivable on the exercise of the
Warrant above the amount payable therefor on such exercise, (ii) will take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of stock on the
exercise of the Warrant, and (iii) will not consolidate with or merge with or
into any other entity or permit any such entity to consolidate with or merge
into the Company (if the Company is not the surviving entity), or permit the
creation of, or allow its shareholders to create, an entity which is a holding
company or a parent corporation or other entity holding all of the Company's
equity securities, unless such other entity shall expressly assume in writing
and will be bound by all the terms of this Warrant.
(e) Notice of Adjustment. When any adjustment is required to be
made in the number or kind of shares purchasable upon exercise of the Warrant,
or in the Exercise Price, the Company shall promptly notify the Holder of such
event and of the number of shares of Common Stock or other securities or
property thereafter purchasable upon exercise of the Warrant.
9. No Fractional Shares. No fractional shares shall be issued
upon the exercise of this Warrant, and the number of shares of stock issued
upon exercise of this Warrant shall be rounded to the nearest whole share.
10. No Stockholder Rights. Prior to the exercise of this Warrant,
the Holder shall not be entitled to any rights of a shareholder with respect to
the shares of Common Stock purchasable
- 5 -
<PAGE> 6
hereunder, including (without limitation) the right to vote such shares,
receive dividends or other distributions thereon, or be notified of shareholder
meetings, and such Holder shall not be entitled to any notice or other
communication concerning the business or affairs of the Company.
11. Exchange of Warrant. Subject to any restriction upon transfer
set forth in this Warrant, each Warrant may be exchanged for another Warrant or
Warrants of like tenor and representing in the aggregate a like number of
Warrants. Any Holder desiring to exchange a Warrant or Warrants shall make such
request in writing delivered to the Company, and shall surrender, properly
endorsed, the Warrant or Warrants to be so exchanged.
12. Mutilated or Missing Warrants. In case any Warrant shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant,
or in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of such Warrant and indemnity or bond, if requested,
also reasonably satisfactory to the Company. An applicant for such substitute
Warrant shall also comply with such other reasonable regulations and pay such
other reasonable charges as the Company may prescribe.
13. Payment of Taxes. The Company will pay all taxes (other than
any income taxes or other similar taxes), if any, attributable to the initial
issuance of the Warrant and the issuance of the shares of Common Stock upon
the exercise of the Warrant, provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of the
issuance or delivery of any Warrant, or the transfer thereof, and no such
issuance, delivery or transfer shall be made unless and until the person
requesting such issuance or transfer has paid to the Company the amount of any
such tax, or has established, to the satisfaction of the Company, that no such
tax is payable or such tax has been paid.
14. Warrant Register. The Warrants shall be numbered and shall be
registered in a Warrant Register (hereinafter defined) as they are issued. The
Company shall be entitled to treat the registered holder of any Warrant on the
Warrant Register as the owner in fact thereof for all purposes and shall not be
bound to recognize any equitable or other claim to or interest in such Warrant
on the part of any other person, and shall not be liable for any registration
or transfer of Warrants which are registered or to be registered in the name of
a fiduciary or the nominee of a fiduciary unless made with the actual knowledge
that a fiduciary or nominee is committing a breach of trust in requesting such
registration of transfer, or with knowledge of such facts that its
participation therein amounts to bad faith.
15. Transfer of Warrants.
(a) By accepting this Warrant, the Holder hereby agrees that such
Warrant, and any shares of Common Stock issuable hereunder, will be held for
investment purposes only and not with a view to resell. This Section 15(a)
shall be binding upon the Holder and its heirs, successors and assigns.
- 6 -
<PAGE> 7
(b) Notwithstanding Section 15(a) or any other provision herein
contained, the Warrants shall be transferable on the books of the Company (the
"Warrant Register") only upon delivery thereof duly endorsed by the Holder or
by his duly authorized attorney or representative, or accompanied by proper
evidence of succession, assignment or authority to transfer. In all cases of
transfer by an attorney, the original power of attorney, duly approved, or an
official copy thereof, duly certified shall be deposited with the Company.
In case of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited with the company in its
discretion. Upon any registration of transfer, the Company shall deliver a
new Warrant or Warrants to the person entitled thereto. Notwithstanding the
foregoing, the Company shall have no obligation to cause a Warrant to be
transferred on its books to any person, unless (i) such Warrant and the shares
of Common Stock issuable upon exercise of such Warrant are registered under a
valid and effective registration statement under the Securities Act of 1933,
as amended, and applicable state blue sky laws or (ii) the Company receives a
written opinion of counsel satisfactory to the Company that registration is not
required under such act. Any shares of Common Stock issued pursuant to this
Warrant shall bear legends describing, among other things, restrictions on
transfer.
16. Registration Rights.
16.1 Registration Under the Securities Act of 1933. Upon exercise,
in part or in whole, of the Warrants, certificates representing the shares
Common Stock and any other securities issuable upon exercise of the Warrants
(collectively, the "Warrant Securities") shall bear the following legend:
The securities represented by this certificate may not be offered or
sold except pursuant to (i) an effective registration statement under
the Act, (ii) to the extent applicable, Rule 144 under the Act (or
any similar rule under such Act relating to the disposition of
securities), or (iii) an opinion of counsel, if such opinion shall be
reasonably satisfactory to counsel to the issuer, that an exemption
from registration under such Act is available.
16.2 Piggyback Registration. If, at any time commencing after the
date hereof the Company registers any of its securities under the Securities
Act of 1933, as amended, or any successor statute thereto (the "Act") (such
period being hereinafter referred to as the "Registration Period"), the Company
proposes to register any of its securities under the Act (other than in
connection with a transaction contemplated by Rule 145(a) promulgated under the
Act or pursuant to Form S-4, Form S-8 or any successor form thereto) it will
give written notice by registered mail, at least thirty (30) days prior to the
filing of each such registration statement, to all Holders of the Warrants
and/or the Warrant Securities of its intention to do so. If the Holders of the
Warrants and/or Warrant Securities notify the Company within fifteen (15) days
after receipt of any such notice of its or their desire to include any such
securities in such proposed registration statement, the Company shall afford
the Holders of the Warrants and/or Warrant Securities the opportunity to have
such Warrant Securities registered under such registration statement, except as
otherwise provided herein. In the case of the registration of shares of its
common stock by the Company in
- 7 -
<PAGE> 8
connection with an underwritten public offering, the Company shall not be
required to register Warrant Securities in excess of the amount, if any, of
Warrant Securities that the principal underwriter of an underwritten offering
shall reasonably and in good faith agree in writing to include in such
offering.
Notwithstanding the provisions of this Section 16.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 16.2 (irrespective of whether a written request for inclusion of
any such securities shall have been made) to elect not to file any such
proposed registration statement, or to withdraw the same after the filing but
prior to the effective date thereof.
16.3 Demand Registration.
(a) At any time during the Exercise Period, the Holders of the
Warrant Securities representing 51% of the Common Stock (assuming the exercise
of all of the Warrants), issued pursuant to this Warrant shall have the right
(which right is in addition to the registration rights under Section 16.2
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Commission, on one occasion, a registration statement
and such other documents, including a prospectus, as may be necessary in the
opinion of both counsel for the Company and counsel for the Underwriter and
Holders, in order to comply with the provisions of the Act, so as to permit a
public offering and sale of their respective Warrant Securities for twelve (12)
consecutive months by such Holders and any other Holders of the Warrants and/or
Warrant Securities who notify the Company within ten (10) days after receiving
notice from the Company of such request. Anything herein to the contrary
notwithstanding, the Company shall be obligated to take any action to comply
with this Section 16.3 on only one occasion.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 16.3 by the majority of the Holders to
all other a registered Holders of the Warrants and the Warrant Securities
within ten (10) days from the date of the receipt of any such registration
request.
(c) In addition to the registration rights under Section 16.2 and
subsection (a) of this Section 16.3, at any time commencing after and expiring
ten (10) years thereafter, any Holder of Warrants and/or Warrant Securities
shall have the right, exercisable by written request to the Company, to have
the Company prepare and file, on one occasion, with the Commission a
registration statement so as to permit a public offering and sale for twelve
(12) consecutive months by any such Holder of its Warrant securities; provided,
however, that the provisions of Section 16.4(b) hereof shall not apply to any
such registration request and registration and all costs incident thereto shall
be at the expense of the Holder or Holders making such request.
(d) Notwithstanding anything to the contrary contained herein, if
the Company shall not have filed a registration statement for the Warrant
Securities within forty-five (45) days of the receipt of the written notice
specified in Section 16.3(a), the Company agrees that upon written notice by the
Holders of the Warrants and/or Warrant Securities representing more than 50% of
the
- 8 -
<PAGE> 9
Warrants and the Warrant Securities, at that time outstanding (assuming the
exercise of all of the Warrants) it shall repurchase (i) any and all Warrant
Securities at the higher of the fair market value (as defined in Section 5(b))
per share of Common Stock on (x) the date of the notice sent pursuant to
Section 16.3(a) or (y) the expiration of the period specified in Section
16.4(a) and (ii) any and all Warrants at such fair market value less the
exercise prices of such Warrants. Such repurchase shall be in immediately
available funds and shall close within two (2) days after the latter of (i) the
expiration of the period specified in Section 16.4(a) of (ii) the delivery of
the written notice of election specified in this Section 16.3(d).
16.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 16.2 or 16.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand pursuant to Section
16.3, shall use its good faith efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each Holder
desiring to sell Warrant Securities such number of prospectus as shall
reasonably be requested.
(b) The Company shall pay all costs (excluding transfer taxes, if
any, and fees and expenses of Holder(s)' counsel and any underwriting or
selling commissions), fees and expenses in connection with all registration
statements filed pursuant to Sections 16.2 and 16.3(a) hereof including,
without limitation, the Company's legal and accounting fees, printing expenses,
blue sky fees and expenses. The Holder(s) will pay all costs, fees and expenses
in connection with any registration statement filed pursuant to Section
16.3(c). If the Company shall fail to comply with the provisions of Section
16.4(a), the Company shall, in addition to any other equitable or other relief
available to the Holder(s), be liable for any or all incidental, special and
consequential damages and damages due to loss of profit sustained by the
Holder(s) requesting registration of their Warrant Securities.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Securities included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s), provided that
the Company shall not be obligated to execute or file any general consent to
service of process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each person,
if any, who controls such Holders within the meaning of Section 15 of the Act
or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act,
the Exchange Act or otherwise, arising from such registration statement, as a
result of any violation by the Company of the Act, any state securities or
"blue sky" laws or any rule or regulation thereunder, except to the extent the
Company is to be indemnified for such items pursuant to Section 16.4(e) below.
- 9 -
<PAGE> 10
(e) The Holder(s) of the Warrant Securities to be sold pursuant to
the registration statement, and their successors and assigns, shall severally,
and not jointly, indemnify the Company, its officers and directors and each
person, if any, who controls the Company within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage
or expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their successors
or assigns, for specific inclusion in such registration statement.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities
other than the Warrant Securities and Securities issued by the Company to be
included in any registration statement filed pursuant to Section 16.3 hereof,
without the prior written consent of the Underwriter.
(h) With respect to a registration statement filed pursuant to
Sections 16.3, the Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(i) The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
(j) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration
- 10 -
<PAGE> 11
statement as it deems reasonably necessary to comply with applicable securities
laws and rules of the National Association of Securities Dealers, Inc.
("NASD"). Such investigation shall include access to books, records and
properties and opportunities to discuss the business of the Company with its
officers and independent auditors, all to such reasonable extent and at such
reasonable times and as often as any such Holder shall reasonably request.
(k) With respect to a registration statement filed pursuant to
Section 16.3, the Company shall enter into an underwriting agreement with the
managing underwriter, reasonably satisfactory to the Company, selected for such
underwriting by Holders holding a majority of the Warrant Securities requested
to be included in such underwriting. Such agreement shall be satisfactory in
form and substance to the Company, each Holder and such managing underwriters,
and shall contain such representations, warranties and covenants by the Company
and such other terms as are customarily contained in agreements of that type
used by the managing underwriter. The Holders shall be parties to any
underwriting agreement relating to an underwritten sale of their Warrant
Securities and may, at their option, require that any or all of the
representations, warranties and covenants of the Company to or for the benefit
of such underwriters shall also be made to and for the benefit of such Holders.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the underwriters except as they may relate to
such Holders and their intended methods of distribution.
16.5 Public Sale without Registration. In no event shall the
Company be obligated to register any Warrant Securities if, in the opinion of
counsel to the Company, in form and substance acceptable to Holders, all of the
Warrant Securities proposed to be registered may be sold publicly without
restrictions and without registration under the Act.
17. Successors and Assigns. The terms, provisions and rights
evidenced by this Warrant shall inure to the benefit of, and be binding upon,
the Company and the Holder and their respective successors and assigns.
18. Amendments and Waivers. Except for the number of shares
purchasable under this Warrant and except for the Exercise Price (as set forth
in Section 3 hereof), any term of this Warrant may be amended and the
observance of any term of this Warrant may be waived (either generally or in a
particular instance and either retroactively or prospectively), with the
written consent of the Company and the holders of sixty-six and two thirds (66
2/3%) of the total number of shares of Common Stock issuable pursuant to this
Warrant and other warrants of like tenor and effect (except for variations
necessary to express the name of the holder) issued of even date herewith. Any
waiver or amendment effected in accordance with this section shall be binding
upon each holder of any shares of Common Stock purchased under this Warrant at
the time outstanding (including securities into which such Shares have been
converted), each future holder of all such shares of Common Stock, and the
Company.
19. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO THE POSSIBLE APPLICATION OF PRINCIPLES OF CONFLICT OF LAWS.
- 11 -
<PAGE> 12
20. Notice Generally. Any notice, demand, request, consent,
approval, declaration, delivery or other communication hereunder to be made
pursuant to the provisions of this Warrant shall be sufficiently given or made
if in writing and either delivered in person with receipt acknowledged or sent
by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) If to Holder, at Two Houston Center, 909 Fannin, Suite 3100,
Houston, Texas 77010, or at the last known address appearing on the books of
the Company maintained for such purpose.
(b) If to the Company
Michael Holdings, Inc.
13101 Northwest Freeway
Suite 320
Houston, Texas 77040
Attention: President
or such other address as may be substituted by notice given as herein provided.
The giving of any notice required hereunder may be waived in writing by the
party entitled to receive such notice. Every notice, demand, request, consent,
approval, declaration, delivery or other communication hereunder shall be
deemed to have been duly given or served on the date on which personally
delivered, with receipt acknowledged, or three (3) business days after the same
shall have been deposited in the United States mail.
21. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT NOT PERMITTED BY
LAW, EACH OF THE UNDERSIGNED HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVES ANY RIGHT WHICH IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN
CONNECTION WITH THE TERM NOTE, THIS AGREEMENT OR THE OTHER SECURITY DOCUMENTS,
OR ANY TRANSACTION CONTEMPLATED THEREBY, BEFORE OR AFTER MATURITY.
22. Arbitration.
(a) Holder and the Company (the "parties") will attempt in good
faith to resolve any controversy or dispute arising out of or relating to
this Agreement promptly by negotiations between themselves. The negotiation
process may be started by the giving of written notice by any party to the
other parties in accordance with the terms of Section 20 hereof, and the
parties agree to negotiate in good faith, and select an independent mediator to
facilitate the negotiations and conduct up to eight consecutive hours of
mediated negotiations in Houston, Texas within 30 days after the notice is
first sent. If, within 10 days after the initial notice, the parties are not
able to agree upon
- 12 -
<PAGE> 13
a mediator, the party originally giving the notice shall promptly notify
American Arbitration Association ("AAA"), 140 West 51st Street, New York, New
York 10020-1203 [telephone (212) 484-3266; fax (212) 307-4387], AAA will
promptly designate a mediator who is independent and impartial, and AAA's
decision about the identity of the mediator will be final and binding.
(b) No arbitration may be commenced by any party unless and until
a negotiation complying with the foregoing paragraph has been completed, and no
litigation or other proceeding may ever be instituted at any time in any court
for the purpose of adjudicating, interpreting or enforcing any rights or
obligations of the parties hereto or any rights or obligations relating to the
subject matter hereof, whether or not covered by the express terms of this
Agreement, or for the purpose of adjudicating a breach or determination of the
validity of this Agreement, or for the purpose of appealing any decision of an
arbitrator, except a proceeding instituted for the sole purpose of having the
award or judgment or an arbitrator entered and enforced.
(c) If a controversy or dispute is not resolved after completion
of the negotiation process described above, then, upon notice by any party to
the other parties (an "Arbitration Notice") and to AAA, the controversy or
dispute shall be submitted to a sole arbitrator who is independent and
impartial, for binding arbitration in Houston, Texas, in accordance with AAA's
Commercial Arbitration Rules (the "Rules"). The parties agree that they will
faithfully observe this Agreement and the Rules and that they will abide by and
perform any award rendered by the arbitrator. The arbitration shall be governed
by the Federal Arbitration Act, 9 U.S.C. Section 1-16 (or by the same
principles enunciated by such Act in the event it may not be technically
applicable). The award or judgment of the arbitrator shall be final and binding
on all parties and judgment upon the award or judgment of the arbitrator may be
entered and enforced by any court having jurisdiction. If any party becomes the
subject of a bankruptcy, receivership or other similar proceeding under the
laws of the United States of America, any state or commonwealth or any other
nation or political subdivision thereof, then, to the extent permitted or not
prohibited by applicable law, any factual or substantive legal issues arising
in or during the pendency of any such proceeding shall be subject to all of the
foregoing mandatory mediation and arbitration provisions and shall be resolved
in accordance therewith. The agreements contained herein have been given for
valuable consideration, are coupled with an interest and are not intended to be
executory contracts. The fees and expenses of the arbitrator will be shared by
all parties engaged in the dispute or controversy on a basis determined to be
fair and equitable by the arbitrator, taking into account the relative fault of
each party, the relative credibility and merit of all claims and defenses made
by each party and the cooperation, speed and efficiency of each party in
conducting the arbitration proceedings and complying with the Rules and with
orders and requests of the arbitrator.
(d) Promptly after the Arbitration Notice is given, AAA will
select three possible arbitrators with experience in the subject matter of the
controversy, to whom AAA will give the identifies of the parties and the
general nature of the controversy. If any of those arbitrators disqualifies
himself or declines to serve, AAA shall continue to designate potential
arbitrators until the parties have three to select from. After the panel of
three potential arbitrators has been completed, a two-page summary of the
background of each of the potential arbitrators will be given to each of the
parties, and the parties will have a period of 10 days after receiving the
summaries in
- 13 -
<PAGE> 14
which to attempt to agree upon the arbitrator to conduct the arbitration. If
the parties are unable to agree upon an arbitrator, then one of the parties
shall notify AAA, and AAA shall select the arbitrator from one of the three, or
less, if one or more has been found to be disqualified or removes himself from
consideration (if all three are disqualified or remove themselves, then AAA
shall start the arbitration-selection process over again). The decision of AAA
with respect to the selection of the arbitrator will be final and binding in
such case.
(e) Within 10 days after the selection of the arbitrator, the
parties and their counsel will appear before the arbitrator at a place and time
in Houston, Texas, as may be designated by the arbitrator for the purpose of
each party making a one hour or less presentation and summary of the case.
Thereafter, the arbitrator will set dates and times for additional hearings
until the proceeding is concluded. The desire and goal of the parties is, and
the arbitrator will be advised that his goal should be, to conduct and conclude
the arbitration proceeding as expeditiously as possible. If any party or his
counsel fails to appear at any hearing, the arbitrator shall be entitled to
reach a decision based on the evidence which has been presented to him by the
parties who did appear.
(f) Any arbitral award may be enforced in the courts of the state
of New York or of the United States of America for the Southern District of New
York, and, by execution and delivery of this Agreement, the parties hereby
accept for themselves and in respect of their property, generally and
unconditionally, the nonexclusive jurisdiction of the aforesaid courts for said
purpose and the parties hereby irrevocably waive to the fullest extent
permitted by law any objection, including without limitation, any objection to
the laying of venue or based on the grounds of forum non conveniens, which they
may now or hereafter have to the bringing of any such action or proceeding in
such respective jurisdictions.
(g) The arbitrator will have no authority to award punitive or
other damages not measured by the prevailing party's actual damages and may
not, in any event, make any ruling, finding, or award that does not conform to
the terms and conditions of the this Warrant.
(h) The provisions of this Section 22 relating to arbitration of
disputes shall not apply to the enforcement of any rights or obligations in
connection with this Warrant.
23. Successors and Assigns. Subject to the provisions in Section
14, this Warrant and the rights evidenced hereby shall inure to the benefit of
and be binding upon the successors of the Company and the successors and
assigns of Holder.
24. Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Warrant.
25. Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
- 14 -
<PAGE> 15
26. Cancellation of Existing Warrants; Entire Agreement. This
Warrant has been issued in replacement of, and substitution for, that certain
Michael Holdings, Inc. Stock Purchase Warrant dated as of August 12, 1996
issued by the Company (designated Warrant No. 1) and that certain Michael Gas
Production Corporation Stock Purchase Warrant dated as of August 12, 1996
issued by Michael Gas Production Corporation (designated Warrant No. 1)
(collectively the "Existing Warrants"), which Existing Warrants have been duly
endorsed and returned by each Holder to the respective issuer thereof and which
Existing Warrants have been marked canceled and such cancellation has been duly
noted in the Warrant Register and other appropriate records of the Company and
Michael Gas Production Corporation, as applicable. This Warrant constitutes the
entire agreement between the parties respecting the subject matter hereof and
hereby terminates, cancels and supersedes the Existing Warrants and any and all
other negotiations, understandings, written and verbal agreements relating to
the subject matter hereof between the parties hereto.
IN WITNESS WHEREOF, the undersigned hereby executes this Stock
Purchase Warrant as of , 1998.
MICHAEL HOLDINGS, INC.
By:
-------------------------------------
Printed Name:
---------------------------
Title:
----------------------------------
- 15 -
<PAGE> 16
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
Pursuant to Section 5 of this Warrant, the undersigned registered
owner of this Warrant irrevocably exercises this Warrant for the purchase of
_____ shares of Common Stock of Michael Holdings, Inc., and herewith makes
payment therefor, all at the price and on the terms and conditions specified in
this Warrant and requests that certificates for the shares of Common Stock
hereby purchased (and any securities or other property issuable upon such
exercise) be issued in the name of and delivered to _________________ whose
address is _________________________ and, if such shares of Common Stock shall
not include all of the shares of Common Stock now and hereafter issuable as
provided in this Warrant, that a new Warrant ("New Warrant") of like tenor and
date for the balance of the shares of Common Stock issuable hereunder be
delivered to the undersigned.
By executing this Subscription Form, the undersigned agrees that the
shares of Common Stock being requested hereby, and any New Warrant being issued
pursuant hereto, will be held for investment purposes only and without a view
to resell, in accordance with Section 15 of the Warrant.
---------------------------------------------
(Name of Registered Owner)
---------------------------------------------
(Signature of Registered Owner)
---------------------------------------------
(Street Address)
---------------------------------------------
(City)(State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the
name as written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever.
- 16 -
<PAGE> 1
EXHIBIT 10.8
INDEMNITY AGREEMENT
This Indemnity Agreement ("Agreement") is made and entered into by and
between Michael Holdings, Inc. a Texas corporation ("Company"), and
______________ ("Indemnitee") (together, the "Parties").
INTRODUCTION
Indemnitee is a director of the Company. The Parties desire that the
Company provide indemnification (including advancement of expenses) to
Indemnitee against any and all liabilities asserted against Indemnitee to the
fullest extent permitted by the Texas Business Corporation Act - ("Act"), as
the Act presently exists and may be expanded from time to time. Based on such
premise, and for certain good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereby agree as
follows:
1. Continued Service. Indemnitee will serve as a director of
the Company for so long as Indemnitee is duly elected and qualified in
accordance with the Bylaws of the company or until Indemnitee tenders his
registration to the Company.
2. Indemnification. The Company shall indemnify Indemnitee when
he was, is or is threatened to be made a named defendant or respondent in a
proceeding because Indemnitee is or was a director of the Company but only if
it is determined in accordance with Section 5 below that Indemnitee:
2.1 conducted himself in good faith;
2.2 reasonably believed:
(i) in the case of conduct in his official capacity as a director
of the Company, that his conduct was in the Company's best interests;
and
(ii) in all other cases, that his conduct was at least not opposed
to the Company's best interests; and
2.3 in the case of any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful.
The termination of a proceeding by judgment, order, settlement or
conviction, or on a plea of nolo contendere or its equivalent is not of itself
determinative that Indemnitee did not meet the requirements set forth in this
Section 2.
3. Limitation on Indemnification. Except to the extent permitted
by Section 4 below, Indemnitee shall not be indemnified under Section 2 above
in respect of a proceeding:
3.1 in which Indemnitee is found liable on the basis that personal
benefit was improperly received by him, whether or not the benefit resulted
from an action taken in his official capacity; or
3.2 in which Indemnitee is found liable to the Company.
<PAGE> 2
For the purposes hereof, Indemnitee shall be deemed to have been found
liable in respect of any claim, issue or matter only after the Indemnitee shall
have been so adjudged by a court of competent jurisdiction after exhaustion of
all appeals therefrom.
4. Extent of Indemnification. If Indemnitee is entitled to
indemnification under Section 2, the Company shall indemnify Indemnitee against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses actually incurred by Indemnitee in connection with the
proceeding; however, if the Indemnitee is found liable to the Company or is
found liable on the basis that personal benefit was improperly received by
Indemnitee, the indemnification (1) shall be limited to reasonable expenses
actually incurred by Indemnitee in connection with the proceeding, and (2)
shall not be made in respect of any proceeding in which Indemnitee shall have
been found liable for willful or intentional misconduct in the performance of
Indemnitee's duty to the Company. The reasonableness of the Indemnitee's
expenses contemplated in this Section 4 shall be determined in the same manner
that the determination of indemnification is made under Section 5.
5. Determination of Indemnification.
5.1 a determination of whether Indemnitee is entitled to
indemnification under Section 2 shall be made:
(i) by the Board of Directors of the Company by a majority vote of
a quorum consisting of directors who at the time of the vote are not
named defendants or respondents in the proceeding;
(ii) if such a quorum cannot be obtained, by a majority vote of a
committee of the Board of Directors, designated to act in the matter
by a majority vote of all directors, consisting sole of two or more
directors who at the time of the vote are not named defendants or
respondents in the proceeding;
(iii) by special legal counsel selected by the Board of Directors or
a committee of the Board of Directors by vote as set forth in
paragraphs 5.1(i) or 5.1(ii) of this Section 5, or, if such a quorum
cannot be obtained and such a committee cannot be established, by a
majority vote of all directors; or
(iv) by the shareholders in a vote that excludes the shares held by
directors who are named defendants or respondents in the proceeding.
5.2 the Board of Directors, independent legal counsel or
shareholders, as the case may be, shall make such determination of
indemnification under paragraph (a) of this Section 5 in accordance with the
following procedures:
(i) Indemnitee may submit to the Board of Directors a sworn
statement Request for Indemnification, substantially in the form of
Exhibit A, in which the Indemnitee requests indemnification from the
Company pursuant to this Agreement and states that he has met the
standard of conduct required for indemnification under Section 2.
(ii) The Indemnitee's submission of a Request for Indemnification
to the Board of Directors shall create a rebuttable presumption that
the Indemnitee has met the
<PAGE> 3
requirements set forth in Section 2 and, therefore, is entitled to
indemnification thereunder. The directors, special legal counsel or
shareholders, as the case may be, shall determine, within 30 days
after submission of the Request for Indemnification, specifically that
the Indemnitee is so entitled unless they or it possess clear and
convincing evidence to rebut the foregoing presumption, which evidence
shall be disclosed to the Indemnitee with particularity.
6. Mandatory Indemnification for Reasonable Expenses upon
Successful Defense. The Company shall indemnify Indemnitee against reasonable
expenses incurred by him in connection with a proceeding in which he is a named
defendant or respondent because he is or was a director of the Company if he
has been wholly successful, on the merits or otherwise, in the defense of the
proceeding. The reasonableness of the Indemnitee's expenses contemplated in
this Section 6 shall be determined in any manner set forth in Section 5.
7. Advancement of Reasonable Expenses. Reasonable expenses
incurred by Indemnitee who was, is or is threatened to be made a named
defendant or respondent in a proceeding shall be paid or reimbursed by the
Company, in advance of the final disposition of the proceeding, without the
determination specified in Section 5 or the determination as to the
reasonableness of such expenses contemplated in Sections 4 and 6, within 14
days after: the Company receives from Indemnitee, the Statement of
Undertaking, substantially in the form of Exhibit B, in which Indemnitee shall
state that he believes in good faith that he has met the standard of conduct
necessary for indemnification under Section 2, and (ii) the Indemnitee, or any
other person on behalf of Indemnitee, shall undertake to repay the amount paid
or reimbursed by the Company if it is ultimately determined that he has not met
those requirements or if it is ultimately determined that the indemnification
of Indemnitee against expenses incurred by him in connection with that
proceeding is prohibited by Section 5.
8. Merger, Consolidation or Change in Control. If the Company is
a constituent corporation in a merger or consolidation, whether the Company is
the resulting or surviving corporation or is absorbed as a result thereof, or
if there is a change in control of the Company, Indemnitee shall stand in the
same position under this Agreement with respect to the resulting, surviving or
changed corporation as Indemnitee would have with respect to the Company if its
separate existence had continued or if there had been no change in the control
of the Company.
9. Certain Definitions. For the purposes of this Agreement, the
following terms shall have the indicated meanings and understandings:
9.1 "director" means any person who is or was a director of the
Company and any person who, while an officer of the Company, is or was
serving at the request of the Company as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary
of another foreign or domestic corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit plan or other
enterprise;
9.2 "expenses" include court costs and attorneys' fees;
9.3 "officer" means any person who is or was an officer of the
Company and any person who, while an officer of the Company, is or was
serving at the request of the Company as a director, officer, partner,
venturer, proprietor, trustee, employee, agent,
<PAGE> 4
or similar functionary of another foreign or domestic corporation,
partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise;
9.4 "official capacity"
(i) means when used with respect to a director, the
office of director in the Company; and
(ii) means when used with respect to a person other than a
director, the elective or appointive office in the Company
held by the officer or the employment or agency relationship
undertaken by the employee or agent on behalf of the Company;
but
(iii) in both paragraphs 9.4(i) and 9.4(ii), does not
include service for any other foreign or domestic corporation
or any partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or other enterprise;
9.5 "proceeding" means any threatened, pending, or completed
action, suit or proceeding whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit, or
proceeding, and any inquiry or investigation that could lead to such
an action, suit or proceeding; and
9.6 "change of control" means any change in the ownership of a
majority of the capital stock of the Company or in the composition of
a majority of the members of the Board of Directors of the Company.
10. Attorneys' Fees. If Indemnitee institutes any legal action to
enforce Indemnitee's rights under this Agreement, or to recover damages for
breach of this Agreement, Indemnitee, if Indemnitee prevails in whole or in
part, shall be entitled to recover from the Company all fees and expenses
(including attorneys' fees) incurred by Indemnitee in connection therewith.
11. Amendments to Act. This Agreement is intended to provide
indemnity to Indemnitee to the fullest extent allowed under Texas law.
Accordingly, to the extent permitted by law, if the Act permits greater
indemnity than the indemnity set forth herein, or if any amendment is made to
the Act expanding the indemnity permissible under Texas law, the indemnity
obligations contained herein automatically shall be expanded, without the
necessity of action on the part of any party, to the extent necessary to
provide to Indemnitee the fullest indemnity permissible under Texas law.
12. Miscellaneous Provisions.
12.1 Survival. The provisions of this Agreement shall survive the
termination of Indemnitee's service as a director of the Company.
12.2 Entire Agreement. This Agreement constitute the full
understanding of the Parties and a complete and exclusive statement of
the terms and conditions of their agreement relating to the subject
matter hereof and supersedes all prior negotiations, understandings
and agreements, whether written or oral, between the Parties, their
<PAGE> 5
affiliates, and their respective principals, shareholders, directors,
officers, employees, consultants and agents with respect thereto.
12.3 Amendments and Waivers. No alteration, modification,
amendment, change or waiver of any provision of this Agreement shall
be effective or binding on any party hereto unless the same is in
writing and is executed by all Parties hereto.
12.4 Modification and Severability. If a court of competent
jurisdiction declares that any provision of this Agreement is illegal,
invalid or unenforceable, then such provision shall be modified
automatically to the extent necessary to make such provision fully
legal, valid or enforceable. If such court does not modify any such
provision as contemplated herein, but instead declares it to be wholly
illegal, invalid or unenforceable, then such provision shall be
severed from this Agreement, this Agreement and the rights and
obligations of the Parties hereto shall be construed as if this
Agreement did not contain such severed provision, and this Agreement
otherwise shall remain in full force and effect.
12.5 Enforceability. This Agreement shall be enforceable by and
against the Company, the Indemnitee and their respective executors,
legal representatives, administrators, heirs, successors and
assignees.
12.6 Governing Law. This Agreement shall be governed by, construed
under, and enforced in accordance with the laws of the State of Texas
without reference to the conflict-of-laws provisions thereof.
12.7 Multiple Counterparts. This Agreement may be executed by the
Parties hereto in multiple counterparts, each of which shall be deemed
an original for all purposes, and all of which together shall
constitute one and the same instrument.
The parties hereto have executed this Agreement to be effective as of December
4, 1996.
COMPANY:
MICHAEL HOLDINGS, INC.
By: /s/ GLENN D. HART
---------------------------------
Name: Glenn D. Hart
-------------------------------
Title: Chief Executive Officer
------------------------------
INDEMNITEE:
By:
---------------------------------
<PAGE> 1
EXHIBIT 10.9
SOUTH CALLAGHAN RANCH (LOBO) ASSETS AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into between
Mobil Exploration & Producing U.S. Inc. acting as Agent for Mobil Producing
Texas & New Mexico Inc. ("Mobil") and Michael Petroleum Corporation
("Michael"). In consideration of the mutual benefits and covenants contained
herein, the parties agree as follows:
The following Exhibits are attached hereto and shall be considered a
part of this Agreement:
Exhibit "A" -- Description of the McElroy Lease,
the GBGL&C Lease, and the Oil and
Gas Interests.
Exhibit "B-1" -- Plat of South Callaghan Ranch Lands.
Exhibits "B-2 - B-24" -- Plats of Program Wells.
Exhibit "C-1" -- Term Assignment of Oil and Gas
Leases.
Exhibit "C-2" -- South Callaghan Ranch Lease.
Exhibit "C-3" -- Excluded Wells.
Exhibit "D" -- JOA.
Exhibit "E" -- Production Headers and Applicable
Wells.
Exhibit "F" -- VPP Pipeline Delivery Points.
For additional consideration described and defined below, Mobil agrees
to (i) assign to Michael a term leasehold interest in the "McElroy Leases" and
the "GBGL&C Lease" as defined and described in attached Exhibit "A," and (ii)
grant all of Mobil's right, title and interest in, to and under or derived from
the lands described as "Oil and Gas Interests" in Exhibit "A" attached hereto.
This Agreement covers the lands depicted on the plat attached hereto as Exhibit
"B-1" (the "South Callaghan Ranch Lands"), INSOFAR AND ONLY INSOFAR as the
South Callaghan Ranch Lands cover the interval from the surface of the ground
down to 100 feet below the stratigraphic equivalent of the base of the Lobo 6
Sand, which is seen at a measured depth of 8,775 feet on the electric log run
in the South Callaghan Ranch Well #164 (API 4247936793) located in the
Margarito Herrera Survey 1192, A-2293, Webb County, Texas. This grant shall be
pursuant to an oil and gas lease from Mobil to Michael and substantially in the
form of the lease attached hereto as Exhibit "C-2" (the "South Callaghan Ranch
Lease") and this assignment shall be pursuant to the Term Assignment form
attached hereto as Exhibit "C-1."
The South Callaghan Ranch Lease shall have a primary term of seven (7)
years, shall be effective January 1, 1998, and shall cover only Mobil's
"undeveloped acreage" in the South Callaghan Ranch Lands with an express
provision that no well drilled under such lease shall have
<PAGE> 2
a bottom-hole location closer than 1,200 feet from any existing producing well
thereon (except this distance shall be 1,250 feet for the "Program Wells"
defined below) unless mutually agreed otherwise between the parties. For
purposes of this Agreement, undeveloped acreage shall include all of the South
Callaghan Ranch Lands, SAVE AND EXCEPT the wells listed on Exhibit "C-3"
attached hereto (the "Excluded Wells") and the drilling units allocated to the
23 wells (the "Program Wells") drilled or proposed by Mobil under its 1997
Mobil Development Fund Program. Each such Program drilling unit contains 40
acres, and each is designated with its applicable Program Well on the plats
attached hereto as Exhibits "B-2" through "B-24."
If any currently producing well, including any Program Well, should
cease producing and become a plugging candidate under the JOA (described
below), then upon the parties' consent to plug such well, the 1,200 foot
restriction shall no longer apply to that well. Furthermore, if any proposed
Program Well is not actually drilled as of the date of this Agreement, then the
1,200 foot restriction shall not apply to that well. Michael and Mobil further
agree not to seek an exception to the density provisions as provided in Rule 38
WELL DENSITIES of the Statewide Rules for Oil, Gas and Geothermal Operations of
the Railroad Commission of Texas and not to seek changes to current field rules
or seek new field rules, without prior written agreement between the parties.
Michael and Mobil shall execute a new joint operating agreement
substantially in the form attached hereto as Exhibit "D" (the "JOA") covering
the South Callaghan Ranch Lands to replace a portion of the Contract Area
covered by the current August 16, 1979 operating agreement. The JOA shall
reflect pertinent changes regarding the parties and address among other
matters, the interests of the parties, the COPAS Accounting Procedure and the
gas balancing agreement. Upon closing, Mobil shall resign as operator (i)
effective May 1, 1998 with respect to the undeveloped acreage in the South
Callaghan Ranch Lands, and (ii) as soon as reasonably possible with respect to
currently producing wells located on the balance of the South Callaghan Ranch
Lands. Upon such resignations, Michael shall be appointed operator of the
South Callaghan Ranch Lands. In order to insure an orderly change in operator
of the currently producing wells, Michael and Mobil anticipate a transition
period of up to, but not more than, one hundred twenty (120) days during which
Mobil will provide the agreed-upon transition services set forth in Exhibit "G"
of the JOA. Upon completion of the transition period, Michael, as successor
operator, will be responsible for assuming all accounting, administrative and
regulatory services currently provided by Mobil. Michael agrees that as
successor Operator under the JOA, it shall be subject to a currently existing
agreement with Maverick Engineering, Inc. regarding production operations,
production facilities, production engineering services and production
compression.
Michael shall operate the South Callaghan Ranch Lands as a reasonable
and prudent operator acting in a lawful, safe, efficient and cost effective
manner at all times. As Operator, Michael agrees that it shall, for the
benefit of the joint account under the JOA, render and make timely payment of
all (i) royalties and other payments out of production under the terms of
leases comprising the Contract Area, and (ii) severance, production, and ad
valorem taxes assessed against the Contract Area in the JOA. Michael shall
keep the South Callaghan Ranch Lands free from all liens, encumbrances, claims
and causes of action except for (i) liens for taxes or assessments not yet due
or not yet delinquent, and (ii) unperfected existing inchoate claims which may,
by subsequent action
2
<PAGE> 3
of the claimants or operation of law, attach to the South Callaghan Ranch
Lands. Michael shall provide to Mobil its quarterly financial statements and
such other information as Mobil may reasonably request regarding Michael's
operating practices and business condition. Michael shall employ or contract
with those engineering and field operations personnel who are capable and
experienced in the drilling, completing, reworking, producing and operating of
high pressure gas wells. The JOA shall provide for the removal of Michael as
Operator for good cause, which shall include gross negligence, willful
misconduct, the material breach of, or inability to meet, the standards of
operation, and the material failure or inability to perform its obligations
under the terms and provisions of the JOA. Such terms, provisions and
obligations under the JOA shall include, but are not limited to, the timely
delivery of the VPP and maintaining appropriate flowline pressures. The COPAS
Accounting Procedure attached to the JOA as Exhibit "C" shall enable Michael to
charge Mobil for its proportionate share of costs as set out therein.
In operating and producing the South Callaghan Ranch Lands, Michael
agrees to conduct operations in a manner such that pressures on existing
flowlines immediately upstream of the flowline block valves on the Production
Headers do not increase by more than 5% above the pressure at which they were
operating as of the Closing. If Michael wishes to increase pressures on an
existing flowline by more than 5%, Michael shall obtain written permission from
Mobil, prior to effecting an increase. No permission shall be required if the
pressure increase is a result of a successful wellwork project on the well
originally serviced by the flowline. "Production Headers" are those headers
referred to as Header A through Header RR on Drawing Nos. D-960089-0201-0000
through D-960089-0201-0015, depicted on Exhibit "E" attached hereto (legible,
large scale versions of which drawings were furnished to, and are in the
possession of, Michael).
As additional consideration for the agreements contained herein,
Michael shall guarantee the delivery of a volumetric production payment (the
"VPP") equal to 4.0 BCF of natural gas, free of all cost and expense (net of
royalty, production and severance taxes, post-production charges and the like),
delivered into one (1) or more of either (i) Katy Plant Tailgate pipelines
listed on attached Exhibit "F", (ii) Mobil LaGloria tailgate, or (iii) Agua
Dulce pipelines listed on attached Exhibit "F", in such volumes at each as
Michael shall reasonably determine. Michael shall timely notify Mobil (by
telephone, confirmed in writing or by electronic communication) of the volumes
Michael will make available to Mobil at each of the three (3) points for each
month no later than three (3) working days prior to the last day of the
preceding month. Once Michael has notified Mobil of the volumes available at
each of the three (3) points, Michael shall not change the volume it makes
available at any of the three (3) points during that month without Mobil's
prior consent. Contemporaneously with the confirmation by Michael of the
delivery point(s) for a particular month, Mobil or its agent or designee shall
have the right to nominate the specific Exhibit "F" pipeline(s) for actual
delivery purposes. Michael will use its best efforts to honor Mobil's pipeline
nomination.
The VPP shall be delivered out of Michael's then-current Webb and
Zapata Counties production base in a volume stream of an average of 16.35 MMCF
per day (491MMCF per month) beginning on May 1, 1998 and continuing until
December 31, 1998 until the entire 4.0 BCF VPP
3
<PAGE> 4
has been delivered to Mobil. The parties, recognize that, as a practical
matter, pipeline imbalances may cause the actual volumes to be delivered to
vary; such variance shall not constitute a default in the payment of the VPP.
The parties agree to use their best efforts to remedy any such variances in
delivered volumes by the end of the month following the month during which the
variance in delivery actually occurred. Failure by Michael to deliver the VPP
shall result in the ipso facto termination of the South Callaghan Ranch Lease;
provided, however and in that event, Michael shall be entitled to own only 40
acres around each then producing or currently drilling well located on the
South Callaghan Ranch Lands as governed by the South Callaghan Ranch Lease.
Failure by Michael to timely deliver the VPP over the course of such period
shall result automatically in (i) Mobil becoming the operator of the wells
existing as of the date of this agreement and (ii) the termination of the JOA
as to all of the Contract Area not otherwise retained by Michael. Michael and
Mobil agree that the VPP is excluded from any and all South Callaghan Ranch
Lease gas balancing calculations and agreements.
With respect to the VPP, Michael's delivery of such gas shall be
subject to the following quality specs:
All gas delivered by Michael shall meet the quality and heat content
of the receiving transporter. The unit of quality measurement for
purposes of this agreement shall be one MMBtu dry. Measurement of gas
quantities hereunder shall be in accordance with the established
procedures of the receiving transporter.
Closing of the transactions contemplated hereby shall occur on or
before April 23, 1998, at such time and place as Mobil and Michael shall
mutually agree.
In addition to the above specific matters, the parties do generally
agree as follows:
1. The parties do not intend to create, nor shall this Agreement
be construed to create, a partnership, mining partnership, joint venture, or
other relationship of mutual agency between the parties, their relation with
respect to this Agreement and all rights, interests, and obligations hereunder
being solely one of lessor and lessee. Nothing herein shall be construed as
authorization of one party hereto to act as general agent for the other party
nor to permit either party to act for or on behalf of the other party outside
the terms of the Agreement.
2. Michael may not transfer or assign its operational duties and
responsibilities hereunder without first obtaining the written consent of
Mobil, which consent shall not be unreasonably withheld. Except as otherwise
expressly provided in this Agreement, Mobil's rights under this Agreement shall
be freely assignable. Notwithstanding anything herein to the contrary, no
assignment by either party shall operate to relieve the transferring party from
direct responsibility and liability to the other party hereto for the
performance of all of the transferring party's obligations hereunder.
3. Time is of the essence in each and every provision of this
Agreement.
4
<PAGE> 5
4. This Agreement is solely for the benefit of the parties hereto
and their respective successors and assigns. There are no intended third-party
beneficiaries of this Agreement.
5. The parties hereto agree to execute, acknowledge, and deliver,
as appropriate, such other and further instruments, documents, and assurances
as the other of them may reasonably require to effectuate the purpose and
intent of this Agreement.
6. Any failure by Michael, on the one hand, or Mobil, on the
other hand, to comply with any obligation, covenant, agreement or condition
contained herein may be expressly waived in writing by the other party;
provided, however, any such waiver or failure to insist upon strict compliance
shall not operate as a waiver of, or estoppel with respect to, any subsequent
or other failure.
7. All notices, requests, demands, and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered by hand (including, without limitation, by
overnight courier), transmitted by facsimile, or mailed, certified or
registered mail (return receipt requested) with postage prepaid to the
applicable party as follows:
(a) If to Michael:
Michael Petroleum Corporation
13101 Northwest Freeway, Suite 320
Houston, Texas 77040
Fax: (713) 895-0320
Attention: Land Manager
(b) If to Mobil:
Mobil Exploration & Producing U.S. Inc.
12450 Greenspoint Drive
Houston, Texas 77060-1991
Fax: (281) 775-4370
Attention: South Texas Producing Manager
with a copy to: Mobil Exploration & Producing U.S. Inc.
12450 Greenspoint Drive
Houston, Texas 77060-1991
Fax: (281) 775-4095
Attention: Robert E. Weitzel
or to such other persons or entities or addresses as the applicable party shall
furnish to the other parties in writing in accordance with this section.
Delivery of notices shall be effective only upon actual receipt by the intended
recipient (or in the case of facsimile transmission, the completion of such
transmission during the recipient's normal business hours).
5
<PAGE> 6
8. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
9. This Agreement, and the legal relations among the parties
hereto arising from this Agreement, shall be governed by and construed in
accordance with the laws of the State of Texas.
10. This Agreement (including the Exhibits hereto and the other
instruments referred to herein) embodies the entire agreement and understanding
of the parties hereto in respect of the subject matter contained herein; there
are no restrictions, promises, warranties, covenants or undertakings, other
than those expressly set forth or referred to herein; and this Agreement
supersedes all prior agreements and understandings among the parties with
respect to such subject matter.
11. Neither this Agreement nor any other agreement between the
parties nor any uncertainty or ambiguity herein or therein shall be construed
or resolved using any presumption against any party hereto or thereto, whether
under any rule of construction or otherwise. On the contrary, this Agreement
and the other agreements between the parties have been reviewed by the parties
and their counsel and, in the case of any ambiguity or uncertainty, shall be
construed according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
12. Any headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
13. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14. In the event of any conflict between this Agreement and any
instrument or document executed pursuant hereto, the terms of this Agreement
shall in all respects govern and control.
15. The parties shall make no press release or other public
announcement or public disclosure relating to this Agreement or the subject
matter of this Agreement, except as necessary to meet legal or regulatory
requirements, or as mutually approved.
16. Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association
("AAA") by three (3) arbitrators. Each party shall appoint one arbitrator who
shall be an impartial and independent person. If a party fails to appoint an
arbitrator within thirty (30) days from the date a Demand to Arbitrate was made
under Rule 6, the AAA shall make the appointment of the arbitrator. The two
(2) arbitrators thus appointed shall appoint the third arbitrator who shall be
an impartial and independent person. If said two (2) arbitrators fail to
appoint the third arbitrator within sixty (60) days from the date a Demand to
Arbitrate was made under Rule 6, the AAA shall make the appointment of the
third arbitrator. Should any of the
6
<PAGE> 7
arbitrators appointed die, resign, refuse or become unable to act before a
decision is given, the vacancy shall be filled by the method set forth in this
clause for the original appointment. The arbitration shall be held in Houston,
Texas. Judgment upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof.
Executed this 20th day of April, 1998
Michael Petroleum Corporation
By: /s/ MICHAEL G. FARMAR
--------------------------------------
Michael G. Farmar
President
Mobil Exploration & Producing U.S. Inc.,
as Agent for Mobil Producing Texas &
New Mexico Inc.
By: /s/ D.B. LITCHFIELD
--------------------------------------
D. B. Litchfield
Attorney-in-Fact
7
<PAGE> 1
EXHIBIT 10.10
OIL AND GAS LEASE
THE STATE OF TEXAS )
)
COUNTY OF WEBB )
This agreement made effective this, the first day of January, 1998, between
Mobil Producing Texas & New Mexico Inc., herein called "Lessor", whose address
is 12450 Greenspoint Drive, Houston, Texas 77060-1991 and Michael Petroleum
Corporation, as "Lessee", whose address is 13101 Northwest Freeway, Suite 320,
Houston, Texas 77040.
WITNESSETH:
DEFINITIONS: The parties hereto agree that for purposes of this lease,
the following definitions shall be applicable:
a. "Oil and/or gas" is defined as oil, gas, casinghead gas, other
gaseous substances and associated hydrocarbons in either a liquid or
gaseous phase or state and such minerals as may be produced in
association with the production of oil, gas, casinghead gas, other
gaseous substances and associated hydrocarbons; provided, however, that
nothing in this Lease shall be deemed to authorize the gas gasification
or in situ combustion of coal or lignite, and this Lease shall not be
deemed to cover either coal or lignite. The classification of a well as
either a gas well or oil well by the Railroad Commission of Texas shall
be conclusive in respect of its classification under the terms of this
Lease.
b. "Operations for drilling", "drilling operations", "commencement of
operations", "commence drilling operations", "commences drilling
operations", "commencement of a well" and "actual drilling operations"
shall have the same meaning being (i) the actual entry of the drillbit
of a drilling rig, capable of achieving the total depth permitted and
approved by the Railroad Commission of Texas, into the soil of leased
premises and the timely prosecution of such actual drilling operations
with reasonable diligence to the completion of same as a dry hole or
commercial well, or (ii) the actual reentry into an existing wellbore
with a drilling or workover rig capable of re-entering such well for
the purpose of completing or recompleting such well in previously
uncompleted and unproduced zones and the timely prosecution of such
actual re-entry operations, with reasonable diligence, toward the
completion of such previously uncompleted and unproduced zone or zones
encountered in such wellbore as either producing or dry zones.
c. "Operations for reworking", "reworking operations", "commencement of
reworking operations", "commence reworkinq operations" and "actual
reworking operations" shall have the same meaning, being the actual
re-entry into an existing wellbore with a drilling or workover rig
capable of reentering and reworking such well and the timely
prosecution of such actual reworking operations with reasonable
diligence toward the re-establishment or enhancement of production of
commercial oil or gas from such previously producing zone or zones.
d. "Operations" shall be defined as all other lease operations which
may be conducted by Lessee under this lease except those defined in b
and c above. "Operations" as defined in this subparagraph d shall
never be the basis for perpetuation of this lease.
<PAGE> 2
e. "Completed", or "completion" shall have the same meaning and the
date a well is completed shall be on (i) the date of the potential
test conducted for Railroad Commission purposes; (ii) sixty (60)
days after the drilling rig is released from such well; or (iii)
the date a well is abandoned as a dry hole, whichever happens sooner.
f. A well shall be considered and defined as "shut-in" on the earlier
of the following dates: (1) the date of the potential test conducted
for Railroad Commission purposes; (2) sixty (60) days after the
drilling rig is released; or (3) the day that gas ceases to be sold
from a gas well capable of producing in paying quantities.
g. "Excluded Wells" shall be those South Callaghan Ranch Wells listed
on Exhibit "B" attached hereto.
1. GRANTING CLAUSE: LESSOR, in consideration (i) of Ten Dollars
($10.00) in hand paid, (ii) of the agreements of Lessee herein contained, and
(iii) of the forbearance by Lessee from drilling any well with a bottom-hole
location closer than 1,200 feet from any Excluded Well (except with respect to
Program Wells, this distance shall be 1,250 feet) without mutual agreement from
Lessor, hereby GRANTS, LEASES and LETS exclusively unto Lessee, for the purpose
of investigating, exploring, prospecting, and drilling for and producing oil,
gas and all other hydrocarbons and sulphur necessarily produced with such oil
and gas, conducting exploration, geologic and geophysical surveys by
seismograph, core test and magnetic methods, injecting and re-injecting gas,
fresh water and other fluids and air into subsurface strata for secondary or
tertiary recovery purposes only, laying, maintaining and replacing pipelines,
building roads, tanks, power stations, telephone lines and other structures
thereon and to produce, save, take care of, treat, transport and own said
products, the following described land situated in Webb County, Texas, to wit:
2. PROPERTY DESCRIPTION: See attached Exhibit "A".
For the purpose of determining the amount of any payments hereunder,
said land shall be deemed to contain 38,176.56 acres, whether actually
containing more or less.
3. RESERVATIONS: There is EXCEPTED from this lease and Lessor RESERVES
unto himself, his heirs, successors, administrators and assigns:
<PAGE> 3
(a) all minerals except oil, gas and all other liquid, solid and
gaseous hydrocarbons and sulphur that is necessarily produced with such oil or
gas;
(b) equal and concurrent rights of occupancy, use and possession of
the surface estate by Lessor, surface owners or Lessor's or surface owner's
other mineral, surface, grazing and recreational lessees or assignees, together
with the right of ingress to and egress from the above described lands and other
lands owned by Lessor for the purpose of exploring (including the granting of
geophysical and seismic permits), developing and operating said lands for oil,
gas and other minerals of whatever nature which may hereafter be released from
this lease, and equal and concurrent rights to complete water source wells on
the leased premises and in any reservoir not productive of oil or gas for the
purposes of obtaining water for the exploration, development and operation of
Lessor's reserved rights, subject to the provisions of paragraph 15.(n) and 18.
Further, Lessor or surface owner reserves surface use for grazing, farming and
recreational lessees, which surface use rights shall be concurrent with the
surface rights herein granted to Lessee.
(c) All depths below 100' beneath the stratigraphic equivalent of
the base of the Lobo 6 Sand, which is seen at a measured depth of 8,775 feet on
the electric log run in the South Callaghan Ranch # 1 64 Well (API 4247936793),
in Margarito Heffera Survey II 92, Abstract 2293,
(d) All wells currently existing on the leased premises, including
but not limited to the Excluded Wells.
4. HABENDUM CLAUSE: Subject to the other provisions herein contained,
this lease shall be for a term of seven (7) years from January 1, 1998 (called
"Primary Term") and as long thereafter as oil, gas or other leased substance is
produced from said land in paying quantities or as long as this lease is
continued in effect as otherwise provided herein.
5. ROYALTIES: Lessor is not retaining or reserving any royalties or
royalty interests under the terms of this Lease and no royalties are payable to
Lessor under the terms of this Lease. However, Lessor and Lessee recognize and
acknowledge that there are certain outstanding perpetual non-participating
royalty interests of record as of the effective date of this Lease burdening
Lessor's mineral estate leased hereunder (the "NPRI Interests") and that Lessee
is acquiring the leasehold estate granted hereunder subject to and burdened by
the NPRI Interests. Lessee shall, as of the effective date of his Lease, assume
and be responsible for the payment of the NPRI Interests in accordance with the
terms of the instruments creating such
<PAGE> 4
interests and shall defend, indemnify and hold Lessor harmless from and against
any and all claims arising out of or relating to the payment of royalties to
the holders of the NPRI Interests insofar as they relate to periods of time
from and after the effective date of this Lease.
6. SHUT-IN ROYALTY CLAUSE: (a) If after the expiration of the primary
term there is a gas well on this lease capable of producing gas in paying
quantities and classified as a gas well by the Railroad Commission of the State
of Texas, but gas is not being sold for ninety (90) consecutive days, Lessee may
pay or tender as royalty, to the owner or owners of the NPRI Interests, on or
before ninety (90) days after the date on which said well is shut in, or the
lease ceases to be otherwise maintained, (whichever date Lessee elects to
utilize) and thereafter at annual intervals, a sum equal to the amount of FIVE
AND NO/100 ($5.00) DOLLARS per acre for each such net acre then subject to the
shut-in provisions of this lease at the time such payment is made; and if such
payment is made or tendered, this lease shall not terminate but this lease shall
continue and it will be considered that gas is being produced from this lease in
paying quantities, for a twelve (12) month period commencing from date such
payment is made whether or not sporadic production occurs during such twelve
(12) month period. Each subsequent shut-in payment shall be in like amounts of
FIVE AND NO/100 ($5.00) DOLLARS per acre for each such net acre then subject to
the shut-in provisions of this lease and payable on or before the annual
anniversary date the first payment is made; and, upon each timely and proper
payment, this lease shall not terminate for twelve (12) months (each payment
shall be due by and each annual shut-in royalty period shall commence from the
date established as the first payment date, and subsequent 12-month payments
shall be payable on or before the same day of the twelfth month following the
month of the prior payment); however, if a well capable of producing gas in
commercial or paying quantities is completed during the primary term of this
lease, then Lessee may, at its election, pay or tender the first or initial
shut-in royalty payment within ninety (90) days after such well is shut-in or on
or before the next ensuing anniversary date of this lease whichever happens
later.
(b) This lease may not be continued in force and effect by the
payment of shut-in gas royalty alone for more than a period of two (2) years
after the expiration of the primary term; however, in the event that, after such
two (2) year period and after the actual production and marketing of the gas has
once been obtained, the Lessee is thereafter required to shut in said well(s)
due to its inability to (1) obtain a reasonable market for the gas, or (2) where
its purchaser of gas is unwilling or unable to purchase and take such gas from
no fault of Lessee, the Lessee may pay or tender to the owners of the NPRI
Interests, as royalty, on or before ninety (90) days after the date on which
said well(s) is shut in, a sum equal to FIVE AND NO/100 ($5.00) DOLLARS per acre
of land for each such net acre then subject to the shut-in provisions of this
lease, and it will be considered that gas is being produced from this lease in
paying quantities for a period of twelve (12) months.
(c) In the event Lessee tenders a timely and proper shut-in royalty
payment, no additional shut-in royalty payments shall be required to be made by
Lessee to the owners of the NPRI Interests during the twelve (12) month period
earned by such payment (if payment
<PAGE> 5
is tendered for periods covered up to two (2) years after the expiration of the
primary term) or the 12-month period earned by such payment (if made after two
(2) years after the expiration of the primary term when Lessee is unable to
obtain a gas contract or Lessee's purchaser is unwilling or unable to take gas,
as the case may be), in order to perpetuate this lease for such 12-month
shut-in period.
(d) In the event Lessee utilizes paragraph 6 to continue this lease
in force and effect as to all or any portion of said lands by the payment of
shut-in royalty, Lessee shall, upon the written request of Lessor by certified
mail and at Lessee's cost and expense, conduct appropriate and adequate tests of
each shut-in gas well designated by Lessor in such request to determine whether
each such designated gas well is actually capable of producing gas in paying
quantities. Such tests shall be made at times selected by Lessee within thirty
(30) days after Lessee's receipt of Lessor's written request but not less than
thirty (30) days prior to the expiration of any annual period for which a
shut-in royalty payment has been made by Lessee on each particular well
designated by the Lessor, if notice is timely received. Lessee shall give Lessor
reasonable notice prior to conducting such well tests, and Lessor or Lessor's
duly appointed representative shall have the right to be present at the testing
of each well and shall be entitled to receive full information in connection
with such testing. In the event any such test discloses that such well is not
capable of producing gas in paying quantities, it shall be considered that such
well has ceased to produce gas in paying quantities on the last date of testing
of such well. Likewise, Lessor shall have the same privileges, and Lessee shall
have the same requirements, as above outlined to test any oil well on said
lands, and if such tests determine such oil well or wells are not producing or
capable of producing in paying quantities, then such well or wells shall be
considered as having ceased to produce oil in paying quantities as of the date
of such test. Furthermore, if it is considered that any well is not capable of
producing oil and/or gas in paying quantities after such tests, Lessee shall
nevertheless have the opportunity to work-over or recomplete such well or
commence actual drilling operations on a new well within ninety (90) days after
it has been tested as non-commercial in accordance with paragraph 9 below.
7. LESSEE'S USE OF WATER/MINERALS: Subject to the provisions of
paragraphs 15(n) and 18, Lessee shall have use of oil, gas and non-potable water
from said lands except water from surface owner's tanks and wells, for all
operations hereunder. However, Lessee's use of such water shall be limited to
primary drilling operations only on the leased premises and may not be used for
water flooding, secondary or tertiary operations. No royalty shall be owed on
oil or gas used by Lessee for operations on the leased premises.
<PAGE> 6
Notwithstanding the above, Lessee may recycle gas for gas lift purposes
or for injection into any oil or gas producing formation underlying the leased
premises, and no royalties shall be payable on the gas so recycled until such
time as the same may thereafter be produced and sold or used by Lessee in such
manner as to entitle the royalty owners to a royalty under the provisions of
this lease.
Lessee shall not have the use of fresh water or surface owner's surface
waters without written consent and agreed compensation, and nothing herein shall
be construed to limit the application of paragraphs 15(n) or 18. Lessee shall
have the free use of fresh water from water wells drilled by Lessee as herein
provided for drilling purposes only. Lessee shall not have the right to dispose
of salt or waste water produced or obtained from off of the leased premises.
Lessee shall have the privilege of injecting salt water produced or obtained
from the leased premises back into subsurface strata, conditioned upon such
reinjection not contaminating or contacting fresh water bearing sands and so
long as such reinjection does not damage the production of water or gas and oil
reservoirs or strata payments or conduct drilling or reworking operations in
order to perpetuate this lease to the end of the primary term. Further,
irrespective of whether drilling operations, reworking operations and/or actual
production has commenced and/or ceased during the primary term, this lease shall
be perpetuated to the end of the primary term.
8. PAID UP LEASE: This lease is a "Paid Up Lease" meaning that delay
rentals ordinarily required to be paid to perpetuate a lease from year to year
in lieu of drilling operations have been paid in advance. Therefore, Lessee
shall not be required to make any annual delay rental payments or conduct
drilling or reworking operations in order to perpetuate this lease to the end of
the primary term. Further, irrespective of whether drilling operations,
reworking operations and/or actual production has commenced and/or ceased during
the primary term, this lease shall be perpetuated to the end of the primary
term.
9. DRILLING. CONTINUOUS DEVELOPMENT AND CESSATION OF PRODUCTION
CLAUSES:
(a) DRILLING AND CONTINUOUS DEVELOPMENT OPERATIONS: If, at the
expiration of the primary term, oil and/or gas is not being produced from said
land, but Lessee is then engaged in actual drilling operations thereon, this
lease shall remain in force as long as such actual drilling operations are
prosecuted with no cessation of more than one hundred twenty (120) consecutive
days until completion of such operations and if they result in production of oil
and/or gas and subject to the provisions of Paragraph 10 below, so long
thereafter as oil or gas or either of them is produced from said land in paying
or commercial quantities. If this lease is extended beyond the primary term by
virtue of production or actual drilling operations, then Lessee agrees to
commence a continuous development program without allowing a period of more than
120 days to elapse between the completion of one well and the commencement of
actual drilling operations on the next succeeding well. Commencement of
operations on the first such continuous development well shall occur not later
than 120 days after the end of the primary term, or 10 days after the completion
of a well which is being drilled at the end of the primary term, whichever is
the later date and this lease shall continue in full force and effect during
such continuous development program. Upon cessation of such continuous
development program, this lease shall terminate (either in whole or in part) as
provided in paragraph 10 hereinbelow. The sole liability or penalty, if any, for
the failure of Lessee to drill or complete any well or wells required or
permitted hereunder shall be termination (either in whole or in part) of this
lease as more fully described in paragraph 10 below.
<PAGE> 7
(b) CESSATION OF PRODUCTION: If, within ninety (90) days prior to
the expiration of the primary term or at any time thereafter and after discovery
of oil and/or gas, production of oil and/or gas should cease from any cause,
this lease shall not terminate if (i) Lessee commences actual drilling
operations within ninety (90) days thereafter and continuously conducts actual
drilling operations without cessation thereof for more than ninety (90) days and
such actual drilling operations result in production of oil and/or gas, so long
thereafter as oil, gas or either of them is produced from said land in paying or
commercial quantities; or (ii) within such ninety (90) day period after
cessation, Lessee commences actual reworking operations, as opposed to drilling
operations as defined in DEFINITIONS above and so long as Lessee continuously
conducts such actual reworking operations on such well or wells without
cessation of more than ninety (90) days and such actual reworking operations on
such well result in re-establishment of production in paying quantities. If such
actual reworking operations do not result in re-establishing production, Lessee
shall have ninety (90) days after the termination of such reworking operations
within which to commence the drilling of a new well, or recompleting in a
previously uncompleted or unproduced zone, or further reworking operations in a
previously producing zone.
(c) DILIGENT, GOOD FAITH OPERATIONS: Each well drilled under this
lease shall be drilled with reasonable diligence and in good faith and in a good
and workmanlike manner in a bona fide attempt to produce oil or gas therefrom.
10. RELEASE CLAUSE: At the expiration of the primary term, or upon
cessation of the continuous development program, if applicable, this lease shall
ipso facto terminate as to all lands covered hereby, SAVE AND EXCEPT one hundred
sixty (160) acres surrounding each oil and gas covered lease shall continue in
force and effect as to the proration unit surrounding each well required to
obtain such full allowable. Lessee shall, within thirty (30) days after the
expiration of this lease or parts hereof, file of record in the office of the
County Clerk of Webb County, Texas, an instrument releasing this lease insofar
as said lease has terminated, specifically describing by metes and bounds or
other proper legal description the retained unit for each producing well and the
depth which may be retained by Lessee thereunder. In the event Lessee shall fail
to either designate a unit or units or fail to release acreage and/or horizons
of record within sixty (60) days after the expiration of this lease by Lessee
filing such designation or release in the Office of the County Clerk of Webb
County, Texas, then Lessors shall notify the Lessee of its failure and if within
thirty (30) days of the date of such written notice by certified mail to Lessee,
Lessee does not designate unit or units or release the acreage or horizons by
filing a proper instrument in the Office of the County Clerk of Webb County,
Texas, then Lessor shall make the designation of unit or units or release of
acreage and/or horizons by filing the instrument designating the unit or units
or release of acreage and/or horizons in the Office of the County Clerk of Webb
County, Texas, and such designation and/or release by Lessors shall be binding
upon the Lessees.
<PAGE> 8
At such time as a partial termination of this lease occurs under the
provisions of this paragraph, each such retained unit as to which said lease has
not terminated shall be considered as a separately leased tract, in the same
manner as if Lessor had executed separate and distinct leases covering each such
retained unit. Lessee shall not be obligated to protect against drainage, if
any, between and among "separately leased tracts". Notwithstanding a partial
termination of this lease under the above provisions, it is agreed that Lessee
shall have and retain such easements of ingress and egress over those lands
originally covered hereby as shall be necessary to enable Lessee to develop and
operate the portion or portions of this lease then in effect for the production
of oil or gas therefrom; and, it is further agreed that it shall not be
necessary for Lessee to remove or relocate any pipelines, tank batteries or
other surface equipment or installations from any portions of this lease which
have terminated for so long as same continue to be used for the development of
and operations on such portions of this lease as continued in force and effect.
The drilling of wells in accordance with spacing provisions of
Paragraph 10 shall not be construed as an agreement or consent on the part of
Lessor that such drilling constitutes reasonable development of the leased
premises, but Lessee agrees to drill all such additional well or wells on the
leased premises, or such portion or portions thereof as may be in force and
effect from time to time, as would a reasonably prudent operator under the same
or similar circumstances in order to reasonably develop the same for the
production of oil and/or gas.
11. OFFSET CLAUSE: If any well or wells producing oil or gas in paying
quantities should be brought in on adjacent land and draining a portion of the
leased premises to which this lease is then in force and effect, Lessee agrees
within a reasonably prudent time after such offset well commences actual
production to drill such offset well or wells as a reasonably prudent operator
would drill under the same or similar circumstances, or to rework or recomplete
a well on that portion of the leased premises being drained, in a zone or
horizon being the stratigraphic equivalent of that zone or horizon producing in
such offset well. In lieu of drilling, reworking or recompleting an offset well,
Lessee shall have the option of releasing this lease as to an eighty acre tract
of land adjacent to such draining well.
12. ASSIGNMENT CLAUSE: The rights of Lessor may be assigned in whole or
in part but no change or division of ownership of the land, or royalties,
however accomplished, shall operate to enlarge the obligations or diminish the
rights of Lessee; and no change or division in such ownership shall be binding
on Lessee until thirty (30) days after Lessee shall have been furnished by
certified U.S. mail at the address specified herein, with a certified or
photocopy of the recorded instrument or instruments evidencing same. The rights
of Lessee may not be assigned in whole or in part without the prior written
consent of Lessor, which consent shall not be unreasonably withheld only if
Lessee can demonstrate that its proposed assignee possesses (i) a proven
ability to operate the kind of wells located on the South Callaghan Ranch Lands
and (ii) a level of financial responsibility and corporate capitalization
substantially similar to that of Lessee.
All requests by Lessee for consent to assign must be in writing. Any
request for consent for a proposed assignment must be objected to in writing by
Lessor within thirty (30) days after receipt of such written request, failing in
which such request shall be deemed to be approved. No assignment of an
<PAGE> 9
interest in this Lease shall be effective until a recorded copy of such
assignment has been received by Lessor. Notwithstanding anything herein to the
contrary, no assignment by either party shall operate to relieve the
transferring from direct responsibility and liability to the other party hereto
for the performance of all of the transferring party's obligations hereunder.
In the event of the death of any person entitled to royalties or other payments
hereunder, Lessee shall suspend such royalties or other payments until such
time as Lessee is furnished with proper evidence of the appointment and
qualification of an executor or administrator of the estate or if there be
none, then until Lessee is furnished with evidence satisfactory to it as to the
heirs or devisees of the deceased or the successors in interest to such
deceased owner and that all debts of the estate have been paid.
13. FORCE MAJEURE CLAUSE: Should Lessee be prevented from complying
with any express or implied covenant of this lease, from conducting drilling or
reworking operations thereon or from producing oil or gas therefrom by reason of
or by operation of force majeure, any federal or state law or any order, rule or
regulation of governmental authority, then while so prevented, Lessee's
obligations to comply with such covenants shall be suspended and Lessee shall
not be liable in damages for failure to comply therewith and this lease shall be
extended while and so long as Lessee is prevented by any such cause from
conducting drilling or reworking operations on or from producing oil and gas
from the leased premises, and the time while Lessee is so prevented shall not be
counted against Lessee, anything in this lease to the contrary notwithstanding.
In the event Lessee intends to claim any rights under this paragraph, Lessee
shall advise Lessor or Lessor's Agent in writing within a period of thirty (30)
days after the date Lessee claims any obligation hereunder is suspended, setting
forth in reasonable detail such facts as Lessee relies upon to make the
provisions of this paragraph applicable. Notwithstanding anything above stated
to the contrary, if Lessee is prevented from complying with this lease or
resorts to force majeure because of Lessee's intentional acts or omissions, then
this provision shall not be available to Lessee to perpetuate this lease or
suspend Lessee's obligations. This provision shall not suspend nor delay the
time for the payment of royalties, shut-in gas royalties, or any other monetary
payments due and payable to Lessor under the Lease.
14. WELL/DRILLING INFORMATION CLAUSE: If requested by Lessor in
writing, Lessee agrees to give Lessor and affected surface owners written
notice, prior to the commencement of any operations which are critical to the
enforcement of the terms and provisions of this lease. Said notice(s) shall
advise Lessor and the affected surface owner of the approximate date that
commencement of operations is intended and the approximate location of the same
and the objective depths of any proposed well, such notice to be given within a
reasonable time prior to the commencement of such operations. Lessor shall have
the optional right to either (i) request Lessee to furnish Lessor at the address
provided herein promptly upon Lessor's written request, free of charge, copies,
or (ii) have reasonable access during regular business hours to Lessee's records
and all information concerning the drilling, deepening, plugging back, coring,
testing and completing or recompleting of any and all wells, including the
driller's log, all electrical logs, and surveys, production charts and records
and information concerning the production and marketing of oil and gas from said
lands, with copies of all forms filed with the Railroad Commission of Texas or
any other governmental authority having jurisdiction over Lessee's operations
and pertaining to Lessee's operations under this lease; and, including seismic
data only as to shot point maps and reproducible film copies of seismic data
shot by Lessee over the lands covered in this lease with a half-mile flare, if
available, provided Lessor agrees to keep confidential all information acquired
by it under the terms of this paragraph. The confidentiality agreement shall not
apply to (a) any information of
<PAGE> 10
15. SURFACE/SUBSURFACE PROTECTION CLAUSES: As a part of the
consideration for this lease:
(a) Prior to commencing any operations under this lease, when
acting as operator of the leased premises, Lessee shall consult surface owner
and provide information as to the form of operations, the proposed date of
commencement and the location of said operations.
(b) Lessee agrees to use existing gates and roadways to enter and
leave the premises, where available.
(c) Lessee and all persons entering or leaving said lands in
connection with Lessee's operations hereunder shall keep all outside and
interior gates along the route or routes designated for such use securely closed
except immediately before and immediately after each such separate use. Lessee
agrees that it will promptly repair any gate, fence or other improvement that
may suffer damage or injury by reason of Lessee's operations hereunder. Lessee
may, during the term of this lease place separate locks on any perimeter access
gate. If Lessee leaves a perimeter gate open during drilling or reworking
operations, surface owner may, at his option, require Lessee to place a guard at
the entrance to the leased premises during drilling and completion operations.
(d) When acting as operator of the leased premises, Lessee will
maintain approaches, gates, cattle guards and roadways designated and used in
connection with its operations in a good state of repair and will promptly cause
to be repaired and restored any damage thereto occasioned by or resulting from
Lessee's operations. In regard to maintenance of roads used by Lessee or its
employees, contractors and invitees, Lessee shall repair damaged or
deteriorating portions of roads within a reasonable time not to exceed thirty
(30) days after notice by surface owner of need for such repair. Materials used
to repair road damage shall be either caliche, gravel or other materials except
dirt fill. Lessee agrees to work with the surface owner to keep the roads used
by Lessee in continuous state of good repair.
<PAGE> 11
In connection with any roads built by Lessee, Lessee agrees to consult
with the surface owner as to the location of such roads and will construct such
division terraces as may be reasonably necessary to reduce soil erosion. Lessee
shall be required to install cattle guards or, at surface owner's option, pipe
gates to the side of such cattle guards at each fence crossing.
(e) Each drill site on said lands, including slush pits, tanks,
separators, treaters and any and all other pertinent well and lease equipment
above the surface, will be enclosed and kept enclosed with a wire mesh or
bullwire fence capable of turning livestock, promptly after completion of any
drilling operations and such fence shall be maintained by Lessee for so long as
such equipment remains on leased premises or during the period of production
resulting from such operations. No drilling operations, pipeline constructed,
seismic lines or operations of any nature shall be conducted within 300 feet of
any houses, barns, water wells or permanent improvements, without surface
owner's notice and consent.
(f) Within ninety (90) days after completion or abandonment of any
well drilled on said lands, Lessee or its designated operator will clean up the
well site and remove from said lands any and all oil spills, junk materials,
pieces of iron, pipes, steel and other debris and foreign materials and will
level all mounds, fill all pits, and other excavations upon being notified by
Lessor and will remove all deleterious materials and substances that might cause
injury to person or livestock. Any such clean up shall be conducted in
compliance with all applicable rules and regulations of the State of Texas
Railroad Commission or other regulatory authority and any subsurface fresh water
stratum, but will be contained and dispose of same in keeping with applicable
governmental rules and regulations, including without limitation, Environmental
Laws, as hereinafter defined.
(g) Lessee or its designated operator will use its best efforts to
prevent the escape of salt or other noxious waters and will not permit the same
to run into any surface water tank, water well, creek, ravine, or upon or over
the premises, not to penetrate, seep or flow or be injected into any subsurface
fresh water stratum, but will be contained and dispose of same in keeping with
applicable governmental rules and regulations, including without limitation,
Environmental Laws, as hereinafter defined.
(h) Lessee or its designated operator will use its best efforts to
prevent fires on said lands and will use its best efforts to prevent papers,
boxes, sacks and containers and waste materials of any kind from coming on said
lands and littering the premises.
(i) Prior to erecting any storage tanks, pipelines, compressor
stations or other usual lease facilities required by Lessee for producing oil
and gas and operating this lease,
<PAGE> 12
Lessee, when acting as operator, shall advise surface owner of Lessee's
intentions. Surface owner and Lessee will then mutually select the site or
sites for locating such equipment and pipelines, taking into consideration the
operations of surface owner and Lessee's needs in conducting its operations
under the terms of this lease in a reasonable manner.
(j) Lessee or its designated operator is prohibited from
constructing an oil or gas refinery or a plant for cleaning up gas and removing
H2S on the leased premises. The location of separators, dehydrators and
compressors shall not be considered as plants.
(k) No employee, representative or contractor of Lessee or any
other person allowed to come upon said land by Lessee shall be permitted to
hunt, fish, swim, camp or picnic on said land, and no dog, gun, firearm, fishing
equipment or other sporting paraphernalia of this type will be permitted on the
premises. If any of Lessee's representatives or employees violate this
provisions, surface owner may give notice thereof to Lessee and, if Lessee does
not voluntarily remove or exclude any such party, surface owner shall have the
right to eject such party from said lands and thereafter prohibit such party
from entering upon said lands.
(l) Except as otherwise provided for herein, Lessee shall have the
right, at any time within ninety (90) days after abandonment or cessation of
use, but not thereafter, to remove any property and fixtures placed on said
lands and if Lessee fails to remove such property and fixtures within said
ninety (90) days, such property and fixtures shall be deemed to have been
abandoned by Lessee, and Lessor may take possession thereof and dispose of the
same as Lessor sees fit; provided, however, Lessee shall not be relieved of its
liability to plug any well so abandoned. Lessee shall bury all pipelines a
minimum of thirty-six (36") inches or more beneath ground level unless surface
owner deems otherwise.
(m) Lessee or its designated operator will restore the surface of
said lands used by Lessee or its agents, contractors and employees, to as near
its original condition as is reasonably practicable after the completion of each
operation conducted hereunder and root plow such areas and seed such areas with
4 to 6 pounds per acre of grass of surface owner's choice.
(n) Each water well drilled on the leased premises by Lessee
together with all equipment in or on said well shall become the property of
surface owner upon the full release of this lease; provided, however, the
surface owner shall have the right to use water therefrom during the term of
this lease, so long as such use does not interfere with Lessee's operations.
<PAGE> 13
Provided, further, that if Lessor so elects, Lessee shall, at Lessee's sole
cost and expense, plug and abandon each water well which surface owner elects
not to take over.
(o) Lessee or its designated operator agrees to pay to the surface
owner the actual damages, if any, resulting to the surface of said lands, ranch
roadways used and/or constructed by Lessee, fences, gates, cattle guards,
houses, barns, windmills, tanks and other structures, trees, grass, crops,
cattle and livestock caused by Lessee's operations or occasioned by reason of
such operations or such damages as surface owner may incur by reason of
Lessee's failure to comply with the terms of this lease.
(p) If Lessee or its designated operator conducts seismic
operations or should Lessee lay gathering pipelines across the leased premises,
then Lessee shall be required to compensate the surface owner for damages based
on the prevailing rate being paid in the area at the time for pipeline
right-of-way and/or seismic lines. Further, Lessee shall be obligated to pay
surface owner for each surface site, such as drillsites, separator, dehydrator
and compressor sites based on the usual going rate being paid for such surface
sites and usage in the area at the time. Nothing herein shall restrict Lessee's
right to lay gathering pipelines for transportation of lease gas or conduct
seismic operations on leased premises.
(q) Lessee or its designated operator shall be required to
compensate surface owner for each new road based on the prevailing price being
paid for new roads in the area at the time of construction of same. Lessee shall
not be allowed more surface for roads and/or drillsites than is necessary,
taking into consideration the nature and depth of drilling contemplated. As to
any other actual damage to the surface, surface owner shall be compensated based
on the rate prevailing for similar damages in the area at the time.
(r) Regarding drillsites, Lessee or its designated operator shall,
no later than twelve (12) months after completion of a well, fill all pits,
level all dumps, remove debris and restore the surface to substantially its
original condition including root plowing the area used and seeding same with 4
to 6 pounds per acre of grass of surface owner's choice.
16. NOTICE CLAUSE. This lease and all of Lessee's operations
hereunder shall be in keeping with the standard of conduct of a reasonably
prudent operator and shall be done in good faith and in compliance with all
valid and applicable laws, rules and regulations, both Federal and State, and
any agency thereof. Lessee agrees to designate in writing, or give notice in
person to Lessor and surface owner, the name of the person or persons to be
present from time to time on said premises as current operations are being
conducted and with whom surface owner may handle directly any claim of injury
and damage to livestock, surface area or improvements on said premises as
current operations are being conducted. All notices required to be given under
the terms of this lease shall be given to the following persons who are
designated Lessor's,
<PAGE> 14
Lessee's and surface owner's respective agents for notice only:
TO LESSOR:
Mobil Producing Texas & New Mexico
12450 Greenspoint Drive
Houston, Texas 77060-1991
Attention: South Texas Producing Manager
Fax: (281) 775-4370
TO LESSEE:
Michael Petroleum Corporation
13101 Northwest Freeway, Suite 320
Houston, Texas 77040
Attention: Land Manager
Fax: (713) 895-0320
TO SURFACE OWNERS:
(According to record title determination)
Any party hereto may from time to time designate in writing a different address
or agent for the giving of any notice hereunder.
17. WARRANTY OF TITLE: Lessor warrants title to the property being
herein leased by, through and under Lessor but not otherwise. It is agreed
that if a Lessor owns an interest in the oil, gas or leased substances on, in
or under said land less than the entire fee simple estate, then the royalties
and shut-in royalties to be paid to the owners of the NPRI Interests shall be
reduced in the proportion that said Lessor's interest bears to the whole and
undivided fee in accordance with the nature of the estate of which Lessor is
seized.
18. CORRELATIVE AND CONCURRENT SURFACE RIGHTS: Lessor (as each Lessor's
interest may appear) and Lessee recognize (i) the rights herein granted to
Lessee to reasonable use and access over, across and upon the surface estate to
explore for, develop, store, market, transport and produce the leased minerals;
and (ii) the concurrent and correlative rights of the surface owner(s) to the
use, enjoyment and benefits of the surface estate that the Lessee, in exercising
the rights herein granted, is limited thereby to such use or usage as is
reasonably necessary and which is conducted with due regard for the rights of
the surface owners(s) and which does not unduly interfere with the surface
owner's use of surface.
<PAGE> 15
In the event that surface owner desires to cultivate, subdivide, and/or
develop all or a portion of the surface estate subject to this lease, then in
such event, Lessee and surface owner agree to enter into such agreement or
agreements that will facilitate the intended cultivation, sale or development of
such tract to and by the surface owner, as the case may be, but which will also
allow Lessee reasonable access to and use of the surface to such surface tracts
to be sold, subdivided, developed or cultivated.
19. FORFEITURE CLAUSE: In the event Lessor considers that obligations
of Lessee or implied covenants of this lease are not being complied with, Lessor
shall notify Lessee in writing by certified mail of the facts relied upon as
constituting a breach of any expressed or implied covenants or obligations of
Lessee hereunder and Lessee, if in default, shall have sixty (60) days after
receipt of such notice in which to commence compliance with its obligations
hereunder. If such breach is not timely cured and Lessor obtains a final
non-appealable judgment finding that Lessee has breached any covenant hereof,
expressed or implied, then it is agreed that Lessor shall be entitled to a
decree providing for cancellation or forfeiture of the lease in the event such
breach is not rectified or commenced in good faith to be rectified by Lessee
within sixty (60) days from the date such decree becomes final; provided,
however, that failure on the part of the Lessee to cure any alleged default of
any expressed or implied covenant of this lease shall not result in Lessee
forfeiting any producing oil or gas well or wells or shut-in gas well or wells
and acreage allocated thereto for production, not then subject to breach or
default. Failure of Lessee to (i) produce oil, gas or other leased substances in
paying or commercial quantities; (ii) to timely and properly pay shut-in
royalties; (iii) to timely commence drilling or reworking operations as provided
in provisions of this lease, and/or (iv) failure to pay royalty in accordance
with Paragraph 50) above, and other special limitations shall not constitute an
obligation for purposes of this paragraph, as failure of Lessee to timely
comply with such provisions shall result in termination of this lease.
20. ABSTRACTS: Any abstracts in Lessor's possession or control shall,
upon written request of Lessee or its assignee, be delivered to Lessee or its
assignee for examination; but Lessee or its assignee shall be liable for the
safekeeping and return of same. If Lessee or its assignee shall obtain an
abstract, such abstract or a copy thereof along with copies of any and all title
opinions covering this land shall be delivered to Lessor along with Lessor's
abstracts as soon as Lessee or its assignee has completed its title examination.
21. CHECK METERS CLAUSE: In those instances where Lessee is acting as
operator of the leased premises, Lessor shall be entitled at Lessor's own cost-
and expense to install and maintain a check meter on any gas well upon such
leased premises in order to satisfy Lessor of the amount of production from any
such well, so long as same is installed under supervision of an engineer and
after due written notice to Lessee. In this connection, Lessee shall have the
right to make such installation itself of Lessor's check meter in order that
such installation does not interfere with Lessee's operations, provided such
installation is performed by Lessee within a reasonable time, not exceeding
thirty (30) days following written request of Lessor. Calibration of such meter,
its
<PAGE> 16
give the other sufficient written notice in advance of such tests so that each
party may, at its election, be present in person or by its representative to
observe adjustments, if any, which are made. If upon any test the metering
equipment in the aggregate is found to be inaccurate by two percent (2%) or
more, then following the test any metering equipment found to be inaccurate to
any degree shall be adjusted immediately to measure accurately. If for any
reason any meter is out of service or out of repair so that the quantity of gas
delivered through such meter cannot be ascertained or computed from the readings
thereof, the quantity of gas so delivered during such period same is out of
service or out of repair shall be estimated and agreed upon by the parties
hereto upon the basis of the best available data.
22. AD VALOREM TAXES: Each party having an interest in the minerals
under the subject lands shall be responsible for rendering, adjusting,
protesting, and defending values on his interest in minerals and for the payment
of his proper share of ad valorem taxes. After production, all ad valorem taxes
shall be paid by the parties entitled to participate in revenue from production
proportionate to each party's percentage interest in revenue. Lessee and Lessor
agree to work together to obtain adjustments to which the parties may be
entitled as a result of mineral rights or depths not presently covered by this
lease or which may hereafter be released from the lease.
23. ADMINISTRATIVE RELIEF: Lessee and Lessor agree that Lessor or
Lessor's representative shall have the concurrent rights and privileges with
Lessee to pursue and/or defend against proceedings before any administrative
agency without the joinder or consent of Lessee, and Lessee agrees that Lessor
shall have standing to pursue or defend any matter before any administrative
agency. Nothing herein shall in any way be construed as diminishing Lessee's
implied duties and obligations to protect and preserve Lessor's rights before
administrative agencies, but shall be supplemental of any such implied duties.
24. INDEMNITY AGREEMENT: Lessee hereby indemnifies and agrees to hold
harmless Lessor, surface owner and their respective heirs and assigns, from and
against any and all liability, liens, demands, penalties, fines, remedial costs,
costs, response, restoration costs, judgments, suits and claims of any kind or
character caused or arising out of, in connection with, or relating to Lessee's
(including Lessee's servants, employees or its independent contractors)
operations in connection with and under the terms of this Lease, express and
implied, including, but not limited to, claims for injury or death of any
persons, or damage, loss or destruction of any property, real or personal, under
any theory of tort, contract or strict liability or violation of any
Environmental Law (as hereinafter defined) based upon a real or alleged act or
omission of Lessee, its agents, servants or employees or independent
contractors. Further, neither Lessor nor surface owner shall ever be liable for,
and Lessee indemnifies and agrees to hold harmless Lessor, surface owner, and
their respective successors, heirs and assigns from, any claims, demands, costs,
expenses, damages, loses, causes of action or suits for damages because of
injury to persons or property arising out of acts or omissions of Lessee, its
agents, employees, servants, contractors or any person acting under its
direction and control
<PAGE> 17
on said lands. Lessee further covenants and agrees to defend any suits or
actions brought against Lessor on account of said claims and to pay any
judgments, penalties, fines, remedial costs, and other obligations assessed
against Lessor resulting from any such claims, actions, suit or suits together
with all costs and expense relative to any such claims, actions or suits,
including attorney's fees, costs incurred in connection in defense of same,
including court costs. It is nevertheless understood, however, that Lessor, if
it so elects, shall have the right to participate in the defense of any such
claims, actions, suit or suits in which it may be a party without relieving
Lessee of the obligation to defend the same. In the event Lessor and/or any
surface owner under the above tract shall resort to a court of law or to
arbitration to enforce or interpret any provision, covenant, condition, duty,
obligation or commitment, whether expressed or implied, arising out of this
agreement, then Lessee shall reimburse Lessor or surface owner for reasonable
attorney's and expert witness fees incurred in such suit or arbitration, in the
event Lessor or surface owner should prevail in such cause of action or
arbitration.
"Environmental Laws" mean any and all laws, statutes, regulations,
rules, orders, ordinances, permits or determinations of any governmental
authority pertaining to health or the environment in effect in any and all
jurisdictions in which the leased premises are located, including without
limitation, the Clean Air Act, as amended, the Federal Water Pollution Control
Act, as amended, the Rivers and Harbors Act of 1899, as amended, the Safe
Drinking Water Act, as amended, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), as amended, the Superfund Amendments
and Reauthorization Act of 1986 ("SARA"), as amended, the Resource Conservation
and Recovery Act ("RCRA"), as amended, the Toxic Substances Control Act, as
amended, the Occupational Safety and Health Act, as amended, the Hazardous
Materials Transportation Act, as amended, and other federal, state and local
laws whose purpose is to conserve or protect health, the environment, wildlife
or natural resources. The terms "hazardous substance," "release" and "threatened
release" shall have the meanings specified in CERCLA, and the terms "solid
waste," "hazardous waste," and "disposal" (or "disposed") shall have the meaning
specified in RCRA, provided, however, that to the extent the laws of any state
in which the leased premises are located are applicable and have established a
meaning for the terms "hazardous substance," "release," "threatened release,"
"solid waste," "hazardous waste," and "disposal" (or "disposed") that is broader
than specified in CERCLA or RCRA, such broader meaning shall apply with respect
to the matters covered by such laws, and (the term "solid waste" shall include
all oil and gas exploration, development and production wastes, even if such
wastes are specifically exempt from classification as hazardous substances or
hazardous wastes pursuant to CERCLA or RCRA, or the state analogues to those
statutes. Lessee shall comply with all Environmental Laws in the conduct of all
drilling and producing operations on the leased premises and agrees that Lessee
shall not store nor dispose of solid waste or hazardous waste on the leased
premises.
25. NO POOLING: Lessee is expressly denied the right to utilize any
rights granted herein to pool or unitize any part of the leased premises without
the prior written consent of Lessor.
26. RECORDING: In lieu of filing this agreement for record in the
office of the County Clerk in which the acreage covered hereby is located,
Lessor and Lessee agree that a memorandum
<PAGE> 18
of this lease, making appropriate reference hereto, shall be filed for record in
said county. The provisions of this lease are binding upon the parties hereto,
their respective heirs, successors and assigns. Lessee, by its acceptance of
this lease, agrees and obligates itself to all terms and provisions of this
lease.
27. OPERATING AGREEMENT: The leasehold interest granted to Lessee
hereunder is expressly made subject to the terms of that certain Operating
Agreement dated May 1, 1998, between Lessee, as Operator, and Lessor, as
Non-Operator, covering the leased premises.
28. AFTER ACQUIRED TITLE: This lease is intended to grant, lease and
let unto Lessee all of Lessor's interest in the oil, gas or leased substances
on, in or under the leased premises which Lessor owned in the leased premises on
January 1, 1998, and is not intended to cover any additional mineral interests
which Lessor may acquire in the leased premises after January 1, 1998. In the
event Lessor acquires additional interests in the oil, gas or leased substances
on, in or under the leased premises after January 1, 1998, it is expressly
understood and agreed that such additional acquired interests shall not be
subject to or covered by the terms of this Lease and that Lessor shall own and
hold such additional after acquired interests free and clear from the terms of
this Lease.
29. COUNTERPART EXECUTION: This lease may be executed in multiple
counterparts, each of which shall, for all purposes, be deemed an original but
which together shall constitute one and the same instrument. This Lease shall be
binding on any Lessor party which has executed a counterpart original hereof,
whether or not all parties Lessor have executed counterpart originals hereof. In
making proof of this Lease, it shall only be necessary to produce a counterpart
hereof, executed by the party sought to be charged, and it shall not be
necessary to produce nor to account for any other counterpart hereof.
<PAGE> 19
EXECUTED as of the respective acknowledgment dates of the signatory
parties hereto, but effective as of January 1, 1998.
ATTEST:
By: /s/ L. W. COPPAGE
----------------------------------------
Assistant Secretary
LESSOR:
MOBIL PRODUCING TEXAS & NEW MEXICO INC.
By: /s/ D. B. LITCHFIELD
---------------------------------
D. B. Litchfield
Attorney-in-Fact
By: /s/ K. R. HOMRIGHAUS
---------------------------------
K. R. Homrighaus
Attorney-in-Fact
LESSEE:
MICHAEL PETROLEUM CORPORATION
By: /s/ MICHAEL G. FARMAR
---------------------------------
Michael G. Farmar
President
STATE OF TEXAS )
)
COUNTY OF Harris )
This instrument was acknowledged before me on this the 20th day of
April, 1998, by D.B. Litchfield, Attorney-in-Fact for Mobil Producing Texas &
New Mexico Inc., a Delaware corporation, on behalf of Mobil Exploration &
Producing U.S. Inc. as such Agent.
(PERSONALIZED SEAL)
/s/ RICHARD B. HEMINGWAY, JR.
- -------------------------------------------
Notary Public in and for the State of Texas
STATE OF TEXAS )
)
COUNTY OF HARRIS )
<PAGE> 20
STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on this the 20th day of
April, 1998, by Michael G. Farmar, President of Michael Petroleum Corporation.,
a Texas corporation, on behalf of said corporation.
(PERSONALIZED SEAL)
/s/ RICHARD B. HEMINGWAY, JR.
- --------------------------------------------
Notary Public in and for the State of Texas
<PAGE> 1
EXHIBIT 10.11
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 AS AMENDED (THE "ACT") OR ANY APPLICABLE STATE SECURITIES LAWS.
THIS WARRANT HAS BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE
PLEDGED, HYPOTHECATED, SOLD, TRANFERRED, OR OTHERWISE DISPOSED OF EXCEPT (A)
PURSUANT TO AN EFFECTIVE REGISTRATION OR (B) UPON OPINION OF COUNSEL ACCEPTABLE
TO THE COMPANY, PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND
SUCH APPLICABLE STATE SECURITIES LAWS OR THE RULES AND REGULATIONS PROMULGATED
THEREUNDER.
MICHAEL HOLDINGS, INC.
WARRANT CERTIFICATE 15,000 WARRANTS
NUMBER DATE
------------ ----------
WARRANT TO PURCHASE SHARES OF COMMON STOCK
THIS CERTIFIES that, for good and valuable consideration received,
Michael Holdings, Inc., a Texas corporation (the "Company") hereby grants to
Dale L. Schwarzhoff, an individual, or registered assign ("Holder"), the number
of warrants set forth above (the "Warrants"), each of which entitles Holder to
purchase, subject to the terms and conditions set forth below, one fully-paid
and non-assessable share of Common Stock of the Company at a purchase price of
[Twenty Five percent above the initial public offering price] Dollars
($________) (the "Purchase Price"), at any time or from time to time after the
date set forth above (the "Exercise Date") and on or prior to 5:00 P.M. Pacific
Daylight Time on [Five Years from the first day of Initial Public Offering]
(the "Expiration Date"). If the Warrants represented hereby are not exercised
on or before 5:00 PM Pacific Daylight Time, on the Expiration Date, they shall
become void and all rights thereunder shall cease. The Purchase Price and the
number and kinds of securities of the Company purchasable upon the exercise of
the Warrants represented hereby are subject to modification or adjustment as
provided below. The Purchase Price shall be payable in lawful funds of the
United States. Upon presentation and surrender of this Warrant Certificate
together with the payment of the Purchase Price for the shares of Common Stock
thereby purchased and the Form of Notice of Exercise attached hereto duly
executed, at the place and in the manner specified in Section 4, below, the
Holder shall be entitled to receive a certificate or certificates for the
shares of Common Stock so purchased.
1
<PAGE> 2
1. REGISTRATION AND TRANSFER
1.1 General
The Company shall maintain books for the registration and
transfer of the Warrants. Prior to due presentment for registration of
transfer of the Warrants, the Company may deem and treat the
registered Holder as the absolute owner thereof.
1.2 Transfer
The Warrants may not be assigned or transferred without the
prior written consent of the Company, in its sole and absolute
discretion.
1.3 Registration
Subject to Section 1.2 above, the Company shall register upon
its books any transfer of the Warrants upon surrender of this Warrant
Certificate to the Company accompanied (if so required by the Company)
by a written instrument of transfer duly executed by the registered
Holder or by a duly authorized attorney. Upon any such registration of
transfer, a new Warrant Certificate shall be issued to the transferee
and the surrendered Warrant Certificate shall be cancelled by the
Company. If only a portion of the Warrants represented by this Warrant
Certificate are transferred, a new Warrant Certificate shall also be
issued to the transferor.
2. LOSS OR MUTILATION
Upon receipt by the Company of reasonable evidence of the
ownership and the loss, theft, destruction, or mutilation of the
Warrant Certificate and, in the case of loss, theft, or destruction,
of indemnity reasonably satisfactory to the Company, or, in the case
of mutilation, upon surrender and cancellation of the mutilated
Warrant Certificate, the Company shall execute and deliver in
substitution therefor a new Warrant Certificate representing an equal
number of Warrants.
3. ADJUSTMENTS
The Purchase Price and the number of shares purchasable upon
the exercise of the Warrants shall be subject to adjustment from time
to time upon the occurrence of certain events described herein.
2
<PAGE> 3
3.1 Purchase Price Adjustments
a. Split, Subdivision, or Combination of Shares
If the Company at any time while these Warrants remain
outstanding and unexpired shall split (but excluding any split
effected as a stock dividend, which shall be covered by Section 3.1G
hereof), subdivide, or combine the securities as to which purchase
rights hereunder exist, the Purchase Price shall be proportionately
increased or decreased as appropriate.
b. Common Stock Dividends
If the Company at any time while these Warrants remain
outstanding and unexpired shall pay a dividend or make any other
distribution with respect to Common Stock payable in shares of Common
Stock, then the Purchase Price shall be adjusted, from and after the
record date for determining the shareholders entitled to receive any
dividend or distribution, to that price determined by multiplying the
Purchase Price in effect immediately prior to such date of
determination by a fraction, the numerator of which shall be the total
number of shares of Common Stock outstanding immediately prior to such
dividend or distribution, and the denominator of which shall be the
total number of shares of Common Stock outstanding immediately after
such dividend or distribution.
c. Other Dividends
If the Company, at any time while these Warrants remain
outstanding and unexpired, shall pay a dividend or make any other
distribution with respect to Common Stock payable in stock (other than
Common Stock) or other securities or property (but excluding cash),
the Holder hereof shall be entitled to receive, upon exercise of the
Warrants, in addition to the shares of Common Stock otherwise
receivable upon exercise hereof, the same number and kind of stock or
other securities and property which the Holder would have received had
the Holder than held the shares of Common Stock receivable on exercise
hereof on and before the record date of such dividend or distribution.
3
<PAGE> 4
d. Reclassification and Recapitalization
In the event of any reclassification or recapitalization of
the outstanding Common Stock (other than a change in par value), the
Purchase Price and the number and type of securities to be received
upon the exercise of the Warrant shall be appropriately adjusted in
good faith by the Board of Directors of the Company to reflect such
reclassification or recapitalization and to protect (i) the rights of
the Holder to receive, upon the exercise hereof, the same amount of
securities or property that it would have received had it exercised
the Warrants immediately prior to the date for determination of
Holders of Common Stock entitled to receive securities or property as
a result of such reclassification or recapitalization, and (ii) the
Holder's rights to appropriate adjustment upon any further stock
dividend, stock split, reclassification, or recapitalization.
3.2 Adjustment of Number of Shares
Upon each adjustment in the Purchase Price pursuant to
Sections 3.1(a) or (b) above, the number of shares of Common Stock
purchasable hereunder shall be adjusted to the nearest whole share to
the product obtained by multiplying the number of shares purchasable
immediately prior to such adjustment in the Purchase Price by a
fraction, the numerator of which shall be the Purchase Price
immediately prior to such adjustment, and the denominator of which
shall be the Purchase Price immediately after such adjustment.
3.3 Capital Reorganization, Merger, or Sale of Assets
If, at any time or from time to time, there shall be a merger
or consolidation of the Company with or into another corporation
(other than a merger in which the Company is the continuing
corporation and which does not result in any change in
reclassification or the outstanding shares of Common Stock or other
capital stock of the Company), or a sale of all or substantially all
of the Company's properties and assets to any other person, the Holder
shall thereafter be entitled to receive (and it shall be a condition
to the consummation of any such merger, consolidation, or sale, that
appropriate provision be made so that the Holder shall thereafter be
entitled to receive), upon exercise of the Warrants, the kind and
amount of shares of stock or other securities or property receivable
upon such merger, consolidation, or sale, by a holder of the number of
shares of Common Stock
4
<PAGE> 5
issuable upon exercise would have been entitled upon such merger,
consolidation, or sale. In any such case, appropriate adjustment shall
be made in the application of the provisions of this Section with
respect to the rights of the Holder after the reorganization, merger,
consolidation, or sale to the end that the provisions of this
Section 3 (including adjustment of the Purchase Price then in effect
and the number of shares of Common Stock purchasable upon exercise of
the Warrants) shall be applicable after that event in as nearly
equivalent a manner as may be practicable.
3.4 Certificate as to Adjustment
Upon the occurrence of each adjustment or readjustment of the
Purchase Price and the number of shares of Common Stock or other
securities pursuant to this Section 3, the Company, at its expense,
shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and cause its chief financial officer to verify
such computation and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The
Company shall, upon the written request at any time of the Holder,
furnish or cause to be furnished to the Holder a like certificate
setting forth (a) such adjustment or readjustment, (b) Purchase Price
at the time in effect, and (c) the number of shares of Common Stock
and the amount, if any, of other securities and/or property which at
the time would be receivable upon the exercise of the Warrants. Such
certificate shall set forth in reasonable detail such facts as may be
necessary to show the reason for and manner of computing such
adjustment.
3.5 No Impairment
The Company will not take any action, by amendment of its
Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary
action, specifically designed to avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed
hereunder by the Company.
3.6 Notices of Record Date
In the event of any taking by the Company of a record of the
holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend (other than
5
<PAGE> 6
a cash dividend) or other distribution, any rights to subscribe for,
purchase, or otherwise acquire any shares of stock of any class or any
securities or property, or to receive any other right, the Company
shall mail to the Holder, not later than the later to occur of (i)
fifteen (15) days prior to the date specified therein or (ii) the
business day after determination by the Board of Directors of the
record date to take such action, a notice specifying the date on which
any such record is to be taken for the purpose of such dividend,
distribution, or right, and the amount and character of such dividend,
distribution, or right.
3.7 No Fractional Shares
No fractional shares shall be issued upon the exercise of the
Warrants and the number of shares of Common Stock issued shall be
rounded to the nearest full share. Such rounding shall be determined
on the basis of the total number of Warrants the Holder is at the time
exercising and the number of shares of Common Stock issuable upon such
aggregate exercise.
4. EXERCISE OF WARRANTS
The purchase rights represented by these Warrants are
exercisable by the Holder, in whole or in part, at any time and from
time to time on or after the Exercise Date and on or prior to the
Expiration Date. The Warrants may be exercised by surrender of this
Warrant Certificate, with the Notice of Exercise attached hereto duly
executed, to the principal executive office of the Company, presently
located at 13101 Northwest Freeway, Suite 320, Houston, TX 77040 (or
such other office or agency of the Company as it may designate by
notice in writing to the registered Holder hereof at the address of
such Holder appearing on the books of the Company, and shall be
accompanied by payment in cash, cashier's check, or bank draft,
payable to the Company, in an amount equal to the full purchase price
for the shares of Common Stock with respect to which the Warrants are
being exercised (hereinafter referred to as the "Shares"). The Company
shall deliver a certificate or certificates representing the Shares as
soon as practical, and, in any event, within thirty (30) days after
the notice and payment shall be received. The certificate for the
Shares shall be registered in the name of the person exercising the
Warrants and shall be delivered, as provided above, to the written
order of the person exercising the Warrants. All shares of Common
Stock which may be issued upon the exercise of the Warrants as
provided herein shall be fully paid and non-assessable and free
6
<PAGE> 7
from all taxes, liens, and charges, other than those created by or
otherwise applicable to the Holder. Holder shall not be entitled to
the privileges of share ownership, including without limitation the
right to vote to receive dividends as to any shares of Common Stock
not actually issued and delivered to it. Holder hereby certifies that
these Warrants and all shares of Common Stock in the Company purchased
or to be purchased by it pursuant to the exercise of the Warrants are
being, or are to be, acquired by it for investment purposes and not
with a view to or for resale in connection with any distribution or
public offering thereof.
5. GENERAL
The Company shall, at all times during the term of the
Warrants, reserve and keep available out of its authorized but
unissued shares of Common Stock such number of shares of Common Stock
as will be sufficient to satisfy the requirements of this Warrant
Certificate; and if, at any time, the number of authorized but
unissued shares of Common Stock shall be insufficient to effect the
exercise of the Warrants, in addition to such other remedies as shall
be available to the Holder, the Company shall use its reasonable best
efforts to take such corporate action as may, in the opinion of the
Company, be necessary to increase its authorized but unissued shares of
Common Stock to such number as shall be sufficient for such purposes.
The Company shall pay all original issue and transfer taxes with
respect to the issue of shares of Common Stock pursuant hereto and all
other fees and expenses necessarily incurred by the Company in
connection therewith, and will, from time to time, use its reasonable
best efforts to comply with all laws and regulations which, in the
opinion of the Company, shall be applicable thereto.
6. LEGENDS
The Holder understands that neither the Warrants nor the
shares have been registered under the Act or any state securities laws
and will be issued in reliance on an exception from the registration
requirements thereof. Holder acknowledges that the certificates
evidencing the Shares shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act") or any
applicable state securities laws; they have
7
<PAGE> 8
been acquired by the Holder for investment and may not be
pledged, hypothecated, sold, transferred, or otherwise disposed
of except (A) pursuant to an effective registration statement
or (B) upon opinion of counsel acceptable to a Company,
pursuant to an exemption from registration under the Act and
such applicable state securities laws or the rules and
regulations promulgated thereunder.
7. NOTICES
Any notice required by the provisions of this Warrant
Certificate to be given to the Holder shall be deemed given three (3)
days after it is deposited in the U.S. mail, certified and return
receipt requested, addressed to the Holder at its address appearing on
the books of the Company or on the date actually delivered in person.
8. GOVERNING LAW
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the state of Texas.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of the date first above written.
MICHAEL HOLDINGS, INC.
BY: /s/ GLENN D. HART
----------------------------------
Glenn D. Hart, Chairman & CEO
HOLDER
BY: /s/ DALE L. SCHWARZHOFF
----------------------------------
Dale L. Schwarzhoff
8
<PAGE> 1
EXHIBIT 10.12
MICHAEL HOLDINGS, INC.
FIRST AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
THIS FIRST AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT (this
"Agreement") dated as of December 4, 1996, by and between MICHAEL HOLDINGS,
INC., a Texas corporation (the "Corporation"), and each of the individuals and
entities described on Schedule A attached hereto and incorporated herein by
reference, all of whom appear as signatories hereto (each sometimes hereinafter
referred to individually as a "Shareholder" and collectively as the
"Shareholders"), and the spouse of each of the Shareholders, if any;
W I T N E S S E T H:
WHEREAS, the Corporation is incorporated under the laws of the State
of Texas with an authorized capitalization of 100,000,000 shares of common
stock, $.01 par value (the "Common Stock") and 50,000,000 shares of preferred
stock, $.01 par value;
WHEREAS, all of the Common Stock currently issued and outstanding is
owned by the Shareholders as reflected on Schedule A attached hereto and
incorporated herein by reference;
WHEREAS, the Corporation and the Shareholders desire to promote their
mutual interests and the interests of the Corporation by entering into certain
agreements relating to the ownership and transferability of the Common Stock;
NOW, THEREFORE, in consideration of the mutual promises contained
herein and other good and valuable consideration, the receipt, adequacy, and
sufficiency of which are hereby acknowledged, it is hereby agreed as follows:
1. Definitions. As used in this Agreement:
(a) Stock. The term "Stock" means the Common Stock of the
Corporation (whether presently or hereafter issued and outstanding) and
any security of the Corporation convertible into such stock and any right
to purchase or acquire any such stock or any security convertible into
such stock. Moreover, all references herein to Stock owned by any
Shareholder include the community interest, if any, of the spouse of such
Shareholder in such Stock.
(b) Shareholders. The term "Shareholders" includes each person (and
such person's spouse) and entity identified as a Shareholder on the
<PAGE> 2
signature pages hereof as well as each other person (and such person's
spouse) and entity as may hereafter become holders of the Stock of the
Corporation, and shall include the heirs, executors, administrators,
successors and assigns of a Shareholder.
(c) Disposition. The term "Disposition" means any sale, assignment,
gift, exchange, distribution, charge, transfer, pledge, mortgage or other
encumbrance, or any other disposition of Stock (or any interest therein)
whatsoever, whether voluntary or involuntary, direct or indirect, and each
and every transaction occurring by operation of law or otherwise, which has
the purpose or effect of making one or more of the following changes:
(i) a change in the ownership of any of the Stock covered by
this Agreement or any stock certificate or certificates representing
such shares of Stock; or
(ii) in the case of a person who is not a natural person, a
change in the identity, ownership or control of the holder or owner of
the legal or equitable title of or to any of the shares of Stock
covered by this Agreement or any stock certificate or certificates
representing such shares of Stock;
and shall include the failure of a Shareholder to succeed to the community
interest of such Shareholder's spouse in the Stock upon termination of the
marital relationship of the Shareholder by death or divorce; provided,
however, that such term shall not include any transfer pursuant to or
resulting from the acquisition by a Shareholder of all or any part of the
interest, community or otherwise, of such Shareholder's spouse in any
shares of Stock covered by this Agreement.
(d) Agreed Value Per Share of Stock. The term "Agreed Value Per Share
of Stock" means the fair market value per share of Stock as determined
from time to time by the Board of Directors of the Corporation. If any
Shareholder, or his heirs, executor, administrator or former spouse,
required to offer or sell Stock under Sections 4, 5, 6, 8 or 9 at such
price objects to the Agreed Value Per Share of Stock determined as set
forth above and notifies the Corporation and all of the other Shareholders
of such objection within ten days of the respective Trigger Date (as
hereinafter defined), then the Agreed Value Per Share of Stock on the
Trigger Date (as hereinafter defined), or a date as close as is reasonably
possible to the Trigger Date, to be determined as soon as possible after
the Trigger Date, shall be determined by an independent appraiser chosen
by the Board of Directors of the Corporation who shall be experienced in
valuation of privately held
-2-
<PAGE> 3
companies owning energy reserves as a substantial portion of their asset
value. Such appraiser shall be required to determine the Agreed Value Per
Share of Stock, taking into consideration such factors as he/she deem
advisable. In determining the value of oil and gas reserves, the appraisal
firm shall attribute a value of ninety percent (90%) of proved reserves,
sixty percent (60%) of proved behind pipe reserves, and twenty-five percent
(25%) of proved undeveloped reserves, all at a value based upon the
appraiser's best estimate of future oil and gas prices and utilizing a
present value discounting factor of 10%. All other assets and all
liabilities shall be determined as of the regular unaudited balance sheet
of the Corporation as determined from time to time. All fees and expenses
incurred in connection with such appraisal shall be borne one-half (1/2) by
the Corporation and one-half (1/2) by the objecting Shareholders.
(e) Trigger Date. The term "Trigger Date" means (i) in the case of a
purchase of Stock under Section 4 hereof, the date the written notice
specified in Section 4(a) is sent by the Corporation, (ii) in the case of a
purchase of Stock under Section 5 hereof, the date of death of the spouse
of the Shareholder or the date the decree of divorce of the Shareholder
becomes a final judgment, whichever is applicable, (iii) in the case of a
purchase of Stock under Section 6 hereof, the date on which the Selling
Shareholder sends the Corporation the Offering Notice required by Section
6, or (iv) in the case of a purchase of Stock under Section 9, the date of
death of the Shareholder.
(f) Determination Date. The term "Determination Date" means (i) in
all cases where an appraisal is not required to determine the purchase
price of the Stock being sold, ten days after the Trigger Date, and (ii) in
all cases where an appraisal under Section 1(d) is required to determine
the purchase price of the Stock being sold, the date upon which the report
with respect to the final appraisal required thereunder is delivered to the
Corporation.
2. Provisions of General Applicability. For purposes of this
Agreement:
(a) Pro Rata Offers of Stock. Whenever any Shareholder is required
under this Agreement to offer Stock to the Shareholders, such offer shall
be deemed to be made, to the Shareholders pro rata in accordance with their
respective holdings at the time of the offer of, shares of Stock
(determined exclusive of the Stock held by the offering Stockholder) or in
such other proportions as all of the Shareholders (excluding the offering
Shareholder) may agree upon among themselves. Except as may otherwise be
agreed among all Shareholders (excluding the offering Shareholder) each
such Shareholder to whom Stock is so offered, shall have the right to
-3-
<PAGE> 4
purchase that proportion of the number of shares of such offered Stock
which the number of shares of Stock owned by each such Shareholder bears to
the total number of shares of Stock owned by all such Shareholders electing
to accept the offer.
(b) Corporate Action. Whenever any Stock is offered to the
Corporation pursuant to this Agreement, the determination of the
Corporation to accept or reject such offer shall be made by the Board of
Directors of the Corporation. Any director of the Corporation who is (i)
the offering Shareholder, (ii) if the offering Shareholder is a
corporation, a director, officer or shareholder of the offering
Shareholder, (iii) if the offering Shareholder is a trust, a trustee or
beneficiary of the offering Shareholder, or (iv) if the offering
Shareholder is a partnership, a partner of such partnership or an officer,
director or shareholder of any corporate partner of such partnership, shall
be disqualified and abstain from voting on any such determination. In the
event that all directors are disqualified and abstain pursuant to the
preceding sentence, then the determination of the Corporation to accept or
reject such offer shall be made by vote of the Shareholders (other than the
offering Shareholder).
3. Rights of First Refusal on Stock. If any Shareholder desires to
sell any Stock owned or held by such Shareholder in a bona fide third-party
transaction for cash or a combination of cash and one or more promissory notes
or other debt securities secured only by such Stock, and if all Shareholders do
not consent to such sale as provided in Section 7 or the transaction is not
otherwise permitted by this Agreement, then such Shareholder (for purposes of
this Section 3, the "Selling Shareholder"), prior to making such sale, shall
first offer such shares (for purposes of this Section 3, the "Option Stock")
for sale to the Shareholders as set forth in Section 2(a) hereof, and if such
offer is not accepted by the Shareholders, then to the Corporation, all in
accordance with the following provisions and on the terms and conditions set
forth in this Section 3. Each Shareholder agrees that he will not sell any
Stock to any third party for consideration other than cash, promissory notes or
other securities.
(a) Option Price; Terms; Offering Notices. The price at which the
Selling Shareholder shall be required to offer the Option Stock, and the
terms of such offer, shall be the price at which and the terms upon which
any proposed third-party purchaser shall have offered in writing to
purchase the Option Stock from the Selling Shareholder and which the
Selling Shareholder is prepared to accept. Each offer required to be made
by the Selling Shareholder pursuant to this Section 3 shall be made by a
written notice (for purposes of this Section 3, the "Offering Notice")
which shall state that the offer is being made pursuant to Section 3 of
this Agreement and which shall set forth the number of shares of Option
Stock, the name or names of the proposed purchaser or purchasers of the
Option Stock, the price offered by
-4-
<PAGE> 5
such proposed purchaser or purchasers for the Option Stock (the "Option
Price"), the method of payment of the Option Price and the scheduled date
of consummation of such proposed sale. A copy of the written offer from any
proposed third-party purchaser shall be attached to each Offering Notice.
(b) Offer to Shareholders. The Selling Shareholder shall first offer
the Option Stock to the Shareholders, as set forth in Section 2(a) hereof,
by delivering an Offering Notice to each of them. Within 30 days from the
date of receipt of the Offering Notice, each of the Shareholders shall
deliver to the Selling Shareholder a reply notice accepting or rejecting
the offer of the Option Stock. If by such reply notice one or more of the
Shareholders accepts the offer made by the Selling Shareholder, the reply
notice shall constitute an agreement binding on the Selling Shareholder and
those Shareholders accepting the offer to sell and purchase the Option
Stock at the Option Price. If within such 30-day period, one or more
Shareholders shall have failed to deliver one or more reply notices
accepting the offer of the Selling Shareholder as to all of the Option
Stock, each of such Shareholders shall be deemed to have rejected such
offer.
(c) Lapse of Options. If none of the options provided for in this
Section 3 have been exercised, the Selling Shareholder may sell not less
than all of the Option Stock at any time within, but not subsequent to, 90
days after the lapse of all options granted pursuant to this Section 3;
provided, however, that (i) no sale of all or a part of the Option Stock
shall be made at any price lower than the Option Price or on terms
materially different from those specified in the Offering Notice or to any
person or persons other than the person or persons specified in the
Offering Notice, and (ii) the person or persons to whom the Option Stock is
to be transferred enter into an Addendum Agreement in substantially the
form of Exhibit A attached hereto, pursuant to which such person or persons
agree to be bound by all of the terms and provisions of this Agreement. If
after the lapse of the 90-day period the Option Stock shall not have been
sold, all of the provisions of this Agreement, including the provisions of
this Section 3, shall apply to any future Disposition or proposed
Disposition of Stock owned by the Selling Shareholder.
(d) Consummation of Purchases. Each transaction of purchase and sale
of Option Stock pursuant to this Section 3 shall be completed by delivery
of the stock certificates representing the Option Stock endorsed in blank,
or accompanied by duly executed stock powers or assignments, as
appropriate, and by actual registration of the transfer of the Option Stock
on the books of the Corporation upon payment of the purchase price to the
Selling Shareholder. Any such transaction shall be closed at such time and
-5-
<PAGE> 6
place as shall be agreed upon by the parties thereto, or, if no such
agreement is reached, at the principal office of the Corporation on the
thirtieth (30th) day following the later of the expiration of the thirty
day reply period described in Section 3(b) or the date of delivery of the
last reply notice given in connection with such transaction or, if such
day shall not be a business day, on the first business day thereafter
during normal business hours.
4. Options Upon Termination of Marriage of an Individual
Shareholder. If the marriage of an individual Shareholder is terminated by the
death of his spouse or by divorce, and if such Shareholder does not succeed to
all of his spouse's community interest, if any, in the Stock held by him at the
time of such termination, then such Shareholder shall notify the Corporation
within ten days of such event, and shall have a first option, and if such
Shareholder does not exercise such option, the Shareholders shall have a second
option, in accordance with the provisions of Section 2(a) hereof, and if such
Shareholders do not exercise such option, the Corporation shall have a third
option, to purchase from the former spouse of such Shareholder, or from the
executor, administrator or heirs of the former spouse of such Shareholder, as
the case may be, all (but not less than all) of the interest of such former
spouse, heirs, executor or administrator, as the case may be, in such shares
(the "Option Stock"), in accordance with the following provisions of this
Section 4. As used in the following paragraphs of this Section 4, the term
"Selling Shareholder" means the former spouse of any individual Shareholder who
shall have been divorced or, in the event of the death of the spouse of a
Shareholder, the executor, administrator or heirs of such spouse's estate, as
the case may be, and the term "Individual Shareholder" means the Shareholder
who shall have been divorced or whose spouse shall have died.
(a) Option Price. The price per share at which the Individual
Shareholder, the Shareholders or the Corporation shall be entitled to
purchase the Option Stock shall be the Agreed Value Per Share of Stock at
the Trigger Date. The price at which shares of Stock are purchasable under
this Section 4 is referred to in this Section 4 as the "Option Price."
Within 30 days following the Determination Date, the Corporation shall send
to each Shareholder a notice setting forth the Option Price.
(b) Exercise by Individual Shareholder. If the Individual
Shareholder wishes to exercise his option with respect to the Option
Stock, he shall do so by delivering to the Selling Stockholder, within 30
days from the receipt of the notice from the Corporation provided for in
paragraph (a) of this Section 4, a notice to such effect. If by such notice
the Individual Shareholder elects to exercise such option, such notice
shall constitute an agreement binding on the Selling Shareholder and the
Individual Shareholder to sell and purchase the Option Stock at the Option
Price.
(c) Exercise by Shareholders. If the option of the Individual
Shareholder shall not be exercised by him as provided in paragraph (b) of
this
-6-
<PAGE> 7
Section 4, and if any Shareholders wish to exercise their option with
respect to the Option Stock, they shall do so by delivering to the
Selling Shareholder, within 30 days from the expiration of the 30-day
period referred to in paragraph (b) of this Section 4, a notice to such
effect. If by such notice, any such Shareholders elect to exercise such
option, such notice shall constitute an agreement binding on the
Selling Shareholder and such Shareholders to sell and purchase the
Option Stock at the Option Price.
(d) Exercise by Corporation. If the option in favor of the
Shareholders shall not be exercised by any them as provided in
paragraph (c) of this Section 4, and if the Corporation wishes to
exercise its option with respect to the Option Stock, then the
Corporation shall deliver to the Selling Shareholder, within 30 days
following the expiration of the 30 days following the expiration of the
30-day period referred to in paragraph (c) of this Section 4, a notice
stating its intent to exercise such option. Such notice shall
constitute an agreement binding on the Selling Shareholder and the
Corporation to sell and purchase the Option Stock at the Option Price.
(e) Lapse of Options. If none of the options provided for in this
Section 4 have been timely exercised, then such options shall expire,
but all of the provisions of this Agreement shall apply to any future
Disposition or Proposed Disposition of Stock owned or held by the
Selling Shareholder.
(f) Consummation of Purchases. If any option provided for in this
Section 4 shall be timely exercised as provided in this Section 4, the
purchase and sale of the Option Stock shall be completed by delivery of
the certificates representing such Option Stock endorsed in blank, or
accompanied by duly executed stock powers or assignments, as
appropriate, and by actual registration of the transfer of such Option
Stock on the books of the Corporation upon payment in cash of the
Option Price to the Selling Shareholder. Any such transaction shall be
closed as such time and place as shall be agreed upon by the parties
thereto, or, if no such agreement is reached, at the principal office
of the Corporation on the tenth (10th) day following the date of
delivery of any notice of exercise given to the Selling Shareholders
pursuant to paragraph (b),(c) or (d) of this Section 4, whichever is
applicable, or if such day shall not be a business day, on the first
business day thereafter during normal business hours.
5. Involuntary Disposition of Stock. Upon the reasonable belief of
a Shareholder that any of the shares of Stock owned by such Shareholder are or
will be subject to an involuntary Disposition, and in any event upon or prior to
any involuntary Disposition of such shares of Stock, such Shareholder shall
deliver an offering notice (the "Offering Notice") to the Corporation and to the
Shareholders setting forth the events giving rise to the delivery of the
Offering Notice. Upon
-7-
<PAGE> 8
receipt of the Offering Notice by the Corporation, the Shareholders shall have
a first option, as set forth in Section 2(a) hereof, and if such Shareholders
do not exercise such option, the Corporation shall have a second option, to
purchase from such Shareholder all (but not less than all) of such
Shareholder's interest in such shares (for purposes of this Section 5 the
"Option Stock"), in accordance with the following provisions of this Section 5.
For purposes of this Section 5, "involuntary Disposition" shall include,
without limitation, any Disposition or other transfer of shares of Stock
pursuant to or by reason of or under judicial order, legal or equitable
process, execution, attachment or enforcement of a pledge, trust or other
security interest or encumbrance. As used in the following paragraphs of this
Section 5, the term "Selling Shareholder" means the Shareholder who owns such
shares of stock subject to the involuntary Disposition, or his representative,
as the case may be.
(a) Option Price. The price per share at which the Shareholders or the
Corporation shall be entitled to purchase Option Stock shall be the Agreed
Value Per Share of Stock at the Trigger Date. The price at which shares of
Stock are purchasable under this Section 5 is referred to in this Section 5
as the "Option Price." Within ten (10) days following the Determination
Date, the Corporation shall send to each Shareholder a notice setting forth
the Option Price.
(b) Exercise by Shareholders. If any Shareholder wishes to exercise
his option with respect to the Option Stock, he shall do so by delivering
to the Selling Shareholder, within ten (10) days from the receipt of the
notice from the Corporation provided for in paragraph (a) of this Section
5, a notice to such effect. If by such notice, any such Shareholder elects
to exercise such option, such notice shall constitute an agreement binding
on the Selling Shareholder and such Shareholder to sell and purchase the
Option Stock at the Option Price.
(c) Exercise by Corporation. If the option in favor of the
Shareholders shall not be exercised by any of them as provided in paragraph
(b) of this Section 5, and if the Corporation wishes to exercise its option
with respect to the Option Stock, then the Corporation shall deliver to the
Selling Shareholder, within ten (10) days following the expiration of the
10-day period referred to in paragraph (b) of this Section 5, a notice
stating its intent to exercise such option. Such notice shall constitute an
agreement binding on the Selling Shareholder and the Corporation to sell
and purchase the Option Stock at the Option Price.
(d) Lapse of Options. If none of the options provided for in this
Section 5 shall have been exercised within the applicable 10-day periods
set forth above, then such options shall expire, but all of the provisions
of this
-8-
<PAGE> 9
Agreement shall apply to any future Disposition or proposed Disposition
of Stock owned or held by the Selling Shareholder.
(e) Consummation of Purchases. If any option provided for in this
Section 5 shall be timely exercised as provided in this Section 5, the
purchase and sale of the Option Stock shall be completed by delivery of
the certificates representing such Option Stock endorsed in blank, or
accompanied by duly executed stock powers or assignments, as
appropriate, and by actual registration of the transfer of such Option
Stock on the books of the Corporation upon payment in cash of the
Option Price to the Selling Shareholder. Any such transaction shall be
closed at such time and place as shall be agreed upon by the parties
thereto, or, if no such agreement is reached, at the principal office
of the Corporation on the tenth (10th) day following the date of
delivery of any notice of exercise given to the Selling Shareholder
pursuant to paragraph (b) or (c) of this Section 5, whichever is
applicable, or if such day shall not be a business day, on the first
business day thereafter during normal business hours.
6. Permitted Dispositions. No Disposition of Stock may be made by any
Shareholder (a) except in accordance with the terms of this Agreement or (b) (i)
unless all Shareholders other than the Shareholder making the Disposition
consent in writing to the transfer and (ii) any person other than a current
Shareholder to whom shares are to be so transferred executes an Addendum
Agreement in the form of Exhibit A attached hereto, pursuant to which such
person agrees to be bound by all of the terms and provisions of this Agreement.
7. Voting for Directors. In connection with any annual or special
meeting of the Shareholders for the purposes of electing Directors to the Board
of Directors of the Corporation, each of Glenn D. Hart ("Hart"), Michael G.
Farmar, Stanley T. Polak, Jerry Holditch and Jim R. Smith shall have the right
to designate one nominee for membership on the Board of Directors of the
Corporation. The foregoing right to designate a nominee to the Board of
Directors shall terminate for any individual who no longer is a Shareholder, and
upon such occurrence that person's nominee on the Board of Directors shall
immediately resign. Each of the Shareholders covenant and agree that they will
vote all of their shares of Stock (i) in such a manner that the number of
Directors to serve on the Board of Directors of the Corporation shall be, and
shall thereinafter remain, five (5); and (ii) for each nominee designated by
certain of the Shareholders pursuant to this Section 7. Notwithstanding anything
to the contrary contained herein, no matter requiring approval of the
Shareholders shall be deemed to have taken place unless not only the requisite
vote of the outstanding shares does occur, but in addition the approval of Hart
shall have been procured so long as Hart owns at least thirty percent (30%) or
more of the issued and outstanding shares of the Corporation.
8. Death of Individual Shareholders.
-9-
<PAGE> 10
(a) Purchase by Corporation. Upon the death of any individual
Shareholder, the Corporation will be obligated to purchase the Stock
owned by the deceased Shareholder, and the estate of said Shareholder
will sell all such shares of Stock now owned or hereafter acquired by
such Shareholder or his or her spouse, if any.
(b) Purchase Price. The price per share at which the Corporation
will purchase the Stock (the "Purchase Price") will be equal to the
Agreed Value Per Share of Stock as of the Trigger Date.
(c) Consummation of Purchases. Upon receipt of the cash payment
due and owing for the purchase of the Stock of the deceased
Shareholder, the estate of the deceased Shareholder will deliver the
certificate(s) representing the Stock being purchased by the
Corporation, endorsed in blank or accompanied by duly executed stock
powers or assignments, as appropriate, and by actual registration of
the transfer of the Stock on the books of the Corporation upon payment
of the Purchase Price to the estate of the deceased Shareholder. Any
such transaction will be closed at such time and place as agreed upon
by the parties thereto, or, if no such agreement is reached, at the
principal office of the Corporation on the ninetieth (90th) day
following the Trigger Date or, if such day is not a business day, on
the first business day thereafter, during normal business hours.
9. Disposition by Shareholder upon Termination of Employment.
(a) Obligation of the Company. Upon the termination of any
salaried employee Shareholder's employment with the Corporation for any
reason (other than death which is covered by Section 8 herein or
termination by the Corporation without cause), including (but not
limited to) retirement, resignation, expiration of the term of an
employment agreement, or termination by the Corporation with cause of a
Shareholder, the Corporation shall promptly notify the other
Shareholders of such event. The other Shareholders shall have a first
option, in accordance with the provisions of Section 2(a) hereof, and
if none of the Shareholders exercise such option, the Corporation shall
have a second option, to purchase from the former employee Shareholder
all (but not less than all) of the interest of such former employee in
such shares (the "Option Stock"), in accordance with the following
provisions of this Section 9. As used in the following paragraphs of
this Section 9, the term "Selling Shareholder" means the former
employee Shareholder.
-10-
<PAGE> 11
(b) Option Price. The price per share at which the Selling
Shareholder, the other Shareholders or the Corporation shall be
entitled to purchase the Option Stock shall be the Agreed Value Per
Share of Stock at the Determination Date. The price at which shares of
Stock are purchasable under this Section 9 is referred to in this
Section 9 as the "Option Price." Within thirty (30) days following the
Trigger Date, the Corporation shall send to each Shareholder a notice
setting forth the Option Price.
(c) Exercise by Shareholders. If the other Shareholders wish to
exercise their option with respect to the Option Stock, they shall do
so by delivering to the Selling Stockholder, within thirty (30) days
from the delivery of the notice referred to in paragraph (b) of this
Section 9, a notice to such effect. Such notice shall constitute an
agreement binding on the Selling Shareholder and such Shareholders to
sell and purchase the Option Stock at the Option Price.
(d) Exercise by Corporation. If the option in favor of the other
Shareholders shall not be exercised by any of them as provided in
paragraph (c) of this Section 9, and if the Corporation wishes to
exercise its option with respect to the Option Stock, then the
Corporation shall deliver to the Selling Shareholder, within thirty
(30) days following the expiration of the 30-day period referred to in
paragraph (c) of this Section 9, a notice stating their intent to
exercise such option. Such notice shall constitute an agreement binding
on the Selling Shareholder and the Corporation to sell and purchase the
Option Stock at the Option Price.
(e) Lapse of Options. If none of the options provided for in this
Section 9 have been timely exercised, then such options shall expire,
but all of the provisions of this Agreement shall apply to any future
Disposition or Proposed Disposition of Stock owned or held by the
Selling Shareholder.
(f) Consummation of Purchases. If any option provided for in this
Section 9 shall be timely exercised as provided in this Section 9, the
purchase and sale of the Option Stock shall be completed by delivery of
the certificates representing such Option Stock endorsed in blank, or
accompanied by duly executed stock powers or assignments, as
appropriate, and by actual registration of the transfer of such Option
Stock on the books of the Corporation upon payment in cash of the
Option Price to the Selling Shareholder. Any such transaction shall be
closed at such time and place as shall be agreed upon by the parties
thereto, or, if no such agreement is reached, at the principal office
of the Corporation on the tenth (10th) day following the date of
delivery of any notice of exercise given to the Selling Shareholder
pursuant to paragraph (c) or (d) of this Section 9, whichever is
-11-
<PAGE> 12
applicable, or if such day shall not be a business day, on the first
business day thereafter during normal business hours.
10. Investment Representation and Legend on Stock Certificates. Each
of the Shareholders hereby represents that as of the date any Stock was or will
be acquired by such Shareholder, such Stock was or will be acquired for such
Shareholder's own account, for investment and not with a view to the
distribution thereof. Each of the Shareholders understands that any Stock which
has been or will be acquired by such Shareholder has not been and will not be
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or the securities laws of any state, pursuant to an exemption from the
registration provisions of the Securities Act and such state securities laws.
Each of the Shareholders hereby agrees that the Stock which has been or will be
acquired by such Shareholder pursuant to an exemption from the registration
provisions of the Securities Act and applicable state securities laws shall not
be sold, transferred, pledged or hypothecated unless the sale of such Stock is
registered under the Securities Act and any applicable state securities laws or
unless there is furnished an opinion of counsel satisfactory to the Corporation
that registration of such Stock under the Securities Act and applicable state
securities laws is not required. All certificates representing shares of Stock
now owned or hereafter acquired by the Shareholders shall contain an
appropriate reference on the face thereof to the following legend which shall
be endorsed on the reverse side of each such certificate.
"The transfer of the shares of stock represented by this certificate is
restricted by the terms and conditions of a First Amended and Restated
Shareholders' Agreement (the "Agreement") dated as of December 4, 1996,
among the Corporation and all of the holders of Stock of the Corporation.
As more fully set forth in the Agreement, such shares have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), or the securities laws of any state, have been acquired for
investment and not with a view to distribution thereof, and may not be
sold, offered for sale, transferred, pledged or hypothecated unless the
sale, transfer, pledge or hypothecation of such shares is registered under
the Securities Act and any applicable state securities laws or unless
there is furnished an opinion of counsel satisfactory in form and
substance to the Corporation that registration of such shares under the
Securities Act and any applicable state securities laws is not required. A
copy of the Agreement is on file at the offices of the Corporation."
Each Shareholder understands that the Corporation is under no obligation to
register the Stock under the Securities Act. The provisions of this Section 10
shall remain in effect until, in the opinion of counsel for the Corporation,
they are no longer required.
11. Notices. Any offer, notice, request, reply, instruction or other
communication (herein severally and collectively called "Notice") in this
Agreement provided or permitted to be given to the Corporation or to any
Shareholder or spouse of a Shareholder or executor or administrator of a
deceased Shareholder shall be in writing and shall be considered to have been
sent when personally
-12-
<PAGE> 13
delivered or sent, first class, registered or certified mail, return receipt
requested, postage prepaid. Notice sent in the United States mail, in the
manner described, shall be effective and deemed to be received by the addressee
upon the expiration of three (3) days after deposit. Notice given in any other
manner shall be effective only when received by the party to be notified. For
purposes of Notice, the address of the Corporation shall be 13101 Northwest
Freeway, Suite 320, Houston, Texas 77040, and the respective addresses of the
Shareholders shall be the addresses hereinafter set forth next to the
signatures to this Agreement of each of the Shareholders. Any party to this
Agreement shall have the right to change his address for the purposes of this
Agreement by giving at least three (3) days' written notice of such change of
address to each of the other parties hereto in the manner set forth in this
Agreement.
12. Necessary Documents. If under the terms of this Agreement the
Stock of any Shareholder is purchased, such Shareholder or the spouse of any
Shareholder or the executor or administrator of such Shareholder, as the case
may be, shall execute and deliver at the closing as provided in this Agreement
all necessary documents that may be reasonably required for accomplishing a
complete transfer of such Stock for the purposes of the purchase contemplated
hereby in this Agreement.
13. Miscellaneous Provisions.
(a) Governing Law. This Agreement shall be subject to and governed by
the laws of the State of Texas.
(b) Arbitration. If a dispute arises out of or relates to this
Agreement, or the breach thereof, and if said dispute cannot be settled
through negotiation, the Parties agree first to try in good faith to
settle the dispute by mediation under the Commercial Mediation Rules of
the American Arbitration Association, before resorting to arbitration,
litigation, or some other dispute resolution procedure as required by this
Section 13(b). Failing an adequate resolution by mediation, any
controversy or claim arising out of or relating to this Agreement or the
transactions contemplated hereby, including any controversy or claim
arising out of or relating to the Parties' decision to enter into this
Agreement, shall be settled by binding arbitration. There shall be one
arbitrator to be mutually agreed upon by the Parties involved in the
controversy and to be selected from the Judicial Panel of the Center for
Public Resources (or successor panel, if any). If within 45 days after
service of the demand for arbitration the Parties are unable to agree upon
such an arbitrator who is willing to serve, then an arbitrator shall be
appointed by the American Arbitration Association in accordance with its
rules. Except as specifically provided in this Section 13(b), the
arbitration shall be conducted in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The arbitrator
shall not render an award of punitive damages. Any arbitration hereunder
shall be held in Harris
-13-
<PAGE> 14
County, Texas. Except as otherwise specifically provided hereinafter,
expenses related to the arbitration, including counsel fees, shall be
borne by the Party incurring such expenses. The fees of the arbitrator
and of the American Arbitration Association, if any, shall be divided
equally among the Parties involved in the controversy. Judgement upon
the award rendered by the arbitrator (which may, if deemed appropriate
by the arbitrator, include equitable or mandatory relief with respect
to performance of obligations hereunder) may be entered in any court of
competent jurisdiction. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged
dispute, breach, default or misrepresentation in connection with any of
the provisions of this Agreement, the successful or prevailing Party or
Parties shall be entitled to recover reasonable attorneys' fees and
other costs incurred in that action or proceeding in addition to any
other remedies to which it or they may be entitled at law or equity.
(c) Gender. Whenever the context requires, the gender of all
words used herein shall include the masculine, feminine and neuter, and
the number of all words shall include the singular and plural.
(d) Binding Effect. This Agreement shall be binding upon the
Corporation, the Shareholders, the spouses of the Shareholders and
their heirs, executors, administrators, successors and assigns.
(e) Amendment. This Agreement may be amended from time to time by
an instrument in writing signed by all those who are parties to this
Agreement at the time of such amendment, such instrument being
designated on its face as an "Amendment" to this Agreement.
(f) Termination. This Agreement shall terminate automatically
upon (i) the bankruptcy or lawful dissolution of the Corporation, (ii)
the occurrence of any event which reduces the number of Shareholders to
one or (iii) the merger or consolidation of the Corporation with
another corporation (providing the Corporation is not the surviving
corporation of such merger or consolidation and provided further that
the surviving corporation is not owned or controlled, directly or
indirectly, by the Shareholders). This Agreement may also be terminated
by an instrument in writing signed by all those who are parties to this
Agreement at the time of the signing of such instrument.
(g) Rights after Sale. Any Shareholder who sells all of his Stock
shall cease to be a party to this Agreement and shall have no further
rights hereunder.
-14-
<PAGE> 15
(h) Joinder of Spouses. The respective spouses of the individual
Shareholders are fully aware of, understand, and fully consent and
agree to the provisions of this Agreement and its binding effect upon
any community or other property interest that they may now or hereafter
own, and agree that the termination of their marital relationship with
any Shareholder, for any reason, shall not have the effect of removing
any Stock of the Corporation otherwise subject to this Agreement from
the coverage hereof and that their awareness, understanding, consent
and agreement are evidenced by their execution of this Agreement. If at
any time hereafter a natural person shall become a party to this
Agreement, then the spouse of such natural person, by execution of an
Addendum Agreement in the form of Exhibit A attached hereto pursuant to
which such Shareholder shall adopt this Agreement, shall evidence and
acknowledge that such spouse is fully aware of, understands and agrees
to the provisions of this Agreement and its binding effect upon any
interest, community or otherwise, such spouse may at any time own in
any shares of Stock, and by such execution such spouse will agree that
the termination of marriage to such natural person for any reason shall
not have the effect of removing any shares of Stock otherwise subject
to this Agreement from the coverage hereof.
(i) Attempted Disposition as Breach. Any attempted Disposition in
breach of this Agreement shall be null and void. Each party hereto
acknowledges that a remedy at law for any breach or attempted breach of
any of Sections 3 through 8 shall be inadequate, agrees that each other
party hereto shall be entitled to specific performance and injunctive
and other equitable relief in case of any such breach or attempted
breach, and further agrees to waive any requirement for the securing or
posting of any bond in connection with the obtaining of any such
injunctive or other equitable relief.
(j) Addendum Agreement. No Shareholder shall transfer shares of
Stock, or allow any Disposition of such Shareholder's Stock, and the
Corporation shall not issue shares of Stock, to any person who is not
already a party hereto, unless such person and the spouse of such
person, if applicable, become parties to this Agreement
contemporaneously with the transfer, Disposition or issuance of such
shares. Any such person and the spouse of such person shall become
parties to this Agreement by the execution of an Addendum Agreement in
substantially the form attached hereto as Exhibit A, to be executed by
all Shareholders, which Addendum Agreement shall bind such person to,
and grant them the benefits of, this Agreement as though they were
original parties hereto.
(k) Separability. If any term or provision contained in this
Agreement is or is hereafter found to be inconsistent with, contrary
to, or
-15-
<PAGE> 16
invalid or unenforceable under any law or official rule, regulation or
order, this Agreement shall be deemed to be modified accordingly and
the remaining terms and provisions of this Agreement shall not be
affected thereby and shall continue in full force and effect.
(l) Power of Attorney. Each of the Shareholders hereby
irrevocably appoints and authorizes the Corporation to execute and
deliver on his or her behalf the Addendum Agreement described in
Paragraph 13(j) hereof. The Corporation's authority shall begin on the
date hereof and shall not terminate on the disability of the respective
Shareholder.
(m) Waiver. Any waiver to be enforceable must be in writing and
executed by the party against whom the waiver is sought to be enforced.
(n) Drafting. Both parties hereto acknowledge that each party
was actively involved in the negotiation and drafting of this Agreement
and that no law or rule of construction shall be raised or used in
which the provisions of this Agreement shall be construed in favor or
against either party hereto because one is deemed to be the author
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
multiple counterparts, each of which shall be considered an original, but all of
which together shall constitute but one and the same agreement, effective as of
the date and year first above written.
THE CORPORATION:
MICHAEL HOLDINGS, INC.,
a Texas corporation
Address
By: /s/ GLENN D. HART
-----------------------------------
13101 Northwest Freeway Glenn D. Hart,
Houston, Texas 77040 Chief Executive Officer
<PAGE> 17
THE SHAREHOLDERS:
Address Name
2334 Quenby /s/ GLENN D. HART
Houston, Texas 77005 ---------------------------
GLENN D. HART
/s/ LAUREN HART
---------------------------
LAUREN HART, spouse
6605 Mimosa Ln. /s/ MICHAEL G. FARMAR
Dallas, Texas 75230 ---------------------------
MICHAEL G. FARMAR
/s/ JILL B. FARMAR
---------------------------
JILL B. FARMAR, M.D., spouse
16308 Smith /s/ STANLEY T. POLAK
Houston, Texas 77040 ---------------------------
STANLEY T. POLAK
/s/ CAROL POLAK
---------------------------
CAROL POLAK, spouse
18911 Pheasant Lane /s/ JERRY HOLDITCH
Tomball, Texas 77375 ---------------------------
JERRY HOLDITCH
/s/ CINDY HOLDITCH
---------------------------
CINDY HOLDITCH, spouse
8207 Bairnsdale /s/ DOUGLAS FOGLE
Houston, Texas 77070 ---------------------------
DOUGLAS FOGLE
/s/ ALLISON FOGLE
---------------------------
ALLISON FOGLE, spouse
3210 Ashfield /s/ SCOTT R. SAMPSELL
Houston, Texas 77082 ---------------------------
SCOTT R. SAMPSELL
/s/ DENA L. SAMPSELL
---------------------------
DENA L. SAMPSELL, spouse
-17-
<PAGE> 18
1400 Post Oak Blvd. /s/ JIM R. SMITH
Suite 850 ------------------------------
Houston, TX 77056 JIM R. SMITH
/s/ SHERRY V. SMITH
-------------------------------
Spouse
-18-
<PAGE> 19
SCHEDULE A
Shareholders
<TABLE>
Shares of Common
Shareholder Stock Owned
- ----------- ----------------
<S> <C>
Glenn D. Hart 450,000
Michael G. Farmar 255,000
Jerry F. Holditch 100,000
Douglas R. Fogle 50,000
Stanley T. Polak 20,000
Jim R. Smith 50,000
Scott R. Sampsell 30,000
</TABLE>
-19-
<PAGE> 1
EXHIBIT 12.1
MICHAEL PETROLEUM CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, Pro-forma
------------------------------------------------------ ---------
1993 1994 1995 1996 1997 1997
------ ------ ------ ------ ------ ---------
(In Thousands, Except Ratio Amounts)
<S> <C> <C> <C> <C> <C> <C>
Earnings
Income Before Income Taxes .................. 2,831 (932) (2,193) (699) 4 (2,254)
Add
Interest and fixed charges ................ 976 683 1,220 961 2,202 16,554
Portion of rent under long-term
operating leases representative of an
interest factor ......................... 48 33 30 17 23 23
----- ----- ----- ----- ----- ------
Total Earnings Available for Fixed Charges .... 3,855 (216) (943) 279 2,229 14,323
Fixed Charges
Interest and fixed charges ................. 976 683 1,220 961 2,202 16,554
Portion of rent under long-term
operating leases representative of an
interest factor .......................... 48 33 30 17 23 23
Capitalized interest ....................... 277 218 217 574 574
----- ----- ----- ----- ----- ------
Total Fixed Charges ........................ 1,301 933 1,250 1,195 2,799 17,151
Ratio of Earnings to Fixed Charges(1) ........ 2.96x x x x x x
===== ===== ====== ===== ===== ======
</TABLE>
- ------------
(1) Earnings were insufficient to cover fixed charges by $1,150,000,
$2,193,000, $916,000 and $570,000 for the historical years ended December
31, 1994, 1995, 1996 and 1997, respectively, and $2,828,000 for the proforma
year ended December 31, 1997.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 (i) of
our report dated March 6, 1998, except for information in Note 12, for which the
date is April 23, 1998, on our audits of the financial statements of Michael
Petroleum Corporation, (ii) of our report dated March 9, 1998 on our audits of
the statement of revenues and direct operating expenses of the Enron Properties,
(iii) of our report dated March 9, 1998 on our audits of the statement of
revenues and direct operating expenses of the Conoco Properties, and (iv) of our
report dated March 27, 1998 on our audits of the statement of revenues and
direct operating expenses of the Lobo Properties. We also consent to the
reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 7, 1998
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We consent to the references made to us in the Registration Statement on
Form S-4 of Michael Petroleum Corporation, relating to the exchange offer of
$135,000,000 of its Senior Notes due 2005, including the reference to us under
the caption "Experts - Reserve Engineers" in such Registration Statement.
Huddleston & Co., Inc.
Houston, Texas
May 8, 1998
<PAGE> 1
Exhibit 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We consent to the references made to us in the Registration Statement on
Form S-4 of Michael Petroleum Corporation, relating to the exchange offer of
$135,000,000 of its Senior Notes due 2005, including the reference to us under
the caption "Experts - Reserve Engineers" in such Registration Statement.
Mohajir & Associates, Inc.
Houston, Texas
May 8, 1998
<PAGE> 1
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
--------------------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2)
STATE STREET BANK AND TRUST COMPANY
(Exact name of trustee as specified in its charter)
Massachusetts 04-1867445
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617) 654-3253
(Name, address and telephone number of agent for service)
MICHAEL PETROLEUM CORPORATION
(Exact name of obligor as specified in its charter)
TEXAS 76-0510239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13101 NORTHWEST FREEWAY
SUITE 320
HOUSTON, TX 77040
(Address of principal executive offices) (Zip Code)
11.50% Senior Notes due 2005
(Title of indenture securities)
<PAGE> 2
GENERAL
Item 1. General Information.
Furnish the following Information as to the trustee:
(a) Name and address of each examining or supervisory authority to
which it is subject.
Department of Banking and Insurance of The
Commonwealth of Massachusetts, 100 Cambridge Street,
Boston, Massachusetts.
Board of Governors of the Federal Reserve System,
Washington, D.C., Federal Deposit Insurance
Corporation, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Trustee is authorized to exercise corporate trust
powers.
Item 2. Affiliations with Obligor.
If the Obligor is an affiliate of the trustee, describe each such
affiliation.
The obligor is not an affiliate of the trustee or of its
parent, State Street Corporation.
(See note on page 2.)
Item 3. through Item 15. Not applicable.
Item 16. List of Exhibits
List below all exhibits filed as part of this statement of
eligibility.
1. A copy of the articles of association of the trustee as
now in effect.
A copy of the Articles of Association of the trustee,
as now in effect, is on file with the Securities and
Exchange Commission as Exhibit 1 to Amendment No. 1
to the Statement of Eligibility and Qualification of
Trustee (Form T-1 filed with the Registration
Statement of Morse Shoe, Inc. (File No. 22-17940) and
is incorporated herein by reference thereto.
2. A copy of the certificate of authority of the trustee to
commence business, if not contained in the articles of
association.
A copy of a Statement from the Commissioner of Banks
of Massachusetts that no certificate of authority for
the trustee to commence business was necessary or
issued is on file with the Securities and Exchange
Commission as Exhibit 2 to Amendment No. 1 to the
Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of
Morse Shoe, Inc. (File No. 22-17940) and is
incorporated herein by reference thereto.
3. A copy of the authorization of the trustee to exercise
corporate trust powers, if such authorization is not contained
in the documents specified in paragraph (1) or (2), above.
A copy of the authorization of the trustee to
exercise corporate trust powers is on file with the
Securities and Exchange Commission as Exhibit 3 to
Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the
Registration Statement of Morse Shoe, Inc. (File No.
22-17940) and is incorporated herein by reference
thereto.
4. A copy of the existing by-laws of the trustee, or
instruments corresponding thereto.
A copy of the by-laws of the trustee, as now in
effect, is on file with the Securities and Exchange
Commission as Exhibit 4 to the Statement of
Eligibility and Qualification of Trustee (Form T-1)
filed with the Registration Statement of Eastern
Edison Company (File No. 33-37823) and is
incorporated herein by reference thereto.
1
<PAGE> 3
5. A copy of each Indenture referred to in Item 4. if the
obligor is in default.
Not applicable.
6. The consents of United States institutional trustees
required by Section 321(b) of the Act.
The consent of the trustee required by Section 321(b)
of the Act is annexed hereto as Exhibit 6 and made a
part hereof.
7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.
A copy of the latest report of condition of the
trustee published pursuant to law or the requirements
of its supervising or examining authority is annexed
hereto as Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which
relates to matters peculiarly within the knowledge of the obligor or any
underwriter for the obligor, the trustee has relied upon information furnished
to it by the obligor and the underwriters, and the trustee disclaims
responsibility for the accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be
amended, if necessary, to reflect any facts which differ from those stated and
which would have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of
1939, as amended, the trustee, State Street Bank and Trust Company, a
corporation organized and existing under the laws of The Commonwealth of
Massachusetts, has duly caused this statement of eligibility to be signed on
its behalf by the undersigned, thereunto duly authorized, all in the City of
Hartford and The State of Connecticut, on the 28th day of April 1998.
STATE STREET BANK AND TRUST COMPANY
By: /s/ MICHAEL M. HOPKINS
-------------------------------
NAME: MICHAEL M. HOPKINS
TITLE: VICE PRESIDENT
2
<PAGE> 4
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939, as amended, in connection with the proposed issuance by MICHAEL
PETROLEUM CORPORATION of its 11.50% Senior Notes due 2005, we hereby consent
that reports of examination by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ MICHAEL M. HOPKINS
--------------------------------
NAME: MICHAEL M. HOPKINS
TITLE: VICE PRESIDENT
DATED: APRIL 28, 1998
3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 782
<SECURITIES> 0
<RECEIVABLES> 4,472
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,255
<PP&E> 34,977
<DEPRECIATION> 6,966
<TOTAL-ASSETS> 33,617
<CURRENT-LIABILITIES> 13,856
<BONDS> 19,885
0
0
<COMMON> 1
<OTHER-SE> (1,916)
<TOTAL-LIABILITY-AND-EQUITY> 33,617
<SALES> 9,139
<TOTAL-REVENUES> 9,139
<CGS> 4,113
<TOTAL-COSTS> 4,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,084
<INCOME-PRETAX> 2,193
<INCOME-TAX> (79)
<INCOME-CONTINUING> 2,114
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
