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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
May 26, 1995
ENSERCH Corporation
(Exact name of Registrant as specified in its charter)
Texas 1-3183 75-0399066
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
ENSERCH Center, 300 S. St. Paul, Dallas, Texas 75201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: 214-651-8700
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ITEM 5. Other Events
The Corporation has previously announced that its subsidiary,
Enserch Exploration, Inc. (99.2% owned), has entered into a
definitive agreement for the purchase of DALEN Corporation. The
purchase price is $340 million plus the assumption or refinancing
of $115 million of bank debt. The acquisition is expected to close
on June 8, 1995. Historical and pro forma financial information in
respect of DALEN are included as exhibits to this Form 8-K.
ITEM 7. Financial Statements and Exhibits
(c) Exhibits
Exhibit 10 Stock Purchase Agreement dated as of April 12,
1995, By and Between PG&E Enterprises, as
Seller, and Enserch Exploration, Inc., as
Buyer.
Exhibit 15 Consent of Arthur Andersen L.L.P.
Exhibit 99.1 DALEN Corporation Consolidated Financial
Statements as of December 31, 1994 and 1993,
Together with Auditor's Report.
Exhibit 99.2 DALEN Corporation Condensed Consolidated
Financial Statements (Unaudited) for the
Periods Ended March 31, 1995 and 1994.
Exhibit 99.3 ENSERCH Corporation and Subsidiary Companies
Condensed Pro Forma Consolidated Financial
Statements (Unaudited) for the Periods Ended
December 31, 1994 and March 31, 1995.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ENSERCH Corporation
Date: May 26, 1995 By: /s/ J. W. Pinkerton
J. W. Pinkerton,
Vice President and Controller,
Chief Accounting Officer
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EXHIBIT 10
STOCK PURCHASE AGREEMENT
Dated as of April 12, 1995
By and Between
PG&E ENTERPRISES,
as Seller
and
ENSERCH EXPLORATION, INC.,
as Buyer
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<TABLE>
TABLE OF CONTENTS
<CAPTION>
Article Page
<S> <C>
I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms. . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . 9
1.3 References to Instruments. . . . . . . . . . . . . . 9
1.4 Singular and Plural. . . . . . . . . . . . . . . . . 9
1.5 Certain Terms. . . . . . . . . . . . . . . . . . . . 9
II SALE OF STOCK. . . . . . . . . . . . . . . . . . . . . . . 9
2.1 Sale and Purchase. . . . . . . . . . . . . . . . . . 9
2.2 Excluded Assets. . . . . . . . . . . . . . . . . . . 10
2.3 Resolution of Intercompany Obligations and Bank
Credit Agreement . . . . . . . . . . . . . . . . . . 10
III PURCHASE PRICE AND PAYMENT . . . . . . . . . . . . . . . . 11
3.1 Purchase Price . . . . . . . . . . . . . . . . . . . 11
3.2 Stipulated Value Allocations . . . . . . . . . . . . 11
IV SELLER'S REPRESENTATIONS . . . . . . . . . . . . . . . . . 12
4.1 Ownership of the Stock.. . . . . . . . . . . . . . . 12
4.2 Organization and Good Standing; Qualification. . . . 12
4.3 Capitalization.. . . . . . . . . . . . . . . . . . . 12
4.4 Authorization and Validity.. . . . . . . . . . . . . 12
4.5 Subsidiaries and Joint Ventures. . . . . . . . . . . 13
4.6 Consents.. . . . . . . . . . . . . . . . . . . . . . 13
4.7 Financial Statements.. . . . . . . . . . . . . . . . 13
4.8 No Violation.. . . . . . . . . . . . . . . . . . . . 13
4.9 Finder's Fee.. . . . . . . . . . . . . . . . . . . . 13
4.10 Representations True at Closing. . . . . . . . . . . 14
V BUYER'S REPRESENTATIONS. . . . . . . . . . . . . . . . . . 14
5.1 Organization and Good Standing.. . . . . . . . . . . 14
5.2 Authorization and Validity.. . . . . . . . . . . . . 14
5.3 No Violation.. . . . . . . . . . . . . . . . . . . . 14
5.4 Finder's Fee.. . . . . . . . . . . . . . . . . . . . 14
5.5 Absence of Bankruptcy Proceedings. . . . . . . . . . 15
5.6 Experienced Investor, Etc. . . . . . . . . . . . . . 15
VI ACCESS TO INFORMATION AND INSPECTION; DUE DILIGENCE. . . . 15
6.1 Records and Files. . . . . . . . . . . . . . . . . . 15
6.2 Other Files. . . . . . . . . . . . . . . . . . . . . 15
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6.3 Environmental Assessment and Inspection. . . . . . . 15
6.4 Confidentiality Agreement. . . . . . . . . . . . . . 16
6.5 Geophysical Data . . . . . . . . . . . . . . . . . . 16
6.6 Due Diligence Defect . . . . . . . . . . . . . . . . 16
6.6.1 No Violation . . . . . . . . . . . . . . . . . . . . 17
6.6.2 Gas Imbalances . . . . . . . . . . . . . . . . . . . 17
6.6.3 Assets, Liabilities and Obligations. . . . . . . . . 17
6.6.4 Employee Matters . . . . . . . . . . . . . . . . . . 18
6.6.5 Employee Benefit Plans . . . . . . . . . . . . . . . 18
6.6.6 Conduct of Business. . . . . . . . . . . . . . . . . 19
6.6.7 Commitments. . . . . . . . . . . . . . . . . . . . . 20
6.6.8 Insurance. . . . . . . . . . . . . . . . . . . . . . 20
6.6.9 Compliance with Laws . . . . . . . . . . . . . . . . 20
6.6.10Litigation . . . . . . . . . . . . . . . . . . . . . 20
6.6.11Books of Account . . . . . . . . . . . . . . . . . . 21
6.6.12No Affiliate Transactions. . . . . . . . . . . . . . 21
6.6.13Payout Balances. . . . . . . . . . . . . . . . . . . 21
6.6.14Derivatives. . . . . . . . . . . . . . . . . . . . . 21
6.6.15Hydrocarbon Sale Contracts . . . . . . . . . . . . . 21
6.6.16Consents . . . . . . . . . . . . . . . . . . . . . . 21
6.6.17Taxes. . . . . . . . . . . . . . . . . . . . . . . . 22
6.6.18Accuracy of Records Furnished. . . . . . . . . . . . 23
6.7 Special Matters Regarding Due Diligence Defects. . . 23
6.7.1 Threshold Amount . . . . . . . . . . . . . . . . . . 23
6.7.2 Due Diligence Defect Amount. . . . . . . . . . . . . 23
6.7.3 Additional Due Diligence Defect. . . . . . . . . . . 23
6.8 Section 29 Tax Credits.. . . . . . . . . . . . . . . 24
6.8.1 Section 29 Tax Credit Defects. . . . . . . . . . . . 24
6.8.2 Threshold Amount . . . . . . . . . . . . . . . . . . 24
6.8.3 Section 29 Tax Credit Defect Amount. . . . . . . . . 24
6.8.4 Notice of Section 29 Tax Credit Defects. . . . . . . 24
6.8.5 Section 29 Tax Credit Notice Requirements. . . . . . 24
6.9 Representation and Covenant Matters. . . . . . . . . 24
6.9.1 Representation and Covenant Defects. . . . . . . . . 25
6.9.2 Threshold Amount . . . . . . . . . . . . . . . . . . 25
6.9.3 Representation and Covenant Defect Amount. . . . . . 25
6.10 Pre-Closing Defect Amount. . . . . . . . . . . . . . 25
6.11 Right to Cure. . . . . . . . . . . . . . . . . . . . 26
6.12 Limitation on Multiple Types of Defects. . . . . . . 26
6.13 Positive Adjustments . . . . . . . . . . . . . . . . 26
6.14 Statements Regarding Representation of Financial
Condition. . . . . . . . . . . . . . . . . . . . . . 26
VII TITLE, ENVIRONMENTAL AND OTHER MATTERS . . . . . . . . . . 26
7.1 No Warranty or Representation Regarding
Environmental Laws or Title. . . . . . . . . . . . . 26
(ii)
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7.2 Buyer's Title and Environmental Review . . . . . . . 27
7.2.1 Title Review . . . . . . . . . . . . . . . . . . . . 27
7.2.2 Environmental Review . . . . . . . . . . . . . . . . 30
7.3 Material Defects . . . . . . . . . . . . . . . . . . 31
7.4 Title Defects. . . . . . . . . . . . . . . . . . . . 32
7.5 Preferential Rights to Purchase and Consents . . . . 33
7.6 Purchase Price Adjustment; Limitation. . . . . . . . 34
7.6.1 Reimbursement Amount . . . . . . . . . . . . . . . . 34
7.6.2 Limitations; Payment . . . . . . . . . . . . . . . . 35
7.7 Arbitration. . . . . . . . . . . . . . . . . . . . . 35
VIII OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . 36
8.1 Covenants of Seller Pending Closing. . . . . . . . . 36
8.2 Limitations on Seller's Covenants Pending Closing. . 40
8.3 No Solicitation. . . . . . . . . . . . . . . . . . . 41
8.4 Company Employees; Severance Costs . . . . . . . . . 41
8.5 Tax Matters. . . . . . . . . . . . . . . . . . . . . 42
8.6 Expenses . . . . . . . . . . . . . . . . . . . . . . 46
IX CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . 47
9.1 Seller's Closing Conditions. . . . . . . . . . . . . 47
9.2 Buyer's Closing Conditions . . . . . . . . . . . . . 47
X CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.1 Closing. . . . . . . . . . . . . . . . . . . . . . . 48
10.2 Seller's Closing Obligations . . . . . . . . . . . . 48
10.3 Buyer's Closing Obligations. . . . . . . . . . . . . 50
10.4 Distribution of Properties . . . . . . . . . . . . . 51
10.5 Change of Corporate Name . . . . . . . . . . . . . . 51
10.6 Company's Employee Benefit Plans . . . . . . . . . . 51
10.7 Taking of Necessary Action . . . . . . . . . . . . . 52
XI LIMITATIONS ON WARRANTIES AND REMEDIES; INDEMNIFICATION. . 52
11.1 Limitations. . . . . . . . . . . . . . . . . . . . . 52
11.2 Survival; Time Limit for Claims. . . . . . . . . . . 53
11.3 Indemnification by Buyer . . . . . . . . . . . . . . 53
11.4 Indemnification by Seller; Limitations on Liability. 54
11.5 Indemnification Procedure. . . . . . . . . . . . . . 54
XII DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . 55
12.1 Remedies . . . . . . . . . . . . . . . . . . . . . . 55
12.2 Termination by Lapse of Time . . . . . . . . . . . . 55
12.3 Other Remedies . . . . . . . . . . . . . . . . . . . 55
(iii)
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12.4 Specific Performance . . . . . . . . . . . . . . . . 56
12.5 Seller's Net Worth Covenant. . . . . . . . . . . . . 56
12.6 Buyer's Net Worth Covenant.. . . . . . . . . . . . . 56
XIII MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . 56
13.1 Antitrust Laws . . . . . . . . . . . . . . . . . . . 56
13.2 Confidentiality of Proprietary Information.. . . . . 57
13.3 Public Announcements . . . . . . . . . . . . . . . . 57
13.4 Delivery of Records. . . . . . . . . . . . . . . . . 57
13.5 Further Assurances and Records . . . . . . . . . . . 57
13.6 Notices. . . . . . . . . . . . . . . . . . . . . . . 58
13.7 Incidental Expenses. . . . . . . . . . . . . . . . . 59
13.8 Assumption of Risk . . . . . . . . . . . . . . . . . 59
13.9 Entire Agreement . . . . . . . . . . . . . . . . . . 59
13.10 Governing Law. . . . . . . . . . . . . . . . . . . . 60
13.11 Counterparts . . . . . . . . . . . . . . . . . . . . 60
13.12 Waiver . . . . . . . . . . . . . . . . . . . . . . . 60
13.13 Binding Effect; Assignment . . . . . . . . . . . . . 60
13.14 No Recordation . . . . . . . . . . . . . . . . . . . 60
13.15 Time Periods . . . . . . . . . . . . . . . . . . . . 60
13.16 Construction . . . . . . . . . . . . . . . . . . . . 60
</TABLE>
(iv)
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<TABLE>
EXHIBITS
<S> <C>
A-1 - Arbitration Procedures
A-2 - Subject Interests
B - Financial Statements
C - Production Payments
D - Reserve Reports
E - Form of Indemnity Agreement for NGCC matters
F - Form of Release
G - Opinion of Seller's Special Counsel
H - Opinion of Seller's Chief Counsel
I - Opinion of Buyer's Special Counsel
J - Indemnity Agreement
</TABLE>
<TABLE>
SCHEDULES
<S> <C>
4.5(a) - Subsidiaries
4.5 - Subsidiaries and Joint Ventures
6.6.1 - Violations
6.6.2 - Scheduled (Negative) Imbalances and Scheduled (Positive)
Imbalances
6.6.3 - Assets, Liabilities and Obligations
6.6.4 - Employee Matters
6.6.5 - Employee Benefit Plans
6.6.5(g)- Disability Benefits
6.6.6 - Conduct of Business
6.6.10 - Litigation
6.6.13 - Payout Balances
6.6.14 - Derivatives
6.6.15 - Hydrocarbon Sale Contracts
6.6.17(c)- Tax Deficiencies
6.6.17(g)- Partnerships
6.8.1 - Well Locations
11.3 - Indemnification
</TABLE>
(v)
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STOCK PURCHASE AGREEMENT
THIS AGREEMENT, dated as of the 12th day of April 1995, is by
and between PG&E ENTERPRISES, a California corporation ("Seller"),
and ENSERCH EXPLORATION, INC., a Texas corporation ("Buyer").
W I T N E S S E T H:
WHEREAS, Buyer desires to purchase from Seller, and Seller
desires to sell to Buyer, all of the issued and outstanding capital
stock of DALEN CORPORATION, a Delaware corporation (the "Company"),
a wholly owned subsidiary of Seller, upon the terms and subject to
the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants,
agreements, representations and warranties set forth in this
Agreement, the parties to this Agreement hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Defined Terms. The following terms, as used in
this Agreement, have the following meanings:
"Aggregate Stipulated Value" means $400,500,000.
"Agreement" means this Stock Purchase Agreement between
Seller and Buyer.
"Arbitration Procedures" means the arbitration procedures
set forth in Exhibit A-1.
"Assets" means all of the assets and properties of the
Company and the Subsidiaries, tangible and intangible, real,
personal and mixed, excluding only such assets and properties to be
conveyed or distributed to Seller or Seller's designee or otherwise
excluded from the definition of "Assets" as provided in Sections
2.2, 2.3(c) and 10.4 and Article VII. Without limiting the
generality of the foregoing, "Assets" will include, without
limitation, the Subject Interests, except to the extent
constituting assets or properties conveyed or distributed to Seller
or Seller's designee or otherwise excluded from the definition of
"Assets" as provided in Sections 2.2, 2.3(c) and 10.4 and
Article VII.
"Balance Sheet Date" is defined in Section 2.3.
"Bank Credit Agreement" is defined in Section 2.3.
"Closing" is defined in Section 10.1.
"Closing Date" is defined in Section 10.1.
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"Code" means the Internal Revenue Code of 1986, as
amended.
"Confidentiality Agreement" is defined in Section 6.4.
"Defect Amounts" means, collectively, the Representation
and Covenant Defect Amounts, the Due Diligence Defect Amounts, the
Section 29 Tax Credit Defect Amounts, the Title Defect Amounts and
the Environmental Defect Amounts.
"Defect" means, collectively, a Representation and
Covenant Defect, a Due Diligence Defect, a Section 29 Tax Credit
Defect, a Title Defect and an Environmental Defect.
"Defect Deductible" is defined in Section 7.3(a).
"Defensible Title" means, with respect to any Subject
Interest, such title to such Subject Interest that, subject to and
except for Permitted Encumbrances, (i) entitles the Company or any
Subsidiary to receive not less than the net revenue interest of the
Company or such Subsidiary for such Subject Interest as set forth
in Exhibit A-2 of all oil and gas produced, saved and marketed from
or attributable to such Subject Interest, (ii) obligates the
Company or any Subsidiary to bear the costs and expenses relating
to the maintenance, development and operation of such Subject
Interest in an amount not greater than the working interest of the
Company or such Subsidiary for such Subject Interest as set forth
in Exhibit A-2 and (iii) is free and clear of all liens, security
interests, collateral assignments, encumbrances, irregularities and
defects. It is specifically understood and agreed that the
existence of Permitted Encumbrances affecting any property will not
form the basis for a claim that the Company or any Subsidiary does
not have Defensible Title to such property.
"Deferred Adjustment Claim" is defined in Section 7.7(b).
"Delivery Date" is defined in Section 6.10.
"Deferred Matters Date" is defined in Section 7.7(b).
"Disposition Liabilities" is defined in Section 11.3.
"Due Diligence Benchmark" is defined in Section 6.6.
"Due Diligence Defect" is defined in Section 6.6.
"Due Diligence Defect Amount" is defined in Section
6.7.2.
"Due Diligence Defect Claim" is defined in Section
7.7(a).
"Environmental Defect" means a condition existing at the
Closing Date, whether known or unknown, with respect to the air,
land, soil, surface, subsurface strata, surface water,
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ground water or sediments that causes an Asset to be subject to
remediation under, or not in compliance with, any Environmental
Law. Notwithstanding the foregoing, no Environmental Defect will
exist as to any Asset unless the aggregate Environmental Defect
Amounts in respect of such Asset, when added to the aggregate Title
Defect Amounts in respect of such Asset, if any, exceed $35,000.
If an Environmental Defect exists pursuant to the preceding
sentence, the Environmental Defect Amount for such Environmental
Defect will include the entirety of such Environmental Defect
Amount, including the portion below such threshold amount.
"Environmental Defect Amount" is defined in Section
7.2.2(c)
"Environmental Defect Property" is defined in Section
7.2.2.(e).
"Environmental Laws" means all Laws relating to (a) the
control of any hazardous substance, contaminant, pollutant or
potential pollutant, (b) protection of the air, water, land or the
environment, (c) solid, gaseous or liquid waste generation,
handling, treatment, storage, disposal, transportation or
remediation, or (d) exposure to hazardous, toxic or other
substances alleged to be harmful, including but not limited to
asbestos, radon and polychlorinated biphenyls. "Environmental
Laws" will include, but not be limited to, the Clean Air Act, 42
U.S.C. Sec. 7401 et seq., the Clean Water Act, 33 U.S.C. Sec. 1251 et
seq., the Resource Conservation Recovery Act, 42 U.S.C. Sec. 6901 et
seq., the Superfund Amendments and Reauthorization Act, 42 U.S.C.
Sec. 11001 et seq., the Water Pollution Control Act, 33 U.S.C. Sec. 1251
et seq., the Safe Drinking Water Act, 42 U.S.C. Sec. 300f et seq., the
Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. Sec. 9601 et seq., the Toxic Substance Control Act, 15
U.S.C. Sec. 2601 et seq., and the Oil Pollution Act of 1990, 33 U.S.C.
Sec. 2701 et seq., as such laws have been amended or supplemented from
time to time through the Closing Date and the regulations
promulgated pursuant thereto through the Closing Date.
"Environmental Laws" shall not include the Occupational Safety and
Health Act, 29 U.S.C. Sec. 651 et seq., and other Laws relating to the
protection of workers or the control and regulation of working
conditions.
"Financial Statements" means the 1994 Audited
Consolidated Financial Statements of the Company set forth in
Exhibit B.
"Form" is defined in Section 8.5.
"GAAP" means generally accepted accounting principles, as
set forth in the opinions of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements
of the Financial Accounting Standards Board or in such opinions and
statements of such other entities as may be approved by a
significant segment of the accounting profession in the United
States of America.
"Governmental Authority" means (i) the United States of
America, (ii) any state, county or other governmental subdivision
within the United States of America and (iii) any court or any
governmental department, commission, board, bureau, agency or other
instrumentality of
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the United States of America or of any state, county or other
governmental subdivision within the United States of America.
"Hart-Scott Act" is defined in Section 13.1.
"Hydrocarbons" means crude oil, natural gas, casinghead
gas, condensate, sulphur, natural gas liquids and other liquid or
gaseous hydrocarbons (including CO2), and also refers to all other
minerals of every kind and character that may be covered by or
included in the Subject Interests.
"Income Taxes" is defined in Section 8.5.
"Indemnity Agreement" means the Indemnity Agreement dated
as of the Closing Date between Buyer and Seller, the form of which
is attached as Exhibit E.
"Interest Amount" means, in respect of the period from
the Balance Sheet Date through the day prior to the Closing Date,
all interest earned on net cash balances of the Company.
"Joint Venture" means any partnership, joint venture or
joint exploration arrangement with third parties (other than
operating, exploration or similar arrangements entered into in the
ordinary course of business) in which the Company or any Subsidiary
is a partner, venturer or participant and which is operated or
managed by the Company or any Subsidiary.
"Law" means any applicable statute, law, ordinance,
regulation, rule, ruling, order, restriction, requirement, writ,
injunction, decree or other official act of or by any Governmental
Authority.
"Losses and Obligations" is defined in Section 11.3.
"Material Defect Properties" is defined in Section 7.3.
"NGCC Indemnity" means the indemnity obligations of
Natural Gas Corporation of California under Section 10.3 of each of
the two Purchase and Sale Agreements, dated March 23, 1987 between
Natural Gas Corporation of California and PG&E Gas Supply
Corporation (a predecessor in interest to the Company).
"Non-Material Defect Properties" is defined in
Section 7.3.
"Permitted Encumbrances" means any of the following
matters:
(a) the terms, conditions, restrictions, exceptions,
reservations, limitations and other matters contained in the
agreements, instruments and documents (x) that create or
reserve to the Company or any Subsidiary its interests in any
of the Subject Interests or
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(y) that are listed in this Agreement or in any schedule or
exhibit to this Agreement, to the extent such terms, conditions,
restrictions, exceptions, reservations, limitations or other
matters (i) do not reduce (or effectively reduce, as in the case of
a net profits interest or production payment) the net revenue or
royalty interest of the Company or any Subsidiary in the Subject
Interests or increase the working interest of the Company or any
Subsidiary in the Subject Interests from that specified on Exhibit
A-2 and (ii) do not create liens on the Subject Interests other
than those permitted under the following provisions of this
definition;
(b) any (i) inchoate liens or inchoate charges
constituting or securing the payment of expenses that were
incurred incidental to maintenance, development, production,
or operation of the Assets for the purpose of developing,
producing or processing Hydrocarbons therefrom or therein and
(ii) materialman's, mechanics', repairman's, employees',
contractors', operators' or other similar liens or charges for
liquidated amounts arising in the ordinary course of business
for obligations that are not delinquent or, if delinquent,
that are being contested in good faith by appropriate action;
(c) any liens in respect of Taxes and assessments for
Taxes not yet delinquent;
(d) any liens or security interests created by Law
(including without limitation any Environmental Laws) or
reserved in oil and gas leases for bonus or rental or for
compliance with the terms under which the Subject Interests
are held, securing obligations that are not delinquent or, if
delinquent, that are being contested in good faith by
appropriate action;
(e) any obligations or duties affecting the Subject
Interests to any municipality or public authority with respect
to any franchise, grant, license, or permit, and all
applicable laws, rules and orders of Governmental Authority;
(f) (i) easements, rights-of-way, servitudes, permits,
surface leases and other rights in respect of surface
operations, pipelines, grazing, hunting, fishing, logging,
canals, ditches, reservoirs or the like or (ii) easements for
streets, alleys, highways, pipelines, telephone lines, power
lines, railways and other similar rights-of-way, on, over or
in respect of property owned or leased by the Company or any
Subsidiary or over which the Company or any Subsidiary owns
rights-of-way, easements, permits, or licenses, to the extent
such matters, individually or in the aggregate, do not
interfere materially with oil and gas operations on the
applicable Subject Interest;
(g) all production payments, mortgages, liens and
pledges in favor of lenders (including those under the Bank
Credit Agreement) or other parties set forth in Exhibit C;
(h) all lessor's royalties, overriding royalties, net
profits interests, carried interests, reversionary interests
and other burdens if the net cumulative effect of such burdens
does not operate to reduce the net revenue or royalty interest
or increase the
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working interest of the Company or any Subsidiary in the
Subject Interests as reflected in Exhibit A-2;
(i) preferential rights to purchase and similar
agreements;
(j) required third party consents to assignments and
similar agreements (not including preferential rights to
purchase and similar agreements, which are covered by (i)
above) so long as not triggered by the transactions
contemplated hereby or, if triggered by the transactions
contemplated hereby, with respect to which waivers or consents
are obtained or the appropriate time period for asserting such
rights has expired without an exercise of such rights;
(k) all rights to consent by, required notices to,
filings with, or other actions by governmental entities in
connection with the sale or conveyance of oil and gas leases
or interests therein if the same are customarily obtained
contemporaneously with or subsequent to such sale or
conveyance;
(l) production sale contracts, division orders,
contracts for sale, purchase, exchange, or processing of
Hydrocarbons (including obligations to the Municipal Gas
Authority of Georgia), unitization and pooling designations,
declarations, orders and agreements, operating agreements,
agreements of development, area of mutual interest agreements,
gas balancing or deferred production agreements, processing
agreements, plant agreements, pipeline, gathering and
transportation agreements, injection, repressuring and
recycling agreements, carbon dioxide purchase or sale
agreements, salt water or other disposal agreements, seismic
or geophysical permits or agreements, and other agreements
that are customary in the oil, gas and other mineral
exploration and development business or in the business of
processing of gas and gas condensate production for the
extraction of products therefrom, in each case, that
individually or in the aggregate are not such as to interfere
materially with the value of any Subject Interest, and do not
prevent the Company or any Subsidiary, as the case may be,
from receiving the proceeds of production from such Subject
Interest; and, provided that such agreements do not create
liens on the Subject Interests other than those permitted
under other provisions of this definition;
(m) all other liens, charges, encumbrances, contracts,
agreements, instruments, obligations, defects and
irregularities affecting any Subject Interest that
individually or in the aggregate are not such as to interfere
with the operation, value or use of such Subject Interest, and
do not prevent the Company or any Subsidiary, as the case may
be, from receiving the proceeds of production from such
Subject Interest;
(n) any encumbrance, title defect or other matter
(whether or not constituting a Title Defect) waived or deemed
waived by Buyer pursuant to Section 7.2; and
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(o) any agreement, contract, lease, instrument, permit,
amendment or extension entered into by the Company or any
Subsidiary in accordance with Section 8.1 or 8.2.
"Post-Closing Periods" is defined in Section 8.5(a).
"Pre-Closing Defect" is defined in Section 6.10.
"Pre-Closing Defect Amount" is defined in Section 6.10.
"Pre-Closing Defect Claim" is defined in Section 7.7(a).
"Pre-Closing Periods" is defined in Section 8.5.
"Producing Properties" means those Subject Interests that
are identified and set forth in Part One of Exhibit A-2.
"Purchase Price" is defined in Section 3.1.
"Refund Limit" is defined in Section 7.6.2.
"Reimbursement Amount" is defined in Section 7.6.1.
"Remaining Deductible" is defined in Section 7.3(a).
"Remediation" means actions taken to correct an
Environmental Defect and implement the terms of a written plan that
sets forth the actions to be taken to effect any remediation
necessary to bring an Asset into compliance with applicable
Environmental Laws.
"Reports" means the reserve and/or property reports or
schedules identified in Exhibit D as well as any schedules included
in Exhibit D.
"Representation and Covenant Defect" is defined in
Section 6.9.1.
"Representation and Covenant Defect Amount" is defined in
Section 6.9.3.
"Scheduled (Negative) Imbalances" means, with respect to
the Producing Properties to which the Subject Interests are
attributable and without duplication, the sum (expressed in Mcfs)
of (i) the aggregate make-up, prepaid or other volumes of
Hydrocarbons, that the Company or any Subsidiary was obligated as
of the Balance Sheet Date, on account of prepayment, advance
payment, take-or-pay, gas balancing or similar obligations, to
deliver from the Subject Interests after the Balance Sheet Date
without then or thereafter being entitled to receive full payment
therefor and (ii) to the extent same are not covered by clause (i)
above, the aggregate pipeline or processing plant imbalances or
overdeliveries for which the Company or any Subsidiary was
obligated as of the Balance Sheet Date to deliver or pay
Hydrocarbons or cash to any pipeline,
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gatherer, transporter, processor, co-owner or purchaser in
connection with any Hydrocarbons attributable to the Subject
Interests.
"Scheduled (Positive) Imbalances" means, with respect to
the Producing Properties to which the Subject Interests are
attributable and without duplication, the sum (expressed in Mcfs)
of (i) the aggregate make-up, prepaid or other volumes of
Hydrocarbons, that the Company or any Subsidiary was entitled as of
the Balance Sheet Date, on account of prepayment, advance payment,
take-or-pay, gas balancing or similar obligations, to receive from
the Subject Interests after the Balance Sheet Date without then or
thereafter being obligated to make any payment therefor and (ii) to
the extent same are not covered by clause (i) above, the aggregate
pipeline or processing plant imbalances or underdeliveries for
which the Company or any Subsidiary was entitled as of the Balance
Sheet Date to receive Hydrocarbons or cash from any pipeline,
gatherer, transporter, processor, co-owner or purchaser in
connection with any Hydrocarbons attributable to the Subject
Interests.
"Section 29 Tax Credit Defect" is defined in Section 6.8.
"Section 29 Tax Credit Defect Amount" is defined in
Section 6.8.
"Seller Parent Company" means Pacific Gas and Electric
Company and any subsidiary or affiliate thereof, other than Seller,
the Company and the Subsidiaries.
"Stipulated Value" means the value of each Subject
Interest set forth in Exhibit A-2, which value is stipulated solely
for purposes of calculating any adjustment to the Purchase Price in
accordance with Article VII and not for any other purpose
including, but not limited to, any purchase price allocation
requirements of Section 338 of the Code.
"Stock" is defined in Section 2.1.
"Subject Interests" means all interests presently owned
by the Company or any Subsidiary by instruments recorded in the
Counties or Parishes set forth in Exhibit A-2 and in federal leases
described in Exhibit A-2, or which the Company or any Subsidiary is
entitled to receive by reason of any participation, joint venture,
farm-in, farmout, operating or other agreement, in and to the oil,
gas and/or mineral leases, lands, permits, licenses, concessions,
leasehold estates, fee, royalty and overriding royalty interests
described in Exhibit A-2. With respect to Exhibit A-2, Part Two-1
through -5, the Subject Interests include only acres described
under the column "Our Undev Net Acres."
"Subsidiary" means any corporation at least a majority of
the voting shares (i.e., shares entitled to vote for the election
of directors, but excluding shares entitled so to vote only upon
the happening of some contingency unless such contingency will have
occurred) of which are owned directly or indirectly by the Company.
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"Subsidiary Stock" means the issued and outstanding
shares of capital stock of each Subsidiary.
"Tax" or "Taxes" means any federal, state, local, foreign
and other taxes, assessments, fees and other governmental charges,
including without limitation taxes relating to income, gross
receipts, net proceeds, alternative or add-on minimum, ad valorem,
value added, turnover, sales, use, property (tangible and
intangible), stamp, lease, user, excise, duty, franchise, transfer,
license, withholding, payroll, employment, fuel, excess profits,
occupational, interest equalization, windfall profit, severance and
other similar governmental charges (including any interest thereon
and any penalties, additions to tax or additional amounts
applicable thereto).
"Tax Claim" is defined in Section 8.5.
"Tax Returns" is defined in Section 6.6.17.
"Title Defect" is defined in Section 7.4.
"Title Defect Amount" is defined in Section 7.2.1(d).
"Title Defect Properties" is defined in Section 7.2.1(c).
1.2 Accounting Terms. For the purposes of this Agreement,
all accounting terms not otherwise defined in this Agreement will
have the meanings assigned to such terms in accordance with GAAP.
1.3 References to Instruments. Unless the context otherwise
indicates, references in this Agreement to a particular section,
exhibit or schedule are to the corresponding section of, or the
corresponding exhibit or schedule to, this Agreement.
1.4 Singular and Plural. The definitions contained in
Section 1.1 are equally applicable to both the singular and plural
form of the terms defined in such Section.
1.5 Certain Terms. As used in this Agreement, the term
"knowledge" means actual knowledge (without any requirement for
independent investigation or verification) of any fact,
circumstance or condition by the Designated Persons (as defined
below) of the party involved, and does not include (i) knowledge
imputed to the party involved by reason of knowledge of or notice
to any person, firm or corporation other than the Designated
Persons for such party or (ii) knowledge deemed to have been
constructively given by reason of any filing, registration or
recording of any document or instrument in any public record or
with any Governmental Authority. In the case of Seller, the
Company or the Subsidiaries, "Designated Persons" means any of the
following individuals: James D. Shiffer, Tony F. DiStefano, Stuart
W. Booth, Marilyn D. Johnson, Richard C. Jones, Michael J.
Donnelly, Joseph T. Williams, Kent E. Johnson, Don W. Moore, J.
Richard Moore, Lonnie T. Samford, Randall B. Wilson, Linda J.
Gould, William M. Middleton, C. Byron Behrens, Dennis R. Coe, Jim
L. Buron, Harvey J. Dupuy, Jr.,
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Charles L. Newell and Bruce R. Baum. In the case of Buyer,
"Designated Persons" means any of the executive officers of Buyer.
As used in this Agreement, the term "day" means any calendar day.
As used in this Agreement, all references to "dollars" or the
symbol "$" refer to lawful currency of the United States of
America.
ARTICLE II
SALE OF STOCK
2.1 Sale and Purchase. Subject to the terms and conditions
set forth in this Agreement, at the Closing Buyer will purchase and
acquire, and Seller will sell, assign, transfer, convey and deliver
to Buyer, in exchange for the Purchase Price, all of the issued and
outstanding shares of capital stock of the Company (the "Stock")
free and clear of all security interests, liens, adverse claims,
proxies, options, stockholders' agreements and other encumbrances.
The certificates representing the Stock will be duly endorsed in
blank by Seller or accompanied by stock powers duly executed in
blank. Seller agrees to cure any deficiencies with respect to the
endorsements of the certificates representing the Stock or with
respect to the stock powers accompanying any such certificates. At
the Closing, Buyer will pay the Purchase Price determined in
accordance with Article III.
2.2 Excluded Assets. At or before Closing Seller will cause
the Company and the Subsidiaries to take all actions necessary to
convey or distribute to Seller the following rights, interests,
assets and properties:
all right, title and interest of the Company or any Subsidiary
in and to the name "Pacific Gas and Electric" or "PG&E", any
name that includes the words "Pacific Gas and Electric" or
"PG&E" and any logo, service mark, copyright, trade name or
trademark associated with the name "Pacific Gas and Electric"
or "PG&E" or any variant of any of the above reasonably
related thereto or derived therefrom.
The foregoing rights, interests, assets and properties will not be
included in the term "Assets" and are expressly excluded from this
Agreement. At Closing and thereafter Seller and Buyer will take
all actions necessary to remove the name "PG&E" from the corporate
name of any of the Subsidiaries in which it appears and to change
such names to such names as Buyer will select by written notice to
Seller at least seven days prior to Closing. As soon as reasonably
possible after Closing, Buyer will cause the name "PG&E" and any
logo, service mark or trademark excluded under this Agreement to be
painted over or removed from the Assets.
2.3 Resolution of Intercompany Obligations and Bank Credit
Agreement.
(a) As reflected on the audited consolidated balance
sheet (the "Balance Sheet") of the Company as of December 31,
1994 (the "Balance Sheet Date"), contained in the Financial
Statements, certain intercompany receivables and intercompany
payables existed
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between the Company and certain Subsidiaries on the one hand
and Seller or Seller Parent Company on the other hand as of
the Balance Sheet Date. In the ordinary course of the
Company's business following the Balance Sheet Date and to the
Closing Date, changes have occurred and will occur in the
amounts of intercompany receivables and intercompany payables.
Except as otherwise set forth in this Agreement, all of such
intercompany payables and intercompany receivables that exist
at the Closing Date will be paid by the Company and the
Subsidiaries on the one hand, and the Seller and Seller Parent
Companies on the other hand, (a) at Closing, to the extent
practicable, and (b) in the ordinary course consistent with
past practice, to the extent payment at Closing is not
practicable. To the extent practicable, payment may be made
by offsetting payables and receivables, with a final net
payment by the Company or Seller as applicable. To the extent
Seller assumes or pays accrued liabilities reflected in the
books of the Company and the Subsidiaries as of the Balance
Sheet Date, the amount of such liabilities reflected in the
books and assumed or paid shall be treated as a payable from
the Company to the Seller generated in the ordinary course of
business consistent with past practice. To the extent the
Company or any Subsidiary assumes or pays accrued liabilities
reflected in the books of Seller as of the Balance Sheet Date,
the amount of such liabilities reflected in the books and
assumed or paid shall be treated as a payable from Seller to
the Company generated in the ordinary course of business
consistent with past practice. Except as otherwise
specifically set forth in this Agreement, all other
intercompany obligations and commitments (including without
limitation all past, present and future liabilities under the
NGCC Indemnity) shall be released at Closing pursuant to the
releases contemplated by Sections 10.2(o) and 10.3(k).
(b) At the Closing, a wholly owned subsidiary of the
Company is anticipated to be a party to an Amended and
Restated Credit Agreement dated as of February 22, 1995 with
Bank of America National Trust and Savings Association
("BOA"), as agent (the "Bank Credit Agreement"). On the
Closing Date, Buyer will cause all unpaid principal and all
accrued and unpaid interest and fees outstanding under the
Bank Credit Agreement to be repaid; provided that such amounts
need not be repaid on the Closing Date if, prior to or at the
Closing, Buyer, at its sole expense, obtains and delivers
releases, executed by BOA, as agent, fully releasing Seller
and Seller Parent Company of all liability under or with
respect to the Bank Credit Agreement, such releases to be in
form and substance reasonably acceptable to Seller.
(c) At or before Closing Seller will cause the Company
to convey or distribute to Seller an amount equal to the
Interest Amount. The Interest Amount will not be included in
the term "Assets" and it is expressly excluded from this
Agreement.
ARTICLE III
PURCHASE PRICE AND PAYMENT
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3.1 Purchase Price. The purchase price that will be payable by
Buyer to Seller for the Stock (the "Purchase Price") will be
$340,000,000. The Purchase Price, subject to such closing
adjustments, if any, as are expressly provided for in this
Agreement, will be paid by Buyer to Seller at Closing by means of
a completed federal funds transfer to the account of Seller at
Wells Fargo Bank, N.A., San Francisco, California, the account
number of which will be given to Buyer by Seller at least 48 hours
before the Closing (or such other account of Seller in the United
States as may be designated in writing by Seller to Buyer at least
48 hours before the Closing).
3.2 Stipulated Value Allocations.
(a) The Aggregate Stipulated Value is allocated to the
various Subject Interests in the manner and in accordance with
the Stipulated Values set forth in Exhibit A-2. Seller and
Buyer acknowledge that this is a proper allocation of the
Aggregate Stipulated Value solely for purposes of any
adjustments to or refunds of the Purchase Price as provided
for in this Agreement and not for any other purpose, including
without limitation any purchase price allocation requirements
of Section 338 of the Code.
(b) To the extent that matters giving rise to an
adjustment to or refund of the Purchase Price affect only an
undivided interest in a Subject Interest, such undivided
interest shall be deemed to have a stipulated value that is
proportionate to the stipulated value allocated to the
entirety of such Subject Interest.
ARTICLE IV
SELLER'S REPRESENTATIONS
Seller hereby represents to Buyer that:
4.1 Ownership of the Stock. Seller owns, beneficially and of
record, good and marketable title to the Stock, which constitutes
all of the issued and outstanding capital stock of the Company,
free and clear of all security interests, liens, adverse claims,
proxies, options, stockholders' agreements and other encumbrances.
At the Closing, subject to the terms and conditions of this
Agreement, Seller will convey to Buyer good and marketable title to
all of the Stock, free and clear of all security interests, liens,
adverse claims, proxies, options, stockholders' agreements and
other encumbrances. There exist no options, warrants,
subscriptions or other rights to purchase, or securities
convertible into or exchangeable for, capital stock of the Company.
4.2 Organization and Good Standing; Qualification.
(a) The Seller is a corporation duly organized, validly
existing and in good standing under the laws of its state of
incorporation, with all requisite corporate power and
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authority to carry on the business in which it is engaged, to
own the properties it owns, to execute and deliver this
Agreement and to consummate the transactions contemplated
hereby.
(b) The Company and each Subsidiary is a corporation
duly organized, validly existing and in good standing under
the laws of its state of incorporation, with all requisite
corporate power and authority to carry on the business in
which it is engaged and to own the properties it owns. The
Company and each Subsidiary is duly qualified to do business
and is in good standing in all jurisdictions where the nature
of its business makes such qualification necessary.
4.3 Capitalization. The authorized capital stock of the
Company consists of 1,000 shares of common stock, par value $.01
per share, of which 100 shares are issued and outstanding, and no
shares of such capital stock are held in the treasury of the
Company. All of the issued and outstanding shares of capital stock
of the Company are duly authorized, validly issued, fully paid and
nonassessable.
4.4 Authorization and Validity. The execution, delivery and
performance by Seller of this Agreement and the other agreements
contemplated hereby to which Seller is or will be a party, and the
consummation by Seller of the transactions contemplated hereby and
thereby, have been duly authorized by Seller. This Agreement has
been, and each other agreement contemplated hereby to which Seller
is or will be a party will as of the Closing Date be, duly executed
and delivered by Seller and constitutes or will constitute the
legal, valid and binding obligation of Seller, enforceable against
Seller in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and subject to principles of equity and
public policy that affect enforceability of agreements generally.
4.5 Subsidiaries and Joint Ventures.
(a) The Company does not own, directly or indirectly,
any Subsidiary except as listed in Schedule 4.5(a). All
issued and outstanding shares of Subsidiary Stock are duly
authorized and validly issued and outstanding, fully paid and
nonassessable and are owned by the Company free and clear of
all security interests, liens, adverse claims, proxies,
options, stockholders' agreements and other encumbrances.
There are in existence no options, warrants or similar rights
granted by any Subsidiary, or any agreements to which any
Subsidiary is a party, for the issuance or sale by it of any
securities except to the Company.
(b) Except as listed on Schedule 4.5(b), neither the
Company nor any Subsidiary owns, directly or indirectly, any
interest in any Joint Venture.
4.6 Consents. Except for filings and approvals required
under the Hart-Scott Act, no consent, authorization, exemption,
franchise, approval, permit or license of, or filing with, any
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Governmental Authority is required for Seller to sell the Stock to
Buyer as contemplated by this Agreement.
4.7 Financial Statements. The Company has furnished to Buyer
the Financial Statements. The Financial Statements fairly present,
in accordance with GAAP applied on a basis consistent with prior
periods, the consolidated financial position and results of
operations and cash flows of the Company and the Subsidiaries as of
the dates and for the periods indicated.
4.8 No Violation. Neither the execution, delivery or
performance of this Agreement or the other agreements contemplated
hereby nor the consummation of the transactions contemplated hereby
or thereby will (i) conflict with, or result in a violation or
breach of the terms, conditions and provisions of, or constitute a
default under, the Articles of Incorporation or Bylaws of Seller or
any material agreement, indenture or other instrument under which
Seller is bound or (ii) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any Governmental
Authority having jurisdiction over Seller or the properties or
assets of Seller.
4.9 Finder's Fee. None of Seller, the Company or any
Subsidiary has incurred any obligation for any finder's, broker's
or agent's fee in connection with the transactions contemplated
hereby, except that Seller will pay Goldman, Sachs & Co. a fee in
consideration for advice with respect to the sale of the Stock.
4.10 Representations True at Closing. All representations
made by Seller in this Article IV will be true on the Closing Date.
ARTICLE V
BUYER'S REPRESENTATIONS
Buyer represents to Seller that:
5.1 Organization and Good Standing. Buyer is a corporation
duly organized, validly existing and in good standing under the
laws of the State of Texas, with all requisite corporate power and
authority to carry on the business in which it is engaged, to own
the properties it owns, to execute and deliver this Agreement and
to consummate the transactions contemplated hereby.
5.2 Authorization and Validity. The execution, delivery and
performance by Buyer of this Agreement and the other agreements
contemplated hereby to which Buyer is or will be a party, and the
consummation of the transactions contemplated hereby and thereby,
have been duly authorized by Buyer. This Agreement has been, and
each other agreement contemplated hereby to which Buyer is or will
be a party will as of the Closing Date be, duly executed and
delivered by Buyer and constitutes or will constitute legal, valid
and binding obligations of Buyer, enforceable against Buyer in
accordance with their respective terms, except as may be limited by
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applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and subject to principles of equity and
public policy that affect enforceability of agreements generally.
5.3 No Violation. Neither the execution, delivery or
performance of this Agreement or the other agreements contemplated
hereby nor the consummation of the transactions contemplated hereby
or thereby will (i) conflict with, or result in a violation or
breach of the terms, conditions and provisions of, or constitute a
default under, the Articles of Incorporation or Bylaws of Buyer or
any material agreement, indenture or other instrument under which
Buyer is bound or (ii) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any Governmental
Authority having jurisdiction over Buyer or the properties or
assets of Buyer.
5.4 Finder's Fee. Buyer has not incurred any obligation for
any finder's, broker's or agent's fee in connection with the
transactions contemplated hereby, except that Buyer has engaged
Morgan Stanley & Co. Incorporated to render a fairness opinion in
connection therewith.
5.5 Absence of Bankruptcy Proceedings. There are no
bankruptcy, reorganization or arrangement proceedings pending
against, being contemplated by, or to Buyer's knowledge threatened
against, Buyer.
5.6 Experienced Investor, Etc. Buyer is an experienced and
knowledgeable investor in the oil and gas business and is an
"accredited investor" as defined in Regulation D promulgated under
the Securities Act of 1933, as amended. Prior to entering into
this Agreement, Buyer was advised by and has relied solely on its
own legal, tax and other professional counsel concerning this
Agreement and the Company and the value of the Stock. Buyer is
acquiring the Stock for its own account and not for distribution or
resale. Buyer acknowledges that it understands that (i) the sale
of the Stock has not been registered under any federal or state
securities laws, (ii) the Stock is being sold hereunder in reliance
on exemptions from such registration based in part on the
representations of Buyer set forth herein and (iii) the Stock
cannot be resold by Buyer unless such resale is registered under
applicable federal and state securities laws or exemptions from
such registration are available.
ARTICLE VI
ACCESS TO INFORMATION AND INSPECTION; DUE DILIGENCE
6.1 Records and Files. From the date hereof until the Closing
Date, Seller will give or cause to be given to Buyer and its
representatives at reasonable times during normal business hours
reasonable (i) access to examine, at their actual location, all
Assets and all books, records, abstracts of title, title opinions,
title files, ownership maps, lease files, assignments, division
orders and agreements pertaining to the Company, any Subsidiary and
the Assets insofar as the same may now be in existence and in the
possession or control of Seller, the Company or any Subsidiary,
except for items covered by Section 6.2 and (ii) opportunity to
interview the
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employees and representatives of Seller, the Company and the
Subsidiaries regarding the Assets and the business of the Company
and the Subsidiaries.
6.2 Other Files. Prior to Closing, Seller will make
available to Buyer for inspection by Buyer at reasonable times
during normal business hours at their actual location, all
geological, seismic, geophysical, production and engineering books,
records and data in possession or control of Seller, the Company or
any Subsidiary pertaining to the Company, any Subsidiary or the
Assets, except for records or data that Seller, the Company or any
Subsidiary is prevented by contractual obligations with third
parties from disclosing to Buyer.
6.3 Environmental Assessment and Inspection. From the date
hereof until 180 days after the Closing Date, Buyer shall have the
right (subject to third party operator approval, which Seller will
use reasonable efforts to obtain) to make an environmental
assessment of the Assets. Buyer and its agents shall have the
right (subject to third party operator approval, which Seller will
use reasonable efforts to obtain) to enter upon the Assets and all
facilities thereon at reasonable times and at Buyer's sole risk,
cost and expense, for the purpose of conducting reasonable
inspections of the same, conduct soil and water tests and borings,
and generally conduct such tests, examinations, investigations and
studies as may be necessary or appropriate for the preparation of
appropriate engineering and other reports in relation to the
Assets, their environmental condition and the presence of hazardous
substances; provided, however, Buyer shall repair any damage to the
Assets resulting from such inspections or tests and Buyer does
hereby indemnify and hold harmless Seller, the Company and the
Subsidiaries from and against any and all losses, costs, damages,
obligations, claims, liabilities, expenses or causes of action
arising from Buyer's inspection of the Assets or tests, including,
without limitation, claims for personal injuries, property damage
and reasonable attorney fees (except to the extent caused by the
gross negligence or willful misconduct of the Company or the
Subsidiaries). During Seller's investigation of an asserted
Environmental Defect pursuant to Section 7.2.2(d), Seller shall
have the right (subject to third party operator approval, which
Buyer will use reasonable efforts to obtain) to make an
environmental assessment of the Assets subject to asserted
Environmental Defects. Seller and its agents shall have the right
(subject to third party operator approval, which Buyer will use
reasonable efforts to obtain) to enter upon the Assets subject to
asserted Environmental Defects and all facilities thereon at
reasonable times and at Seller's sole risk, cost and expense, for
the purpose of conducting reasonable inspections of the same,
conduct soil and water tests and borings, and generally conduct
such tests, examinations, investigations and studies as may be
necessary or appropriate for the preparation of appropriate
engineering and other reports in relation to the Assets subject to
asserted Environmental Defects, their environmental condition and
the presence of hazardous substances; provided, however, Seller
shall repair any damage to the Assets subject to asserted
Environmental Defects resulting from such inspections or tests and
Seller does hereby indemnify and hold harmless Buyer, the Company
and the Subsidiaries from and against any and all losses, costs,
damages, obligations, claims, liabilities, expenses or causes of
action arising from Seller's inspection of the Assets subject to
asserted Environmental Defects or tests, including, without
limitation, claims for personal injuries, property damage and
reasonable attorney fees (except to the extent caused by the gross
negligence or willful misconduct of Buyer, the Company or the
Subsidiaries).
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6.4 Confidentiality Agreement. All information made
available to Buyer pursuant to this Agreement will be maintained
confidential by Buyer as provided in that certain letter agreement
regarding confidentiality dated March 10, 1995, between the Company
and Buyer (the "Confidentiality Agreement"), the terms of which are
incorporated into this Agreement by reference and made a part
hereof as if the term "DALEN" and references to "we" and "us" used
therein included Seller within the meaning of such terms. Buyer
will further take whatever steps may be necessary to ensure that
Buyer's employees, consultants and agents comply with the
provisions of this Article VI and the provisions of the
Confidentiality Agreement.
6.5 Geophysical Data. For purposes of this Article VI,
seismic and geophysical records and data will include (to the
extent in existence and in the possession or control of the Company
or any Subsidiary), but not be limited to, basic field seismic
tapes, observer's logs, surveyor's notes, base maps showing shot
point locations and all other information necessary to allow
complete reprocessing thereof, subject to the limitations referred
to in Section 6.2 as to contractual obligations with third parties.
6.6 Due Diligence Defect. The parties acknowledge that for
purposes of this Agreement it is necessary to establish a list of
due diligence benchmarks against which the results of the due
diligence to be completed by Buyer prior to the Closing Date can be
assessed. The sole purpose of these due diligence benchmarks is
for use in determining Due Diligence Defect Amounts, if any, which
will be utilized to determine whether Buyer is entitled to a refund
of a portion of the Purchase Price (subject to the Refund Limit)
and whether Buyer's condition to its obligations set forth in
Section 9.2(c) has been satisfied. The following subsections of
this Section 6.6 (the "Due Diligence Benchmarks") are not intended
to be, and shall not be construed as, statements, representations
or warranties of Seller or any other party (and Seller specifically
does not represent that all of the Due Diligence Benchmarks are
true). Rather, the Due Diligence Benchmarks shall serve only as
benchmarks for purposes of determining Due Diligence Defect Amounts
and whether such condition to Closing has been satisfied, and
Seller shall have no liability for any untrue statement expressed
in the Due Diligence Benchmarks except as a result of a refund of
a portion of the Purchase Price pursuant to Section 7.6 (subject to
the Refund Limit). For the purposes of this Agreement, "Due
Diligence Defect" means a fact or circumstance that causes any one
or more of the following Due Diligence Benchmarks to be untrue with
respect to the Company or any Subsidiary, as the case may be, as of
the date hereof:
6.6.1 No Violation. Except as set forth on Schedule
6.6.1, neither the execution, delivery or performance of this
Agreement or the other agreements contemplated hereby nor the
consummation of the transactions contemplated hereby or
thereby will (i) conflict with, or result in a violation or
breach of the terms, conditions or provisions of, or
constitute a default under, the Certificate of Incorporation
or Bylaws of the Company or any agreement, indenture or other
instrument under which the Company is bound or to which the
Stock or any of the Assets are subject (other than the Bank
Credit Agreement), or result in the creation or imposition of
any security interest, lien, adverse claim or encumbrance upon
the Stock or any of the Assets, or (ii) violate or conflict
with any judgment, decree, order, statute, rule or regulation
of any court or any Governmental
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Authority having jurisdiction over the Company, the Stock or
the Assets. Except as set forth on Schedule 6.6.1, none of
the Assets (other than Subject Interests) are subject to a
preferential purchase right, third party consent to assignment
requirement or similar right or restriction that will be
triggered upon the execution and delivery of this Agreement or
the other agreements contemplated hereby or the consummation
of the transactions contemplated hereby or thereby.
6.6.2 Gas Imbalances. Schedule 6.6.2 contains an
accurate list of all Scheduled (Negative) Imbalances and all
Scheduled (Positive) Imbalances as of the Balance Sheet Date.
6.6.3 Assets, Liabilities and Obligations. Except as
set forth in Schedule 6.6.3, the Financial Statements reflect
all assets and liabilities of the Company and the Subsidiaries
as of the Balance Sheet Date, accrued, contingent or
otherwise, arising out of transactions effected or events
occurring on or prior to the Balance Sheet Date. Except as
set forth in the Financial Statements, neither the Company nor
any Subsidiary is liable upon or with respect to, or obligated
in any other way to provide funds in respect of or to
guarantee, any debt, obligation or dividend of any person,
corporation, association, partnership, joint venture, trust or
other entity, except as may have occurred in the ordinary
course of business.
6.6.4 Employee Matters.
(a) Employee Policies and Procedures. Subject to
applicable Law, all employee manuals, policies, procedures and
work-related rules that apply to employees of the Company or
any Subsidiary (excluding each of those items referred to in
Subsection 6.6.5) ("Employee Policies and Procedures") can be
amended or terminated at will by the Company or the
appropriate Subsidiary as the case may be.
(b) Discrimination. Except for matters described on
Schedule 6.6.4 or 6.6.10, neither the Company nor any
Subsidiary has received any written claim of any unfair labor
practice or illegal discrimination on the basis of race,
color, religion, sex, national origin, age or handicap in its
employment conditions or practices. Except as otherwise
ultimately may be determined with respect to the matters
described on Schedule 6.6.4 or 6.6.10, neither the Company nor
any Subsidiary has engaged in any unfair labor practice or
illegal discrimination on the basis of race, color, religion,
sex, national origin, age or handicap in its employment
conditions or practices.
(c) Labor Disputes and Charges. Except as set forth on
Schedule 6.6.4 or 6.6.10, there are no existing or, to
Seller's knowledge, threatened labor strikes, disputes,
grievances, controversies or other labor troubles affecting
the Company or any Subsidiary.
6.6.5 Employee Benefit Plans.
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(a) Identification. Schedule 6.6.5 contains a complete
and accurate list of all employee benefit plans (the "Employee
Benefit Plans") (within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA")) (i) sponsored by the Company or any Subsidiary,
(ii) to which the Company or any Subsidiary contributes on
behalf of its employees, (iii) with respect to which the
Company or any Subsidiary participates on behalf of their
employees or (iv) previously sponsored or contributed to by
the Company or any Subsidiary on behalf of its employees
within the three years preceding the date hereof. Except as
set forth in Schedule 6.6.5, each of the Employee Benefit
Plans can be terminated or amended at will by the Company or
the appropriate Subsidiary, as the case may be, with no
unfunded liability to the Company or any Subsidiary. No
unwritten amendment exists with respect to any Employee
Benefit Plan.
(b) Compliance. Each Employee Benefit Plan has been
administered and maintained in compliance with all Laws. No
Employee Benefit Plan is currently the subject of an audit,
investigation, enforcement action or other similar proceeding
conducted by any Governmental Authority. No prohibited
transactions (within the meaning of Section 4975 of the Code)
have occurred with respect to any Employee Benefit Plan. No
pending or, to the knowledge of Seller, threatened claims,
suits or other proceedings exist with respect to any Employee
Benefit Plan other than normal benefit claims filed by
participants or beneficiaries.
(c) Qualification. A favorable determination letter or
ruling has been received from the Internal Revenue Service as
to the current qualified status of each Employee Benefit Plan
intended to be qualified within the meaning of Section 401(a)
of the Code and/or tax-exempt within the meaning of
Section 501(a) of the Code. No proceedings exist or, to
Seller's knowledge, have been threatened against the Company
or any Subsidiary that would result in the revocation of any
such favorable determination letter or ruling.
(d) Funding Status. No accumulated funding deficiency
(within the meaning of Section 412 of the Code), whether
waived or unwaived, exists with respect to any Employee
Benefit Plan. With respect to each Employee Benefit Plan
subject to Title IV of ERISA, the assets of each such plan are
at least equal to the liabilities that result if all employees
were fully vested and terminated employment and the plan is
terminated as of the Closing Date. With respect to each
Employee Benefit Plan described in Section 501(c)(9) of the
Code, the assets of such plan are at least equal in value to
the present value of accrued benefits under such plan as of
the date hereof.
(e) Multiemployer Plans. Neither the Company nor any
Subsidiary is or ever has been obligated to contribute to a
multiemployer plan within the meaning of Section 3(37) of
ERISA.
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(f) PBGC. No facts or circumstances exist that would
result in the imposition of liability against Buyer by the
Pension Benefit Guaranty Corporation as a result of any act or
omission by the Company or any Subsidiary. No reportable
event (within the meaning of Section 4043 of ERISA) for which
the notice requirement has not been waived has occurred with
respect to any Employee Benefit Plan subject to the
requirements of Title IV of ERISA.
(g) Retirees. Except as set forth on Schedule 6.6.5(g)
and except as required by Law, neither the Company nor any
Subsidiary has any obligation or commitment to provide
medical, dental or life insurance benefits to or on behalf of
any of its employees who may retire or any of its former
employees who have retired from employment with the Company or
any Subsidiary, including those receiving disability benefits.
6.6.6 Conduct of Business. Except as set forth in
Schedule 6.6.6, since the Balance Sheet Date, the business of
the Company and the Subsidiaries has been conducted in a
manner consistent with past practices of the Company or the
Subsidiary, as appropriate, and in the ordinary course of
business. In addition, except as set forth in Schedule 6.6.6,
since the Balance Sheet Date, neither the Company nor any
Subsidiary has
(a) incurred any indebtedness for borrowed money or
issued or sold any debt securities;
(b) suffered any damage or destruction to or loss of any
Assets, including by fire, explosion, accident, earthquake,
act of public enemy, act of God or similar casualty event,
(whether or not covered by insurance) that could materially
and adversely affect the subject Asset;
(c) formed, or acquired or disposed of any interest in,
any corporation or other entity that is characterized as a
partnership under the Code;
(d) sold, granted or otherwise disposed of, directly or
indirectly, any of its capital stock or securities or any
rights to acquire such capital stock or securities, or agreed
to change the terms and conditions of such rights; or
(e) with respect to the Company only, paid or declared
any distribution, payment or dividend of any kind on capital
stock of the Company.
6.6.7 Commitments. Neither the Company nor any
Subsidiary is in default under, nor has any event occurred
that with the giving of notice or lapse of time or both would
constitute a default by the Company or any Subsidiary under,
any contract or arrangement that involves the payment of
money.
6.6.8 Insurance. The Company and the Subsidiaries
carry property, liability, workers' compensation and such
other types of insurance as is customary in the industry
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of the insured. All of the policies under which such
insurance is provided are valid and enforceable policies,
issued by insurers of recognized responsibility in amounts and
against such risks and losses as is customary in the industry
of the insured. Such insurance will be outstanding and duly
in force without interruption up to the Closing Date.
6.6.9 Compliance with Laws. The Company and each of
the Subsidiaries has complied with all Laws and has filed with
the proper authorities all necessary statements and reports.
There are no existing violations by the Company, any
Subsidiaries or Seller of any Law that would adversely affect
the property or business of the Company or any Subsidiary.
The Company and each of the Subsidiaries possesses all
necessary licenses, franchises, permits and governmental
authorizations, in full force and effect, to conduct its
business as now conducted (collectively, "Governmental
Authorizations"). Neither the Company nor any Subsidiary is
in violation of any Governmental Authorization. No proceeding
is pending, or to the knowledge of Seller, the Company, or any
Subsidiary, threatened, which purports to challenge, revoke or
limit any Governmental Authorization.
6.6.10 Litigation. Except as described in Schedule
6.6.10, there are no legal actions (including arbitration) or
administrative proceedings or investigations instituted
(including without limitation expropriation or forfeiture
proceedings), or to the knowledge of Seller, the Company or
any Subsidiary threatened, against or affecting, or that
reasonably could affect, the Company, any Subsidiary, any of
the Stock, any of the Assets or the business of the Company or
any Subsidiary. None of Seller, the Company or any Subsidiary
has knowledge of any set of facts or situation that is
reasonably likely to give rise to any such action, proceeding
or investigation that is reasonably likely to result in an
uninsured liability of the Company and/or the Subsidiaries in
excess of $1,000,000. None of Seller, the Company or any
Subsidiary is (i) subject to any continuing court or
administrative order, writ, injunction or decree applicable
specifically to the Company or any Subsidiary or to its
respective business, Assets, operations or employees or (ii)
in default with respect to any such order, writ, injunction or
decree.
6.6.11 Books of Account. The books of account of the
Company and the Subsidiaries have been kept accurately in the
ordinary course of business, the transactions entered therein
represent bona fide transactions and the revenues, expenses,
assets and liabilities of the Company and the Subsidiaries
have been properly recorded in such books, all in conformity
with GAAP.
6.6.12 No Affiliate Transactions. Between the Balance
Sheet Date and the Closing Date, neither the Company nor any
Subsidiary has sold or otherwise conveyed, and will not sell
or otherwise convey, any Assets reflected on the Balance Sheet
to Seller or Seller Parent Company other than in a manner
consistent with past practices of the Company or the
Subsidiary, as appropriate, and in the ordinary course of
business (except as provided in Sections 2.2, 2.3 and 10.4).
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6.6.13 Payout Balances. The payout balances with
respect to any of the Assets that are subject to future change
on account of reversionary interests, non-consent penalties or
similar agreements or arrangements set forth on Schedule
6.6.13 are correct as of the dates shown on such statements.
6.6.14 Derivatives. Except as set forth in Schedule
6.6.14, neither the Company nor any Subsidiary is, or has been
since the Balance Sheet Date, a party to any oil and gas swap,
collar, futures, hedging or similar agreement.
6.6.15 Hydrocarbon Sale Contracts. Except as set
forth on Schedule 6.6.15, the Assets are not subject to any
contract for the sale of Hydrocarbons, except those contracts
for the sale of Hydrocarbons that are terminable within 90
days or less. Except as set forth in Schedule 6.6.15, as of
the Balance Sheet Date, there existed no claims that have been
asserted against the Company or any Subsidiary by oil or gas
purchasers for any refund with respect to proceeds from the
sale of Hydrocarbons produced from the Assets. Except as set
forth in Schedule 6.6.15, the Company and the Subsidiaries are
currently receiving, with respect to Hydrocarbons produced
from all of the Assets, the prices provided for under the
applicable contract governing the purchase of the
Hydrocarbons. Except as set forth in Schedule 6.6.15, no
person has any call upon, option to purchase, or other right
with respect to the Company's or any Subsidiary's share of
production from the Assets, whether upon the transfer of any
of the Assets or otherwise.
6.6.16 Consents. Except for filings and approvals
required under the Hart-Scott Act, no consent, authorization,
exemption, franchise, approval, permit or license of, or
filing with, any Governmental Authority is required to
authorize, or is required in connection with, the execution,
delivery and performance of this Agreement or the other
agreements contemplated hereby or the performance of the
obligations contemplated hereby or thereby by or on the part
of the Company.
6.6.17 Taxes.
(a) Filing of Tax Returns. The Company and each
Subsidiary have duly and timely filed or will duly and timely
file (in accordance with any extensions duly granted by the
appropriate governmental agency, if applicable) with the
appropriate governmental agencies all returns (including
information returns) and reports, including all schedules or
attachments thereto, required by the United States or any
state or any political subdivision thereof or any foreign
jurisdiction to be filed on or before the Closing Date by the
Company and each Subsidiary in connection with any Tax ("Tax
Returns"). All such Tax Returns are, or will be, complete and
accurate and properly reflect the Taxes of the Company and
each Subsidiary for the periods covered hereby. Seller and
Seller Parent Company have duly and timely filed or will duly
and timely file (in accordance with any extensions duly
granted by the appropriate governmental agency, if applicable)
all consolidated and combined unitary Tax Returns required to
be filed for each taxable period through and including the
Closing Date which Tax Returns were required to include the
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Company or any of the Subsidiaries. All such Tax Returns are,
or will be, complete and accurate and properly reflect the
Taxes of the Seller and Seller Parent Company for the periods
covered thereby.
(b) Payment of Taxes. Seller, Seller Parent Company,
the Company and each Subsidiary have paid or accrued all Taxes
that have become due with respect to any Tax Returns that they
have filed.
(c) No Pending Deficiencies, Delinquencies, Assessments
or Audits. Except as described in Schedule 6.6.17(c), no Tax
deficiency or delinquency has been asserted against the
Company or any Subsidiary; there is no unpaid assessment,
proposal for additional Taxes, deficiency or delinquency in
the payment of any of the Taxes of the Company or any
Subsidiary that, to the knowledge of Seller, could be
asserted by any Tax authority; there is no Tax authority audit
of the Company or any Subsidiary pending and the results of
any completed audits are properly reflected in the Financial
Statements; neither the Company nor any Subsidiary has
violated any federal, state, local or foreign Tax law, except
where such violation would not have a material adverse effect;
and there are no pending claims for refund of Taxes filed by
the Company or any Subsidiary.
(d) Tax Liens. There are no liens for Taxes upon any
assets of the Company or any Subsidiary other than statutory
liens for Taxes not yet delinquent.
(e) All Withholding Requirements Satisfied. All monies
required to be withheld by the Company and each Subsidiary and
paid to governmental agencies for all Taxes (including any
amounts required to be withheld pursuant to Sections 1441
through 1446 of the Code) have been (i) collected or withheld
and either paid to the respective governmental agencies or set
aside in accounts for such purpose or (ii) properly reflected
in the Financial Statements.
(f) Request for Rulings. There are no outstanding
requests for rulings with any Tax or revenue authority that
would have a material adverse effect on the operations of the
Company and its Subsidiaries.
(g) Partnerships. Except as set forth in Schedule
6.6.17(g), neither the Company nor any Subsidiary owns any
interest in any entity that is characterized as a partnership
under the Code.
6.6.18 Accuracy of Records Furnished. The production
and lease operating expense records furnished to Buyer by the
Company in connection with the transactions contemplated
hereby, as well as the "Top Fields Marketing Arrangements
Summary - March 22, 1995" furnished to Buyer by the Company,
are materially accurate.
6.7 Special Matters Regarding Due Diligence Defects.
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6.7.1 Threshold Amount. Notwithstanding the
foregoing, no Due Diligence Defect will exist as to any fact
or circumstance that causes a Due Diligence Benchmark to be
untrue unless the sum of the Due Diligence Defect Amounts in
respect of such fact or circumstance exceeds $35,000. If a
Due Diligence Defect exists pursuant to the preceding
sentence, the Due Diligence Defect Amount for such Due
Diligence Defect will include the entirety of such Due
Diligence Defect Amount, including the portion below such
threshold amount.
6.7.2 Due Diligence Defect Amount. With respect to
each Due Diligence Defect, "Due Diligence Defect Amount" means
the amount of the loss, liability or diminution in value of
Assets (other than Subject Interests) that is directly
attributable to such Due Diligence Defect; provided however
that to the extent a Due Diligence Defect relates to an Asset
or liability reflected in the Financial Statements, the Due
Diligence Defect Amount with respect thereto shall mean only
the diminution in value of the Asset, or the increase in the
amount of the liability, from that reflected in the Financial
Statements.
6.7.3 Additional Due Diligence Defect. In addition
to the matters set forth above, it shall be a Due Diligence
Defect if the likely aggregate liability of the Company
(including interest) with respect to the matters covered by
clause (d) of Section 1 of the Indemnity Agreement (the
"Indemnity Agreement") to be entered into in substantially the
form of Exhibit E hereto (the "Likely Liability") exceeds
$1,500,000. The Due Diligence Defect Amount with respect to
such Due Diligence Defect shall be the amount of the Likely
Liability in excess of $1,500,000. Notwithstanding the
foregoing, the Due Diligence Defect Amount with respect to
such Due Diligence Defect shall be reduced by the amount by
which Seller, at its option, increases the indemnity amount
applicable to clause (d) of Section 1 of the Indemnity
Agreement above $1,500,000. Any disputes regarding the Likely
Liability will be determined in accordance with the provisions
of Section 7.7. Seller will use its reasonable efforts to
assist Buyer in locating all the, and in determining what,
data and information that it needs to make the determinations
required by this Section 6.7.3.
6.8 Section 29 Tax Credits.
6.8.1 Section 29 Tax Credit Defects. For purposes of
this Agreement, "Section 29 Tax Credit Defect" means a fact or
circumstance that causes the following sentence to be untrue.
Each well of the Company and each Subsidiary set forth on
Schedule 6.8.1 is qualified for tax credits under Section 29
of the Code.
6.8.2 Threshold Amount. Notwithstanding the
foregoing, no Section 29 Tax Credit Defect will exist unless
the Section 29 Tax Credit Defect Amount exceeds $35,000. If
a Section 29 Tax Credit Defect exists pursuant to the
preceding sentence, the Section 29 Tax Credit Defect Amount
for such Section 29 Tax Credit Defect will include the
entirety of such Section 29 Tax Credit Defect Amount,
including the portion below such threshold amount.
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6.8.3 Section 29 Tax Credit Defect Amount. Set forth
on Schedule 6.8.1 with respect to each well is the "Present
Value" of the tax credits under Section 29 of the Code for
purposes of this Agreement (in each case, the "Attributed Tax
Value"), which Attributed Tax Values total $14,687,000.
"Section 29 Tax Credit Defect Amount" means the aggregate
Attributed Tax Value of all wells set forth on Schedule 6.8.1
that are not qualified for tax credits under Section 29 of the
Code.
6.8.4 Notice of Section 29 Tax Credit Defects.
Within a reasonable time after discovery by Buyer, but in no
event later than 180 days after the Closing Date, Buyer will
notify Seller in writing of any matters that, in Buyer's
reasonable opinion, constitute Section 29 Tax Credit Defects.
For all purposes of this Agreement, Buyer will be deemed to
have waived any Section 29 Tax Credit Defects that Buyer fails
to assert as Section 29 Tax Credit Defects by written notice
given to Seller on or before 180 days after the Closing Date.
6.8.5 Section 29 Tax Credit Notice Requirements. To
be effective, Buyer's written notice of a Section 29 Tax
Credit Defect must (i) identify the specific Subject Interest
(or portion thereof) affected by the asserted Section 29 Tax
Credit Defect, (ii) describe the material facts that establish
the existence of a Section 29 Tax Credit Defect and the extent
of such Section 29 Tax Credit Defect, and (iii) calculate the
Section 29 Tax Credit Defect Amount that Buyer asserts is
attributable to such Section 29 Tax Credit Defect.
6.9 Representation and Covenant Matters.
6.9.1 Representation and Covenant Defects. For
purposes of this Agreement, "Representation and Covenant
Defect" means a fact or circumstance that constitutes a breach
of a representation of Seller set forth in Article IV or a
breach of a covenant of Seller set forth in Article VIII.
6.9.2 Threshold Amount. Notwithstanding the
foregoing, no Representation and Covenant Defect will exist as
to any fact or circumstance that constitutes a breach as
described in Section 6.9.1 unless the sum of the
Representation and Covenant Defect Amounts in respect of such
fact or circumstance exceeds $35,000. If a Representation and
Covenant Defect exists pursuant to the preceding sentence, the
Representation and Covenant Defect Amount for such
Representation and Covenant Defect will include the entirety
of such Representation and Covenant Defect Amount, including
the portion below such threshold amount.
6.9.3 Representation and Covenant Defect Amount.
With respect to each Representation and Covenant Defect,
"Representation and Covenant Defect Amount" means (i) with
respect to facts or circumstances that constitute a breach of
a representation of Seller set forth in Article IV (except a
breach of Section 4.7), the amount of loss, liability or
diminution in value that is directly attributable to such
Representation and
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Covenant Defect and (ii) with respect to facts or
circumstances that constitute a breach of a covenant of Seller
set forth in Article VIII or a breach of the representation of
Seller in Section 4.7, the amount of loss, liability or
diminution in value that is directly attributable to such
Representation and Covenant Defect; provided however that to
the extent such Representation and Covenant Defect relates to
an Asset or liability reflected in the Financial Statements,
the Representation and Covenant Defect Amount with respect
thereto shall mean only the diminution in value of the Asset,
or the increase in the amount of the liability, from that
reflected in the Financial Statements.
6.10 Pre-Closing Defect Amount. Seven days prior to the
Closing Date (the "Delivery Date"), Buyer will notify Seller in
writing of all matters Buyer has discovered during its due
diligence review that in Buyer's reasonable opinion constitute (a)
Representation and Covenant Defects, (b) Due Diligence Defects, (c)
Title Defects, (d) Environmental Defects and (e) Section 29 Tax
Credit Defects (collectively, "Pre-Closing Defects"). To be
effective, such notice must also state the specific Defect Amount
that Buyer attaches to each individual Pre-Closing Defect, a brief
description of the matter constituting the asserted Pre-Closing
Defect, appropriate supporting documents that are reasonably
available to Buyer to verify the existence of such asserted Pre-
Closing Defect, and any other information that would be required by
Sections 6.8.5, 7.2.1(b) or 7.2.2(b) with respect to such asserted
Pre-Closing Defect. The existence of all Pre-Closing Defects
(including the attempted cure thereof by Seller) and the final
aggregate amount of all Defect Amounts with respect to uncured
Pre-Closing Defects (the "Pre-Closing Defect Amount") will be
determined by agreement of Buyer and Seller, or, if disputes exist,
in accordance with the provisions of Section 7.7. Notwithstanding
the foregoing, Buyer will have the right to supplement its
notification pursuant to this Section prior to Closing to add any
Representation and Covenant Defects or Due Diligence Defects that
relate to events occurring between the Delivery Date and the
Closing Date (but will not have the right to supplement its
notification with respect to any events that occurred prior to the
Delivery Date).
6.11 Right to Cure. Seller will have the right, but not the
obligation, to cure any Pre-Closing Defects. If the Pre-Closing
Defect Amount timely asserted by Buyer pursuant to and in
accordance with Section 6.10 exceeds $12,000,000, and Buyer does
not waive the condition stated in Section 9.2(c), the parties agree
that, at the election of Seller, the Closing may be delayed for a
period of up to thirty (30) days to allow Seller the opportunity to
cure any Pre-Closing Defects to the extent necessary to satisfy
such condition, after which cure period the final Pre-Closing
Defect Amount shall be determined as set forth in Section 6.10.
6.12 Limitation on Multiple Types of Defects. Notwithstanding
any other provisions of this Agreement, in the event that a fact or
circumstance does or could constitute more than one type of Defect
under this Agreement, the fact or circumstance will be deemed to
constitute only one type of Defect as selected by Buyer in the
applicable notice to Seller setting forth such fact or circumstance
as a Defect.
6.13 Positive Adjustments. To the extent any representation
of Seller contained in Article IV or any covenant of Seller set
forth in Article VIII is discovered to be incorrect in a
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manner that results in a monetary benefit to the Company or any
Subsidiary in excess of $35,000, the amount of such benefit
(including the amount below such threshold) shall be offset against
all Pre-Closing Defects in calculating the Pre-Closing Defect
Amount. In addition, to the extent any Due Diligence Benchmark, or
any statement set forth in the second sentence of Section 6.8.1
(dealing with Section 29 Tax Credits), is untrue in a manner that
results in a monetary benefit to the Company or any Subsidiary in
excess of $35,000, the amount of such benefit (including the amount
below such threshold) shall be offset against all Pre-Closing
Defects in calculating the Pre-Closing Defect Amount.
6.14 Statements Regarding Representation of Financial
Condition. Notwithstanding anything in this Agreement to the
contrary, except as set forth in Section 4.7, Seller makes no
warranty or representation, express or implied, with respect to the
financial condition or results of operations, or the assets or
liabilities of the Company or any Subsidiary. Nothing in this
Agreement, however, will be construed to limit or otherwise qualify
the effectiveness of the representations made in Section 4.7.
ARTICLE VII
TITLE, ENVIRONMENTAL AND OTHER MATTERS
7.1 No Warranty or Representation Regarding Environmental
Laws or Title. Notwithstanding anything in this Agreement to the
contrary, Seller makes no warranty or representation, express or
implied, with respect to Environmental Laws, the Company's or any
Subsidiary's title to the Assets, or the accuracy or completeness
of the information, records and data now, heretofore or hereafter
made available to Buyer in connection with this Agreement
(including, without limitation, any description of the Assets,
pricing assumptions, potential for production of Hydrocarbons from
the Subject Interests or other matters contained in the Reports or
in any other material furnished to Buyer by Seller, the Company or
any Subsidiary or by any agent or representative of any of them).
Additionally, without limiting in any way the provisions of
Subsection 6.6.2, the parties recognize that there may be over or
under imbalances with respect to gas production or processing
attributable to certain Subject Interests and hereby agree that the
existence of such imbalances will not be deemed a Title Defect and
that no representation or warranty is made by Seller with respect
to such matters.
7.2 Buyer's Title and Environmental Review.
7.2.1 Title Review.
(a) Notice of Title Defects. Not later than 90 days
after the Closing Date, Buyer will notify Seller in writing of
any matters that, in Buyer's reasonable opinion, constitute
Title Defects with respect to the Company's or any
Subsidiary's title to all or any portion of the Subject
Interests. For all purposes of this Agreement, Buyer will be
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deemed to have waived any Title Defects that Buyer fails to
assert as Title Defects by written notice given to Seller on
or before 90 days after the Closing Date.
(b) Title Notice Requirements. To be effective, Buyer's
written notice of a Title Defect must include (i) the specific
Subject Interest (or portion thereof) affected by the asserted
Title Defect, (ii) a brief description of the matter
constituting the asserted Title Defect, (iii) the claimed
Title Defect Amount attributable thereto and (iv) supporting
documents reasonably available to Buyer that are reasonably
necessary for Seller (or a title attorney or examiner hired by
Seller) to verify the existence of such asserted Title Defect.
(c) Seller's Right to Cure Title Defects and Effect of
Failure to Cure. Seller will have until 180 days after the
Closing Date, at its cost and expense, if it so elects, but
without obligation, to cure all or a portion of asserted Title
Defects. If asserted Title Defects are waived by Buyer or
cured within such time, any such waived or cured Title Defects
will be deemed "Permitted Encumbrances". If Seller within
such time fails or refuses to cure any Title Defect of which
Buyer has given timely written notice as required above and
that Buyer has not waived, each portion of an undivided
interest in a Subject Interest affected by such uncured and
unwaived Title Defect will be a "Title Defect Property" and
all such portions will collectively be "Title Defect
Properties". Buyer no later than 270 days after the Closing
Date will elect by written notice to Seller, as Buyer's sole
and exclusive remedy, either to (x) waive such Title Defects,
which will then be deemed "Permitted Encumbrances" or
(y) subject to Section 7.3, cause the Company or any
Subsidiary to convey to Seller or Seller's designee those
portions of the Title Defect Properties that constitute
Material Defect Properties (together with all rights, titles
and interests attributable thereto), and subject to Section
7.6.2 (including, but not limited to, the Refund Limit set
forth therein) obtain a refund from Seller of a portion of the
Purchase Price equal to the aggregate amount of the Stipulated
Values of such Material Defect Properties. Notwithstanding
the foregoing, in the event Buyer elects to cause the Company
or such Subsidiary to convey Material Defect Properties to
Seller or Seller's designee as aforesaid, Seller, at its sole
option, may nevertheless elect, within 20 days after the
expiration of the 270-day period, that any such Material
Defect Properties not be conveyed to Seller or Seller's
designee, but be retained by the Company or such Subsidiary as
part of the Assets, in which case Seller, subject to Section
7.6.2 (including, but not limited to, the Refund Limit set
forth therein), will refund a portion of the Purchase Price
equal to the aggregate amount of Title Defect Amounts with
respect to such Material Defect Properties. Failure by Buyer
to make an election with respect to any Title Defect within
the aforesaid time period will be deemed an election to waive
such Title Defect. Failure of Seller to make an election to
refuse reconveyance of any Material Defect Property within the
aforesaid time period will be deemed an election to accept
such reconveyance. Buyer will not have the right to reduce,
or receive a refund of any portion of, the Purchase Price on
account of any Non-Material Defect Properties.
(d) Method of Determining Title Defect Amounts. The
"Title Defect Amount" means, with respect to each Title Defect
affecting a Title Defect Property, the amount by
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which the value of such Title Defect Property is impaired as
a result of the existence of such Title Defect, which amount
will be determined as follows:
(i) If the Title Defect relates to failure of title
to the entirety of the Company's or any Subsidiary's
interest in an Asset, the Title Defect Amount will be the
entire Stipulated Value of such Asset.
(ii) If the Title Defect relates to an undivided
interest in an Asset, the Title Defect Amount shall be an
amount that is proportionate to the Stipulated Value of
such Asset.
(iii) If the Title Defect results from a lien,
security interest, pledge or collateral assignment upon
one or more Assets (or a portion thereof) that is
liquidated in amount, then the Title Defect Amount will
be the amount necessary to remove such lien, security
interest, pledge or collateral assignment from the
Company's or any Subsidiary's title to such one or more
Assets (or a portion thereof).
(iv) If the Title Defect results from the Company or
any Subsidiary having a lesser net revenue interest in an
Asset than the net revenue interest specified therefor in
Exhibit A-2, the Title Defect Amount will be equal to the
product obtained by multiplying the Stipulated Value for
that Asset in Exhibit A-2 by a fraction, the numerator of
which is the reduction in the net revenue interest and
the denominator of which is the net revenue interest
specified for such Asset in Exhibit A-2.
(v) If the Title Defect results from the Company or
any Subsidiary having a greater working interest in an
Asset than the working interest specified therefor in
Exhibit A-2, the Title Defect Amount will be equal to the
present value (discounted at 10% compounded annually) of
the increase in the costs and expenses forecasted in the
Reports with respect to such Asset for the period from
and after the Balance Sheet Date that is attributable to
such increase in working interest.
(vi) If the Title Defect results from any matter not
described in paragraphs (i), (ii), (iii), (iv) or (v)
above, then the Title Defect Amount will be a portion of
the Stipulated Value set forth for that Asset in Exhibit
A-2, such portion to be equal to the difference between
the value of the Company's or such Subsidiary's title to
such Asset without such Title Defect and with such Title
Defect (assuming the value without such Title Defect to
be the Stipulated Value of such Asset set forth in
Exhibit A-2); provided that if such Title Defect is
reasonably susceptible of being cured, the Title Defect
Amount will be the reasonable cost and expense of curing
such Title Defect, if less.
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(vii) If a Title Defect is not effective or does
not affect a Title Defect Property throughout the entire
productive life of such Title Defect Property, such fact
will be taken into account in determining the Title
Defect Amount.
(viii) Each Title Defect Amount will be
determined without duplication of costs or losses, or any
other Title Defect Amount. For example, but without
limitation, if a lien affects more than one Title Defect
Property or the curative work with respect to one Title
Defect results (or is reasonably expected to result) in
the curing of any other Title Defect affecting the same
or another Title Defect Property, the amount necessary to
discharge such lien or the cost and expense of such
curative work will only be included in the Title Defect
Amount for one Title Defect Property and only once as a
Title Defect Amount.
(ix) If a Title Defect affects only a portion of an
Asset (as contrasted with an undivided interest in the
entirety of such Asset) and a portion of the Purchase
Price has not been allocated specifically to such portion
of an Asset in Exhibit A-2, then for purposes of
computing the Title Defect Amount, the Purchase Price
allocated to such Asset will be further allocated among
the portions of such Asset in a fair and reasonable
manner, taking into account the Stipulated Values set
forth in Exhibit A-2.
(x) No Title Defect Amount will be allowed on
account of and to the extent that an increase in the
Company's or any Subsidiary's working interest in a
property has the effect of proportionately increasing the
Company's or any Subsidiary's net revenue interest in
such property.
Notwithstanding anything in this Agreement to the contrary,
the aggregate Title Defect Amounts attributable to Title
Defects relating to a Subject Interest for which Buyer
receives a refund of a portion of the Purchase Price will
never exceed the Stipulated Value of that Subject Interest as
set forth in Exhibit A-2. Any disputes between Buyer and
Seller concerning the existence of a Title Defect and/or the
Title Defect Amount shall be subject to arbitration, as set
forth in Section 7.7 below, unless Buyer elects to waive such
Title Defect.
7.2.2 Environmental Review.
(a) Notice of Environmental Defects. Not later than 180
days after the Closing Date, Buyer will notify Seller in
writing of any matters that, in Buyer's reasonable opinion,
constitute Environmental Defects with respect to all or any
portion of the Assets. For all purposes of this Agreement,
Buyer will be deemed to have waived any Environmental Defects
that Buyer fails to assert as Environmental Defects by written
notice given to Seller on or before 180 days after the Closing
Date.
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(b) Environmental Notice Requirements. To be effective,
Buyer's written notice of an Environmental Defect must (i)
identify the specific Asset (or portion thereof) affected by
the asserted Environmental Defect, (ii) describe the material
facts, including the results of soil and/or groundwater
sampling or other analytical testing, which establish the
existence of an Environmental Defect and the extent of such
Environmental Defect, and (iii) calculate the Environmental
Defect Amount that Buyer asserts is attributable to such
Environmental Defect.
(c) Method of Determining Environmental Defect Amounts.
The "Environmental Defect Amount" means, with respect to any
Environmental Defect, the present value as of the Closing Date
of the most cost effective Remediation of the Environmental
Defect. Buyer's calculation of the Environmental Defect
Amount must describe the Remediation proposed for each
condition that contributes to the asserted Environmental
Defect, identify all assumptions used by the Buyer in
calculating the Environmental Defect Amount, including the
standards the Buyer asserts must be met to comply with
Environmental Laws existing as of the Closing Date, and
discount all costs to be incurred in connection with the
Remediation at an annual discount rate of 10%.
(d) Seller's Response to Environmental Notice. Seller
shall have a period of sixty (60) days following the receipt
of Buyer's notice of an asserted Environmental Defect in which
to investigate the material facts that Buyer has identified as
establishing the existence of the Environmental Defect.
During such sixty (60) day period, Buyer shall give or cause
to be given to Seller and its representatives at reasonable
times during normal business hours reasonable (i) access to
examine the Assets identified in the notice and to conduct
such soil and groundwater sampling and other testing as Seller
deems necessary, (ii) access to all information relied on by
Buyer in preparing such notice, and (iii) opportunity to
examine the employees or other representatives of Buyer with
knowledge related to the material facts set forth in the
notice. Prior to the expiration of the sixty (60) day period,
Seller shall notify Buyer in writing if it contests the
existence of the asserted Environmental Defect and/or Buyer's
calculation of the Environmental Defect Amount. Seller's
notice to Buyer shall identify the material facts listed in
Buyer's notice with which Seller disagrees, Seller's basis for
its disagreement, and Seller's calculation of the
Environmental Defect Amount attributable to the asserted
Environmental Defect.
(e) Procedures for Resolving a Contested Environmental
Notice. Buyer shall have thirty (30) days after receipt of
Seller's notice in which to investigate the matters and/or
calculations set forth in Seller's notice and to attempt to
resolve any disagreements it has with Seller regarding such
matters and/or calculations. Prior to the expiration of such
thirty (30) day period, Buyer shall notify Seller in writing
of the matters and calculations set forth in Seller's notice
with which it disagrees. If Buyer and Seller agree on the
existence of an Environmental Defect and the Environmental
Defect Amount attributable to such Environmental Defect, such
Environmental Defect Amount shall be an Environmental Defect
Amount for which Buyer may be entitled to a refund of the
Purchase Price, subject to the remaining provisions of this
Article VII (including, but not
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limited to, Section 7.6.2 and the Refund Limit set forth
therein). Each portion of an Asset affected by such agreed
Environmental Defect will be an "Environmental Defect
Property" and such portions collectively will be
"Environmental Defect Properties". Any disputes between Buyer
and Seller concerning the existence of an Environmental Defect
and/or the Environmental Defect Amount shall be subject to
arbitration, as set forth in Section 7.7 below, unless Buyer
elects to waive such Environmental Defect.
(f) Contribution. If Buyer, the Company or any
Subsidiary have any claim for or right of contribution,
reimbursement or other similar action against any third party
with respect to an Environmental Defect that causes Seller to
be required to refund a portion of the Purchase Price to
Buyer, then Buyer, the Company or any Subsidiary shall assign
a pro rata portion of such right to Seller (based upon the
ultimate liability paid by each of Buyer and Seller with
respect to such Environmental Defect) and will assist Seller
in pursuing such claim against the third party; provided that
Buyer will not be obligated to bear any out-of-pocket third-party
costs in respect of such claim.
7.3 Material Defects.
(a) General. All or such part of the Title Defect
Properties and the Environmental Defect Properties with
respect to which the aggregate Title Defect Amounts and
Environmental Defect Amounts are equal to or less than
$7,000,000 (the "Defect Deductible") will be "Non-Material
Defect Properties." If the aggregate Title Defect Amounts and
Environmental Defect Amounts with respect to all Title Defect
Properties and Environmental Defect Properties is less than
the Defect Deductible, the excess of the Defect Deductible
over the aggregate of such Title Defect Amounts and
Environmental Defect Amounts is referred to in this Agreement
as the "Remaining Deductible". If the sum of the Title
Defect Amounts and Environmental Defect Amounts with respect
to all Title Defect Properties and Environmental Defect
Properties is greater than the Defect Deductible, then all
Title Defect Properties and Environmental Defect Properties
that are not Non-Material Defect Properties will be "Material
Defect Properties." If Title Defect Properties and
Environmental Defect Properties include both Non-Material
Defect Properties and Material Defect Properties, Buyer may
select the Title Defect Properties and Environmental Defect
Properties to be included in the Non-Material Defect
Properties by written notice given to Seller not later than
270 days after the Closing Date. If by such deadline Buyer
fails to make such selection or fails to select Title Defect
Properties and Environmental Defect Properties with respect to
which the sum of the Title Defect Amounts and Environmental
Defect Amounts is at least equal to the Defect Deductible,
Seller will have the right to make such selections or such
additional selections as may be necessary to meet the Defect
Deductible.
(b) Offsets to Purchase Price
Reductions. Notwithstanding any other provisions of this
Article VII to the contrary, all net increases in the
Company's or any Subsidiary's net revenue interest in any
lease, well or unit included in the Assets over and above the
Company's or such Subsidiary's net revenue interest reflected
in Exhibit A-2 and all net
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decreases in costs resulting from decreases in any of the
Company's or any Subsidiary's working interest in any lease,
well or unit included in the Assets below the Company's or
such Subsidiary's working interest reflected in Exhibit A-2
will be taken into account as an offset to any Title Defect
Amounts and Environmental Defect Amounts. The value of an
offsetting interest will be proportionate to the value of the
related Subject Interest as determined pursuant to
Section 3.2. For example, if a particular Subject Interest in
a well is valued at $500,000 pursuant to Section 3.2 and the
actual net revenue interest owned by the Company in such well
is 25% greater than the net revenue interest for such well as
set forth in Exhibit A-2, then Seller will be entitled to an
offset against Title Defect Amounts and Environmental Defect
Amounts of $125,000. Buyer will promptly furnish Seller with
written notice of any offsetting interest that is discovered
by any of Buyer's employees or representatives while
conducting Buyer's title review, due diligence or
investigation with respect to the Subject Interests.
Notwithstanding the foregoing, no net increase in net revenue
interest or decrease in costs in respect of any Subject
Interest will be taken into account as an offset against any
Title Defect Amounts and Environmental Defect Amounts if the
value thereof is less than $35,000.
7.4 Title Defects. For the purposes of this Agreement, a
portion of the Subject Interests will be deemed to have a "Title
Defect" if any one or more of the following statements is untrue
with respect to such portion of the Subject Interests as of the
Balance Sheet Date and as of the Closing Date:
(a) The Company or any Subsidiary has Defensible Title
thereto; provided that the Company and such Subsidiary will
not be deemed to lack Defensible Title for failure to pay
royalties, rentals or other payments with respect to a Subject
Interest or by reason of default under any lease, farmout
agreement or other contract or agreement with respect to a
Subject Interest, except to the extent the same would be a
Title Defect under paragraphs (b) or (c) below.
(b) All royalties, rentals, Pugh clause payments, shut-in
gas payments and other payments due with respect to such
portion of the Subject Interests have been properly and timely
paid, except for payments held in suspense for title or other
reasons that are customary in the industry and that will not
result in grounds for cancellation of the Company's or any
Subsidiary's rights in such portion of the Subject Interests.
(c) Neither the Company nor any Subsidiary is in default
under the terms of any leases, farmout agreements or other
contracts or agreements respecting such portion of the Subject
Interests that could (1) interfere with the operation, value
or use thereof, (2) prevent the Company or such Subsidiary
from receiving the proceeds of production or other revenues
attributable to the Company's or such Subsidiary's interest
therein or (3) result in cancellation of the Company's or such
Subsidiary's interest therein.
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Notwithstanding the foregoing:
(i) No Title Defect will exist as to a Subject
Interest unless the sum of the Title Defect Amounts in
respect thereof, when added to the aggregate
Environmental Defect Amounts in respect thereof, if any,
exceed $35,000. If a Title Defect exists pursuant to the
preceding sentence, the Title Defect Amount for such
Title Defect will include the entirety of such Title
Defect Amount, including the portion below such threshold
amount.
(ii) Loss of any Asset or portion thereof following
the date of this Agreement due to (A) any election or
decision made by Seller in accordance with Article VIII
or (B) expiration of the primary or secondary term of a
lease, will not constitute a Title Defect.
7.5 Preferential Rights to Purchase and Consents.
(a) In the event Buyer identifies any preferential
purchase rights or consents to assignment that would be
triggered by the transactions contemplated hereby, Buyer will
furnish to Seller a list of the same together with reference
to the instruments Buyer has identified evidencing such
rights. Seller will request from the parties so identified,
in accordance with the instruments creating such rights,
waivers of the preferential rights to purchase and
requirements that consent to assignment be obtained that were
so identified.
(b) If a party from whom a waiver of a preferential
right to purchase is requested fails or refuses to give such
waiver, Seller may send to the holder of such right (with a
copy to Buyer) a notice offering to sell to such holder, in
accordance with the contractual provisions applicable to such
right, those Assets covered by such right on substantially the
same terms as those contained in this Agreement and for the
portion of the Purchase Price allocated to such Assets as
provided in this Agreement, subject to adjustments in price in
the same manner that the Purchase Price may be adjusted
pursuant to this Agreement.
(c) If, prior to Closing, any holder of a preferential
right notifies Seller of such holder's election to purchase
the Assets to which its preferential purchase right applies,
then the Company or Subsidiary, as applicable, will (i)
satisfy all such preferential purchase right obligations and
(ii) receive all proceeds received from such holders in
connection with such preferential purchase rights. All Assets
for which a preferential purchase right has not been exercised
prior to the Closing by the holder of such right will be
included in the Assets owned by the Company or any Subsidiary
at the Closing. If one or more of the holders of such
preferential purchase rights notifies Seller subsequent to the
Closing of such holder's election to purchase, Seller will
give notice thereof to Buyer, whereupon the Company or
Subsidiary, as applicable, will (i) satisfy all such
preferential purchase right obligations of Seller to such
holders and (ii) receive all proceeds received from such
holders in connection with such preferential purchase rights.
In the event the
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Company or any Subsidiary, as applicable, is obligated to
satisfy any such preferential purchase right obligation at
less than the Stipulated Value of such Assets, then the
difference between (i) the Stipulated Value for such Assets
and (ii) the proceeds received from such holders in connection
with such preferential purchase rights, will be deemed to be
a Title Defect Amount; provided that such difference will not
be deemed to be a Title Defect unless it exceeds $35,000, but
once it exceeds $35,000, all of such difference shall
constitute a Title Defect Amount. In the event the Company or
any Subsidiary, as applicable, is obligated to satisfy any
such preferential purchase right obligation at more than the
Stipulated Value of such Assets, then the difference between
(i) the proceeds received from such holders in connection with
such preferential purchase rights and (ii) the Stipulated
Value for such Assets, will be an offset against the Title
Defect Amounts; provided that such difference will not be
offset against the Title Defect Amounts unless it exceeds
$35,000, but once it exceeds $35,000, all of such difference
will be an offset against the Title Defect Amounts. Seller
will deliver promptly to Buyer copies of all notices, or other
correspondence relating to Buyer's acquisition of the Stock,
received at any time from the date of this Agreement to the
Closing Date from any person purporting to hold and to
exercise or waive any preferential purchase right pertaining
to any of the Assets.
7.6 Purchase Price Adjustment; Limitation.
7.6.1 Reimbursement Amount. Within twenty-five (25)
days after the expiration of the 270-day period referred to in
subsection 7.2.1(c), Seller and Buyer will execute and deliver
an agreement evidencing the refund, if any, to Buyer of the
Purchase Price required by this Section 7.6 (the
"Reimbursement Amount"). Subject to the Refund Limit set
forth in Section 7.6.2, the Reimbursement Amount shall be
calculated as follows:
(i) If Material Defect Properties exist, the sum of (A)
the aggregate Title Defect Amounts and Environmental Defect
Amounts with respect to all Material Defect Properties that
are not conveyed to Seller or Seller's designee pursuant to
Section 7.2.1(c), (B) the aggregate Stipulated Values of all
Material Defect Properties that are conveyed to Seller or
Seller's designee pursuant to Section 7.2.1(c), (C) the
Section 29 Tax Credit Defect Amounts, (D) the Representation
and Covenant Defect Amounts with respect to Representation and
Covenant Defects that constitute Pre-Closing Defects, and (E)
the Due Diligence Defect Amounts with respect to Due Diligence
Defects that constitute Pre-Closing Defects.
(ii) If Material Defect Properties do not exist, the
result of (A) the sum of (1) the Section 29 Tax Credit Defect
Amounts, (2) the Representation and Covenant Defect Amounts
with respect to Representation and Covenant Defects that
constitute Pre-Closing Defects and (3) the Due Diligence
Defects that constitute Pre-Closing Defects, minus (B) the
Remaining Deductible.
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7.6.2 Limitations; Payment. Notwithstanding any
other provisions of this Agreement, including, but not limited
to the calculations set forth in Section 7.6.1, the
Reimbursement Amount will in no event exceed $5,000,000 (the
"Refund Limit"). Seller agrees to pay to Buyer the
Reimbursement Amount, plus interest thereon from the Closing
Date to the date of payment at a rate of six percent (6%) per
annum, within 10 days following the final determination
thereof.
7.7 Arbitration.
(a) If the Pre-Closing Defect Amount timely asserted by
Buyer pursuant to and in accordance with Section 6.10 exceeds
$12,000,000 (a "Pre-Closing Defect Claim"), and Buyer does not
waive the condition stated in Section 9.2(c), and if Seller
disputes such assertion by Buyer, such dispute and any dispute
regarding attempted cure by Seller shall be settled pursuant
to this Section 7.7 and the Closing shall be delayed until
10:00 a.m., Dallas, Texas time on the fifth business day
immediately following the earliest of (i) the date, if any, on
which such dispute is resolved in favor of Seller in
accordance with the Arbitration Procedures, (ii) the date on
which Seller and Buyer cause such condition stated in Section
9.2(c) to be satisfied pursuant to the next sentence of this
Section 7.7(a), or (iii) the date on which Seller causes such
condition stated in Section 9.2(c) to be satisfied pursuant to
Section 6.11; provided that if prior to the earliest of the
dates described in clauses (i), (ii) and (iii) above Seller
terminates all then unresolved disputes at a time when the
condition stated in Section 9.2(c) is not satisfied (whether
before or after arbitration has begun) then this Agreement
shall then terminate as a result of the failure of the
condition set forth in Section 9.2(c). Buyer and Seller shall
each deliver to the other a written notice describing the
amount in dispute and a statement setting forth the facts and
circumstances that support such party's position with respect
to such dispute, and Buyer and Seller shall attempt in good
faith to reach agreement in respect of the Pre-Closing Defect
Claim. Any such dispute that is not resolved by the scheduled
Closing Date (as it may be delayed by Seller pursuant to
Section 6.11) shall be submitted to final and binding
arbitration in accordance with the Arbitration Procedures.
(b) If after Closing Buyer and Seller have not agreed
upon the existence of one or more Defects, the effect of any
attempted cure by Seller or the amount of one or more
adjustments, credits or offsets related to the calculation of
Defect Amounts claimed by Buyer or Seller pursuant to and in
accordance with the requirements of this Agreement, any such
claim (a "Deferred Adjustment Claim") shall be settled
pursuant to this Section 7.7. With respect to each potential
Deferred Adjustment Claim, Buyer and Seller shall deliver to
the other a written notice describing each such potential
Deferred Adjustment Claim, the amount in dispute and a
statement setting forth the facts and circumstances that
support such party's position with respect to such Deferred
Adjustment Claim. On or prior to the 285th consecutive
calendar day following the Closing Date (the "Deferred Matters
Date"), Seller and Buyer shall attempt in good faith to reach
agreement on the Deferred Adjustment Claims and, ultimately,
to resolve by written agreement all disputes regarding the
Deferred Adjustment Claims. Any Deferred Adjustment Claims
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that are not so resolved on or before the Deferred Matters
Date shall be submitted to final and binding arbitration in
accordance with the Arbitration Procedures; provided, however,
that Seller may elect at any time to resolve any and all
disputes relating to the Deferred Adjustment Claims by
refunding to Buyer the portion of the Purchase Price that
would be refundable on account of the Defects that constitute
Deferred Adjustment Claims if same did not constitute Deferred
Adjustment Claims. Notwithstanding anything herein provided
to the contrary, including Sections 7.2.1(c) and 7.2.2(d),
Seller shall be entitled to cure any Defect that constitutes
a Deferred Adjustment Claim at any time prior to the point in
time when a final and binding written decision of the
applicable arbitrator(s) is made with respect thereto in
accordance with the Arbitration Procedures. The amount of any
refund of a portion of the Purchase Price (but in no event
greater than the Refund Limit) to which Buyer becomes entitled
under the final and binding written decision of the applicable
arbitrator(s) shall be promptly refunded by Seller to Buyer.
(c) Buyer and Seller will each use their reasonable
efforts to cause the completion of any Arbitration Procedures
within 90 days after the appointment of arbitrator in
accordance with the Arbitration Procedures. Either Buyer or
Seller may unilaterally terminate this Agreement prior to the
Closing if any arbitration proceeding instituted prior to the
Closing is not concluded within 180 days after the appointment
of arbitrators in accordance with the Arbitration Procedures.
ARTICLE VIII
OTHER AGREEMENTS
8.1 Covenants of Seller Pending Closing. From and after the
date of this Agreement and until the Closing, except as
contemplated by this Agreement or as otherwise consented to by
Buyer in writing, and subject to Section 8.2 below and the
constraints of applicable operating and other agreements, Seller
will cause the Company and the Subsidiaries to conduct their
businesses in the ordinary course consistent with past practices.
In addition, from and after the date of this Agreement and until
the Closing, except as contemplated by this Agreement or otherwise
consented to by Buyer in writing, and subject to Section 8.2 below
and the constraints of applicable operating and other agreements:
(a) Capital Expenditures. Seller will use reasonable
efforts to prevent the Company from making any capital
expenditures (with respect to the Company's net working
interest) relating to the Company's and the Subsidiaries'
business and within the Company's current capital budget as
provided to Buyer that, singly or in the aggregate with
respect to any single project, exceed $500,000, except in
connection with the performance by Seller, the Company or any
Subsidiary of an obligation or agreement existing on the date
of this Agreement or pursuant to this Agreement.
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(b) Business Operations. Seller will use reasonable
efforts to cause the Subject Interests to be developed,
maintained and/or operated in a manner consistent with past
practices of the Company or the Subsidiary, as appropriate,
and in the ordinary course of business. Seller will use
reasonable efforts to cause the Company and the Subsidiaries
to continue the marketing of Hydrocarbons from the Assets
consistent with past practices. Seller will use reasonable
efforts not to, and will use reasonable efforts to cause the
Company and the Subsidiaries not to, take or fail to take any
action (except at the instruction of Buyer or as required by
Section 8.1) that would cause or permit any of the
representations made in Article IV or any of the Due Diligence
Benchmarks set forth in Sections 6.6.1, 6.6.3 (second sentence
only), 6.6.4, 6.6.5, 6.6.6, 6.6.7, 6.6.8, 6.6.9, 6.6.10,
6.6.11, 6.6.12, 6.6.14, 6.6.15 (except for the second
sentence), 6.6.16, 6.6.17 and 6.6.18 to be inaccurate at the
time of Closing. Seller will use reasonable efforts to cause
the Company to provide Buyer, as soon as reasonably
practicable following receipt by the Company, with copies of
all written proposals for drilling or other operations
proposed in writing by third parties with respect to proposals
involving the expenditure of more than $250,000 net to the
Company's interest per proposal, and provide Buyer with such
proposals made by the Company at the time they are sent to
third persons, except to the extent any such proposals may be
restricted from disclosure by contractual obligations with
third parties. Seller will use reasonable efforts to cause
the Company and the Subsidiaries to timely pay all costs and
expenses incurred in connection with the Assets, except to the
extent contested in good faith utilizing appropriate action,
and otherwise to keep the Assets free of liens (except for
Permitted Encumbrances).
(c) Material Change. Seller will promptly inform Buyer
in writing of any material adverse change in the financial
condition, operations, Assets, liabilities (contingent or
otherwise), business or prospects of the Company or any
Subsidiary. Notwithstanding the disclosure to Buyer of any
such material adverse change, Seller will not be relieved of
any liability for, nor will the providing of such information
by Seller to Buyer be deemed a waiver by Buyer of, the breach,
if any, of any representation or warranty of Seller contained
in this Agreement.
(d) Approvals of Third Parties. Seller will use
reasonable efforts to secure, as soon as practicable after the
date hereof, all necessary approvals and consents of third
parties to the consummation of the sale of the Stock.
(e) Employee Matters. Seller will use reasonable
efforts to cause the Company and the Subsidiaries not to,
without the prior written approval of Buyer, except as
required by law:
(i) increase the cash compensation of any employee
of the Company or any Subsidiary;
(ii) adopt, amend or terminate any compensation plan
or employment agreement;
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(iii) except for readoption and amendment of the
Employee Severance Pay Plan as attached as Exhibit J,
adopt, amend or terminate any Employee Policies and
Procedures, including severance plans;
(iv) enter into, modify, amend or terminate any
agreement with any union, labor organization or
collective bargaining unit; or
(v) take or fail to take any action with respect to
any past or present employee of the Company or any
Subsidiary that would materially adversely affect the
business of the Company or any Subsidiary.
(f) Employee Benefit Plans. Except as contemplated by
clause (e)(iii) above, Seller will use reasonable efforts to
insure that neither the Company nor any Subsidiary, without
the prior written approval of Buyer, except as required by
Law:
(i) adopts, amends or terminates any Employee
Benefit Plan;
(ii) takes any action that would deplete the assets
of any Employee Benefit Plan, other than payment of
benefits in the ordinary course to participants and
beneficiaries;
(iii) fails to pay any premium or contribution
due with respect to any Employee Benefit Plan;
(iv) fails to file any return or report with respect
to any Employee Benefit Plan; or
(v) takes or fails to take any action that would
materially adversely affect any Employee Benefit Plan.
(g) Contracts. Seller will use reasonable efforts to
cause the Company and the Subsidiaries to perform all material
obligations of the Company or any Subsidiary under any
material contract. Seller will use reasonable efforts to
insure that neither the Company nor any Subsidiary will waive
any material right or cancel any material contract, debt or
claim or assume or enter into any material contract, lease,
license, obligation, indebtedness, commitment, purchase or
sale except in a manner consistent with past practices of the
Company or the Subsidiary, as appropriate, and in the ordinary
course of business. Seller will use reasonable efforts to
cause the Company and the Subsidiaries to maintain in full
force and effect all insurance policies.
(h) Capital Assets; Payments of Liabilities. Seller
will use reasonable efforts to insure that neither the Company
nor any Subsidiary, (i) acquires or disposes of any material
capital asset or (ii) discharges or satisfies any material
lien or encumbrance or pays or performs any material
obligation or liability other than (A) liabilities and
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obligations reflected in the Financial Statements, only as
required by the express terms of the agreement or other
instrument pursuant to which the liability or obligation was
incurred or (B) current liabilities and obligations incurred
in a manner consistent with past practices of the Company or
the Subsidiary, as appropriate, and in the ordinary course of
business since the Balance Sheet Date; provided that written
approval of Buyer will not be required in respect of any
action taken in a manner consistent with past practices of the
Company or the Subsidiary, as appropriate, and in the ordinary
course of business.
(i) Mortgages, Liens and Guaranties. Seller will use
reasonable efforts to insure that neither the Company nor any
Subsidiary makes any material capital contribution or
investment in any corporation, business or other person,
enters into or assumes any mortgage, pledge, conditional sale
or other title retention agreement, permits any security
interest, lien, encumbrance or claim of any kind (other than
Permitted Encumbrances) to attach to any of the Assets,
whether now owned or hereafter acquired, or guarantees or
otherwise becomes contingently liable for any obligation of
another, except obligations arising by reason of endorsement
for collection and other similar transactions in a manner
consistent with past practices of the Company or the
Subsidiary, as appropriate, and in the ordinary course of
business.
(j) Distributions and Repurchases. Seller will insure
that no distribution, payment or dividend of any kind is
declared or paid by the Company or any Subsidiary, and no
repurchase of any Stock or Subsidiary Stock is approved or
effected.
(k) Notices. Seller will use reasonable efforts to
cause the Company and the Subsidiaries to promptly notify
Buyer of any notice or threatened notice of which Seller, the
Company or any Subsidiary becomes aware relating to any
default, inquiry into any possible default or action to alter,
terminate, rescind or procure a judicial reformation of any
material lease or other material contract or any provision
thereof. The Seller will use reasonable efforts to cause the
Company and the Subsidiaries to notify promptly Buyer of any
new suits, actions or other proceedings before any court,
arbitrator or governmental agency and any causes of action
involving the Assets and that would materially impair the
value of the Assets.
(l) Production Declines. Prior to the Closing, Seller
will promptly notify Buyer if Seller, the Company or any
Subsidiary determines, in its good faith judgment, that any
well producing more than 1,000 Mcfe per day net to the
Company's or Subsidiary's interest as of the date hereof has
experienced a material adverse change in its production
characteristics that is reasonably anticipated to be
permanent, based upon normal and customary petroleum
engineering practices, including without limitation a decline
in the rate of Hydrocarbon production from such well to a
level materially below the historical levels of decline for
such well.
(m) Casualty and Condemnation. Seller will use
reasonable efforts to cause the Company and the Subsidiaries
to promptly notify Buyer of any material loss or destruction
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by fire, explosion, accident, earthquake, act of the public
enemy, act of God or other similar casualty affecting any of
the Assets of which Seller, the Company or any Subsidiary
becomes aware.
Notwithstanding the other provisions of this Article VIII, (i)
Seller, the Company and the Subsidiaries may take (or not take, as
the case may be) any of the foregoing actions if reasonably
necessary under emergency circumstances and provided Buyer is
notified as soon thereafter as possible, and (ii) neither Seller,
the Company nor any Subsidiary shall have liability to Buyer for
the incorrect payment of delay rentals, royalties, shut-in
royalties or similar payments or for any failure to pay any such
payments through mistake or oversight (INCLUDING, WITHOUT
LIMITATION, THE NEGLIGENCE OF SELLER, THE COMPANY OR ANY
SUBSIDIARY) unless caused by Seller's gross negligence or willful
misconduct. Any consent requested of Buyer with respect to the
matters covered by this Article VIII will not be unreasonably
withheld or action with respect thereto unduly delayed. Failure to
give any notice provided for in this Section 8.1 shall not be a
basis for any claim with respect to Pre-Closing Defects or
otherwise impose any liability on Seller with respect thereto and
the information contained in the notice shall not be a basis for
any claim with respect to a Pre-Closing Defect unless the
information otherwise would cause a Pre-Closing Defect under other
provisions of this Agreement.
8.2 Limitations on Seller's Covenants Pending Closing.
(a) To the extent Seller, the Company or any Subsidiary
is not the operator of any of the Assets, the obligations of
Seller, the Company or any Subsidiary in Section 8.1 above,
which have reference to operations or activities that normally
or pursuant to existing contracts are carried out or performed
by the operator, will be construed to require only that
Seller, the Company or such Subsidiary, as the case may be,
use reasonable efforts (without being obligated to incur any
expense or institute any cause of action) to cause the
operator of such Assets to take such actions or render such
performance within the constraints of the applicable operating
agreements and other applicable agreements.
(b) Notwithstanding anything to the contrary in this
Article VIII, should Seller or the Company conclude that the
Company or any Subsidiary should not pay any lease rental or
other payment or not participate in any reworking, deepening,
drilling, completion, equipping or other operation on or with
respect to any well or other Asset that may otherwise be
required by Section 8.1 above, Seller will cause the Company
or such Subsidiary to give Buyer written or oral notice
thereof as soon as reasonably practicable after Seller, the
Company or such Subsidiary receives written notice thereof
from the operator of such property and the Company and such
Subsidiary will not be obligated (nor will Seller be obligated
to cause the Company or such Subsidiary) to make any such
payment or to elect to participate in any such operation that
Seller or the Company has concluded should not be made or
participated in unless the Company receives from Buyer, within
a reasonable time prior to the date when such payment or
election is required to be made by the Company or such
Subsidiary, (i) the written election and agreement of Buyer
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to require the Company or such Subsidiary to take such action
and to indemnify Seller, the Company and such Subsidiary
therefrom and (ii) all funds necessary for such action.
Notwithstanding the foregoing, Seller will not be obligated to
cause the Company or any Subsidiary to pay any lease rental or
other payment or to elect to participate in any operation if
the operator of the property involved recommends that such
action not be taken. If Buyer advances any funds pursuant to
this Section 8.2(b) and the Assets to which such payments
relate are conveyed to Seller or Seller's designee, pursuant
to Article VII, and Seller does not reimburse Buyer for all
advances made by Buyer with respect to such Assets pursuant to
this Section 8.2(b) within 30 days after the Asset is conveyed
to Seller or Seller's designee, then (i) Buyer will own and be
entitled to any right of Seller, the Company or such
Subsidiary that would have lapsed but for such payment and
(ii) in the case of operations, Buyer will be entitled to
receive the penalty that Seller, the Company or such
Subsidiary, as nonconsenting party, would have suffered under
the applicable operating agreement with respect to such
operations as if Buyer were a consenting party thereunder.
8.3 No Solicitation. From and after the date of this
Agreement until June 15, 1995, Seller will not, and will not permit
any of its affiliates to, participate in any discussions with,
solicit offers from, or negotiate with, any party other than Buyer
for the purpose of selling any of the Stock or all or substantially
all of the Assets or merging the Company or any of the
Subsidiaries.
8.4 Company Employees; Severance Costs.
(a) With respect to persons who are employees of the
Company or a Subsidiary at any time between the date of this
Agreement and the Closing Date ("Employees") and are
terminated (the "Terminated Employees") by the Company or any
Subsidiary during the period beginning on the date of this
Agreement and ending 180 days after the Closing (the
"Transition Period"), Seller will reimburse the Company or
Subsidiary, as appropriate, for up to $4,000,000 of Severance
Costs (as defined below) paid by the Company or the Subsidiary
to the Terminated Employees.
(b) During the Transition Period, Buyer will cause the
Company and the Subsidiaries to maintain in effect the
severance policies that affect Employees as described in
Section 10.6 and Buyer shall not permit the Company or any
Subsidiary to decrease the cash compensation or materially
change other benefits of any Employees until termination.
Buyer will cause the Company and the Subsidiaries to maintain
in effect the severance policies that affect the executives of
the Company as described in Section 10.6 for a period of two
years after the Closing Date.
(c) "Severance Costs" will mean the amounts paid in
accordance with the Company's and the Subsidiaries' severance
plans as in effect on the Closing Date that are calculated
based on a period of time multiplied by base salary, plus the
costs of outplacement services and post-termination "COBRA"
(as defined in such severance plans)
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benefits, but will not include salary, vacation and pro rata
bonuses under the Company's and the Subsidiaries' incentive
pay plans or other benefits owing to employees through the
Closing Date.
(d) In the event the Company, any Subsidiary, Buyer or
any of their affiliates hires a Terminated Employee as a
employee or consultant (or in any similar capacity) at any
time within nine months after the Closing Date (except
pursuant to the last sentence of (e) below), Buyer will repay
to Seller all Severance Costs that Seller reimbursed to
Company, any Subsidiary, Buyer or any of their affiliates with
respect to such Terminated Employee. Notwithstanding the
foregoing, Buyer may contract to use a Terminated Employee's
services for up to 3 months or for a total compensation of
$20,000, whichever occurs first, without repaying such
severance costs to Seller.
(e) After Closing Buyer shall cause the employees of the
Company to cooperate with Seller as provided in Section 8.5
and to cooperate in the preparation of final financial
statements for periods prior to Closing. To the extent that
the Company does not have sufficient employees to cooperate to
Seller's satisfaction, Seller may elect to cause the Buyer to
hire, at Seller's expense, part-time employees to perform such
services.
(f) Payments under this Section 8.4 will be made
promptly and without reference to the procedures and
limitations set forth in Article XI. Buyer will not permit
the Company or any Subsidiary to pay any Severance Costs to
any Terminated Employee who has not executed a release
substantially in the form of Exhibit F.
8.5 Tax Matters.
(a) Preparation and Filing of Certain Tax Returns. At
the appropriate time (taking into account all extensions of
time relating to any filing) after the Closing Date, Seller
shall prepare and file, or cause Seller Parent Company to
prepare and file, all appropriate consolidated and combined
unitary Tax Returns for all Tax periods which include, on a
consolidated or combined unitary basis, the business and
operations of the Company and its Subsidiaries (the
"Operations") through the end of business on the Closing Date
(the "Pre-Closing Periods"). Seller shall have no
responsibility for filing Tax Returns for the Company and its
Subsidiaries for taxable periods beginning after the Closing
Date (the "Post Closing Periods") and the Buyer shall prepare
and file such returns. Seller or the Seller Parent Company
will include the income of the Company and its Subsidiaries
(including any gain or loss recognized as a result of the
election pursuant to Section 338 of the Code or similar state
statute) for all Pre-Closing Periods on Seller's or Seller
Parent Company's consolidated and combined unitary Tax Returns
and pay all Taxes attributable thereto. The income of the
Company and its Subsidiaries shall be apportioned among the
Pre-Closing Periods and the Post-Closing Periods by closing
the books of the Company and its Subsidiaries as of the end of
the Closing Date.
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(b) Payment and Indemnity of Taxes Described in Section
8.5(a). Seller shall pay or cause to be paid all Income Taxes
due with respect to the consolidated and combined unitary Tax
Returns described in the first sentence of Section 8.5(a)
(including any gain or loss recognized as a result of the
election pursuant to Section 338 of the Code or similar state
statute) with respect to any income earned or recognized in
taxable years which include, on a consolidated or combined
unitary basis, the Operations during the Pre-Closing Periods.
The term "Income Taxes" as used herein means any Taxes which
are determined by reference to the net income from the
business and operations of an entity, irrespective of whether
such Taxes are referred to as Income Taxes or by some other
designation. Seller shall indemnify, defend and hold harmless
Buyer and its affiliates from and against any liability for
any Income Taxes of Seller, Seller Parent Company, or the
Company and its Subsidiaries described in the preceding
sentence, including, but not limited to, any liability arising
(i) under Treasury Regulation Section 1.1502-6 (or similar
provision of state, local, or foreign law); (ii) as a
transferee or successor; (iii) by contract or (iv) otherwise,
and Seller shall be entitled to all refunds of such Taxes.
Buyer shall be liable for, and shall indemnify, defend and
hold harmless Seller and its affiliates from and against any
Taxes of the Company and its Subsidiaries described in the
second sentence of Section 8.5(a) and Buyer shall be entitled
to all refunds of such Taxes.
(c) Preparation and Filing of Other Tax Returns. In the
case of those jurisdictions which require a short period Tax
Return (other than a Tax Return covered by Section 8.5(a))
ending on or before the Closing Date, as soon as practicable
after the Closing Date, Seller shall prepare and file or cause
Seller Parent Company to prepare and file all appropriate
returns required to be filed on a consolidated, combined
unitary or any other basis with respect to Taxes attributable
to the Operations and the properties of the Company and its
Subsidiaries for the Pre-Closing Periods (including any gain
or loss recognized as a result of the election pursuant to
Section 338 of the Code or similar state statue). In the case
of any other Tax Returns which include both Pre-Closing
Periods and Post-Closing Periods and are required to be filed
after the Closing Date, Buyer shall prepare and file such
returns and timely provide copies of any such returns to
Seller.
(d) Payment and Indemnity of Other Taxes. Seller shall
pay or cause to be paid, and shall indemnify, defend and hold
harmless Buyer and its affiliates from and against, all Income
Taxes due with respect to Tax Returns described in the first
sentence of Section 8.5(c) that include the Operations and the
properties of the Company and its Subsidiaries for the
Pre-Closing Periods (including any gain or loss recognized as
a result of the election pursuant to Section 338 of the Code
or similar state statute). Except as set forth in Section
8.5(f), Buyer shall pay or cause to be paid, and shall
indemnify, defend and hold harmless Seller and its affiliates
from and against, all other Taxes due with respect to Tax
Returns described in the first sentence of Section 8.5(c) that
include the Operations and properties of the Company and its
Subsidiaries for the Pre-Closing Periods. In the case of
those returns described in the second sentence of Section
8.5(c), Seller shall pay or cause to be paid, and shall
indemnify, defend and hold harmless Buyer and its affiliates
from and against, all Income Taxes attributable to the
Operations and the
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properties of the Company and its Subsidiaries for Pre-Closing
Periods (including any gain or loss recognized as a result of
the election pursuant to Section 338 of the Code or similar
state statute) and shall be entitled to all refunds of such
Taxes; and Buyer shall pay or cause to be paid, and shall
indemnify, defend and hold harmless Seller and its affiliates
from and against, (i) all other Taxes attributable to the
Operations and the properties of the Company and its
Subsidiaries for Pre-Closing Periods, and (ii) all Taxes
attributable to the Operations and the properties of the
Company and its Subsidiaries for Post-Closing Periods and
shall be entitled to all refunds of such Taxes.
(e) Refund or Credit. If and to the extent that Buyer
or the Company or its Subsidiaries shall become entitled to a
refund or credit of Income Taxes of the Company or any of its
Subsidiaries for any Pre-Closing Period, Buyer shall promptly
pay to Seller the amount of such refund or credit. If any
refund or credit of Income Taxes for which a payment has been
made pursuant to this Section 8.5(e) is subsequently reduced
or disallowed, Seller shall indemnify, defend and hold
harmless Buyer for any liability for Income Taxes assessed
against Buyer or the Company and its Subsidiaries by reason of
the reduction or disallowance.
(f) State and Local Sales or Use Tax. Buyer and Seller
shall each be responsible for one-half of any state and local
sales or use Taxes that may arise from the consummation of the
transactions contemplated by this agreement.
(g) Termination of Tax Sharing Agreements. Effective as
of midnight, December 31, 1994, all liabilities and
obligations between Seller, Seller Parent Company and any of
the Company and its Subsidiaries under any tax allocation
agreement or arrangement in effect shall be extinguished in
full, and any liabilities or rights existing under any such
agreement or arrangement shall cease to exist and shall no
longer be enforceable, except for amounts reflected in the
Financial Statements. Accordingly, neither Seller nor Seller
Parent Company shall make any payments to Buyer or the Company
or its Subsidiaries in the event that Seller, Seller Parent
Company or any of their affiliates other than the Company and
its Subsidiaries realizes a reduction in Taxes as a result of
the inclusion of the Company and its Subsidiaries in a
consolidated or combined unitary Tax Return of Seller or
Seller Parent Company for any taxable year or period ending on
or before the Closing Date.
(h) Section 338 Election. Seller and Buyer agree to
make valid elections under Section 338(h)(10) and Section
338(g) of the Code, and any similar state law tax election in
all applicable states with respect to the Company, except that
no such state law tax election shall be made in California.
Seller and Buyer shall exchange completed and executed copies
of Form 8023-A and required schedules thereto (the "Form") and
Seller and Buyer agree to take all other action and file all
other necessary reports to elect validly pursuant to Section
338(h)(10) of the Code to treat the transaction as a sale of
assets as opposed to a sale of stock. Buyer and Seller shall
each file a copy of the Form in a timely manner and shall
provide assurance to the other party that it has done so.
Buyer and Seller
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agree to confer as to the allocation of the Purchase Price for
Tax purposes. However, in the event that Seller and Buyer do
not reach an agreement as to any such allocation, then Seller
and Buyer shall not be bound by any partial or preceding
agreement. Nothing in this paragraph shall be construed as
requiring that either Seller or Buyer hire appraisers or
otherwise incur out-of-pocket expenses in order to reach
agreement as to any of the allocations described above.
(i) Cooperation. After the Closing Date, Buyer, Seller,
and Seller Parent Company shall, and shall cause their
respective subsidiaries to, cooperate in the preparation of
all Tax Returns (including any statements, reports or returns
required as a result of the elections made under Section 338
of the Code) and responses to Tax audits and shall preserve
and provide, or cause to be provided, to the requesting party
any records or other information requested by such party in
connection therewith as well as access to, and the cooperation
with, the auditors of Buyer and Seller. Each of Seller and
Buyer shall provide notice within 25 days in writing to the
other of any pending Tax audits, assessments or proceedings
that it becomes aware of related to Taxes of the Company and
the Subsidiaries for which it is indemnified by the other
party hereunder. Seller shall retain the originals of all Tax
records, including asset records, presently existing with
respect to the Company and the Subsidiaries, and Seller shall
make such records available to Buyer and its representatives
upon reasonable request by Buyer. Seller shall also retain
copies of all other records pertaining to the Company and the
Subsidiaries for Pre-Closing Periods which Seller deems
necessary or desirable to have for use in connection with Tax
matters. The originals of all records of the Company and the
Subsidiaries that are not retained by Seller shall be retained
by the Company and the Subsidiaries, made available to Seller
and its representatives upon reasonable request by Seller and
shall not be destroyed without Buyer first giving Seller 60
days prior written notice of the intention to destroy any such
original records. In addition, Seller shall use its
reasonable efforts to cause any partnership or Tax partnership
in which the Company is a partner to make an election under
Section 754 of the Code to adjust the basis of the assets of
such partnership.
(j) Notice. If a claim shall be made by any Tax
authority against Buyer or the Company and its Subsidiaries or
the Seller which, if successful, would result in the
indemnification of Buyer by Seller or of Seller by Buyer
pursuant to this Section 8.5 (a "Tax Claim"), or if an audit
is commenced by any taxing authority with respect to any Tax
that could give rise to a Tax Claim, Buyer or Seller, as the
case may be, shall notify the other party in writing within 25
days of such claim or commencement of such audit. If such
notice is not given in reasonable detail to apprise the party
receiving the notice of the nature of the Tax Claim or audit,
the party receiving the notice shall not be liable to the
party giving the notice to the extent that the position of the
party receiving the notice is prejudiced as a result thereof.
In the event that either Seller or Buyer receives a request
for information or documents from any Tax authority and any
such information or documents is in the possession or control
of the other party, then such other party shall make such
information or documents available within 45 days of the date
so requested to
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do so. If, following any such request for information or
documents, (i) the party in possession of the requested
information or documents fails or refuses to comply with the
request therefor, and (ii) said failure or refusal is a
proximate cause of any assessment of any Tax by the Tax
authority referenced in the preceding sentence, then,
notwithstanding any other provision of this Agreement, the
party in possession of the requested information or documents
shall assume exclusive liability for the defense of any such
assessment and the payment of any such Tax and the other party
shall be indemnified, defended and held harmless by the party
in possession of the requested information or documents.
(k) Control of Proceedings. (i) Seller shall have the
right upon timely notice to Buyer, to assume and control the
conduct of any audit and the defense of any suit, action or
proceeding with respect to any Tax Claim for Income Taxes
resulting from a Pre-Closing Period at its own expense and
with its own counsel. If Seller elects to assume the defense
of any audit or Tax Claim, notwithstanding anything to the
contrary contained herein, (A) Seller shall not agree to any
settlement thereof without the written consent of Buyer if the
effect of such settlement would be to increase the liability
of Buyer or its affiliates (including the Company and its
Subsidiaries) for any Tax for any Post-Closing Period unless
Seller agrees to pay to Buyer the full amount of the increase
in liability, (B) Buyer shall not be required to pay for or
otherwise indemnify Seller against any attorneys' fees of
Seller in connection with such audit or Tax Claim if Seller
elects to assume the defense of such audit or Tax Claim as
provided herein, and (C) Seller shall keep Buyer informed of
all material developments and events relating to such audit or
Tax Claim. Except as provided above, Seller will either
pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the Tax authority
with respect to any audit or Tax Claim and may, in its sole
option, either pay the Income Tax claimed and sue for a refund
where applicable law permits such refund suits or may contest
the Tax Claim in any permissible manner, and prosecute such
contest to an initial determination in a court of initial
jurisdiction, and to a final determination in an appellate
court.
(ii) Except as otherwise provided in Section 8.5 (k)(i),
Buyer shall have the right upon timely notice to Seller, to
assume and control the conduct of any audit and the defense of
any suit, action or proceeding with respect to any Tax Claim,
whether resulting from a Pre-Closing Period or a Post-Closing
Period, at its own expense and with its own counsel. If Buyer
elects to assume the defense of any audit or Tax Claim,
notwithstanding anything to the contrary contained herein, (A)
Buyer shall not agree to any settlement thereof without the
written consent of Seller if the effect of such settlement
would be to increase the liability of Seller or its affiliates
for any Tax for any Pre-Closing Period unless Buyer agrees to
pay to Seller the full amount of the increase in liability,
(B) Seller shall not be required to pay for or otherwise
indemnify Buyer against any attorneys' fees of Buyer in
connection with such audit or Tax Claim if Buyer elects to
assume the defense of such audit or Tax Claim as provided
herein, and (C) Buyer shall keep Seller informed of all
material developments and events relating to such audit or Tax
Claim. Except as provided above, Buyer will either pursue or
forego any and all administrative appeals, proceedings,
hearings and conferences with the Tax authority with respect
to any audit or
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Tax Claim and may, in its sole option, either pay the Tax
claimed and sue for a refund where applicable law permits such
refund suits or may contest the Tax Claim in any permissible
manner, and prosecute such contest to an initial determination
in a court of initial jurisdiction, and to a final
determination in an appellate court.
8.6 Expenses. Except as provided in Section 13.7, Buyer will
bear its own expenses, and Seller will bear its own expenses and
the expenses of the Company and the Subsidiaries, in connection the
Closing, including the fees and disbursements of its counsel,
petroleum engineers, accountants, financial advisors and other
representatives, whether or not the transactions contemplated
hereby are consummated.
ARTICLE IX
CLOSING CONDITIONS
9.1 Seller's Closing Conditions. The obligations of Seller
under this Agreement are subject, at the option of Seller, to the
satisfaction at or prior to the Closing of the following
conditions:
(a) All representations of Buyer contained in Article V
will be true in all material respects at and as of the Closing
as if such representations were made at and as of the Closing,
and Buyer will have performed and satisfied all agreements
required by this Agreement to be performed and satisfied by
Buyer at or prior to the Closing;
(b) All necessary consents of and filings with third
parties (including the Federal Trade Commission and the
Department of Justice) necessary for Seller's sale of Stock
will have been obtained, accomplished or waived and all
applicable waiting periods under the Hart-Scott Act will have
expired or been terminated;
(c) As of the Closing Date, no suit, action or other
proceeding (excluding any such matter initiated by Seller or
the Company) will be pending or threatened before any
Governmental Authority seeking to restrain Seller or prohibit
the Closing or seeking damages against Seller, the Company or
any Subsidiary as a result of the consummation of this
Agreement;
(d) Seller will have received all documents, duly
executed in form reasonably satisfactory to Seller and its
counsel, referred to in Section 10.3.
9.2 Buyer's Closing Conditions. The obligations of Buyer
under this Agreement are subject, at the option of Buyer, to the
satisfaction at or prior to the Closing of the following
conditions:
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(a) All necessary consents of and filings with third
parties (including the Federal Trade Commission and the
Department of Justice) necessary for Seller's sale of the
Stock will have been obtained, accomplished or waived and all
applicable waiting periods under the Hart-Scott Act will have
expired or been terminated;
(b) As of the Closing Date, no suit, action or other
proceeding (excluding any such matter initiated by Buyer) will
be pending or threatened before any Governmental Authority
seeking to restrain Buyer or prohibit the Closing or seeking
damages against Buyer as a result of the consummation of this
Agreement;
(c) The Pre-Closing Defect Amount will not have exceeded
$12,000,000;
(d) Buyer will have received all documents, duly
executed in form reasonably satisfactory to Buyer and its
counsel, referred to in Section 10.2; and
(e) Buyer will have received satisfactory evidence that
all expenses of the Company and the Subsidiaries in respect of
the transactions contemplated hereby have either been
reimbursed by Seller or adequate provision for such
reimbursement after the Closing Date has been made.
ARTICLE X
CLOSING
10.1 Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") will be held at 10:00 a.m., Dallas,
Texas time, at the offices of Jackson & Walker, L.L.P., 901 Main,
Suite 6000, Dallas, Texas, on June 8, 1995, or as soon thereafter
as practicable, or at such other date or place as the parties may
agree in writing (the "Closing Date").
10.2 Seller's Closing Obligations. At Closing, Seller will
deliver to Buyer the following:
(a) Certificates representing all of the Stock, duly
endorsed and in proper form for transfer to Buyer by delivery
under applicable law, or accompanied by duly executed
instruments of transfer in blank;
(b) A copy of resolutions of the Board of Directors of
Seller authorizing the execution, delivery and performance of
this Agreement and all related documents and agreements,
certified by the Secretary of Seller as being true and correct
copies of the originals thereof subject to no modifications or
amendments;
(c) A certificate of an executive officer of Seller,
dated the Closing Date, setting forth the status of Seller's
performance and compliance with the covenants of Seller
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contained in Article VIII, which shall be utilized solely for
purposes of determining whether a Representation and Covenant
Defect exists;
(d) A certificate of an executive officer of Seller,
dated the Closing Date (i) as to the truth and correctness of
the representations of Seller under Article IV as of the
Closing Date, (ii) as to the performance of and compliance by
Seller with the covenants of Seller (other than those set
forth in Article VIII) contained herein on and as of the
Closing Date and (iii) certifying that all conditions
precedent of Seller to the Closing have been satisfied or are
waived;
(e) A certificate of the Secretary of Seller certifying
as to the incumbency of the directors and officers of Seller
and as to the signatures of all directors and officers who
have executed documents delivered at the Closing on behalf of
Seller;
(f) Certificates, dated within five business days prior
to the Closing Date, of the Secretary of State of the states
of incorporation of Seller, the Company and each of the
Subsidiaries establishing that Seller, the Company and each of
the Subsidiaries is in existence, has paid all franchise taxes
and otherwise is in good standing to transact business in its
state of incorporation;
(g) Certificates, dated within five business days prior
to the Closing Date, of the Secretaries of State of the states
in which the Company and each of the Subsidiaries is qualified
to do business, to the effect that the Company and each of the
Subsidiaries is qualified to do business and is in good
standing as a foreign corporation in each of such states;
(h) An opinion of Fulbright & Jaworski L.L.P., special
counsel to Seller, reasonably acceptable to Buyer, dated as of
the Closing Date, with respect to the matters set forth in
Exhibit G;
(i) An opinion of Richard C. Jones, Chief Counsel of
Seller, as to opinions involving Seller, and an opinion of
Randall B. Wilson, General Counsel of the Company, as to
opinions involving the Company, in each case reasonably
acceptable to Buyer, dated as of the Closing Date, with
respect to matters set forth in Exhibit H;
(j) All authorizations, consents, approvals, permits and
licenses required by Section 4.6;
(k) Evidence of Seller's compliance with the Hart-Scott
Act;
(l) Resignations or terminations of the directors and
officers of the Company and the Subsidiaries effective as of
the Closing Date that are requested by Buyer;
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(m) An Indemnity Agreement dated as of the Closing Date
executed on behalf of Seller, substantially in the form
attached as Exhibit E;
(n) A nonforeign affidavit, as such affidavit is
referred to in Section 1445(b)(2) of the Code, in form
reasonably acceptable to Buyer, of Seller and Pacific Gas and
Electric Company, signed under penalty of perjury and dated as
of the Closing Date, to the effect that such persons are
United States citizens (and thus not foreign persons) and
providing such persons' United States taxpayer identification
numbers;
(o) Duly executed documents in form reasonably
satisfactory to Buyer pursuant to which Seller, except as set
forth in the proviso below, releases, relinquishes and waives
any and all claims, demands, causes of action, suits,
judgments or controversies of any kind whatsoever, whether
known or unknown, that Seller may have against the Company
and/or the Subsidiaries as of the Closing Date, for any reason
whatsoever, including without limitation claims by Seller
against the Company the Subsidiaries with respect to
dividends, repayment of loans, violation of preemptive rights,
or payment of salaries or other compensation, provided that
Seller shall not release the intercompany receivables that are
to be paid, or are payable, in accordance with Section 2.3 or
subleases of (a) the lease covering certain office space in
Two Corporate Centre in Concord, California and (b) the lease
covering certain office space in Four Embarcadero Center in
San Francisco, California; and
(p) Such other instrument or instruments of transfer as
will be necessary or appropriate, as Buyer or its counsel
reasonably requests, to vest in Buyer good and marketable
title to the Stock.
10.3 Buyer's Closing Obligations. At Closing, Buyer will
deliver to Seller the following:
(a) The Purchase Price in immediately available funds;
(b) Any unpaid portion of the Interest Payment;
(c) A copy of the resolutions of the Board of Directors
of Buyer authorizing the execution, delivery and performance
of this Agreement and all related documents and agreements,
each certified by Buyer's Secretary as being true and correct
copies of the originals thereof subject to no modifications or
amendments;
(d) A certificate of the President of Buyer, dated the
Closing Date (i) as to the truth and correctness of the
representations of Buyer under Article V on and as of the
Closing Date, (ii) as to the performance of and compliance by
Buyer with all covenants contained herein on and as of the
Closing Date and (iii) certifying that all conditions
precedent of Buyer to the Closing have been satisfied or are
waived;
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(e) A certificate of the Secretary of Buyer certifying
as to the incumbency of the directors and officers of Buyer
and as to the signatures of all directors and officers who
have executed documents delivered at the Closing on behalf of
Buyer;
(f) A certificate, dated within five business days prior
to the Closing Date, of the Secretary of State of the State of
Texas establishing that Buyer is in existence, has paid all
state taxes and otherwise is in good standing to transact
business in such state;
(g) An opinion of Jackson & Walker, L.L.P., special
counsel to Buyer, reasonably acceptable to Seller, dated as of
the Closing Date, with respect to the matters set forth in
Exhibit I;
(h) Evidence of Buyer's compliance with the Hart-Scott
Act;
(i) Effective releases regarding, or evidence of payment
of indebtedness under, the Bank Credit Agreement contemplated
by Section 2.3; and
(j) Duly executed documents in form satisfactory to
Seller pursuant to which the Company and the Subsidiaries,
except as set forth in the proviso below, release, relinquish
and waive any and all claims, demands, causes of action,
suits, judgments or controversies of any kind whatsoever,
whether known or unknown, that the Company and the
Subsidiaries, or any of them, may have against Seller as of
the Closing Date, for any reason whatsoever, including without
limitation claims with respect to intercompany payables and
receivables (including without limitation the NGCC Indemnity)
that are not settled pursuant to Section 2.3, provided that
the Company and the Subsidiaries shall not release the
intercompany receivables that are to be paid, or payable, in
accordance with Section 2.3 or subleases of (a) the lease
covering certain office space in Two Corporate Centre in
Concord, California and (b) the lease covering certain office
space in Four Embarcadero Center in San Francisco, California.
10.4 Distribution of Properties. To the extent not conveyed
or distributed to Seller or Seller's designee prior to the Closing
Date, at Closing, Seller will cause the Company to cause to be
conveyed or distributed to Seller or Seller's designee the rights,
interests, properties and assets excluded from the Assets under
Sections 2.2 and 2.3(c) and Article VII.
10.5 Change of Corporate Name. Seller, the Company, the
Subsidiaries and Buyer will execute such documents at Closing as
may be necessary to change the corporate names of certain
Subsidiaries as provided in Section 2.2.
10.6 Company's Employee Benefit Plans.
(a) Buyer expressly acknowledges that the Company has
adopted an Employee Severance Pay Plan (the "ESPP") and an
Executive Severance Pay Plan (the "ExSPP") and that the ExSPP
will continue in effect for two (2) years and the ESPP will
continue in
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effect for a period of 180 days after the Closing as
obligations of the Company subject to the Seller reimbursement
provisions of Section 8.4. Buyer hereby guarantees prompt
payment and performance of the Company's obligations under the
ESPP and an ExSPP. The parties hereby expressly agree that
the Employees (as defined in Section 8.4) will be intended
third party beneficiaries of the obligations and guaranty set
forth in this Section 10.6(a), with the right to enforce such
obligations and guaranty for their benefit, and such
obligations and guaranty may not be rescinded, modified or
amended in any manner (except as provided below) that is
adverse to any such Employee without such Employee's prior
written consent (whether or not any such Employee will have
been notified of the provisions of this Section 10.6(a) or
materially changed his position in reliance thereon). As of
the close of business on the 180th day following Closing, the
ESPP may be terminated and the employees of the Company will
be eligible for severance pay under Buyer's plan, if any. As
of the close of business on the second anniversary of the
Closing, the ExSPP may be terminated and the executives of the
Company will be eligible for severance pay under Buyer's plan,
if any. Seller will reimburse the Company for any liability
incurred in connection with the termination of the ESPP and
the ExSPP pursuant to their terms in existence on the Closing
Date. Prior to the 90th day following the Closing Date, Buyer
will notify each Employee of any plans it has to terminate
that Employee within 180 days following the Closing Date.
(b) After the Closing, to the extent that (i) the
Company is authorized or required to seek a release from any
officer or employee under either the ESPP or the ExSPP, or
(ii) the execution of a release by an officer or employee is
a condition to the receipt of benefits under either the ESPP
or the ExSPP, Buyer will cause the Company to seek, and such
officer or employee to execute, a release substantially in the
form of Exhibit F.
(c) With respect to the right of the Committee (as
defined in the ExSPP) to reduce the severance benefits of an
executive under the ExSPP if the executive accepts a position
that is not a Comparable Position (as defined in the ExSPP),
for a period of 210 days after Closing, Buyer will cause the
Company to require the Committee to exercise such right in
accordance with the instructions of Seller.
10.7 Taking of Necessary Action. Subject to the terms and conditions of
this Agreement and to applicable Law, each of the parties to this
Agreement will use all reasonable efforts promptly to take or cause
to be taken all action and promptly to do or cause to be done all
things necessary, proper or advisable under applicable Laws to
consummate and make effective the transactions contemplated by this
Agreement. Without limiting the foregoing, each of the parties to
this Agreement will, and will cause each of its subsidiaries to,
use reasonable efforts to obtain and make all consents, approvals,
assurances or filings of or with third parties and Governmental
Authorities necessary or, in the opinion of Seller, advisable for
the consummation of the transactions contemplated hereby. Each
party will cooperate with the other in good faith to help the other
satisfy its obligations in this Section 10.7.
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ARTICLE XI
LIMITATIONS ON WARRANTIES AND REMEDIES; INDEMNIFICATION
11.1 Limitations. The representations of Seller contained in
this Agreement are exclusive and are in lieu of all other
representations and warranties, express, implied or statutory,
including without limitation any representation or warranty with
respect to the quality, quantity or volume of the reserves of oil,
gas or other Hydrocarbons in or under the Subject Interests. The
items of personal property, equipment, fixtures and appurtenances
included as part of the Assets are accepted by Buyer "AS IS, WHERE
IS" and no warranties or representations of any kind or character,
express or implied, including any warranty of quality,
merchantability, fitness for a particular purpose or condition, are
given by or on behalf of Seller. THE WARRANTIES OF SELLER AND
BUYER CONTAINED IN THIS AGREEMENT ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, AND BUYER AND SELLER HEREBY
WAIVE ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE OR CONDITION. To the maximum extent permitted
by Law, Seller and Buyer waive all provisions of the Texas
Deceptive Trade Practices Act, Chapter 17, Texas Business and
Commerce Code (other than Section 17.555 thereof), insofar as the
provisions of such Act may be applicable to this Agreement or the
transactions contemplated hereby. To evidence its ability to grant
such waiver, Buyer hereby represents and warrants to Seller
(A) that Buyer (i) is seeking or acquiring, by purchase or lease,
goods or services for commercial or business use, (ii) has assets
of $5,000,000 or more according to its most recent financial
statement prepared in accordance with GAAP, (iii) has knowledge and
experience in financial and business matters that enable it to
evaluate the merits and risks of the transaction contemplated
hereby and (iv) is not in a significantly disparate bargaining
position and (B) that (i) Buyer has assets of $25,000,000 or more
or (ii) is owned or controlled by a corporation or entity with
assets of $25,000,000 or more. Similarly, Buyer, on its own behalf
and on behalf of the Company, hereby releases, acquits and forever
discharges Seller from any claim, demand or cause of action Buyer
or the Company may have against Seller for contribution or
reimbursement provided under Environmental Law, except for a
Purchase Price refund (subject to the Refund Limit as provided in
this Agreement and indemnity for Disposition Liabilities).
11.2 Survival; Time Limit for Claims. No representation,
warranty, covenant or agreement made in this Agreement will survive
the Closing except as provided in this Section 11.2. It is
expressly agreed that the terms and provisions of Articles I, II,
III, VII, XI, XII and XIII and Sections 4.1, 5.6, 6.3, 6.4, 6.6,
6.7, 6.8, 6.9, 6.10, 6.11, 6.12, 6.13, 6.14, 8.1, 8.2, 8.4, 8.5,
8.6, 10.4, 10.5 and 10.6 will survive the Closing until the
expiration of the relevant statute of limitations period; provided
that Seller shall have no liability (whether for indemnity or
otherwise) with respect to the provisions of Articles VI or VIII
except through the return of Purchase Price procedure of Section
7.6. In addition, the definitions set forth in this Agreement that
are used in the provisions that survive the Closing pursuant to
this Section 11.2 shall survive the Closing to the extent necessary
to give operative effect to such surviving
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provisions. No claim for liability with respect to any provision
of this Agreement, whether through indemnity or otherwise, may be
made after the survival period for such provision. Notwithstanding
the foregoing, nothing contained herein shall be deemed to limit
Buyer's or Seller's right to assert a claim based on fraud in
connection with the transactions contemplated hereby. As set forth
in Section 11.4, notwithstanding any other provisions of this
Agreement, Seller will have no liability under this Agreement
(whether for indemnity or otherwise), and will not be required in
any circumstances to pay to Buyer any amounts in the aggregate, in
excess of the Purchase Price.
11.3 Indemnification by Buyer. From and after the Closing,
Buyer agrees to indemnify, defend and hold harmless Seller and
Seller Parent Company and their past, present and future officers,
directors, employees, consultants and agents and the past, present
and future (through the Closing Date) officers, directors,
employees, consultants and agents of the Company from and against
any and all liabilities, losses, damages, claims (whether or not
ultimately successful), costs, expenses (including without
limitation reasonable legal costs and expenses) and obligations
("Losses and Obligations") of the Company and the Subsidiaries
(specifically including the employee claims described on Schedule
6.6.5(g), but excluding liabilities associated with assets that
were owned by the Company and the Subsidiaries and disposed of
prior to the Closing Date to the extent such liabilities have not
been specifically listed on Schedules to this Agreement
("Disposition Liabilities") and excluding the Severance Costs to be
reimbursed by Seller to the Company pursuant to Section 8.4
("Reimbursed Severance Costs")) and any and all Losses and
Obligations related to the Assets, including without limitation
Losses and Obligations under Environmental Laws (except to the
extent of any refund of a portion of the Purchase Price on account
of Environmental Defects under Article VII), Losses and Obligations
with respect to employee compensation, welfare or benefit plans
(other than Reimbursed Severance Costs) and Losses and Obligations
ARISING FROM THE NEGLIGENCE OF ANY INDEMNIFIED PARTY.
11.4 Indemnification by Seller; Limitations on
Liability. Seller agrees to indemnify, defend and hold harmless
Buyer and its past, present and future officers, directors,
employees, consultants and agents from and against any Losses and
Obligations relating to (i) breach of the representations of Seller
set forth in Section 4.1 or covenants of Seller set forth in
Section 8.1(j) or (ii) Disposition Liabilities. In addition, the
parties will enter into an Indemnity Agreement on the Closing Date,
substantially in the form attached as Exhibit E, which relates to
those matters covered by the NGCC Indemnity at the date hereof.
Notwithstanding any other provisions of this Agreement, Seller will
have no liability under this Agreement (whether for indemnity or
otherwise), and will not be required in any circumstances to pay to
Buyer any amounts in the aggregate, in excess of the Purchase
Price.
11.5 Indemnification Procedure.
(a) For the purposes of this Section 11.5, the term
"Indemnitee" will refer to the person or persons indemnified
or entitled (or claiming to be entitled) to be indemnified
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pursuant to the provisions of this Agreement; and the term
"Indemnitor" will refer to the person having the obligation to
indemnify pursuant to such provision.
(b) An Indemnitee will promptly give the Indemnitor
notice of any matter that an Indemnitee has determined has
given or could give rise to a right of indemnification under
this Agreement, stating the amount of the Losses and
Obligations, if known, and method of computation thereof, all
with reasonable particularity, and stating with particularity
the nature of such matter. Failure to provide such notice
will not affect the right of the Indemnitee to indemnification
except to the extent such failure will have resulted in
liability to the Indemnitor that could have been avoided had
such notice been provided promptly.
(c) The obligations and liabilities of an Indemnitor
under this Article XI with respect to Losses and Obligations
arising from claims of any third party that are subject to the
indemnification provided for in this Article XI ("Third Party
Claims") will be governed by and contingent upon the following
additional terms and conditions: if an Indemnitee receives
notice of any Third Party Claim, the Indemnitee will give the
Indemnitor notice of such Third Party Claim pursuant to
clause (b) above, and the Indemnitor may, at its option,
assume and control the defense of such Third Party Claim at
the Indemnitor's expense and through counsel of the
Indemnitor's choice that is reasonably acceptable to the
Indemnitee. In the event the Indemnitor assumes the defense
against any such Third Party Claim as provided above, the
Indemnitee will have the right to participate at its own
expense in the defense of such asserted liability, will
cooperate with the Indemnitor in such defense and make
available on a reasonable basis to the Indemnitor all
witnesses, pertinent records, materials and information in its
possession or under its control relating thereto as is
reasonably required by the Indemnitor. In the event the
Indemnitor does not elect to assume the defense against any
such Third Party Claim, the Indemnitor will pay all reasonable
costs and expenses of such defense as incurred and will
cooperate with the Indemnitee (and be entitled to participate)
in such defense and make available on a reasonable basis all
such witnesses, records, materials and information in its
possession or under its control relating thereto as is
reasonably required by the Indemnitee. Except for the
settlement of a Third Party Claim that involves the payment of
money only and for which the Indemnitee is totally indemnified
by the Indemnitor, no Third Party Claim may be settled without
the prior written consent of the Indemnitee, which consent
will not unreasonably be withheld or action with respect
thereto unduly delayed.
(d) The amount that an Indemnitee will be entitled to
receive from an Indemnitor with respect to any indemnifiable
Losses and Obligations under this Agreement will be net of any
insurance recovery by the Indemnitee on account of such Losses
and Obligations from an unaffiliated party. Each Indemnitee
will be required to pursue recovery from applicable insurance
carriers, to the fullest reasonable extent, before asserting
a claim for indemnification for Losses and Obligations
hereunder.
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ARTICLE XII
DEFAULT AND REMEDIES
12.1 Remedies. Upon failure of either party to comply with
this Agreement by the Closing Date, as it may be extended in
accordance with this Agreement, the other party will be entitled to
pursue, exercise and enforce any and all remedies, rights, powers
and privileges available at law or in equity, provided that, as set
forth in Section 11.4 and notwithstanding any other provisions of
this Agreement, Seller will have no liability under this Agreement
(whether for indemnity or otherwise), and will not be required in
any circumstances to pay to Buyer any amounts in the aggregate, in
excess of the Purchase Price.
12.2 Termination by Lapse of Time. This Agreement may be
terminated by either party by providing written notice to the other
party if the Closing is not completed before 5:00 p.m., Dallas,
Texas, time, on June 15, 1995 (or such later date provided for in
Section 6.11), unless the circumstances resulting in the failure to
consummate the Closing before that time are the result of a breach
of any of the terms of this Agreement by the party seeking to
exercise its right to terminate under this Section 12.2.
12.3 Other Remedies. In addition to the foregoing,
termination of this Agreement will not prejudice or impair Seller's
or Buyer's obligations under Sections 6.4 (and the Confidentiality
Agreement referenced in Section 6.4) and 8.2(b) and such other
portions of this Agreement as are necessary to the enforcement and
construction of Sections 6.4 and 8.2(b). The prevailing party in
any legal proceeding brought under or to enforce this Agreement
will be additionally entitled to recover court costs and reasonable
attorney's fees from the non-prevailing party.
12.4 Specific Performance. Buyer and Seller understand and
agree that the covenants and undertakings on each of their parts
contained in this Agreement are uniquely related to the desire of
Buyer and Seller to consummate the transactions contemplated by
this Agreement, and that the sale of the Stock to Buyer is a unique
business opportunity for Buyer and Seller, and that monetary
damages would not be an adequate remedy therefor. Accordingly,
Buyer and Seller agree that Buyer will be entitled to obtain
specific performance from Seller of each and every covenant and
undertaking contained in this Agreement to be observed or performed
by Seller and that Seller will be entitled to obtain specific
performance from Buyer of each and every covenant and undertaking
contained in this Agreement to be observed or performed by Buyer.
The election by Buyer or Seller to exercise its right to obtain
specific performance shall be in lieu of any right to damages as
provided in Section 12.1; provided, however, if specific
performance is not available to the terminating party pursuant to
this Section 12.4, such party shall be entitled to receive damages
as provided in Section 12.1 in lieu of such specific performance.
12.5 Seller's Net Worth Covenant. Prior to the second
anniversary of the date of this Agreement, Seller will not declare
or pay a distribution on any of its capital stock that (after
taking into account such distribution) would cause its net worth to
be less than $200,000,000, unless Seller's liabilities to Buyer
under this Agreement are assumed by an entity under common
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<PAGE>
control with Seller that (i) has a net worth not less than
$200,000,000 and (ii) agrees in writing with Buyer that it will
not, prior to the second anniversary of the date of this Agreement,
declare or pay a distribution on any of its capital stock that
(after taking into account such distribution) would cause its net
worth to be less than $200,000,000.
12.6 Buyer's Net Worth Covenant. Prior to the second
anniversary of the date of this Agreement, Buyer will not declare
or pay a distribution on any of its capital stock that (after
taking into account such distribution) would cause its net worth to
be less than $200,000,000, unless Buyer's liabilities to Seller
under this Agreement are assumed by an entity under common control
with Buyer that (i) has a net worth not less than $200,000,000 and
(ii) agrees in writing with Seller that it will not, prior to the
second anniversary of the date of this Agreement, declare or pay a
distribution on any of its capital stock that (after taking into
account such distribution) would cause its net worth to be less
than $200,000,000.
ARTICLE XIII
MISCELLANEOUS
13.1 Antitrust Laws. This Agreement is subject in all
respects to and conditioned upon compliance by the parties with
Title II of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "Hart-Scott Act"), and rules and regulations promulgated
pursuant thereto, to the extent that such Act, rules and
regulations are applicable to the transactions contemplated hereby.
Buyer and Seller agree to make such filings with and provide such
information to the Federal Trade Commission and the Department of
Justice with respect to the transactions contemplated hereby as are
required in connection with the Hart-Scott Act sufficiently in
advance of the Closing Date to permit the lapse of the normal
waiting periods prescribed in connection with the Hart-Scott Act
prior to the Closing Date and to join each others' requests for
early termination. Buyer and Seller agree to use reasonable
efforts to obtain all governmental approvals required to consummate
the transactions contemplated hereby and to cause early termination
of the waiting period under the Hart-Scott Act.
13.2 Confidentiality of Proprietary Information. Subsequent
to the execution of this Agreement, neither Seller nor any of its
affiliates will for itself or on behalf of any corporation, person,
firm, partnership, association, or other entity (whether as an
individual, agent, servant, employee, employer, director, officer,
shareholder, investor, principal, consultant or in any other
capacity) disclose to any person or entity any of the confidential
seismic and other oil and gas information, trade secrets,
exploratory data, methods, systems, procedures, data bases or
software programs or applications or processes of, or utilized by,
the Company; provided that (after reasonable measures have been
taken to maintain the confidentiality and after giving reasonable
notice to Buyer specifying the information involved and the manner
and extent of the proposed disclosure thereof) (i) any disclosure
of such information may be made to the extent required by
applicable Law or judicial or regulatory process, (ii) such
information may be used as evidence in or in connection with any
pending or threatened litigation relating to this Agreement or any
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<PAGE>
transaction contemplated hereby, (iii) any disclosure of such
information may be made to the extent that such information is in
the public domain (other than by or through Seller), and (iv) any
disclosure of such information may be made to the extent required
by any agreement or agreements under which Seller, the Company or
any Subsidiary is bound or to which the Stock or any of the Assets
are subject.
13.3 Public Announcements. Except as set forth in the
following sentence, the parties to this Agreement agree that prior
to making any public announcement or statement with respect to the
transactions contemplated by this Agreement, the party desiring to
make such public announcement or statement will consult with the
other party and exercise reasonable efforts to (i) agree upon the
text of a joint public announcement or statement to be made by both
of such parties or (ii) obtain approval of the other party to the
text of a public announcement or statement to be made solely by
Seller or Buyer, as the case may be. Nothing contained in this
Section will be construed to require either party to obtain
approval of the other party to disclose information, or to submit
any such disclosed information for review by the other party, with
respect to any disclosure (i) required by applicable Law or
(ii) necessary to comply with disclosure requirements of any
applicable stock exchange.
13.4 Delivery of Records. Except as otherwise provided in
Section 8.5(i), Seller will deliver to Buyer as soon after the
Closing Date as is practicable all files, data, books (including
corporate minute books) and records (including stock transfer
records) of the Company and the Subsidiaries.
13.5 Further Assurances and Records.
(a) After the Closing each of the parties will execute,
acknowledge and deliver to the other such further instruments,
and take such other action, as may be reasonably requested in
order to more effectively assure to such party all of the
respective properties, rights, titles, interests, estates, and
privileges intended to be assigned or delivered to, or to
inure to the benefit of, such party in consummation of the
transactions contemplated hereby.
(b) Buyer agrees to maintain the files and records of
the Company and the Subsidiaries that are acquired pursuant to
this Agreement until December 31, 2005 (or for such longer
period of time as Seller will advise Buyer is necessary in
order to have records available with respect to open years for
Tax audit purposes), or, if any of such records pertain to any
claim or dispute pending at December 31, 2005, Buyer will
maintain any of such records designated by Seller until such
claim or dispute is finally resolved and the time for all
appeals has been exhausted. Buyer will provide Seller and its
representatives reasonable access to and the right to copy
such files and records for the purposes of (i) preparing and
delivering any accounting provided for under this Agreement
and adjusting, prorating and settling the charges and credits
provided for in this Agreement, (ii) complying with any Law
affecting Seller's interest in the Stock or the Company's or
any Subsidiary's interest in the Assets prior to the Closing
Date, (iii) preparing any audit
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<PAGE>
of the books and records of any third party relating to
Seller's interest in the Stock or the Company's or any
Subsidiary's interest in the Assets prior to the Closing Date,
or responding to any audit prepared by such third parties,
(iv) preparing Tax Returns, (v) responding to or disputing any
Tax audit or (vi) asserting, defending or otherwise dealing
with any claim or dispute under this Agreement or with respect
to the Company, the Subsidiaries or the Assets. In no event
will Buyer destroy any such files and records without giving
Seller 60 days advance written notice thereof and the
opportunity, at Seller's expense, to obtain such files and
records prior to their destruction.
13.6 Notices. Except as otherwise expressly provided in this
Agreement, all communications required or permitted under this
Agreement will be in writing and any such communication or delivery
will be deemed to have been duly given and received when actually
delivered to the address set forth below of the party to be
notified personally (by a recognized commercial courier or delivery
service that provides a receipt) or by telecopier (confirmed in
writing by a personal delivery as set forth above), addressed as
follows:
If to Seller: PG&E Enterprises
444 Market Street, Suite 1900
San Francisco, CA 94111
Attention: Vice President--Finance
Fax: (415) 291-6496
With a copy to:
PG&E Enterprises
444 Market Street, Suite 1900
San Francisco, CA 94111
Attention: Chief Counsel
Fax: (415) 291-6498
If to Buyer: Enserch Exploration, Inc.
c/o ENSERCH Corporation
300 S. St. Paul
Dallas, TX 75201
Attention: Michael G. Fortado, Esq.
Fax: (214) 670-2097
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<PAGE>
<PAGE>
With a copy to:
Jackson & Walker, L.L.P.
901 Main Street, Suite 6000
Dallas, TX 75202-3797
Attention: Fred W. Fulton, Esq.
Fax: (214) 953-6115
Any party may, by written notice so delivered to the other, change
the address to which delivery will thereafter be made.
13.7 Incidental Expenses. Buyer will bear and pay (i) all
transfer or documentary taxes incident to the transfer of Stock to
Buyer and (ii) all filing, recording or registration fees for any
assignment or conveyance delivered under this Agreement.
13.8 Assumption of Risk. Effective if and only if the Closing
occurs, Buyer shall assume all risk of diminution in the value of
the Stock due to a change in the condition of the Assets or the
business of the Company and the Subsidiaries from the Balance Sheet
Date until Closing (INCLUDING, WITHOUT LIMITATION, ANY SUCH
DIMINUTION OR CHANGE ATTRIBUTABLE TO THE NEGLIGENCE OF SELLER, THE
COMPANY OR ANY SUBSIDIARY), except (i) to the extent any change of
condition is attributable to the willful misconduct or gross
negligence of Seller or (ii) to the extent a breach by Seller of
its covenants in Section 8.1 gives rise to a refund of the Purchase
Price pursuant to Section 7.6.
13.9 Entire Agreement. Except for the Confidentiality
Agreement, this Agreement embodies the entire agreement between the
parties with respect to the subject matter of this Agreement
(superseding all prior agreements, arrangements, understandings and
solicitations of interest or offers related to the subject matter
of this Agreement), and may be supplemented, altered, amended,
modified or revoked by writing only, signed by both of the parties
to this Agreement. The headings in this Agreement are for
convenience only and will have no significance in the
interpretation of any term or provision of this Agreement.
13.10 Governing Law. This Agreement will be governed and
construed and enforced in accordance with the laws of the State of
Texas, without regard to rules concerning conflicts of laws.
13.11 Counterparts. This Agreement may be executed in any
number of counterparts, and each and every counterpart will be
deemed for all purposes one agreement.
13.12 Waiver. Any of the terms, provisions, covenants,
representations or conditions contained in this Agreement may be
waived only by a written instrument executed by the party waiving
compliance. The failure of any party at any time or times to
require performance of any provision of this Agreement will 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 or
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<PAGE>
representation contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, will 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 or representation.
13.13 Binding Effect; Assignment. All the terms,
provisions, covenants, representations and conditions of this
Agreement will be binding upon and inure to the benefit of and be
enforceable by the parties to this Agreement and their respective
successors and assigns; but this Agreement and the rights and
obligations hereunder will not be assignable or delegable by any
party without the prior written consent of the non-assigning or
non-delegating parties, which may be withheld at the sole
discretion of such parties.
13.14 No Recordation. Buyer and Seller expressly covenant
and agree not to record or place of record this Agreement or any
copy or memorandum thereof in any real property records.
13.15 Time Periods. Time is of the essence in the
performance of this Agreement.
13.16 Construction. Each party hereby acknowledges and
agrees that such party has consulted legal counsel in connection
with the negotiation of this Agreement and that such party has
bargaining power equal to that of the other party in connection
with the negotiation and execution of this Agreement. Accordingly,
the parties agree the rule of contract construction to the effect
that an agreement will be construed against the draftsman will have
no application in the construction or interpretation of this
Agreement.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed by their duly authorized officers as of the date first
above written.
ATTEST: PG&E ENTERPRISES
By /s/ Stuart W. Booth
Name:
Title: Vice President - Finance and
Treasurer
ATTEST: ENSERCH EXPLORATION, INC.
By /s/ David W. Biegler
Name:
Title: Chairman and Chief Executive
Officer
<PAGE>
<PAGE>
EXHIBIT A-1
ARBITRATION PROCEDURES
The arbitration procedures (the "Arbitration Procedures")
referred to in the Stock Purchase Agreement (the "Agreement") to
which this Exhibit A-1 is attached shall be as follows:
1. Capitalized terms used herein, and not otherwise herein
defined, shall have the meaning ascribed to such terms in the
Agreement.
2. (a) If a disagreement regarding a Pre-Closing Defect
Claim or any other matter for which arbitration is available
under the Agreement is submitted to arbitration, such
disagreement will constitute a "Disputed Issue" to be resolved
by the binding arbitration provided for herein.
(b) With respect to unresolved Deferred Adjustment
Claims, on or before the Deferred Matters Date, Seller and
Buyer shall each submit to the other the list of what such
party considers to comprise the remaining unresolved Deferred
Adjustment Claims. The two lists shall together comprise the
"Disputed Issues" relating to Deferred Adjustment Claims which
shall be resolved by the binding arbitration provided for
herein.
3. Seller and Buyer, each being duly authorized by all necessary
corporate proceedings, shall submit the Disputed Issues to
binding arbitration by an arbitrator selected as follows:
Buyer and Seller shall use reasonable efforts to select a
mutually acceptable arbitrator. If the parties fail to agree
on an arbitrator within fifteen (15) days, either party may
follow the procedures specified below and request judicial
appointment of an arbitrator. Either party may request the
judge of the United States District Court for the Northern
District of Texas having greatest tenure, but not yet on
retired or senior status, to appoint an arbitrator. If that
judge fails to do so within thirty (30) days, either party may
request the judge of that court next senior to name the
arbitrator, and if that judge fails to do so after ten (10)
days, either party may make the request of the judge of that
court next senior, and so on, until the arbitrator is
appointed. Each arbitrator shall be knowledgeable about
matters affecting the Disputed Issue(s) for which such
arbitrator is appointed. In addition, the arbitrator shall be
required to meet the qualification requirements of the
Commercial Arbitration Rules of the American Arbitration
Association (the "AAA Rules"). If prior to rendering a
decision an arbitrator resigns or becomes unable to serve, the
arbitrator will be replaced using the mechanism set forth in
this Section 3.
4. No party subject to these Arbitration Procedures will commence
or prosecute any suit or action against another party subject
to these Arbitration Procedures relating to the Disputed
Issues, other than as may be necessary to compel arbitration
under these Arbitration Procedures or to enforce the award of
an arbitrator.
A-1-1
<PAGE>
<PAGE>
5. In fulfilling his duties hereunder with respect to Disputed
Issues, any arbitrator shall be bound by the applicable
provisions of the Agreement that relate to Defects. Except as
set forth in Section 7.6.2 of the Agreement, the arbitrator
shall not add any interest factor reflecting the time value of
money to any amount awarded.
6. No matters whatsoever, other than the Disputed Issues, are
subject to the agreement to arbitrate embodied in these
Arbitration Procedures. The arbitrator shall be empowered
hereunder solely to resolve the Disputed Issues. The
arbitrator shall not have any authority to award
consequential, exemplary or punitive damages. The sole forum
for the arbitration shall be Dallas County, Texas and all
hearings shall be conducted in Dallas County, Texas.
7. The decision of the arbitrator shall be rendered in writing
and shall be final and binding upon the parties as to the
Disputed Issues. The expenses of arbitration, including
compensation to the arbitrator, shall be borne equally by the
parties. Each party shall bear the compensation and expenses
of its own counsel, witnesses and employees. If the testimony
of a witness is obtained by both parties, the costs associated
with obtaining such testimony shall be borne equally between
the parties.
8. Matters not specifically provided for in these Arbitration
Procedures shall be governed by the AAA Rules.
A-1-2
<PAGE>
EXHIBIT 15
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in ENSERCH Corporation's registration
statements on Form S-3 (File No. 33-52525), as amended, and
Form S-8 (File No. 33-57715), of our report on the financial
statements of Dalen Corporation as of December 31, 1994 and 1993,
and for the three years in the period ended December 31, 1994,
dated February 24, 1995, included in this Form 8-K, and to all
references to our firm included in these registration statements.
ARTHUR ANDERSEN LLP
Dallas, Texas
May 26, 1995
<PAGE>
EXHIBIT 99.1
DALEN CORPORATION
Consolidated Financial Statements
As Of December 31, 1994 And 1993
Together With Auditor's Report
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
DALEN Corporation:
We have audited the accompanying consolidated balance sheets of DALEN
Corporation (formerly DALEN Resources Corp.) and subsidiaries as of December
31, 1994 and 1993 (as restated, see note 1), and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1994. 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 DALEN Corporation and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles.
As explained in Note 2 to the financial statements, effective January 1, 1993,
DALEN Corporation and subsidiaries adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Prior year financial
statements have not been restated.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 24, 1995
<PAGE>
<PAGE>
<TABLE>
DALEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 1994, 1993 and 1992
(stated in thousands of dollars)
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
REVENUES:
Natural gas $115,593 $152,488 $111,779
Oil and gas liquids 51,054 73,852 82,003
Other 2,341 5,144 5,822
-------- -------- --------
168,988 231,484 199,604
-------- -------- --------
OPERATING EXPENSES:
Lease operating 43,533 56,367 52,389
General and administrative 18,057 17,783 18,788
Depreciation, depletion and amortization 101,151 128,364 109,294
Exploration 24,886 19,453 25,278
-------- -------- --------
187,627 221,967 205,749
-------- -------- --------
OPERATING INCOME (LOSS) (18,639) 9,517 (6,145)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 3,656 1,360 1,848
Interest expense (6,002) (7,255) (6,885)
Other, net 2,845 85 1,105
-------- -------- --------
499 (5,810) (3,932)
-------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (18,140) 3,707 (10,077)
INCOME TAX BENEFIT (EXPENSE):
Current 21,859 18,997 25,656
Deferred (6,653) (13,153) (22,125)
-------- -------- --------
15,206 5,844 3,531
-------- -------- --------
NET EARNINGS (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (2,934) 9,551 (6,546)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 7,958
-------- -------- --------
NET EARNINGS (LOSS) $ (2,934) $ 17,509 $ (6,546)
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
DALEN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
(stated in thousands of dollars)
<CAPTION>
1994 1993
-------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,888 $ 48,117
Accounts receivable:
Oil and gas 20,009 29,934
Trade 6,030 5,537
Affiliates 7,616 11,154
Inventories 2,125 3,802
Prepaid expenses 3,635 6,310
-------- --------
Total current assets 50,303 104,854
-------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties, based on successful
efforts method 787,579 916,354
Other property and equipment 6,671 5,808
-------- --------
794,250 922,162
Less: Accumulated depreciation, depletion
and amortization (362,548) (353,455)
-------- --------
Net property and equipment 431,702 568,707
-------- --------
OTHER ASSETS 655 1,745
-------- --------
TOTAL ASSETS $482,660 $675,306
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,394 $ 25,641
Interest payable 67 954
Accrued liabilities 10,998 12,937
-------- --------
Total current liabilities 26,459 39,532
-------- --------
DEFERRED INCOME TAXES 72,529 65,876
ABANDONMENT, DISMANTLEMENT AND OTHER LIABILITIES 13,864 15,156
LONG-TERM DEBT 115,000 130,000
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value, 1,000 shares
authorized; 100 shares issued and outstanding 1 1
Additional paid-in capital 335,470 502,470
Accumulated deficit (80,663) (77,729)
-------- --------
Total stockholder's equity 254,808 424,742
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $482,660 $675,306
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
DALEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
For the years ended December 31, 1994, 1993, and 1992
(stated in thousands of dollars, except common shares)
<CAPTION>
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Totals
------ ------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1992 100 $1 $637,470 $(88,692) $548,779
Dividends to Parent (135,000) (135,000)
Net loss (6,546) (6,546)
--- -- -------- -------- --------
BALANCE AT DECEMBER 31, 1992 100 1 502,470 (95,238) 407,233
Net earnings 17,509 17,509
--- -- -------- -------- --------
BALANCE AT DECEMBER 31, 1993 100 1 502,470 (77,729) 424,742
Dividends to Parent (167,000) (167,000)
Net loss (2,934) (2,934)
--- -- -------- -------- --------
BALANCE AT DECEMBER 31, 1994 100 $1 $335,470 $(80,663) $254,808
=== == ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
DALEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1994, 1993 and 1992
(stated in thousands of dollars)
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (2,934) $ 17,509 $ (6,546)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation, depletion and amortization 101,151 128,364 109,424
Surrendered leases and impairments 9,461 9,344 12,983
Dry hole expense 9,352 4,143 7,482
Deferred income taxes 6,653 13,153 22,125
Loss (gain) on sale of assets (2,509) 146 (365)
Cumulative effect of change in
accounting principle (7,958) -
Other (769) (2,630) (737)
-------- -------- --------
120,405 162,071 144,366
-------- -------- --------
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 8,563 34,869 (13,141)
Decrease (increase) in prepaid expenses 2,534 54 (1,461)
Decrease in accounts payable (9,842) (11,985) (22,279)
Increase (decrease) in interest payable (887) (529) 556
Decrease in accrued liabilities and other (3,629) (544) (4,183)
-------- -------- --------
Net cash provided by operating activities 117,144 183,936 103,858
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (108,105) (94,442) (89,892)
Proceeds from sales of property and equipment 135,732 1,540 1,907
Receivable related to acquisition 5,573
-------- -------- --------
Net cash provided by (used in) investing
activities 27,627 (92,902) (82,412)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to Parent (167,000) (135,000)
Long-term debt borrowing 15,000 111,000
Repayment of long-term debt (30,000) (60,007) (6)
-------- -------- --------
Net cash used in financing activities (182,000) (60,007) (24,006)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (37,229) 31,027 (2,560)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 48,117 17,090 19,650
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,888 $ 48,117 $ 17,090
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
1. ORGANIZATION:
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and include
the accounts of DALEN Corporation (formerly DALEN Resources Corp.) and
its wholly-owned subsidiaries (the "Company"). All significant
intercompany balances and transactions are eliminated in consolidation.
The Company is a wholly-owned subsidiary of PG&E Enterprises ("Parent"),
which is 100% owned by Pacific Gas and Electric Company ("PG&E"). The
Company's primary business activity is the exploration, development and
production of natural gas and crude oil reserves in the continental
United States.
During 1994, the Parent determined that the Company did not fit within
its long-term corporate strategy. As a result, the Parent intends to
sell its 100% ownership interest in the Company through an initial
public offering of the Company's common stock or by other means. A
registration statement was filed on Form S-1 with the Securities and
Exchange Commission during 1994 to effect the disposition. The
accompanying prior year financial statements were restated in connection
with the filing of the Form S-1, resulting in an increase in 1993 net
earnings and stockholder's equity of $24.2 million.
2. ACCOUNTING POLICIES:
Property and Equipment
The Company uses the successful efforts method of accounting for oil and
gas properties. Under the successful efforts method, lease acquisition
costs are capitalized when incurred. Unproved leasehold costs are
periodically assessed on a property-by-property basis, and a loss is
recognized when assessment indicates a permanent impairment in value has
occurred. Any remaining unproved leasehold costs are charged to expense
upon abandonment of the respective leases.
Exploratory costs, excluding successful exploratory wells, are charged
to expense as incurred. Costs of drilling exploratory wells are
initially capitalized pending determination of whether the wells have
found proved reserves which justify commercial development. If proved
reserves are not found, the drilling costs are charged to expense.
Costs applicable to productive wells and development dry holes are
capitalized and amortized on the units-of-production method based on
estimated proved reserve quantities.
The Company periodically reviews the carrying value of its proved oil
and gas properties for impairment in value on a company-wide basis by
comparing capitalized costs of proved oil and gas properties with
undiscounted future net cash flows, after income taxes. Under this
policy, no impairment in carrying value has been required during 1994,
1993, or 1992. However, in November 1993 the Financial Accounting
Standards Board issued an exposure draft "Accounting for the Impairment
of Long-Lived Assets." Under this proposed standard, an assessment of
fair value of oil and gas properties will be required to be performed
using certain groupings of property costs. Fair value is to be measured
by market value, if an active market exists. If the market value is not
readily determinable, discounted future net cash flows, after income
<PAGE>
<PAGE>
taxes, are to be used to estimate fair value. The impact of adoption
of this proposed statement on the consolidated financial statements of
the Company has not been determined.
Other property and equipment are depreciated on a straight-line basis
over their estimated useful lives ranging from 5 to 20 years. Major
renewals and betterments, which improve or extend the life of the asset,
are capitalized. The costs of repairs and maintenance are charged to
expense as incurred.
Abandonment and Dismantlement Costs
Estimated abandonment and dismantlement costs of offshore wells and
platforms are accrued as liabilities on the units-of-production method
based on estimated proved reserves of the property. At December 31,
1994, total estimated future abandonment and dismantlement costs
associated with proved developed properties were $11.3 million, of which
$6.2 million was accrued.
Inventories
Inventories, consisting principally of equipment and oil field supplies,
are recorded at cost which approximates market value.
Gas Balancing Arrangements
The Company only recognizes revenue associated with volumes sold to
which it is entitled under respective property divisions of interest.
Proceeds received for natural gas volumes in excess of entitlements are
deferred and recognized as revenue when the gas is made up to the other
interest owners. Accounts receivable and payable resulting from gas
balancing arrangements were not significant at December 31, 1994 or
1993.
Hedging Transactions
The Company periodically enters into oil and natural gas hedging
transactions to minimize the risk of price decreases. Such hedging
transactions also limit revenues which might result from potential price
increases. Under the hedging transactions, the Company receives or
makes payments based on the differential between a specified price and
the actual quote market price of oil and natural gas. The Company does
not use derivative financial instruments for trading purposes.
Gains and losses resulting from hedging activities are recognized in the
same period that revenues on hedged volumes are recorded. Net gains
(losses) of $2.4 million, ($8.9) million and ($12.8) million resulting
from such transactions are included in oil and natural gas revenues for
the years ended December 31, 1994, 1993 and 1992, respectively. The
Company had no open hedging positions at December 31, 1994.
Income Taxes
The operations of the Company are ultimately included in the
consolidated tax return of PG&E. A tax-sharing agreement between PG&E
and the Parent provides that the Parent pay its proportionate share of
state and federal income taxes and that PG&E reimburse the Parent for
related tax benefits to the extent realized in the consolidated tax
return. The Parent then allocates its proportionate share of income
<PAGE>
<PAGE>
taxes to the Company based on its contribution to the consolidated tax
liability or benefit.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"), which requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have
been included in the financial statement or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates. The cumulative effect of adopting
SFAS No. 109 at January 1, 1993 resulted in an increase in oil and gas
properties and deferred income taxes of $22.0 million and $14.0 million,
respectively, and a cumulative gain of $8.0 million. The financial
statements for 1992 have not been restated.
Prior to 1993, the provision for income taxes was based on income and
expenses included in the consolidated statements of operations.
Differences between taxes computed on financial earnings and taxes
currently payable under applicable state and federal statutes and
regulations were classified as deferred taxes.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments", defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The
Company's financial instruments are comprised of short-term investments,
accounts receivable, accounts payable and long-term debt. The carrying
amount of the Company's financial instruments approximate fair value
because of the short maturity of the instruments or because the interest
rates of the instruments are based on current market rates.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid cash investments with an original maturity of three months
or less to be cash equivalents.
Supplemental cash flow information is as follows (stated in thousands
of dollars):
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Cash paid for interest during the year $ 6,889 $ 7,656 $ 6,329
======= ======= =======
Cash received from Parent for income
tax benefit $25,196 $25,041 $14,433
======= ======= =======
</TABLE>
3. RELATED PARTY TRANSACTIONS:
The Company sells natural gas to PG&E and to other affiliates. These sales
were made on terms approximating spot market prices at the time of the
transactions. During 1994, 1993 and 1992, such sales totaled
approximately $1.2 million, $1.7 million and $2.8 million, respectively.
<PAGE>
<PAGE>
The Company's employee benefit plans and insurance programs are
administered or combined with affiliated companies under the Parent's
control. The Company has paid its proportionate share of related costs
(administration fees to third parties and premiums) which approximates the
cost of obtaining such programs for non-affiliates.
PG&E and the Parent perform certain other administrative functions,
including cash management services, for the Company. Costs associated
with such services for 1994, 1993 and 1992 were not significant. At
December 31, 1994 and 1993, $8.9 million and $46.1 million, respectively,
of the Company's cash was held by PG&E, at the Company's option, for cash
management purposes. The average interest rate received by the Company on
such cash investments was 4.9% in 1994 and 3.8% in 1993, which
approximates market rates.
Accounts receivable from affiliates at December 31, 1994 and 1993 result
primarily from income tax benefits due from the Parent, and are liquidated
upon the filing of the annual consolidated tax return of PG&E. Other
accounts receivable and payable to affiliates resulting from the above
activities are liquidated by receipts and payments in the normal course of
business.
4. LONG-TERM DEBT:
The Company's credit agreement (the "Agreement"), as amended February 22,
1995, provides for a two-year revolving loan (expiring February 1997),
which is convertible at the Company's option, to a five year term loan.
The revolving loan may be extended annually by consent of the banks. The
Agreement has a maximum commitment from the banks of $200 million, with
actual commitment amounts potentially limited by the periodic
determination of a "Borrowing Base" (determined based on discount future
net revenues expected from the Company's proved oil and gas reserves,
using various parameters set forth in the Agreement). The Borrowing Base
at December 31, 1994, was approximately $168.5 million, of which
$115 million in loans was outstanding.
The Agreement, at the request of the banks, shall be secured by the
Company's interest in the Borrowing Base assets, including all related
property and equipment.
Interest on loans outstanding is based on the Agent Bank's Reference Rate,
as defined, or on the Agent Bank's CD Rate, or an adjusted Offshore Rate,
and is payable quarterly. At December 31, 1994, the interest rate in
effect was 7.0%. The Company is also required to pay certain fees in
connection with the facility, as well as comply with various covenants set
forth in the Agreement.
<PAGE>
<PAGE>
The aggregate maturities of long-term debt outstanding as of December 31,
1994 are as follows (stated in thousands of dollars):
Year Ending
December 31, Amount
------------ --------
1995 $
1996
1997 23,000
1998 23,000
1999 23,000
Thereafter 46,000
--------
$115,000
========
5. INCOME TAXES:
The components of the income tax benefit (expense), before cumulative
effect of change in accounting principle, are as follows (stated in
thousands of dollars):
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Current income taxes:
Federal $19,368 $17,216 $21,982
State 2,491 1,781 3,674
------- ------- -------
21,859 18,997 25,656
------- ------- -------
Deferred income taxes:
Federal (5,455) (11,176) (18,619)
State (1,198) (1,977) (3,506)
------- ------- -------
(6,653) (13,153) (22,125)
------- ------- -------
Total income tax benefit $15,206 $ 5,844 $ 3,531
======= ======= =======
</TABLE>
A reconciliation of income tax benefit computed by applying the federal
statutory income tax rate to earnings (loss) before income taxes is as
follows (stated in thousands of dollars):
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Expected federal tax benefit (expense)
at statutory rate $ 6,349 $(1,297) $ 3,426
State tax benefit (expense) 1,097 (224) 619
Section 29 tight sands gas
tax credits 6,112 7,434 2,128
Permanent differences arising from
acquisitions and other 1,648 (69) (2,642)
------- ------- -------
Total income tax benefit $15,206 $ 5,844 $ 3,531
======= ======= =======
</TABLE>
<PAGE>
<PAGE>
The sources of deferred tax benefit (expense) and their tax effect are as
follows (stated in thousands of dollars):
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
------- -------- --------
<S> <C> <C> <C>
Sale of oil and gas properties $16,498 $ $
Oil and gas property impairments 4,782 2,250 5,694
Depreciation, depletion and
amortization 1,779 13,079 1,392
Intangible drilling costs (29,712) (28,482) (29,211)
------- -------- --------
Total deferred income tax expense $(6,653) $(13,153) $(22,125)
======= ======== ========
</TABLE>
The net deferred tax liability reflected in the Company's consolidated
balance sheet at December 31, 1994 and 1993 results primarily from
temporary differences in the treatment of costs of oil and gas properties
for financial and income tax reporting purposes.
6. OVERRIDING ROYALTY INTEREST:
The Company's interest in certain gas properties acquired in 1991 is
subject to a previously existing undivided overriding royalty interest
("ORRI") held by an unaffiliated party. The ORRI entitles the holder to
receive natural gas production (aggregating 4.0 Bcf at December 31, 1994)
through March 1996, subject to various daily and annual limitations.
Shortfalls in production from the wells subject to the ORRI must be made
up by the Company with production from other properties or through
purchases on the spot market. At December 31, 1994, $1.6 million in
accrued liabilities has been provided for future lease operating expenses
on the subject properties and for potential production shortfalls.
7. EMPLOYEE BENEFIT PLAN:
The Company participates in a 401(k) savings plan ("Plan") sponsored by
the Parent. Under the Plan, eligible employees are permitted to defer
receipt of up to 7% of their compensation (subject to certain limitations
by the Internal Revenue Code of 1986, as amended). After one year of
service, the Company will contribute an amount equal to 5% of an
employee's salary into the Plan, and the Company will match employee
contributions on a 100% basis, up to 5% of the employee's salary. Amounts
held under the Plan are invested among various investment funds at the
direction of the individual employee. Employee contributions are 100%
vested at the date of contribution. Company contributions are vested 100%
after five years of employment. For the years ended December 31, 1994,
1993 and 1992, the Company expensed $1.1 million, $1.2 million and $1.2
million, respectively, for contributions made under the Plan.
<PAGE>
<PAGE>
8. MAJOR CUSTOMERS:
The Company markets its oil and gas production to numerous purchasers
under a combination of short and long-term contracts. One customer
accounted for 11.1% of the Company's consolidated revenues in 1993. There
were no individual customers which accounted for more than 10% of total
revenues in 1994 or 1992. Management believes that the loss of any major
customers would not have a material adverse effect on the Company due to
the availability of other purchasers for the Company's production.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases office space under noncancelable leases, which extend
through 2002. In addition, certain office space no longer in use is being
subleased.
The future minimum rental payments required under the leases, net of
sublease income, are as follows (stated in thousands of dollars):
Year Ending
December 31, Amount
----------- -------
1995 $ 1,990
1996 2,075
1997 1,998
1998 1,703
1999 1,479
Thereafter 3,822
-------
$13,067
=======
The Company has established a $1.9 million reserve as of December 31, 1994
for rent payments on office space no longer in use. The reserve is net of
expected sublease proceeds of $2.5 million under sublease agreements
currently in effect.
The Company has sublet certain of the unused office space to PG&E for
which payments received aggregated $.4 million for each of the three years
in the period ended December 31, 1994. As of December 31, 1994, future
sublease payments from PG&E are expected to aggregate $1.5 million through
1998.
The Company has entered into an agreement to acquire 3-D seismic data in
1995 and 1996 for payments aggregating $3.9 million.
The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry. The concentration of credit
risk in a single industry affects the Company's overall exposure to credit
risk because customers may be similarly affected by changes in economic
and other conditions. The Company has not experienced significant credit
losses on such receivables.
The Company is directly or indirectly involved in various pending lawsuits
and claims. Reserves for lawsuits and claims are provided for when a loss
is determined to be probable and the amount can be reasonably estimated.
In the opinion of management, the ultimate outcome of such claims will not
have a material impact on the results of operations of the Company.
<PAGE>
<PAGE>
10. OIL AND GAS PROPERTIES:
The following table sets forth certain information with respect to costs
incurred in connection with the Company's oil and gas producing activities
(stated in thousands of dollars):
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
-------- ------- --------
<S> <C> <C> <C>
Property acquisitions:
Proved $ 14,119 $ 1,001 $ 14,308
Unproved 23,477 4,944 3,665
Development costs 49,050 76,099 70,771
Exploratory costs 26,921 9,653 11,263
-------- ------- --------
$113,567 $91,697 $100,007
======== ======= ========
</TABLE>
Capitalized costs for oil and gas properties are as follows (stated in
thousands of dollars):
<TABLE>
<CAPTION>
December 31,
1994 1993
--------- ---------
<S> <C> <C>
Oil and gas properties:
Proved $ 739,361 $ 880,198
Unproved 48,218 36,156
--------- ---------
787,579 916,354
Accumulated depreciation, depletion
and amortization (359,331) (351,105)
--------- ---------
$ 428,248 $ 565,249
========= =========
</TABLE>
In the third quarter of 1994, the Company sold certain oil and gas
properties (the "Non-Strategic Properties") that did not fit within the
Company's current business strategy. The Company sold the Non-Strategic
Properties, which had a net book value of $131.7 million, to unrelated
third parties for $134.0 million in cash, resulting in a pre-tax gain of
$2.3 million, which is included in other income in the accompanying
consolidated statement of operations.
In October and November 1994, the Company acquired producing and non-
producing oil and gas properties located in Louisiana, Texas and offshore
Gulf of Mexico for approximately $28.1 million in cash.
11. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED):
The estimates of proved oil and gas reserves utilized in the preparation
of the consolidated financial statements were prepared by independent
petroleum engineers at December 31, 1994. Such estimates are in
accordance with guidelines established by the Securities and Exchange
Commission and the Financial Accounting Standards Board, which require
<PAGE>
<PAGE>
that reserve reports be prepared under existing economic and operating
conditions with no provision for price and cost escalations except by
contractual arrangements. All of the Company's reserves are located in
the United States.
The Company emphasizes that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current
information becomes available. In addition, a portion of the Company's
proved reserves is undeveloped, which increases the imprecision inherent
in estimating reserves which may ultimately be produced.
Proved oil and gas reserve information, together with the changes therein,
are as follows (oil in MBbls, gas in MMcf):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1993 1992
--------------- --------------- --------------
Oil Gas Oil Gas Oil Gas
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year 20,074 364,181 23,861 414,099 23,255 406,332
Revisions (25) (27,253) (740) (15,631) 3,257 (11,110)
Extensions and
discoveries 3,960 80,850 1,582 39,644 1,633 71,300
Purchases and
minerals-in-place 557 12,529 74 2,656 433 16,900
Sales of
minerals-in-place (9,346) (62,722)
Production (3,525) (60,223) (4,703) (76,587) (4,717)(69,323)
------ ------- ------ ------- ------ -------
End of year 11,695 307,362 20,074 364,181 23,861 414,099
====== ======= ====== ======= ====== =======
Proved developed
reserves:
Beginning of year 17,508 335,476 21,670 390,830 19,944 352,285
====== ======= ====== ======= ====== =======
End of year 11,134 262,819 17,508 335,476 21,670 390,830
====== ======= ====== ======= ====== =======
</TABLE>
<PAGE>
<PAGE>
The standardized measure of discounted future net cash flows relating to
proved reserves is as follows (stated in thousands of dollars):
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
--------- ---------- ----------
<S> <C> <C> <C>
Future cash inflows $ 651,143 $1,073,395 $1,322,489
Future costs:
Production (185,726) (313,606) (335,634)
Development (45,437) (42,604) (41,961)
Income taxes (74,250) (111,229) (186,259)
--------- ---------- ----------
Future net cash flows 345,730 605,956 758,635
10% discount factor (83,691) (156,009) (204,473)
--------- ---------- ----------
Standardized measure of
discounted future net
cash flows $ 262,039 $ 449,947 $ 554,162
========= ========== ==========
</TABLE>
Changes in the standardized measure of discounted future net cash flows
relating to proved reserves are as follows (stated in thousands of
dollars):
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Standardized measure,
beginning of year $ 449,947 $ 554,162 $ 531,868
Net changes in sales prices,
net of production costs (105,808) (64,251) 59,647
Revisions of quantity estimates (22,467) (21,132) 10,585
Changes in future development
costs, including development
costs incurred 12,722 8,155 15,504
Accretion of discount 47,490 62,254 56,310
Extension and discoveries 69,331 44,267 91,800
Purchases of minerals-in-place 12,848 1,814 19,695
Sales of minerals-in-place (82,300)
Sales, net of production costs (121,457) (180,775) (156,480)
Net change in income taxes 679 43,429 (37,149)
Changes in timing and other 1,054 2,024 (37,618)
--------- --------- ---------
Standardized measure, end of year $ 262,039 $ 449,947 $ 554,162
========= ========= =========
</TABLE>
<PAGE>
EXHIBIT 99.2
<TABLE>
DALEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(stated in thousands of dollars)
<CAPTION>
Three Months
Ended March 31
----------------------
1995 1994
-------- --------
<S> <C> <C>
REVENUES:
Natural gas $ 19,140 $ 38,516
Oil and gas liquids 9,658 13,611
Other 69 885
-------- --------
28,867 53,012
-------- --------
OPERATING EXPENSES:
Lease operating 8,536 13,689
General and administrative 4,280 4,761
Depreciation, depletion and amortization 19,603 28,889
Exploration 2,695 3,770
-------- --------
35,114 51,109
-------- --------
OPERATING INCOME (LOSS) (6,247) 1,903
-------- --------
OTHER INCOME (EXPENSE)
Interest expense (2,119) (1,392)
Interest income 155 525
Other, net 144 140
-------- --------
(1,820) (727)
-------- --------
EARNINGS (LOSS) BEFORE TAXES (8,067) 1,176
INCOME TAX BENEFIT (EXPENSE):
Current 5,727 5,439
Deferred (1,316) (4,574)
-------- --------
4,411 865
-------- --------
NET EARNINGS (LOSS) $ (3,656) $ 2,041
======== ========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
DALEN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(stated in thousands of dollars)
<CAPTION>
March 31 December 31
1995 1994
-------- -----------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,653 $ 10,888
Accounts receivable
Oil and gas 11,875 20,009
Trade 6,798 6,030
Affiliates 14,708 7,616
Inventories 1,876 2,125
Prepaid expenses 2,437 3,635
--------- ---------
Total current assets 43,347 50,303
--------- ---------
PROPERTY AND EQUIPMENT
Oil and gas properties,
based on successful efforts method 802,337 787,579
Other property and equipment 6,700 6,671
--------- ---------
809,037 794,250
Less: Accumulated depreciation,
depletion and amortization (381,754) (362,548)
--------- ---------
Net property and equipment 427,283 431,702
--------- ---------
OTHER ASSETS 540 655
--------- ---------
TOTAL ASSETS $ 471,170 $ 482,660
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 11,954 $ 15,394
Interest payable 65 67
Accrued liabilities 10,190 10,998
--------- ---------
Total current liabilities 22,209 26,459
--------- ---------
DEFERRED INCOME TAXES 73,845 72,529
ABANDONMENT, DISMANTLEMENT AND OTHER LIABILITIES 8,964 13,864
LONG-TERM DEBT 115,000 115,000
STOCKHOLDER'S EQUITY
Common stock 1 1
Additional paid-in capital 335,470 335,470
Accumulated deficit (84,319) (80,663)
--------- ---------
Total stockholder's equity 251,152 254,808
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 471,170 $ 482,660
========= =========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
DALEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(stated in thousands dollars)
<CAPTION>
Three Months
Ended March 31
---------------------
1995 1994
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (3,656) $ 2,041
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization 19,603 28,889
Deferred income taxes 1,316 4,574
Dry hole expense 933 952
Surrendered leases and other impairments 584 1,381
Loss (gain) on sale of assets (3) (10)
Other (1,309) (532)
-------- --------
17,468 37,295
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (3,540) 5,211
Decrease in prepaid expenses 1,198 798
Increase (decrease) in accounts payable (3,413) 170
Decrease in interest payable (2) (30)
Decrease in accrued liabilities and other (559) (4,360)
-------- --------
Net cash provided by operating activities 11,152 39,084
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (16,350) (12,358)
Decrease in drilling well accrual (60) (1,576)
Proceeds from sale of property and equipment 23 207
-------- --------
Net cash used in investing activities (16,387) (13,727)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (5,235) 25,357
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,888 48,117
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,653 $ 73,474
======== ========
</TABLE>
<PAGE>
<PAGE>
DALEN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
1. The accompanying consolidated financial statement of DALEN Corporation
and Subsidiaries (the "Company") have not been audited by independent
public accountants. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the results of operations for the interim periods
included herein have been made. Certain information and footnote
disclosures normally included in the consolidated financial statements
have been omitted. These consolidated financial statements should be
read in conjunction with the audited consolidated financial statements
and notes thereto included elsewhere in this Form 8-K.
2. In April 1995, Enserch Exploration, Inc., 99.2% owned by ENSERCH
Corporation, entered into a definitive agreement to acquire 100% of the
capital stock of the Company for $340 million plus the assumption of $115
million of bank debt.
3. In the third quarter of 1994, the Company sold certain oil and gas
properties that did not fit within the Company's current business
strategy. The Company sold the properties, which had a net book value
of $131.7 million, to unrelated third parties for $134.0 million in cash,
resulting in a pre-tax gain of $2.3 million. As a result of the sale,
operating results for the three months ended March 31, 1995 are not
comparable to the three months ended March 31, 1994.
<PAGE>
EXH. 99.3
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
TO REFLECT THE PURCHASE OF DALEN CORPORATION
(Unaudited)
The condensed pro forma consolidated financial statements give effect as
of March 31, 1995 to the probable acquisition in early June 1995 by Enserch
Exploration, Inc. (EEX), 99.2% owned by ENSERCH, of 100% of the capital stock
of DALEN Corporation (DALEN) for $340 million cash and the refinancing of
DALEN's $115 million of bank debt. DALEN is a wholly-owned subsidiary of PG&E
Enterprises, which is 100% owned by Pacific Gas & Electric Company. The
condensed pro forma consolidated financial statements for the year ended
December 31, 1994 and for the three months ended March 31, 1995 have been
prepared from the historical financial statements of ENSERCH and DALEN after
adjustments as described below.
ENSERCH and EEX will account for the acquisition of DALEN as a purchase.
All acquired assets, consisting principally of gas and oil properties, will
be evaluated following the acquisition for purposes of assigning the excess
of the purchase price over DALEN's book value. It is anticipated that
essentially all of the valuation adjustment will be assigned to gas and oil
properties, and the pro forma financial statements of the combined entities
have been prepared on that basis.
EEX will initially fund the purchase through borrowings of $340 million
under existing bank lines. EEX intends to issue common stock in a public
offering later this year with proceeds used to repay all or a portion of the
EEX bank line financing used to make the acquisition. The common stock issue
is expected to increase the public ownership in EEX from less than 1% to
approximately 20%. A $150 million bridge loan will be used to refinance
DALEN's $115 million bank debt and reduce advances from ENSERCH. The bridge
loan is expected to be paid later in the year with the proceeds of a
$150 million long-term financing. For purposes of presenting pro forma
financial statements of the combined entities, DALEN's interest income
and interest expense have been eliminated and interest expense, based on
the initial funding through EEX bank lines and the bridge loan, has been
added. The current interest rate on such debt of approximately 6.5% has
been assumed.
DALEN follows the successful efforts method of accounting for gas and oil
properties, whereby exploratory costs, excluding the costs of successful
exploratory wells, are charged to expense as incurred. Costs applicable to
productive wells and development dry holes are capitalized and amortized on
the units-of-production method based on estimated proved reserve quantities.
ENSERCH and EEX follow the full-cost method of accounting for gas and oil
properties, whereby all exploratory costs, including costs of both successful
and unsuccessful exploratory wells, are capitalized and amortized on the
units-of-production method based on estimated proved reserve quantities. For
purposes of presenting pro forma financial statements of the combined
entities, DALEN's statements of operations have been converted to the full-
cost method of accounting.
<PAGE>
<PAGE>
In the third quarter of 1994, DALEN sold certain gas and oil properties.
The properties, which had a net book value of $131.7 million, were sold to
unrelated third parties for $134.0 million in cash, resulting in a pre-tax
gain of $2.3 million, which is included in other income in DALEN's historical
consolidated statement of operations. For purposes of the pro forma statement
of income of the combined entities, the gain on the sale, as well as revenues
and expenses attributable to the sold properties during the periods presented,
have been eliminated.
<PAGE>
<PAGE>
<TABLE>
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
TO REFLECT THE PURCHASE OF DALEN CORPORATION AS OF
March 31, 1995
(in thousands)
<CAPTION>
ENSERCH DALEN
Corporation Corporation Adjustments(a) Proforma
------------ ----------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 3,446 $ 5,653 $ $ 9,099
Accounts receivable 155,944 33,381 189,325
Gas stored underground 85,475 85,475
Advances and prepayments for gas 22,433 22,433
Gas-purchase settlements recoverable
from customers 15,349 15,349
Other 71,774 4,313 76,087
---------- --------- --------- ----------
Total current assets 354,421 43,347 397,768
---------- --------- --------- ----------
Investments 55,119 55,119
---------- --------- --------- ----------
Net Property, Plant and Equipment
(full-cost method for gas and
oil properties) 2,282,913 427,283 15,003 2,725,199
---------- --------- -------- ----------
Other Assets 44,586 540 45,126
---------- --------- -------- ----------
Total $2,737,039 $ 471,170 $ 15,003 $3,223,212
========== ========= ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Commercial paper $ 112,600 $ $(35,000) $ 77,600
Current maturities of senior 10,600 10,600
long-term debt
Accounts payable and other 309,564 22,209 331,773
accrued liabilities
Accrued interest 12,439 12,439
Other 39,636 39,636
---------- --------- -------- ----------
Total current liabilities 484,839 22,209 (35,000) 472,048
---------- --------- -------- ----------
Senior Long-term Debt 714,376 115,000 375,000 1,204,376
---------- --------- -------- ----------
Convertible Subordinated Debentures 90,750 90,750
---------- --------- -------- ----------
Deferred Income Taxes 299,922 73,845 (73,845) 299,922
---------- --------- -------- ----------
Other Liabilities 221,580 8,964 230,544
---------- --------- -------- ----------
Shareholders' Equity
Adjustable rate preferred stock 175,000 175,000
Common shareholders' equity 750,572 251,152 (251,152) 750,572
---------- --------- -------- ----------
Shareholders' equity 925,572 251,152 (251,152) 925,572
---------- --------- -------- ----------
Total $2,737,039 $ 471,170 $ 15,003 $3,223,212
========== ========= ======== ==========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
TO REFLECT THE PURCHASE OF DALEN CORPORATION FOR THE
Year Ended December 31, 1994
(In thousands)
<CAPTION>
ENSERCH DALEN Property December 31
Corporation Corporation Divested Pro Forma 1994
As Reported As Reported in 1994 (d) Adjustments Pro Forma
----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues
Natural gas transmission and distribution $1,689,024 $1,689,024
Natural gas and oil exploration
and production 179,140 $168,988 $ (25,592) $ 322,536
Natural gas liquids processing 87,446 87,446
Power 45,499 45,499
Less intercompany revenues (143,678) (143,678)
---------- -------- --------- -------- ----------
1,857,431 168,988 (25,592) 2,000,827
---------- -------- --------- -------- ----------
Cost and Expenses
Gas purchase 1,208,147 1,208,147
Operating expenses 435,102 86,476 (12,193) (24,864)(c) 484,521
Depreciation and amortization 126,733 101,151 (14,826) (9,511)(c) 203,547
---------- -------- --------- -------- ----------
Total 1,769,982 187,627 (27,019) (34,375) 1,896,215
---------- -------- --------- -------- ----------
Operating Income (Loss) 87,449 (18,639) 1,427 34,375 104,612
Other Income (Expense) - Net (6,506) 6,501 (2,280) (3,656)(b) (5,941)
Interest Expense (68,242) (6,002) (23,573)(b) (97,817)
---------- -------- --------- -------- ----------
Income (Loss) Before Income Taxes 12,701 (18,140) (853) 7,146 854
Income Tax Expense (Benefit) (68,974) (15,206) (298) 2,501(e) (81,977)
---------- -------- --------- -------- ----------
Income (Loss) from Continuing Operations 81,675 (2,934) (555) 4,645 82,831
Income from Discontinued Operations 20,642 20,642
---------- -------- --------- --------- ----------
Net Income (Loss) 102,317 (2,934) (555) 4,645 103,473
Provision for Dividends on Preferred Stock 11,619 11,619
---------- -------- --------- --------- ----------
Earnings (Loss) Applicable to Common Stock $ 90,698 $ (2,934) $ (555) $ 4,645 $ 91,854
========== ======== ========= ========= ==========
Earnings per Share:
Income from Continuing Operations
after provision for dividends on
preferred stock $ 1.05 $ 1.07
Average Common and Dilutive Common ========== ==========
Equivalent Shares Outstanding 66,845 66,845
========== ==========
</TABLE>
<PAGE>
<PAGE>
<TABLE>
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
TO REFLECT THE PURCHASE OF DALEN CORPORATION FOR THE
Three Months Ended March 31, 1995
<CAPTION>
ENSERCH DALEN March 31
Corporation Corporation Pro Forma 1995
As Reported As Reported Adjustments Pro Forma
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Natural gas transmission and distribution $504,805 $ $ $504,805
Natural gas and oil exploration
and production 41,661 28,867 70,528
Natural gas liquids processing 21,679 21,679
Power 8,591 8,591
Less intercompany revenues (28,835) (28,835)
-------- ------- ------- --------
547,901 28,867 576,768
-------- ------- ------- --------
Costs and Expenses
Gas purchase 336,946 336,946
Operating costs and expenses 113,255 15,511 (2,695)(c) 126,071
Depreciation and amortization 31,158 19,603 (2,195)(c) 48,566
-------- ------- ------- --------
Total 481,359 35,114 (4,890) 511,583
-------- ------- ------- --------
Operating Income (Loss) 66,542 (6,247) 4,890 65,185
Other Income (Expense) - Net (1,003) 299 (155)(b) (859)
Interest Expense (17,315) (2,119) (5,275)(b) (24,709)
-------- ------- ------- --------
Income Before Income Taxes 48,224 (8,067) (540) 39,617
Income Tax Expense (Benefit) 17,838 (4,411) (189)(e) 13,238
-------- ------- ------- --------
Income from Continuing Operations 30,386 (3,656) (351) 26,379
Provision for Dividends on Preferred Stock 3,036 3,036
-------- ------- ------- --------
Earnings Applicable to Common Stock $27,350 $(3,656) $ (351) $23,343
======== ======= ======= ========
Earnings per Share $0.41 $0.35
======== ========
Average Common and Dilutive Common
Equivalent Shares Outstanding 66,936 66,936
======== ========
</TABLE>
<PAGE>
<PAGE>
NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Adjustments to the combined historical financial statements of ENSERCH and
DALEN consist of the following:
(a) Adjust the DALEN balance sheet to include in gas and oil properties the
purchase price in excess of book value, eliminate shareholders' equity
and include the borrowings to finance the transaction.
Borrowing under bank line $ 340,000
Bridge loan 150,000
Repay DALEN bank debt (115,000)
---------
375,000
Required for acquisition (340,000)
---------
Excess used to reduce
commercial paper $ 35,000
=========
The acquisition will be recorded based on the balance sheet as of the
closing date. It is anticipated that essentially all of the valuation
adjustment will be assigned to gas and oil properties, and the pro forma
financial statements have been prepared on that basis.
(b) Adjust interest income and interest expense to reflect EEX's financing of
purchase cost and refinancing of debt assumed in purchase transaction.
(c) Adjust the DALEN statements of operations from the successful efforts to
the full-cost method of accounting for gas and oil properties by
eliminating DALEN's exploration costs from Operating Expenses and
adjusting depreciation and amortization as follows:
<TABLE>
<CAPTION>
Twelve Months Three Months
Ended Ended
12/31/94 3/31/95
<S> <C> <C>
Eliminate successful effort
depreciation and
amortization $(86,325) $(19,603)
Add full-cost amortization 76,814 17,408
-------- --------
Net $ (9,511) $ (2,195)
======== ========
</TABLE>
(d) Eliminate revenues, expenses and a gain of $2.3 million in other income,
attributable to properties sold by DALEN in the third quarter of 1994.
(e) Provide income taxes on pro forma adjustments to income before income
taxes at the applicable statutory federal rate of 35%.
