<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1996
REGISTRATION NO. 333-13017
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------------
AMERICAN EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 74-2086890
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1331 LAMAR, SUITE 900
HOUSTON, TEXAS 77010-3088
(713) 756-6000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
JOHN M. HOGAN
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
AMERICAN EXPLORATION COMPANY
1331 LAMAR, SUITE 900
HOUSTON, TEXAS 77010-3088
(713) 756-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
JOE S. POFF JOHN F. WOMBWELL
BAKER & BOTTS, L.L.P. ANDREWS & KURTH L.L.P.
ONE SHELL PLAZA 4200 TEXAS COMMERCE TOWER
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 229-1410 (713) 220-4200
</TABLE>
---------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
*******************************************************************************
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. *
* A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY *
* NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN *
* WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
*******************************************************************************
SUBJECT TO COMPLETION -- DATED OCTOBER 28, 1996
PROSPECTUS
- --------------------------------------------------------------------------------
3,579,229 Shares
AMERICAN EXPLORATION COMPANY
[AMERICAN
EXPLORATION LOGO] Common Stock
- --------------------------------------------------------------------------------
Of the shares of common stock, par value $.05 per share (the "Common Stock"),
offered hereby, 3,000,000 shares are being sold by American Exploration Company,
a Delaware corporation ("American Exploration" or the "Company") and 579,229
shares are being sold by the selling stockholders (the "Selling Stockholders").
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders. See "Selling Stockholders."
The Common Stock is listed on the American Stock Exchange Inc. (the "AMEX")
under the symbol "AX." On October 24, 1996, the last reported sales price of the
Common Stock on the AMEX was $12 7/8 per share. See "Price Range of Common Stock
and Dividend Policy."
SEE "RISK FACTORS" ON PAGES 10 TO 13 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON
STOCK OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
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<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
- ---------------------------------------------------------------------------------------------
Total(3)................ $ $ $ $
=============================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $645,000.
(3) The Company and one of the Selling Stockholders have granted the several
Underwriters 30-day over-allotment options to purchase up to 536,884
additional shares of Common Stock on the same terms and conditions set forth
above. If all such additional shares are purchased by the Underwriters, the
total Price to Public will be $ , the total Underwriting Discounts
and Commissions will be $ , the total Proceeds to Company will be
$ and the total Proceeds to Selling Stockholders will be
$ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about November , 1996.
PRUDENTIAL SECURITIES INCORPORATED
DILLON, READ & CO. INC.
A.G. EDWARDS & SONS, INC.
October , 1996
<PAGE> 3
[MAP SHOWING CERTAIN FIELDS AND 3-D SURVEYS WITHIN
AMERICAN EXPLORATION COMPANY'S PRIMARY OPERATING AREAS]
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMEX, IN THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information, financial statements, including the notes thereto, and other data
set forth elsewhere in this Prospectus. Unless the context indicates otherwise,
(i) "American Exploration" or the "Company" refers to American Exploration
Company, a Delaware corporation, and its consolidated subsidiaries, (ii) all
information in this Prospectus has been adjusted to reflect the one-for-ten
reverse split of the Common Stock effected in June 1995 and (iii) all
information in this Prospectus assumes that the Underwriters' over-allotment
options will not be exercised. The pro forma information presented in this
Prospectus gives effect to the acquisition by the Company of certain properties
in March and September 1996 (the "March 1996 Acquisition" and "September 1996
Acquisition," respectively), the proposed sales of certain properties in
connection with the liquidation of oil and gas partnerships for which the
Company acts as a co-general partner (the "NYLOG Programs") and of certain
related properties (collectively, the "1996 Sales") and the application of the
net proceeds of the offering made by this Prospectus (the "Offering"). See
"--Recent Developments and Results," "Capitalization" and the Notes to the Pro
Forma Condensed Consolidated Financial Statements included elsewhere herein.
For definitions of certain oil and gas terms used in this Prospectus, see
"Glossary of Certain Oil and Gas Terms."
THE COMPANY
American Exploration is an independent company engaged in the exploration,
development, acquisition and production of oil and natural gas. The Company's
operations are conducted in the United States with exploration, development and
acquisition activities primarily concentrated in the Gulf of Mexico, South Texas
and the Smackover Trend in southwestern Arkansas.
On a pro forma basis as of June 30, 1996, the Company's proved reserves
totaled 13 MMBbls of oil and 145 Bcf of natural gas, or an aggregate of 37
MMBOE, with an SEC-10 Value of $225 million. Approximately 70% of these reserves
are developed, and approximately 62% are attributable to properties operated by
the Company. The Company also holds in excess of 200,000 net acres of
undeveloped properties and owns approximately 1,300 square miles of 3-D seismic
data and approximately 79,000 linear miles of 2-D seismic data. On a pro forma
basis, the Company's net production for the month of September 1996 averaged
5,100 Bbls of oil and 80,100 Mcf of natural gas per day, representing a 28%
increase over average daily BOE production for the second quarter of 1996.
Over the past four years, the Company has implemented a series of steps
that has resulted in a significant improvement in its oil and gas operating and
exploration capabilities, overhead and production costs, financial position and
cash operating margins. These steps include (i) hiring experienced personnel in
key management and operating positions, (ii) focusing exploration and
development activities in areas in which the Company believes it has competitive
advantages, (iii) acquiring properties held by certain institutional oil and gas
partnerships formed by the Company in the 1980s and (iv) disposing of over 250
properties, including the sale of the Company's interest in the Sawyer Field in
West Texas for $64 million in July 1995. Largely as a result of these steps, the
Company's operating margin has increased from $2.72 per BOE for the year ended
December 31, 1992 to $6.02 per BOE for the nine months ended September 30, 1996.
In addition, the Company's ratio of total debt to total capitalization has
decreased from 60% at December 31, 1992 to 32% on a pro forma basis at September
30, 1996.
BUSINESS STRATEGY
American Exploration's strategy is to increase per share reserves,
production, cash flow and earnings through exploration, development and
selective acquisitions within its core operating areas. The Company's strategy
is designed to capitalize on its competitive strengths, including the experience
and technical expertise of its operating personnel, a substantial seismic
database and a concentration of developed and undeveloped acreage in its core
operating areas. The principal features of this strategy follow.
3
<PAGE> 5
GEOGRAPHIC FOCUS. The Company's exploration, development and acquisition
activities are primarily focused in the Gulf of Mexico (with an emphasis on the
Texas State Waters area), South Texas (with an emphasis on the Wilcox Trend) and
the Smackover Trend in southwestern Arkansas. The Company believes that by
focusing its operations, it can achieve cost efficiencies and enhance its
ability to add new reserves. For 1996, over 90% of the Company's exploration and
development budget and all of its acquisition activities have been concentrated
in its core operating areas. The Company is also in the process of divesting
certain properties that are not consistent with its geographic focus (see
"-- Recent Developments and Results") and is reviewing the feasibility of
divesting various additional non-strategic properties.
ACTIVE DRILLING PROGRAM. The Company is engaged in an active drilling
program and attempts to maintain a project portfolio consisting of both high
risk, high potential exploration prospects and lower risk development projects.
The Company's exploration activities are generally concentrated in areas where
in-house geological knowledge and 2-D seismic data can be used to identify
prospect leads. The Company then attempts to establish large lease positions and
generally initiates or acquires 3-D seismic data to confirm prospects prior to
drilling. The Company typically shares the risks associated with its exploration
prospects with industry partners. In addition to internally generated
exploration prospects, the Company selectively participates in exploration
prospects initiated by other oil and gas companies. For 1996, the Company has
budgeted approximately $40 million for exploration and development and intends
to drill approximately 40 exploratory wells and 45 development wells. During the
first nine months of 1996, the Company spent approximately $18 million on
exploration and drilled 16 gross (7.0 net) wells, 31% of which were successfully
completed. During the same period, the Company spent approximately $12 million
on development and drilled 34 gross (11.7 net) wells, 85% of which were
successfully completed.
SELECTIVE ACQUISITIONS. The Company's acquisition strategy is to acquire
producing properties within its core operating areas that enhance its
competitive position, offer economies of scale and provide further development
and/or exploration potential. The Company seeks to acquire properties in which
it can obtain a significant ownership percentage and become the operator.
Through September 1996, the Company has invested $53 million, net of interests
being sold to a third party, to acquire interests in seven Gulf of Mexico
fields, four of which are operated by the Company. See "-- Recent Developments
and Results" and the Pro Forma Condensed Consolidated Financial Statements.
ADVANCED TECHNICAL CAPABILITIES. The Company makes extensive use of
advanced technologies, most notably 3-D seismic, computer-aided exploration and
specialized drilling applications such as short radius horizontal wells, to
better delineate or produce oil and gas reserves. The Company's experienced
staff of geologists and geophysicists performs all interpretation and seismic
mapping on in-house 3-D seismic workstations.
FINANCIAL FLEXIBILITY. The Company is committed to maintaining financial
flexibility in order to pursue its existing exploration and development projects
and to take advantage of future opportunities. The Company has taken a number of
steps over the past few years to reduce debt and improve its liquidity and
financial flexibility. As a result, the Company's ratio of total debt to EBITDA
(see Note 4 to "-- Summary Financial Data") for the prior 12 months decreased
from 5.2 as of December 31, 1992 to 1.4 on a pro forma basis as of September 30,
1996. The Company intends to use the net proceeds from the Offering to reduce
its outstanding bank debt. After giving effect to the proceeds from the
Offering, the Company's pro forma ratio of total debt to total capitalization as
of September 30, 1996 is expected to be 32%. See "Use of Proceeds,"
"Capitalization" and the Pro Forma Condensed Consolidated Financial Statements.
RECENT DEVELOPMENTS AND RESULTS
SEPTEMBER 1996 ACQUISITION. On September 27, 1996, the Company acquired
interests in two blocks in the Gulf of Mexico, High Island Block 116 and East
Cameron Block 328 (the "Zilkha II Properties"), for a purchase price of $39
million, net of interests being sold to a third party. The acquisition was
funded through borrowings under the Company's revolving bank credit agreement
(the "Credit Agreement"). The acquired properties added estimated proved
reserves (as estimated by the Company as of the date of acquisition) totaling
3.6 MMBbls of oil and 16.9 Bcf of natural gas. In September 1996, production
from the acquired
4
<PAGE> 6
interests was approximately 700 Bbls of oil and 17,000 Mcf of natural gas per
day. The Company plans to initiate a multi-well development drilling program on
East Cameron Block 328 before year-end 1996 and believes that both blocks have
additional unproved reserve potential through higher primary reserve recovery
and additional drilling.
MARCH 1996 ACQUISITION. On March 15, 1996, the Company and a subsidiary of
Dominion Resources, Inc. ("Dominion") acquired interests in five offshore blocks
in the Gulf of Mexico for a purchase price of approximately $56 million. The
Company's $14 million (25%) share of the March 1996 Acquisition was funded
through borrowings under the Credit Agreement. The acquired properties (the
"Zilkha I Properties") added estimated proved reserves (as estimated by the
Company as of the date of acquisition) totaling 600 MBbls of oil and 11.3 Bcf of
natural gas, net to the Company's interest. Three of the acquired properties,
High Island Block 45, South Marsh Island Block 133 and East Cameron Block 129,
which together represent substantially all of the proved reserve value, are
operated by the Company. In September 1996, the acquired properties produced an
average of approximately 670 Bbls of oil and 7,400 Mcf of natural gas per day,
net to the Company's interest. During the third quarter of 1996, the Company
completed the installation of production facilities on South Marsh Island Block
133 and a development well on East Cameron Block 129. The Company believes that
the acquired properties have additional reserve potential through higher primary
reserve recovery and the installation of gas compression.
PROPOSED 1996 SALES. The Company is in the process of selling interests in
approximately 70 properties, including those properties owned by the NYLOG
Programs. Proved reserves and production attributable to these properties have
not been included in the pro forma amounts set forth in this Prospectus. The
Company intends to use the estimated $8.6 million proceeds from the proposed
sales to reduce amounts outstanding under the Credit Agreement. The Company
believes that these sales, which are expected to be completed by year-end 1996,
will provide additional operating efficiencies.
THIRD QUARTER 1996 RESULTS. For a description of the Company's results of
operations for the quarter and nine months ended September 30, 1996, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarter and Nine Months Ended September 30, 1996 Compared to
Quarter and Nine Months Ended September 30, 1995."
PRIMARY OPERATING AREAS
GULF OF MEXICO. The Gulf of Mexico is the Company's most significant area
of exploration, development and acquisition activity and represents
approximately 60% of the Company's 1996 exploration and development budget. On a
pro forma basis, approximately 40% of total oil and gas production during
September 1996 and approximately 29% of the Company's total proved reserves at
June 30, 1996 were attributable to properties in the Gulf of Mexico. As of June
30, 1996, the Company held working interests in 41 offshore blocks covering
76,515 gross (28,788 net) undeveloped acres.
The Company's principal offshore exploration and development focus is the
Texas State Waters area. Beginning with a successful redevelopment program that
increased Brazos 440 Field gross production from 5,000 Mcf of natural gas per
day in February 1994 to over 25,000 Mcf of natural gas per day in October 1994,
the Company has developed a large area-wide project in which it holds 29,300
gross (18,200 net) acres. In 1995, the Company participated in a 400 square mile
3-D survey covering the Brazos area and has confirmed a number of prospect leads
previously identified using 2-D seismic data. Since January 1, 1994, the Company
has drilled five wells on its Brazos acreage, three of which were successful,
and as of September 30, 1996 it was drilling a sixth well. The Company intends
to further expand its Texas State Waters acreage and participate in additional
3-D seismic surveys.
SOUTH TEXAS. Approximately 30% of the Company's 1996 exploration and
development budget is allocated to its South Texas operating area. On a pro
forma basis, South Texas represented approximately 10% of total oil and natural
gas production during September 1996 and approximately 7% of the Company's total
proved reserves at June 30, 1996.
5
<PAGE> 7
American Exploration's principal exploration focus in South Texas is the
Yoakum Gorge project, located in Lavaca County, where the Company controls over
55,000 acres, holds a 52.5% working interest and is nearing completion of a 152
square mile proprietary 3-D survey. The initial phase of the 3-D data has
confirmed over 20 prospects in the shallow Frio and Yegua formations as well as
the deeper Upper and Lower Wilcox formations. The Company plans to commence
drilling 16 of these prospects in the fourth quarter of 1996.
SMACKOVER TREND. American Exploration's operations in the Smackover Trend
of southwestern Arkansas are focused primarily in the Midway and Buckner fields,
both of which are operated by the Company. The Company's ongoing strategy in
this area is to capitalize on the horizontal drilling expertise it has developed
in exploiting the Midway Field by applying this technology to other Smackover
fields. In 1995, the Company acquired various interests in the Buckner Field,
which is located approximately 11 miles from Midway. The Buckner Field, which is
geologically similar to Midway, has never been unitized and waterflooded. The
Company is working to unitize the field and plans to initiate a horizontal
drilling and waterflood project in 1997.
OTHER OPERATING AREAS. The Company's most significant properties outside of
its primary operating areas are the Bowdoin Field located in Montana, the
Bradshaw Field located near the Hugoton Field in Kansas and the Henderson Canyon
Field located in West Texas. During the first nine months of 1996, the Company
completed 11 gross (8.7 net) development wells in the Bradshaw Field and
increased net gas production by approximately 56% from an average of
approximately 8,000 Mcf per day in January 1996 to approximately 12,500 Mcf per
day in September 1996. In addition, the Company has a large number of
development locations in the Bowdoin Field that it intends to drill as necessary
to maintain production capacity at current levels.
THE OFFERING
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Common Stock Offered:
By the Company............................................ 3,000,000 shares
By the Selling Stockholders............................... 579,229 shares
Total............................................. 3,579,229 shares
Common Stock to be Outstanding After the Offering (1)....... 14,807,741 shares
Use of Proceeds............................................. To reduce amounts outstanding
under the Credit Agreement.
The Company will not receive
any part of the proceeds from
the sale of shares by the
Selling Stockholders. See "Use
of Proceeds."
AMEX Symbol................................................. AX
</TABLE>
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(1) Excludes (i) up to approximately 1.8 million shares issuable upon conversion
of the Company's $450 Cumulative Convertible Preferred Stock, Series C, par
value $1.00 per share (the "Convertible Preferred Stock"), at a conversion
price of $15.00 per share, subject to adjustment in certain circumstances,
(ii) approximately 1.0 million shares issuable upon exercise of stock
options outstanding at September 30, 1996 at prices ranging from $11.50 to
$40.00 per share at a weighted average exercise price of $13.29 per share
and (iii) approximately 1.5 million shares issuable upon exercise of
warrants outstanding at September 30, 1996 at a weighted average exercise
price of $16.94 per share.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
The following table sets forth certain summary historical and pro forma
financial data for the Company. The historical financial data was derived from
the consolidated financial statements of the Company. The pro forma summary of
operations data gives effect to the March 1996 Acquisition, the September 1996
Acquisition and the expected sale of certain assets acquired therein, the 1996
Sales and the application of the net proceeds from the Offering as if such
transactions had occurred on January 1, 1995. The pro forma balance sheet data
gives effect to the expected sale of certain assets acquired in the September
1996 Acquisition, the 1996 Sales and the application of the net proceeds from
the Offering as if such transactions had occurred on September 30, 1996. The pro
forma data for the year ended December 31, 1995 does not include results from
the High Island 116 well acquired in the September 1996 Acquisition because the
well did not produce during the period. Similarly, the pro forma data for the
nine months ended September 30, 1996 includes only two months of results from
the High Island 116 well. The well commenced production in August 1996 at a net
production rate of 300 Bbls of oil per day and 17,100 Mcf of natural gas per
day. The data in the following table should be read in conjunction with the Pro
Forma Condensed Consolidated Financial Statements, Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and related Notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS NINE
PRO FORMA ENDED MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30, ENDED
-------------------------------- DECEMBER 31, ----------------- SEPTEMBER 30,
1993(1) 1994(2) 1995(2)(3) 1995 1995 1996 1996
-------- -------- ---------- ------------ ------- ------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Revenues:
Oil and gas sales................... $ 49,589 $ 50,033 $ 70,768 $ 65,238 $55,049 $52,263 $ 52,928
Other, net.......................... 8,569 1,326 11,166 772 10,352 912 912
-------- -------- ------- -------- ------- ------- -------
Total revenues.................. 58,158 51,359 81,934 66,010 65,401 53,175 53,840
-------- -------- ------- -------- ------- ------- -------
Costs and Expenses:
Production and operating............ 15,998 21,302 24,515 19,377 19,079 15,421 14,482
Depreciation, depletion and
amortization...................... 23,635 29,616 30,726 30,909 22,446 20,871 22,656
General and administrative.......... 7,413 10,035 7,472 7,528 4,683 4,450 4,450
Taxes other than income............. 4,601 5,710 5,760 4,956 4,413 4,254 3,862
Exploration......................... 7,554 2,559 4,826 4,826 3,269 9,152 9,152
Impairment.......................... 10,975 33,570 1,822 1,822 43 1,841 1,841
-------- -------- ------- -------- ------- ------- -------
Total costs and expenses........ 70,176 102,792 75,121 69,418 53,933 55,989 56,443
-------- -------- ------- -------- ------- ------- -------
Income (loss) from operations......... (12,018) (51,433) 6,813 (3,408) 11,468 (2,814) (2,603)
Interest expense...................... (6,847) (6,638) (5,481) (3,336) (4,853) (2,894) (2,984)
Other income (expense), net........... (321) (2,164) 145 147 (105) (63) (63)
-------- -------- ------- -------- ------- ------- -------
Income (loss) before extraordinary
item................................ (19,186) (60,235) 1,477 (6,597) 6,510 (5,771) (5,650)
Extraordinary gain on debt
extinguishment...................... -- 5,419 2,456 2,456 2,456 -- --
-------- -------- ------- -------- ------- ------- -------
Net income (loss)..................... (19,186) (54,816) 3,933 (4,141) 8,966 (5,771) (5,650)
Preferred stock dividends............. (75) (1,800) (1,800) (1,800) (1,350) (1,350) (1,350)
-------- -------- ------- -------- ------- ------- -------
Net income (loss) to common stock..... $(19,261) $(56,616) $ 2,133 $ (5,941) $ 7,616 $(7,121) $ (7,000)
======== ======== ======= ======== ======= ======= =======
Net income (loss) per common share:
Primary and fully diluted:
Loss before extraordinary item.... $ (2.77) $ (7.70) $ (0.03) $ (0.57) $ 0.43 $ (0.60) $ (0.47)
Net income (loss)................. (2.77) (7.02) 0.18 (0.40) 0.64 (0.60) (0.47)
OTHER FINANCIAL DATA:
EBITDA(4)............................. $ 37,224 $ 10,583 $ 33,981 $ 34,588 $27,493 $28,186 $ 30,182
Operating cash flow(5)................ 26,813 4,838 27,514 29,573 21,714 24,285 25,848
Total capital expenditures (6)........ 24,167 49,889 44,215 N/A 31,229 92,116 N/A
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
------------- --------------
<S> <C> <C>
SUMMARY OF BALANCE SHEET DATA:
Working capital (deficit).......................................................... $ (1,623) $(16,007)
Total assets....................................................................... 233,363 218,979
Long-term debt, excluding current obligations...................................... 105,000 56,833
Total stockholders' equity......................................................... 87,506 121,289
</TABLE>
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(1) The Company received aggregate proceeds of approximately $35 million for the
conveyance of approximately 40% of its interest in the Henderson Canyon
Field in March 1993 and the sale of its Canadian assets in mid-1993.
(2) The Company purchased investors' interests in certain institutional oil and
gas partnerships formed by the Company in the 1980s (the "APPL Programs") in
1994 and 1995 for 4.6 million shares of Common Stock and $40.1 million in
cash (the "APPL Consolidation").
(3) The Company sold its interest in the Sawyer Field for $64 million in July
1995.
(4) EBITDA is defined for this purpose as net income (loss) plus interest,
income taxes, depreciation, depletion and amortization, exploration expense,
impairment expense and loss on sales of oil and gas properties, less gain on
sales of oil and gas properties and extraordinary gain from extinguishment
of debt. EBITDA should not be considered as an alternative to earnings
(loss) as an indicator of the Company's financial performance or to cash
flow as a measure of liquidity. See the Consolidated Statements of
Operations included in the Consolidated Financial Statements appearing
elsewhere herein.
(5) Cash flow from operations before working capital changes and after preferred
dividends.
(6) Excludes the acquisition of properties in exchange for the issuance of
Common Stock, principally relating to the APPL Consolidation.
7
<PAGE> 9
SUMMARY OPERATING DATA
The table below sets forth certain operating information of the Company for
the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- -------------------
1993(2) 1994(3) 1995(3)(4) 1995(3) 1996
------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
AVERAGE SALES PRICE(1):
Gas ($/Mcf)........................... $ 1.92 $ 1.90 $ 1.74 $ 1.70 $ 1.88
Oil ($/Bbl)........................... 16.01 15.39 16.83 16.87 16.87
BOE ($/BOE)........................... 12.99 12.67 12.30 12.05 13.17
PRODUCTION DATA:
Gas (MMcf)............................ 15,336 16,241 24,450 19,866 15,772
Oil (MBbls)........................... 1,261 1,241 1,680 1,258 1,340
MBOE.................................. 3,817 3,948 5,755 4,569 3,969
UNIT DATA ($/BOE):
Oil and gas sales..................... $ 12.99 $ 12.67 $ 12.30 $ 12.05 $ 13.17
Production and operating costs........ 4.19 5.40(5) 4.26 4.18 3.89
Taxes other than income............... 1.21 1.45 1.00 0.97 1.07
General and administrative expense.... 1.94 2.54(6) 1.30 1.02 1.12
Interest expense...................... 1.79 1.68 0.95 1.06 0.73
Preferred stock dividends............. 0.02 0.46 0.31 0.30 0.34
------- ------- ------- ------- ------
Operating margin...................... $ 3.84 $ 1.14 $ 4.48 $ 4.52 $ 6.02
======= ======= ======= ======= ======
</TABLE>
- ---------------
(1) Prices reflect impact of hedging gains and losses.
(2) The Company received aggregate proceeds of approximately $35 million for the
conveyance of approximately 40% of its interest in the Henderson Canyon
Field in March 1993 and the sale of its Canadian assets in mid-1993.
(3) The Company purchased investors' interests in the APPL Programs in 1994 and
1995 for 4.6 million shares of Common Stock and $40.1 million in cash.
(4) The Company sold its interest in the Sawyer Field for $64 million in July
1995.
(5) Includes $2.4 million, or $.61 per BOE, for remediation and restoration
costs incurred in 1994.
(6) Includes $2.0 million, or $.51 per BOE, for severance costs incurred in
1994.
8
<PAGE> 10
SUMMARY RESERVE DATA
The following table sets forth summary data with respect to the estimated
proved oil and gas reserves and related present value of estimated future net
revenues of the Company's properties as of June 30, 1996 on a historical basis
and on a pro forma basis after giving effect to the September 1996 Acquisition
and the 1996 Sales. Such estimates on a historical basis are based upon (i) the
quantities of reserves set forth in a reserve report prepared by Netherland,
Sewell & Associates, Inc., independent petroleum engineers, as of December 31,
1995 with respect to the properties owned by the Company as of such date, (ii)
adjustments to such December 31, 1995 reserves made by the Company to reflect
production and drilling activity after such date, which adjustments have been
audited by Netherland, Sewell & Associates, Inc. as set forth in their report
dated October 8, 1996 and included in Appendix A hereto, and (iii) reserve
estimates set forth in a reserve report prepared by William M. Cobb &
Associates, Inc., petroleum engineering consultants, as of June 30, 1996, a copy
of which is included in Appendix A hereto (the "Cobb Report"), with respect to
the properties acquired in the March 1996 Acquisition. Such estimates on a pro
forma basis are based on (i) the historical basis estimates as of June 30, 1996
as described above, (ii) adjustments to such June 30, 1996 estimates made by the
Company to remove reserves attributable to the 1996 Sales and (iii) reserve
estimates set forth in the Cobb Report with respect to the properties acquired
in the September 1996 Acquisition. The estimates of the SEC-10 Value of the
reserves are based upon prices as of June 30, 1996, except in those instances in
which fixed and determinable gas price escalations are covered by contracts. The
prices used as of June 30, 1996 averaged $18.19 per Bbl of oil and $2.25 per Mcf
of natural gas. There are numerous uncertainties inherent in estimating
quantities of proved oil and gas reserves and in projecting future rates of
production and future net cash flows, and reserve estimates may differ
significantly from the quantities of oil and gas that are ultimately recovered.
See "Risk Factors -- Estimates of Reserves and Future Net Revenues" and
"Business -- Reserves."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------------------------------------------------------
HISTORICAL PRO FORMA
---------------------------------- ----------------------------------
PROVED PROVED PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Estimated proved reserves:
Oil (MBbls)................... 9,165 1,351 10,516 8,857 4,390 13,247
Gas (MMcf).................... 112,911 22,428 135,339 104,542 40,639 145,181
MBOE.......................... 27,984 5,089 33,073 26,281 11,163 37,444
Present value of estimated
future net revenue before
income taxes (discounted at
10% per annum) (in
thousands).................... $ 168,513 $22,263 $190,776 $ 162,303 $62,745 $225,048
</TABLE>
9
<PAGE> 11
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information set forth in this Prospectus, in connection
with an investment in the shares of Common Stock offered hereby.
This Prospectus includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements, other than statements of historical facts, included in this
Prospectus that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as future capital, development and exploration expenditures (including
the amount and nature thereof), drilling of wells, reserve estimates (including
estimates of future net revenues associated with such reserves and the present
value of such future net revenues), future production of oil and gas, repayment
of debt, business strategies, expansion and growth of the Company's operations
and other such matters are forward-looking statements. These statements are
based on certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes are appropriate in the
circumstances. Such statements are subject to a number of assumptions, risks and
uncertainties, including the risk factors discussed below, general economic and
business conditions, the business opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in law or regulations and other
factors, many of which are beyond the control of the Company. Prospective
investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in the forward-looking statements.
INDUSTRY CONDITIONS; VOLATILITY OF OIL AND NATURAL GAS PRICES; HEDGING
ACTIVITIES. The Company's revenues, cash flow, profitability and future rate of
growth, as well as the carrying value of its oil and natural gas properties, are
substantially dependent upon the prices of oil and natural gas, which
historically have been volatile and are likely to continue to be volatile.
Various factors beyond the control of the Company affect prices of oil and
natural gas, including worldwide and domestic supplies of and demand for oil and
gas; political and economic conditions; weather conditions; the ability of the
members of the Organization of Petroleum Exporting Countries to agree on and
maintain price and production controls; political instability or armed conflict
in oil-producing regions; the price of foreign imports; the level of consumer
demand; the price and availability of alternative fuels; and changes in existing
federal and state regulations. Any significant decline in oil or gas prices
could have a material adverse effect on the Company's operations, financial
condition and level of development and exploration expenditures and could result
in a reduction of the Company's borrowing base under the Credit Agreement,
thereby reducing the amount of credit available to the Company to fund its
exploration, development and acquisition activities.
Part of the Company's business strategy is to reduce its exposure to the
volatility of oil and natural gas prices by entering into financial arrangements
designed to protect against price declines, including swaps and futures
agreements. The Company's objective is to reduce the risk that a sharp drop in
oil or natural gas prices will cause the Company to defer various capital
spending projects. In certain circumstances, significant reductions in
production, due to unforeseen events, could require the Company to make payments
under the hedge agreements even though such payments are not offset by
production. To reduce this risk, the Company strives to keep a percentage of its
production unhedged. Hedging will also prevent the Company from receiving the
full advantage of increases in oil or natural gas prices above the amount
specified in the hedge. Based upon average daily production during September
1996, the Company's hedge agreements covered approximately 67% and 36% of the
Company's daily average oil and natural gas production, respectively, during
such month. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Hedging Activity."
INCURRENCE OF LOSSES AND WORKING CAPITAL DEFICITS. Although the Company
reported net income available for Common Stock of $2.1 million in 1995, the
Company experienced significant net losses in 1993, 1994 and the nine months
ended September 30, 1996. The Company's results of operations will be
10
<PAGE> 12
significantly impacted by the level of exploration expenses and by the costs of
drilling dry exploratory wells, which are charged to expense under the
successful efforts method of accounting followed by the Company. During the
first nine months of 1996, the Company incurred a loss of $5.8 million. There
can be no assurance that the Company will not experience losses in the future.
If the Company experiences significant losses, its ability to maintain
compliance with financial covenants in its debt instruments could be adversely
affected.
Under certain circumstances, the Company may be required to write down the
book value of the Company's proved oil and natural gas properties or recognize
an impairment in the book value of its unproved properties. The Company has
recorded write-downs of its oil and natural gas properties during the last few
years.
The Company has incurred working capital deficits in the ordinary course of
its business and expects to continue to operate with such working capital
deficits in the future. The Company's working capital deficits reflect, among
other items, payables, short-term debt (including the current portion of
long-term debt), taxes and other amounts that are due within one year. The
Company generally intends to fund its working capital deficits through operating
cash flow and bank borrowings, as available. Any material adverse developments
relating to the Company's operating cash flow or its ability to borrow under the
Credit Agreement or any future bank credit facility could have a material
adverse effect on the Company's financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS OF DEVELOPMENT DRILLING, ACQUISITIONS AND EXPLORATION; REPLACEMENT OF
RESERVES. The Company intends to utilize its cash flow from operations and
borrowing capacity under the Credit Agreement to fund the Company's exploration,
development and exploitation activities and property acquisitions. The decision
to develop, exploit, purchase or explore a property will depend in part on the
Company's assessment of recoverable reserves, future oil and natural gas prices
and operating costs, potential environmental and other liabilities and other
factors that are beyond the control of the Company. Such assessments are
necessarily inexact and their accuracy is inherently uncertain. Even if
geophysical and geological analyses and engineering studies, the results of
which are often inconclusive or subject to varying interpretations, indicate
high reserve potential of a prospect or project, there can be no assurance that
the Company's development, exploitation, acquisition or exploration activities
will result in additional reserves or that the Company will be successful in
drilling productive wells.
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted. Except to the extent that the Company
conducts successful development, exploitation and exploration activities or
acquires properties containing proved reserves, or both, the proved reserves of
the Company will decline as reserves are produced. As is generally the case in
the Gulf Coast region, many of the Company's producing properties are
characterized by a high initial production rate followed by a steep decline in
production. As a result, the Company's future oil and natural gas production is
highly dependent upon its level of success in finding, acquiring, developing and
exploiting additional reserves.
ESTIMATES OF RESERVES AND FUTURE NET REVENUES. There are numerous
uncertainties inherent in estimating quantities of proved oil and gas reserves
and in projecting future rates of production and the timing and results of
development expenditures. Oil and gas reserve engineering is a subjective
process of estimating underground accumulations of oil and gas that cannot be
measured in an exact way, and estimates of other engineers might differ from
those included in this Prospectus. The accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Results of drilling, testing and production
subsequent to the date of an estimate may justify revision of such estimate.
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered, which differences may be significant. In
addition, estimates of the Company's future net revenues from proved reserves
and the present value thereof are based on certain assumptions regarding future
oil and gas prices, production levels and operating and development costs that
may not prove to be correct. Any significant variance in these assumptions could
materially affect the Company's estimated quantity of reserves and future net
revenues therefrom. See "Business -- Reserves."
OPERATING HAZARDS AND UNINSURED RISKS. The Company's operations are subject
to all of the risks normally incident to the exploration for and the development
and production of oil and gas, including
11
<PAGE> 13
blowouts, cratering, uncontrollable flows of oil, gas or well fluids, fires,
pollution and other environmental risks. These hazards could result in
substantial losses to the Company due to injury and loss of life, severe damage
to and destruction of property and equipment, pollution and other environmental
damage and suspension of operations. In addition, offshore operations are
subject to a variety of operating risks peculiar to the marine environment, such
as hurricanes or other adverse weather conditions, to more extensive
governmental regulation and to interruption or termination of operations by
governmental authorities based on environmental or other considerations.
Although the Company maintains insurance coverage considered to be
customary in the industry, it is not fully insured against certain of these
risks, either because such insurance is not available or because of high premium
costs. The occurrence of a significant event against which the Company is not
fully insured could have a material adverse effect on the Company's financial
position.
GOVERNMENT REGULATION AND ENVIRONMENTAL RISKS. The Company's business is
subject to certain federal, state and local laws and regulations relating to
taxation, exploration for and development and production of oil and gas and
environmental and safety matters. Although the Company believes that its
operations are in compliance with applicable environmental regulations, risks of
substantial costs and liabilities are inherent in the operations of companies in
the oil and gas industry, and there can be no assurance that such costs and
liabilities will not be incurred. A variety of federal and state laws and
regulations govern the environmental aspects of oil and gas production,
handling, storage, transportation and processing and may, in addition to other
laws, impose liability in the event of discharges (whether or not accidental),
failure to notify the proper authorities of a discharge and other failures to
comply with those laws. The Company does not believe that its environmental
risks are materially different from those of comparable companies in the oil and
gas industry. Nevertheless, there can be no assurance that future laws and
regulations, including environmental laws and regulations, will not adversely
affect the Company's operations and financial condition.
CAPITAL-INTENSIVE INDUSTRY; LIMITS ON ACCESS TO CAPITAL. The business of
developing, exploring for and acquiring oil and gas reserves is capital
intensive, and the Company will require substantial amounts of cash for planned
expenditures for development and exploratory drilling activities, acquisitions
of reserves and debt service. The ability of the Company to generate cash flow
and obtain financing from third parties will be dependent on the Company's
future performance and liquidity. Substantially all of the Company's assets are
encumbered, and the Company's ability to borrow additional funds is limited by
the terms of the purchase agreements relating to its 11% senior subordinated
notes (the "Subordinated Notes") and the Credit Agreement. Pursuant to the
Credit Agreement, the Company's borrowing base is subject to redetermination on
a semiannual basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity."
COMPETITION. The Company operates in a highly competitive environment. The
Company competes with major oil and gas companies, independent producers,
drilling and production purchase programs and individual producers and operators
for the acquisition of desirable oil and gas properties, as well as for the
equipment and labor required to develop and operate such properties. Many of
these competitors have financial and other resources substantially greater than
those of the Company. See "Business -- Oil and Gas Marketing and Competition."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock by current stockholders or by warrant holders could adversely affect the
prevailing market price of the Common Stock and impair the Company's ability to
raise capital by issuing equity securities. Of the 11.8 million shares of Common
Stock outstanding prior to the Offering, the Company has granted registration
rights with respect to approximately 5.6 million shares. Substantially all of
the remainder of such 11.8 million shares are freely tradeable. In addition, (i)
up to approximately 1.8 million shares are issuable upon conversion of the
Convertible Preferred Stock at a conversion price of $15.00 per share, subject
to adjustment in certain circumstances, (ii) approximately 1.0 million shares
are issuable upon exercise of stock options outstanding at September 30, 1996 at
prices ranging from $11.50 to $40.00 per share at a weighted average exercise
price of $13.29 per share and (iii) approximately 1.5 million shares are
issuable upon exercise of warrants outstanding at September 30, 1996 at a
weighted average exercise price of $16.94 per share. The holders of such
warrants have been granted
12
<PAGE> 14
certain registration rights with respect to the shares of Common Stock issuable
upon exercise of the warrants, and the shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock have been registered under the
Securities Act. In connection with the Offering, the Company, the officers and
directors of the Company, the Selling Stockholders and certain other
stockholders of the Company have agreed not to sell or otherwise dispose of
shares of Common Stock held by them following the Offering for a period of 90
days after the date of this Prospectus. See "Underwriting."
NO DIVIDENDS ON COMMON STOCK. The Company has not declared or paid any
dividends on the Common Stock and does not anticipate declaring or paying any
dividends on the Common Stock for the foreseeable future. In addition, the terms
of the Credit Agreement and purchase agreements relating to its Subordinated
Notes also impose limitations upon the declaration and payment of dividends.
ANTI-TAKEOVER PROVISIONS; STOCKHOLDER RIGHTS PLAN. The Board of Directors
of the Company ("Board of Directors") is authorized to issue additional shares
of preferred stock and could, without stockholder approval, issue such preferred
stock with voting, liquidation preference, dividend and other rights superior to
those of the Common Stock. The issuance of such preferred stock could adversely
affect the voting power of holders of the Common Stock and could have the effect
of delaying, deferring or preventing a change in control of the Company or the
removal of existing management. The terms of the Company's outstanding
Convertible Preferred Stock, with its voting and special conversion rights,
could also have a similar effect. In addition, in 1993 the Company adopted a
stockholder rights plan and shortly thereafter distributed rights to each
outstanding holder of Common Stock. See "Description of Capital
Stock -- Stockholder Rights Plan." While the Company believes that the rights
plan is designed to strengthen the Company's ability to negotiate with potential
acquirors and to protect stockholders from coercive or abusive takeover tactics,
the overall effect of the rights plan may be to delay, defer or prevent a change
in control of the Company. The Company has no specific plans or arrangements for
the issuance of any series of preferred stock other than the issuance of the
preferred stock issuable pursuant to the terms of the Company's stockholder
rights plan.
13
<PAGE> 15
THE COMPANY
American Exploration is an independent company engaged in the exploration,
development, acquisition and production of oil and natural gas. The Company's
operations are conducted in the United States with exploration, development and
acquisition activities concentrated in the Gulf of Mexico, South Texas and the
Smackover Trend in southwestern Arkansas.
The Company was incorporated in Delaware in 1980. From inception through
1991, the Company was principally engaged in the acquisition and management of
oil and gas properties, both for its own account and in partnership with
institutional and non-institutional investors. During this period, the Company
completed over 30 acquisitions on behalf of the Company and its partners. This
period culminated with the acquisition in 1990 and 1991 of Hershey Oil
Corporation and Conquest Exploration Company, respectively. The Company conveyed
approximately 40% of its interest in the Henderson Canyon Field in March 1993
and sold its Canadian assets in mid-1993. In 1994 and 1995, the Company
completed the APPL Consolidation for $40.1 million cash and the issuance of 4.6
million shares of Common Stock. In July 1995, the Company accepted an
unsolicited offer to purchase its interest in the Sawyer Field in West Texas,
the Company's largest property, for $64.0 million. Proceeds from the sale
enabled the Company to repay bank debt and reduce debt as a percentage of
capitalization to 30% at year-end 1995 from 53% at year-end 1994.
The Company is in the process of liquidating the NYLOG Programs, a series
of publicly registered oil and gas partnerships co-managed by a subsidiary of
the Company and a subsidiary of New York Life Insurance Company ("New York
Life"). The co-general partners of the NYLOG Programs have received bids from
third parties and are negotiating to sell the properties owned by the NYLOG
Programs and certain additional property interests of the Company. The Company
anticipates that the 1996 Sales will be completed during the fourth quarter of
1996, with estimated net proceeds to the Company of $8.6 million. See
"Business -- Legal Proceedings." The effect of the 1996 Sales is reflected in
the pro forma financial statements included elsewhere herein. See the Pro Forma
Condensed Consolidated Financial Statements.
The Company's executive offices are located at 1331 Lamar, Suite 900,
Houston, Texas 77010, and its telephone number is (713) 756-6000.
USE OF PROCEEDS
The Company's proceeds, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company, from the
sale of the shares of Common Stock offered by the Company are estimated to be
approximately $33.8 million (approximately $39.3 million if the Underwriters'
over-allotment options are exercised in full) based on an assumed offering price
of $12 1/8 per share, the last reported sales price for the Common Stock on the
AMEX on October 9, 1996. These net proceeds will be used to reduce outstanding
indebtedness under the Credit Agreement, which indebtedness was incurred to
finance the March 1996 Acquisition and the September 1996 Acquisition and for
general working capital purposes. Following the application of the net proceeds
from the Offering, the Company will have approximately $53.2 million of
borrowing capacity available under the Credit Agreement, which will be available
for exploration and development activities, acquisitions and general corporate
purposes. The Company will not receive any of the proceeds from the sale of
Common Stock by the Selling Stockholders.
Principal payments under the Credit Agreement are scheduled to be repaid in
ten quarterly installments commencing September 30, 1999 unless extended by the
lenders thereunder, and at September 30, 1996, the average interest rate on
amounts outstanding under the Credit Agreement was 8.3%.
14
<PAGE> 16
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is listed on the AMEX under the symbol "AX." As of
September 30, 1996, the Company had approximately 4,470 stockholders of record.
The following table sets forth the high and low reported closing sales
prices for the Common Stock for the quarters indicated.
PRICE RANGE OF COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
First Quarter...................................................... $18 3/4 $13 3/4
Second Quarter..................................................... 15 11 1/4
Third Quarter...................................................... 15 11 7/8
Fourth Quarter..................................................... 13 3/4 8 3/4
YEAR ENDED DECEMBER 31, 1995
First Quarter...................................................... $10 $ 8 3/4
Second Quarter..................................................... 10 7/8 8 1/8
Third Quarter...................................................... 12 1/8 10 3/8
Fourth Quarter..................................................... 11 7/8 9 5/8
YEAR ENDED DECEMBER 31, 1996
First Quarter...................................................... $12 $10 5/8
Second Quarter..................................................... 13 1/2 10 5/8
Third Quarter...................................................... 14 11 7/8
Fourth Quarter (through October 24, 1996).......................... 12 7/8 11 7/8
</TABLE>
The Company has not declared or paid any dividends on the Common Stock and
does not expect to declare or pay dividends on the Common Stock for the
foreseeable future. Declaration or payment of dividends on the Common Stock is
currently restricted by the terms of various agreements relating to outstanding
indebtedness of the Company.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 and as adjusted to reflect (i) the incurrence of $39 million
in long-term indebtedness to fund the September 1996 Acquisition, (ii) the
application of the estimated net proceeds from the Offering of $33.8 million to
repay amounts outstanding under the Credit Agreement and (iii) the application
of the estimated net proceeds from the 1996 Sales of $8.6 million to repay
amounts outstanding under the Credit Agreement. The table should be read in
conjunction with the Consolidated Financial Statements of the Company and the
related Notes included elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
AS
ACTUAL ADJUSTED
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
Long-term debt:
Credit Agreement.................................................... $ 70,000 $ 21,833
Subordinated Notes.................................................. 35,000 35,000
--------- ---------
Total long-term debt........................................ 105,000 56,833
--------- ---------
Stockholders' equity:
Preferred stock, $1.00 par value, 100,000 shares authorized; 4,000
shares of Convertible Preferred Stock (represented by Depositary
Shares) issued and outstanding................................... 4 4
Common stock, $.05 par value, 50,000,000 shares authorized,
11,807,741 shares issued and outstanding(1)...................... 590 740
Additional paid-in capital.......................................... 276,658 310,291
Accumulated deficit................................................. (189,664) (189,664)
Unearned compensation............................................... (79) (79)
Notes receivable from officers...................................... (3) (3)
--------- ---------
Total stockholders' equity.................................. 87,506 121,289
--------- ---------
Total capitalization........................................ $ 192,506 $ 178,122
========= =========
</TABLE>
- ---------------
(1) Does not reflect (i) approximately 1.0 million shares issuable upon exercise
of outstanding stock options at prices ranging from $11.50 to $40.00 per
share at a weighted average exercise price of $13.29 per share or (ii)
approximately 1.5 million shares issuable upon exercise of warrants at a
weighted average exercise price of $16.94 per share. See "Description of
Capital Stock -- Warrants."
16
<PAGE> 18
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements (the "Pro Forma Statements") give effect to (i) that portion of the
APPL Consolidation that was completed in the first half of 1995 for a purchase
price of approximately $9 million, (ii) the 1995 sales of interests in several
other fields for aggregate proceeds of approximately $2.5 million (the "1995
Sales"), (iii) the Sawyer Sale in July 1995 for proceeds of $64.0 million, (iv)
the application of the estimated net proceeds from the Offering of $33.8 million
to repay amounts outstanding under the Credit Agreement, (v) the March 1996
Acquisition and the September 1996 Acquisition and (vi) the 1996 Sales. The
Sawyer Sale, the 1995 Sales and the APPL Consolidation are sometimes
collectively referred to in the Pro Forma Statements as the "1995 Transactions."
The pro forma statements of operations for the nine months ended September
30, 1996 and for the year ended December 31, 1995 have been prepared assuming
that each of the transactions described above was consummated as of January 1,
1995. The pro forma statements of operations for the year ended December 31,
1995 do not include results from the High Island 116 well acquired in the
September 1996 Acquisition because the well did not produce during the period.
Similarly, the pro forma data for the nine months ended September 30, 1996
includes only two months of results from the High Island 116 well, which results
reflect the Company's acquired interest net of interests being sold to a third
party. The well commenced production in August 1996 at a net production rate of
300 Bbls of oil per day and 17,100 Mcf of natural gas per day. The pro forma
balance sheet was prepared assuming that the Offering, the expected sale of
certain assets acquired in the September 1996 Acquisition and the 1996 Sales
were consummated as of September 30, 1996.
The Pro Forma Statements are not necessarily indicative of the financial
results that would have occurred had the Company completed each of the
transactions described above as of January 1, 1995 or September 30, 1996, as the
case may be. Furthermore, future results may vary significantly from the results
reflected in the Pro Forma Statements due to changes in production levels,
changes in market prices for oil and gas, future expenditures for acquisitions,
development drilling and exploration and other factors. The Pro Forma Statements
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements and related Notes thereto appearing elsewhere in this Prospectus.
17
<PAGE> 19
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and temporary cash investments..................... $ 6,780 $ 6,780
Accounts receivable..................................... 11,203 11,203
Assets held for sale.................................... 14,384 $ (8,634)(a) --
(5,750)(b)
Other current assets.................................... 2,158 2,158
--------- --------- ---------
Total current assets............................ 34,525 (14,384) 20,141
Property, plant and equipment, net........................ 195,850 195,850
Other assets.............................................. 2,988 2,988
--------- --------- ---------
Total assets.................................... $ 233,363 $ (14,384) $ 218,979
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 15,670 $ 15,670
Payable to partnerships................................. 1,678 1,678
Accrued liabilities..................................... 18,800 18,800
--------- --------- ---------
Total current liabilities....................... 36,148 36,148
Long-term debt............................................ 105,000 $ (5,750)(c) 56,833
(8,634)(d)
(33,783)(e)
Other long-term liabilities............................... 4,709 4,709
Stockholders' equity...................................... 87,506 33,783 (e) 121,289
--------- --------- ---------
Total liabilities and stockholders' equity...... $ 233,363 $ (14,384) $ 218,979
========= ========= =========
</TABLE>
18
<PAGE> 20
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------------------------
MARCH SEPTEMBER
1996 1996
HISTORICAL ACQUISITION ACQUISITION 1996 SALES OFFERING PRO FORMA
---------- ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales............. $ 52,263 $ 1,964 (f) $ 4,467 (h) $ (5,766)(j) $52,928
Other revenues, net........... 912 912
-------- ------- ------- -------- ------ -------
Total revenues......... 53,175 1,964 4,467 (5,766) 53,840
-------- ------- ------- -------- ------ -------
COSTS AND EXPENSES:
Production and operating...... 15,421 109 (f) 963 (h) (2,011)(j) 14,482
Depreciation, depletion and
amortization................ 20,871 728 (f) 2,370 (h) (1,313)(j) 22,656
General and administrative.... 4,450 4,450
Taxes other than income....... 4,254 (392)(j) 3,862
Exploration................... 9,152 9,152
Impairment.................... 1,841 1,841
-------- ------- ------- -------- ------ -------
Total costs and
expenses............. 55,989 837 3,333 (3,716) 56,443
-------- ------- ------- -------- ------ -------
INCOME (LOSS) FROM OPERATIONS... (2,814) 1,127 1,134 (2,050) (2,603)
Interest and other expense,
net........................... (2,957) (280)(g) (2,355)(i) 518 (k) $2,027 (l) (3,047)
-------- ------- ------- -------- ------ -------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM............ (5,771) 847 (1,221) (1,532) 2,027 (5,650)
Preferred stock dividends....... (1,350) (1,350)
-------- ------- ------- -------- ------ -------
INCOME (LOSS) TO COMMON STOCK
BEFORE EXTRAORDINARY ITEM..... $ (7,121) $ 847 $(1,221) $ (1,532) $2,027 $(7,000)
======== ======= ======= ======== ====== =======
LOSS BEFORE EXTRAORDINARY ITEM
PER COMMON SHARE:
Primary and fully diluted..... $ (0.60) $ (0.47)
======== =======
NUMBER OF COMMON AND EQUIVALENT
SHARES:
Primary and fully diluted..... 11,811 3,000 (m) 14,811
======== ====== =======
</TABLE>
19
<PAGE> 21
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------------------------------------------
MARCH SEPTEMBER
1995 1996 1996
HISTORICAL TRANSACTIONS ACQUISITION ACQUISITION 1996 SALES OFFERING PRO FORMA
---------- ------------ ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales...... $ 70,768 $ (9,450)(n) $ 7,513 (f) $ 2,886 (h) $ (6,479)(j) $ 65,238
Gain (loss) on sales of
oil and gas
properties........... 10,230 (10,643)(o) (413)
Other revenues, net.... 936 249 (n) 1,185
-------- ------- ------- ------- -------- ------ --------
Total revenues... 81,934 (19,844) 7,513 2,886 (6,479) 66,010
-------- ------- ------- ------- -------- ------ --------
COSTS AND EXPENSES:
Production and
operating............ 24,515 (3,642)(n) 662 (f) 1,265 (h) (3,423)(j) 19,377
Depreciation, depletion
and amortization..... 30,726 (2,853)(n) 3,506 (f) 1,376 (h) (1,846)(j) 30,909
General and
administrative....... 7,472 56 (n) 7,528
Taxes other than
income............... 5,760 (243)(n) (561)(j) 4,956
Exploration............ 4,826 4,826
Impairment............. 1,822 1,822
-------- ------- ------- ------- -------- ------ --------
Total costs and
expenses....... 75,121 (6,682) 4,168 2,641 (5,830) 69,418
-------- ------- ------- ------- -------- ------ --------
INCOME (LOSS) FROM
OPERATIONS............. 6,813 (13,162) 3,345 245 (649) (3,408)
Interest and other
expense, net........... (5,336) 3,013 (p) (1,120)(g) (3,140)(i) 691 (k) $2,703 (l) (3,189)
-------- ------- ------- ------- -------- ------ --------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM..... 1,477 (10,149) 2,225 (2,895) 42 2,703 (6,597)
Preferred stock
dividends.............. (1,800) (1,800)
-------- ------- ------- ------- -------- ------ --------
INCOME (LOSS) TO COMMON
STOCK BEFORE
EXTRAORDINARY ITEM..... $ (323) $(10,149) $ 2,225 $(2,895) $ 42 $2,703 $ (8,397)
======== ======= ======= ======= ======== ====== ========
LOSS BEFORE EXTRAORDINARY
ITEM PER COMMON SHARE:
Primary and fully
diluted.............. $ (0.03) $ (0.57)
======== ========
NUMBER OF COMMON AND
EQUIVALENT SHARES:
Primary and fully
diluted.............. 11,812 3,000 (m) 14,812
======== ====== ========
</TABLE>
20
<PAGE> 22
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The Pro Forma Condensed Consolidated Balance Sheet is presented as if the
expected sale of certain assets acquired in the September 1996 Acquisition, the
1996 Sales and the Offering occurred as of September 30, 1996. The Pro Forma
Condensed Consolidated Statements of Operations for the nine months ended
September 30, 1996 and for the year ended December 31, 1995 are presented as if
the 1995 Transactions, the March 1996 Acquisition, the September 1996
Acquisition and the expected sale of certain assets acquired therein, the 1996
Sales and the Offering were consummated as of January 1, 1995.
The September 1996 Acquisition, the March 1996 Acquisition and the portion
of the APPL Consolidation completed in 1995 have been accounted for in the Pro
Forma Statements using the purchase method of accounting. The value of the
interests acquired in the September 1996 Acquisition and the March 1996
Acquisition represents the cash consideration given to the seller. The total
value of the acquired interests in the APPL Consolidation was determined based
upon the fair value of the Common Stock and cash offered to the investors.
(2) LOSS PER COMMON SHARE
Loss per common share has been calculated by dividing net loss before
extraordinary items by the number of common shares outstanding at the end of the
respective period. Pro forma common shares outstanding includes the 3,000,000
shares of Common Stock to be issued by the Company in connection with the
Offering.
(3) PRO FORMA ADJUSTMENTS
Balance Sheet
(a) To eliminate the assets to be sold in the 1996 Sales.
(b) To eliminate that portion of assets acquired in the September 1996
Acquisition that are expected to be sold to a third party.
(c) To reflect the application of the estimated net proceeds of $5.7 million
from the expected sale of a portion of the assets acquired in the September
1996 Acquisition to repay amounts outstanding under the Credit Agreement.
(d) To reflect the application of the estimated net proceeds of $8.6 million
from the 1996 Sales to repay amounts outstanding under the Credit
Agreement.
(e) To reflect the issuance of shares pursuant to the Offering and to reflect
the application of the estimated net proceeds of $33.8 million to repay
amounts outstanding under the Credit Agreement.
Statement of Operations
(f) To reflect the results of operations for properties acquired in the March
1996 Acquisition.
(g) To adjust historical interest expense to reflect the $14 million increase in
outstanding bank debt to fund the March 1996 Acquisition assuming an annual
interest rate of 8%, based on the Company's weighted average interest rate
on its bank borrowings.
(h) To reflect the results of operations for the Company's interest in the
properties acquired in the September 1996 Acquisition, net of certain
interests being sold to a third party.
(i) To adjust historical interest expense to reflect the $39.3 million net
increase in outstanding bank debt to fund the September 1996 Acquisition
(net of interests being sold to a third party) assuming an annual interest
rate of 8%, based on the Company's weighted average interest rate on its
bank borrowings.
21
<PAGE> 23
(j) To eliminate the results of operations related to the 1996 Sales.
(k) To adjust historical interest expense to reflect the application of the
estimated net proceeds of $8.6 million from the 1996 Sales to reduce
outstanding bank debt assuming an annual interest rate of 8%, based on the
Company's weighted average interest rate on its bank borrowings.
(l) To adjust historical interest expense to reflect the application of the
estimated net proceeds from the Offering of $33.8 million to reduce
outstanding bank debt assuming an annual interest rate of 8%, based on the
Company's weighted average interest rate on its bank borrowings.
(m) To reflect the issuance of 3,000,000 shares of Common Stock by the Company
in connection with the Offering.
(n) To reflect the impact of the 1995 Transactions on the Company's results of
operations.
(o) To eliminate the nonrecurring gain on the Sawyer Sale.
(p) To adjust historical interest expense to reflect the repayment of $62.5
million of outstanding bank debt using the proceeds from the Sawyer Sale
and assuming an annual interest rate of 8%, based on the Company's weighted
average interest rate on its bank borrowings.
22
<PAGE> 24
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for the
Company as of and for each of the years in the five-year period ended December
31, 1995 and for each of the nine-month periods ended September 30, 1995 and
1996. The historical financial data was derived from the consolidated financial
statements of the Company. The data in the following table should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and related
Notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ -----------------
1991 1992 1993(1) 1994(2) 1995(2)(3) 1995 1996
-------- -------- -------- -------- ---------- ------- -------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Revenues:
Oil and gas sales.......................... $ 71,499 $ 58,560 $ 49,589 $ 50,033 $ 70,768 $55,049 $52,263
Gain (loss) on sales of oil and gas
properties............................... (6,207) (1,309) (6,894) 1,110 10,230 9,674 801
Gas settlement income...................... 1,481 1,849 15,592 374 895 879 --
Other revenues, net........................ 3,268 908 (129) (158) 41 (201) 111
-------- -------- -------- -------- -------- ------- -------
Total revenues......................... 70,041 60,008 58,158 51,359 81,934 65,401 53,175
-------- -------- -------- -------- -------- ------- -------
Costs and Expenses:
Production and operating................... 22,836 19,412 15,998 21,302 24,515 19,079 15,421
Depreciation, depletion and amortization... 35,163 30,193 23,635 29,616 30,726 22,446 20,871
General and administrative................. 12,554 11,047 7,413 10,035 7,472 4,683 4,450
Taxes other than income.................... 6,799 5,606 4,601 5,710 5,760 4,413 4,254
Exploration................................ 5,687 7,843 7,554 2,559 4,826 3,269 9,152
Impairment................................. 340 45,586 10,975 33,570 1,822 43 1,841
-------- -------- -------- -------- -------- ------- -------
Total costs and expenses............... 83,379 119,687 70,176 102,792 75,121 53,933 55,989
-------- -------- -------- -------- -------- ------- -------
Income (loss) from operations................ (13,338) (59,679) (12,018) (51,433) 6,813 11,468 (2,814)
Interest expense............................. (11,997) (9,485) (6,847) (6,638) (5,481) (4,853) (2,894)
Other income (expense), net.................. 1,078 265 (321) (2,164) 145 (105) (63)
-------- -------- -------- -------- -------- ------- -------
Income (loss) before extraordinary item...... (24,257) (68,899) (19,186) (60,235) 1,477 6,510 (5,771)
Extraordinary gain on debt extinguishment.... -- 3,100 -- 5,419 2,456 2,456 --
-------- -------- -------- -------- -------- ------- -------
Net income (loss)...................... (24,257) (65,799) (19,186) (54,816) 3,933 8,966 (5,771)
Preferred stock dividends and expenses....... (114) -- (75) (1,800) (1,800) (1,350) (1,350)
-------- -------- -------- -------- -------- ------- -------
Net income (loss) to common stock...... $(24,371) $(65,799) $(19,261) $(56,616) $ 2,133 $ 7,616 $(7,121)
======== ======== ======== ======== ======== ======= =======
Net income (loss) per common share:
Primary and fully diluted:
Loss before extraordinary item......... $ (4.50) $ (10.73) $ (2.77) $ (7.70) $ (0.03) $ 0.43 $ (0.60)
Net income (loss)...................... (4.50) (10.25) (2.77) (7.02) 0.18 0.64 (0.60)
Cash dividends declared per common share..... -- -- -- -- -- -- --
OTHER FINANCIAL DATA:
EBITDA(4).................................... $ 32,448 $ 24,676 $ 37,224 $ 10,583 $ 33,981 $27,493 $28,186
Operating cash flow(5)....................... 18,875 13,136 26,813 4,838 27,514 21,714 24,285
Total capital expenditures(6)................ 63,636 22,516 24,167 49,889 44,215 31,229 92,116
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF BALANCE SHEET DATA:
Working capital (deficit)..................... $(27,066) $ 2,722 $(10,123) $ (4,102) $(11,691) $ (1,623)
Total assets.................................. 336,803 256,820 185,598 223,894 176,030 233,363
Long-term obligations and convertible
redeemable preferred stock excluding current
obligations................................. 135,226 115,256 62,848 100,710 40,000 105,000
Total stockholders' equity.................... 127,433 85,160 86,406 87,710 94,480 87,506
</TABLE>
- ---------------
(1) The Company received aggregate proceeds of approximately $35 million for the
conveyance of approximately 40% of its interest in the Henderson Canyon
Field in March 1993 and the sale of its Canadian assets in mid-1993.
(2) The Company purchased investors' interests in the APPL Programs in 1994 and
1995 for 4.6 million shares of Common Stock and $40.1 million in cash.
(3) The Company sold its interest in the Sawyer Field for $64 million in July
1995.
(4) EBITDA is defined for this purpose as net income (loss) plus interest,
income taxes, depreciation, depletion and amortization, exploration expense,
impairment expense and loss on sales of oil and gas properties, less gain on
sales of oil and gas properties and extraordinary gain from extinguishment
of debt. EBITDA should not be considered as an alternative to earnings
(loss) as an indicator of the Company's financial performance or to cash
flow as a measure of liquidity. See the Consolidated Statements of
Operations included in the Consolidated Financial Statements appearing
elsewhere herein.
(5) Cash flow from operations before working capital changes and after preferred
dividends.
(6) Excludes the acquisition of properties in exchange for the issuance of
Common Stock, principally relating to the APPL Consolidation.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Over the past four years, the Company has implemented a series of steps
that has resulted in a significant improvement in its oil and gas operating and
exploration capabilities, overhead and production costs, financial position and
cash operating margins. These steps include (i) hiring experienced personnel in
key management and operating positions, (ii) focusing exploration and
development activities in areas in which the Company has competitive advantages,
(iii) acquiring properties held by the APPL Programs and (iv) disposing of over
250 properties, including the sale of the Company's interest in the Sawyer Field
in West Texas for $64 million in July 1995. Largely as a result of these steps,
the Company's operating margin has increased from $2.72 per BOE for the year
ended December 31, 1992 to $6.02 per BOE for the nine months ended September 30,
1996. In addition, the Company's ratio of total debt to total capitalization has
decreased from 60% at December 31, 1992 to 32% on a pro forma basis at September
30, 1996.
The Company accounts for its oil and gas exploration and production
activities using the successful efforts method of accounting. Under this method,
acquisition costs for proved and unproved properties are capitalized when
incurred. Exploration costs other than drilling costs for successful wells,
including geological and geophysical costs and costs of carrying and retaining
unproved properties, are charged to expense as incurred. The costs of drilling
exploratory wells are capitalized pending determination of whether each well
resulted in the discovery of proved reserves. If proved reserves are not
discovered, such drilling costs are charged to expense. Costs incurred to drill
and equip development wells, including unsuccessful development wells, are
capitalized. Internal costs related to the acquisition, development and
exploration of oil and gas properties are expensed as incurred. Interest is
capitalized on qualifying assets, primarily unproved and unevaluated properties.
Depletion of the cost of producing oil and gas properties is computed on
the unit-of-production method. The Company also accrues for platform abandonment
costs related to its offshore platform facilities on the unit-of-production
method. Unproved properties are assessed periodically, and any impairment in
value is recognized currently as impairment expense.
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1995
Revenues. The Company recorded oil and gas sales of $19.1 million for the
third quarter of 1996 compared to $16.9 million for the third quarter of 1995.
Higher sales for the third quarter of 1996 primarily reflect a 12% increase in
the Company's average gas price and increased oil production relative to the
third quarter of 1995. For the first nine months of the year, oil and gas sales
totaled $52.3 million in 1996 and $55 million in 1995. The decline in sales for
the nine-month period of 1996, compared to the same period of 1995, is mainly
attributable to the Sawyer Sale, offset in part by higher gas prices and
increased oil production.
Gas production for the third quarter of 1996 totaled 5,942 MMcf,
representing a 1% decline from third quarter 1995 production of 6,013 MMcf. Gas
production from the properties acquired in the March 1996 Acquisition, together
with higher production due to successful development activity at High Island
Block 13-L and the Bradshaw Field, more than offset the decrease of
approximately 700 MMcf of July 1995 production from the Sawyer Field included in
the third quarter 1995 results. For the nine months ended September 30, 1996,
gas production totaled 15,772 MMcf compared to 19,866 MMcf for the same period
of 1995. The production decline for the nine-month period reflected the loss of
production of approximately 20 MMcf per day due to the Sawyer Sale. For the
quarterly and nine-month periods, the decline in gas volumes in 1996 negatively
impacted sales by approximately $100,000 and approximately $6.9 million,
respectively.
Oil production for the third quarter of 1996 increased to 453 MBbls from
403 MBbls for the third quarter of 1995 primarily due to additional volumes
related to the March 1996 Acquisition. On a nine-month basis, oil production
increased to a lesser extent, totaling 1,340 MBbls for 1996, or 7% above the
same period of 1995. Production increases during the first nine months of 1996
resulting from the March 1996 Acquisition, the late 1995 acquisition of an
additional interest in the Buckner Field and the successful 1995 drilling
program at the Midway Field were partially offset by the impact of the sales of
several oil producing properties in late 1995
24
<PAGE> 26
and early 1996. Increased oil production contributed approximately $800,000 to
the Company's third quarter revenues in 1996 and approximately $1.4 million to
nine-month 1996 revenues.
The Company's 1996 revenues were favorably impacted by approximately $1.5
million due to the effect of higher oil and gas prices in the third quarter of
1996 and by approximately $2.8 million due to higher gas prices for the first
nine months of 1996, compared to the respective periods of 1995. The Company's
gas price averaged $1.90 per Mcf and $1.88 per Mcf for the quarterly and
nine-month periods of 1996, respectively, compared to $1.69 per Mcf for the
third quarter of 1995 and $1.70 per Mcf for the first nine months of 1995. The
Company's average oil price increased by 3% for the quarterly period, rising to
$17.20 per Bbl in the third quarter of 1996 from $16.64 per Bbl for the same
period of 1995. For the first nine months of the year, the Company recorded an
average oil price of $16.87 per Bbl in both 1996 and 1995.
During the third quarter of 1996, the Company had in effect commodity price
swap agreements covering approximately 36% of the Company's gas production and
approximately 69% of its oil production. As a result of the price hedges, the
Company's oil and gas sales revenues were reduced by approximately $2.3 million
during the third quarter of 1996 and were increased by approximately $1.4
million during the same period of 1995. Excluding the impact of the hedging
gains and losses, the Company's average oil and gas prices for the third quarter
of 1996 would have been $20.47 per Bbl and $2.04 per Mcf. For the third quarter
of 1995, the Company's average prices exclusive of the hedges would have been
$15.93 per Bbl and $1.51 per Mcf.
For the first nine months of 1996, hedging agreements covered approximately
52% of the Company's gas production and approximately 67% of its oil production,
resulting in a revenue reduction of approximately $6.1 million. The Company's
nine-month 1996 oil and gas prices would have averaged $19.39 per Bbl and $2.05
per Mcf, exclusive of the hedges. For the comparable period of 1995, the Company
recorded a net hedging gain of approximately $2 million. The Company's average
gas price for the first nine months of 1995 was increased by $0.10 per Mcf due
to the hedges while the average oil price was reduced by $0.07 per Bbl.
In September 1996, the Company entered into additional commodity price swap
agreements covering 3,000 barrels of daily oil production for the period from
January 1, 1997 through December 31, 1997 at an average fixed price of $19.48
per Bbl. For information regarding oil and gas price hedging arrangements in
effect for the remainder of 1996, see "-- Hedging Activity" below.
During the third quarter of 1995, the Company reported a gain on the Sawyer
Sale of approximately $10 million. Also in 1995, other revenues for the
nine-month period included $879,000 of net gas settlement income as a result of
the final judgment in certain litigation regarding the terms of a gas purchase
contract.
Costs and Expenses. Production and operating costs totaled $5.2 million, or
$3.62 per BOE, for the third quarter of 1996 and $5.6 million, or $3.95 per BOE,
for the third quarter of 1995. The 6% decrease in production costs resulted from
reduced production in the third quarter of 1996 while the decline in the
Company's operating cost per unit of production was mainly attributable to the
impact of the offshore properties acquired in the March 1996 Acquisition. Such
properties have high production volumes and low operating costs relative to the
Company's onshore properties. For the nine-month period, production and
operating costs decreased to $15.4 million, or $3.89 per BOE, in 1996 from $19.1
million, or $4.18 per BOE, in 1995. The reduction in total costs was primarily
attributable to the Sawyer Sale, while lower unit costs mainly reflected the
impact of the March 1996 Acquisition.
Depreciation, depletion and amortization ("DD&A") totaled $7.4 million and
$6.9 million for the third quarter of 1996 and 1995, respectively. The increase
in DD&A for the quarterly periods primarily reflected the higher depletion rates
associated with platform abandonment costs for the offshore properties in the
Gulf of Mexico, which represent a greater portion of the Company's property base
than in 1995. For the nine-month period, DD&A totaled $20.9 million in 1996 and
$22.4 million in 1995. DD&A for the nine-month period declined in 1996 due to
lower gas production volumes resulting from the Sawyer Sale, with that decline
partially offset by the impact of higher depletion rates on the offshore
properties.
General and administrative ("G&A") expense declined to $1.3 million for the
third quarter of 1996 from $1.7 million for the same period of 1995. The
reduction in G&A expense reflected lower legal fees in 1996 as the 1995 quarter
included certain costs to resolve a dispute involving a well owned by one of the
NYLOG
25
<PAGE> 27
Programs. For the first nine months of 1996, G&A expense totaled $4.5 million
compared to $4.7 million for the same period of 1995.
Taxes other than income totaled $1.6 million and $1.3 million for the third
quarter of 1996 and 1995, respectively. Production tax expense for the 1995
quarter was unusually low due to the impact of certain severance tax refunds
received related to an outside operated property. During the first nine months
of the year, taxes other than income totaled $4.3 million in 1996 and $4.4
million in 1995. On a nine-month basis, the reduction in production taxes in
1996 due to the Sawyer Sale was essentially offset by the impact of the
severance tax refunds received in 1995, as mentioned above, and higher ad
valorem taxes in 1996.
Exploration expense totaled $2 million and $3.1 million for the third
quarter of 1996 and 1995, respectively, and totaled $9.2 million and $3.3
million for the first nine months of 1996 and 1995, respectively. The Company
began to shift its focus towards exploration activity in late 1995. For the
nine-month 1996 period, exploration expense included the costs of eleven
unsuccessful exploratory wells that were primarily offshore in the Gulf of
Mexico. Impairment expense of $1.8 million in the third quarter of 1996 related
to the write-off of unproved properties on which no further exploration or
development activity is planned.
Interest expense for the third quarter of 1996 totaled $1.1 million
compared to $1 million for the same period of 1995. In addition to interest on
the Subordinated Notes, interest expense for the 1996 quarter related to the
Company's average outstanding bank debt of approximately $25 million for
substantially all of the third quarter of 1996 (since the $45 million funding of
the September 1996 Acquisition occurred near the end of the quarter) while such
expense for the 1995 quarter was primarily based on a $62.5 million bank debt
balance that was outstanding for only one month of the quarter before being
eliminated by the application of the proceeds from the Sawyer Sale. For the
first nine months of 1996, interest expense of $2.9 million was 40% below the
same period in 1995 reflecting higher bank debt carried in the first half of
1995 following the completion of the APPL Consolidation.
Extraordinary Item. The $2.5 million extraordinary gain recorded in 1995
resulted from the extinguishment of nonrecourse debt in conjunction with the
APPL Consolidation.
Net Income (Loss). The Company reported a net loss of $1.2 million and $5.8
million for the third quarter and first nine months of 1996, respectively,
compared to net income of $6 million for the third quarter of 1995 and net
income of $9 million for the nine-month period of 1995. Net losses during 1996
were attributable to an aggregate charge of $3.8 million for exploration and
impairment expenses for the third quarter and $11 million of such expenses for
the first nine months of the year. In 1995, net income for both periods included
the impact of an approximate $10 million gain on the Sawyer Sale, and nine-month
1995 income also reflected a $2.5 million extraordinary gain on debt
extinguishment.
1995 COMPARED TO 1994
Revenues. Oil and gas sales totaled $70.8 million in 1995, 41% higher than
1994 sales of $50.0 million. The increase in 1995 sales revenues primarily
reflects higher production volumes which resulted from the APPL Consolidation.
Through the APPL Consolidation, the Company acquired 22.9 MMBOE and 2.3 MMBOE of
proved oil and gas reserves in late 1994 and early 1995, respectively. The APPL
Consolidation, together with successful development activity at the Midway and
West McAllen fields and the West Cameron Block 408, resulted in a net production
increase of 1.8 MMBOE in 1995 compared to 1994. The higher production levels
achieved through the APPL Consolidation were partially offset by the loss of
production due to the Sawyer Sale in July 1995. The Company's total oil and gas
production increased to 5.8 MMBOE in 1995 from 3.9 MMBOE in 1994, contributing
$22.3 million to oil and gas sales.
Oil and gas sales reflect the impact of lower gas prices offset by higher
oil prices received in 1995. The Company realized an average price of $16.83 per
Bbl of oil in 1995 compared to $15.39 in 1994, which resulted in a $2.4 million
addition to sales revenues. The Company's average gas price realization declined
to $1.74 per Mcf in 1995, or 8% below the prior year average. The decline in the
average gas price negatively impacted sales revenues by $3.9 million.
In July 1995, the Company sold its interest in the Sawyer Field to Louis
Dreyfus Natural Gas Corp. for a purchase price of $64.0 million. The Company
recorded a gain on the sale of the Sawyer Field of
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<PAGE> 28
approximately $10.6 million in 1995. Sales of various other fields in 1995
resulted in a net loss on those fields of approximately $400,000. In 1994, the
Company recognized a $1.1 million gain on the divestiture of minor properties.
Other revenues totaled $936,000 and $216,000 in 1995 and 1994,
respectively. In 1995, the Company recorded gas settlement income of $895,000,
primarily consisting of the proceeds from certain litigation regarding the terms
of a gas purchase contract. The Company also recognized approximately $480,000
of gas balancing income during 1995, primarily relating to cash balancing
settlements receivable on various wells which were plugged and abandoned during
1995. During December 1995, the Company accrued $700,000 as a reduction of other
revenues due to the loss of correlation between actual cash prices and the
prices under the swap agreements at the Henry Hub market reference price. Other
revenues recorded in 1994 primarily included gas balancing income.
Costs and Expenses. Production and operating costs increased to $24.5
million in 1995 from $21.3 million in 1994. The increase in 1995 costs was
mainly attributable to higher production levels resulting from the APPL
Consolidation, although that increase was mitigated by a reduction in
environmental expenses in 1995. During 1994, the Company incurred $2.4 million
of site remediation costs in connection with various environmental proceedings.
On a unit cost basis, production and operating costs per BOE decreased to $4.26
per BOE in 1995 from $5.40 per BOE in 1994, reflecting continued operating
efficiencies achieved following the completion of the APPL Consolidation.
DD&A totaled $30.7 million in 1995 or 4% over 1994 DD&A of $29.6 million.
The Company's DD&A per BOE rate decreased substantially during 1995;
consequently, the Company's DD&A expense did not increase proportionately with
the 46% production increase in 1995. DD&A per BOE decreased to $5.34 per BOE in
1995 from $7.50 per BOE in 1994. The lower DD&A rate reflects the effect of the
acquisition of interests through the APPL Consolidation and the impact of a
$25.0 million impairment charge recorded in the fourth quarter of 1994, which
reduced the cost basis of certain oil and gas properties.
G&A declined to $7.5 million in 1995 from $10.0 million in 1994. The
reduction in G&A resulted primarily from staff reductions in the first half of
1994 and a $2.0 million severance charge recorded in late 1994 in connection
with the elimination of certain partnerships managed by the Company. These
decreases have been partially offset by the loss of management and technical fee
reimbursements previously received from the APPL Programs. The Company's
continuing focus on controlling administrative costs resulted in a 49% reduction
in G&A per unit of production during 1995, which averaged $1.30 per BOE in 1995
compared to $2.54 per BOE in 1994.
Taxes other than income taxes were relatively constant, totaling $5.8
million in 1995 and $5.7 million in 1994. The Company's production tax rate in
1995 was reduced due to the receipt of certain severance tax refunds related to
an outside operated property.
Exploration expense totaled $4.8 million and $2.6 million in 1995 and 1994,
respectively. The Company recognized $4.1 million of dry hole expense on three
wells in 1995, including two offshore wells, compared to $1.5 million of dry
hole expense related to three unsuccessful wells drilled in 1994.
The Company recorded $1.8 million of impairment expense in 1995 compared to
a $33.6 million charge in 1994. The 1995 impairment relates primarily to the
fourth quarter write-off of an unproved offshore property. As discussed below
under the caption "-- 1994 Compared to 1993," the Company recorded a $25.0
million impairment charge in 1994 related to a change in accounting policy and a
$6.4 million charge to write off the Company's remaining leasehold interest in
Tunisia.
Interest expense of $5.5 million in 1995 was 17% below 1994 expense of $6.6
million primarily due to the repayment of $62.5 million of bank debt using the
proceeds of the Sawyer Sale in July 1995. In addition, the Company has
extinguished certain nonrecourse debt associated with the APPL Programs totaling
$6.6 million and $13.6 million in 1995 and 1994, respectively. Other expense of
$2.6 million in 1994 included $2.1 million of fees paid by the Company in
connection with a new bank credit agreement and a bridge facility with New York
Life.
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<PAGE> 29
Extraordinary Item. The Company recorded extraordinary gains of $2.5
million in 1995 and $5.4 million in 1994 related to the elimination of
nonrecourse debt in conjunction with the APPL Consolidation. The gain
represented the difference between the outstanding note balances and the actual
purchase price of the notes.
Net Income (Loss). The Company reported net income of $3.9 million, or
$0.18 per share, in 1995 and a net loss of $54.8 million, or $7.02 per share, in
1994. Nonrecurring transactions reflected in 1995 net income include a $10.2
million gain on property sales, primarily the Sawyer Sale, a $2.5 million
extraordinary gain on the extinguishment of debt and $895,000 of gas settlement
income, partially negated by a $1.8 million impairment charge and a $700,000
loss related to certain natural gas hedges. In contrast, 1994 results included
the negative impact of a $33.6 million impairment charge partially offset by a
$5.4 million extraordinary gain and a $1.1 million gain on property sales.
Excluding the effect of these nonrecurring transactions in both years, the
Company would have recorded net losses of $7.2 million and $27.7 million in 1995
and 1994, respectively. The improvement in operating results primarily reflects
a $17.5 million increase in net operating revenues, which resulted from higher
production levels and reduced unit operating costs following the APPL
Consolidation. In addition, reductions in G&A and interest expense in 1995 more
than offset higher DD&A and exploration expense recorded in that year.
1994 COMPARED TO 1993
Revenues. Oil and gas sales in 1994 totaled $50.0 million compared to $49.6
million in 1993. The Company's 1994 sales reflected higher domestic oil and gas
production offset in part by the impact of declining prices and the sales of the
Company's Canadian oil and gas properties in mid-1993. Comparing the Company's
total production for the two years, the combined effect of a 6% increase in gas
production and a 2% decline in oil production resulted in a net increase to
sales of $1.4 million. Excluding the 1993 Canadian production, which totaled 662
MBOE, the Company's oil and gas production increased by 793 MBOE as a result of
the drilling of new development wells, workovers and recompletions of existing
wells in the first half of the year and the acquisition of investors' interests
in the APPL Programs primarily during the second half of 1994. For 1994, the
Company's average realized natural gas and oil prices were down 1% and 4%,
respectively, from 1993, decreasing sales by $1.0 million. The Company's
realized prices include the impact of certain hedging arrangements relating to a
portion of its natural gas and oil production during 1994. As a result of these
hedges, natural gas sales increased by $1.6 million and oil revenues were
reduced by $44,000.
The Company recognized a gain on sales of oil and gas properties of $1.1
million in 1994 compared to a loss on property sales of $6.9 million in 1993. In
mid-1993, the sale of the Company's Canadian assets resulted in losses totaling
$5.8 million, including $1.8 million for the elimination of the accumulated
foreign currency translation adjustment. The gain for 1994 and the remaining
loss for 1993 resulted from the divestiture of minor properties.
The Company recorded gas settlement income of $15.6 million in 1993, which
included amounts received in connection with the settlement of certain
litigation regarding the terms of a gas purchase contract and for the
renegotiation of the Company's contract to sell gas from the Thomasville Field.
These amounts are reflected as other revenues on the accompanying statements of
operations.
Costs and Expenses. Production and operating expenses increased 33% to
$21.3 million in 1994. The Company's operating costs were increased by $3.8
million during the second half of 1994 due to the acquisition of interests
pursuant to the APPL Consolidation. In addition, the Company recorded site
remediation costs of $2.4 million in 1994. On a BOE basis, operating costs
increased 29% to $5.40 in 1994 compared to $4.19 in 1993. These increases
reflected higher U.S. operating costs which more than offset the decreases
associated with the sales of the Company's Canadian properties in mid-1993.
Higher domestic operating expenses were related to workovers at the Brazos
Blocks and the Sawyer Field totaling $1.1 million.
DD&A expense totaled $29.6 million in 1994, with the 25% increase from the
prior year attributable to an increase in the Company's DD&A per BOE rate and
higher gas production. Downward reserve revisions at year-end 1993, including
reserve revisions related to low oil prices at year-end 1993, resulted in a DD&A
per BOE rate of $7.50 in 1994 compared to $6.19 in 1993. The higher 1994 rate is
also due to the fact that the
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<PAGE> 30
Canadian properties sold in mid-1993 had a lower depletion rate than the average
rate for the Company's other properties.
G&A totaled $10.0 million in 1994, or 35% above 1993 expense of $7.4
million. The higher G&A for 1994 primarily related to the loss of management and
technical fee reimbursements as a result of the APPL Consolidation with no
significant reductions in G&A in 1994. As a result of planned reductions related
to the elimination of certain partnerships managed by the Company, the Company
recorded a $2.0 million severance charge in 1994. These increases were partially
offset by a decrease in salaries and benefits associated with the reductions in
the Company's work staff in early 1994 and the elimination of Canadian G&A.
Taxes other than income increased by $1.1 million in 1994 compared to 1993,
due primarily to higher production taxes related to increased domestic oil and
gas sales and higher ad valorem taxes related to an increase in the Company's
oil and gas property base due to the APPL Consolidation.
Exploration expense decreased 66% to $2.6 million in 1994. The decrease in
exploration expense reflected steps taken by the Company to eliminate its
international exploration commitments and to emphasize domestic development and
exploitation projects in 1994.
The Company recorded impairment charges totaling $33.6 million in 1994 and
$11.0 million in 1993. Effective December 31, 1994, the Company changed its
accounting policy related to impairment of proved oil and gas properties to a
policy that is consistent with the provisions of the Financial Accounting
Standards Board ("FASB") exposure draft, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." A final
statement was subsequently issued by the FASB in March 1995. Previously, the
Company's impairment policy was to recognize an impairment of proved oil and gas
property costs if, on a company-wide basis, those costs exceeded the
undiscounted after-tax future net cash flows from proved reserves. Under the
policy adopted by the Company, if the book value of an individual proved field
is greater than its undiscounted future net cash flow from proved reserves, then
an impairment is recognized for the difference between the net book value and
the fair value. Management's initiative to change its policy was prompted by the
considerable volatility of oil and gas prices during the past several years, the
resulting economic losses of proved reserves and corresponding increases in the
Company's DD&A rate. This change in accounting policy resulted in a $25.0
million noncash impairment charge for 1994 against the book value of certain of
the Company's proved oil and gas properties.
Impairment expense for 1994 also included a $6.4 million noncash charge for
the write-off of the Company's remaining leasehold interest in Tunisia. The
Company sold its interest in exchange for the purchaser assuming its remaining
Tunisian commitment. The remaining impairment expense for 1994 primarily
represented the write-off of several domestic prospects on which the Company did
not plan to conduct any further exploratory activity. The impairment charge for
1993 included $10.2 million associated with the write-offs of the Company's
leasehold interest in Oman and a portion of the leasehold interest in Tunisia.
Interest expense decreased 3% in 1994 to $6.6 million due primarily to a
lower average bank debt balance during 1994 and the elimination of $14.1 million
of debt in connection with the Canadian asset sales in mid-1993, offset in part
by a decrease in capitalized interest. Capitalized interest decreased to $1.5
million in 1994 from $2.3 million in 1993 due to a reduction in the unproved
property base for interest capitalization. Other expense of $2.6 million in 1994
included $2.1 million of fees paid by the Company in connection with a new bank
credit agreement and the bridge facility extended to the Company by New York
Life for the APPL Consolidation.
Extraordinary Item. As part of the APPL Consolidation, the Company recorded
a $5.4 million extraordinary gain in 1994 resulting from the elimination of
nonrecourse debt in conjunction with the repurchases of notes issued by, and net
profits interests in, certain of the APPL Programs.
Net Loss. The Company reported a net loss of $54.8 million, or $7.02 per
share, in 1994 compared to a net loss of $19.2 million, or $2.77 per share, in
1993. The higher net loss for 1994 was primarily due to the impact of the
impairment of proved properties, an increase in operating costs and expenses on
a per unit of production basis and the gas settlement income received in 1993,
offset in part by lower exploration expense
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<PAGE> 31
and the extraordinary gain in 1994 as well as the loss on the sales of the
Company's Canadian assets recognized in 1993.
CAPITAL RESOURCES AND LIQUIDITY
The Company's principal sources of capital are net cash provided by
operating activities and proceeds from financing activities. During the last
three years, the Company has also generated substantial cash flows from the sale
of oil and gas properties, most notably the Sawyer Sale. The Company's primary
uses of capital are to fund its development and exploration programs and
acquisition activity. The Company also has financial obligations related to its
Convertible Preferred Stock and Subordinated Notes.
Net cash provided by operating activities totaled $27.1 million during the
first nine months of 1996 compared to $23.7 million during the same period of
1995. The improvement in operating cash flows was attributable to a higher
operating margin per unit of production in 1996 resulting from higher gas
prices, reduced production and operating costs and lower interest expense.
Net cash provided by operating activities increased to $33.3 million in
1995, as compared to the 1994 amount of $7.7 million. The improvement in cash
flow reflected the impact of the APPL Consolidation and successful development
activity, which together resulted in a 46% increase in production in 1995
compared to 1994. In addition, the Company's operating margins increased in 1995
as unit costs for production, G&A and interest expense decreased in 1995.
Operating cash flow in 1995 also reflected a $5.8 million positive working
capital adjustment which reflects an increase in accounts payable due to the
timing of certain payments. Net cash provided by operating activities totaled
$24.7 million in 1993 which included $15.6 million of gas settlement income
received in that year.
As of September 30, 1996, the borrowing base under the Credit Agreement was
$90 million, reflecting the increase in the aggregate value of the Company's oil
and gas properties due to the March 1996 Acquisition and the September 1996
Acquisition. Upon completion of the Offering and application of the estimated
net proceeds, the Company anticipates that the amount outstanding under the
Credit Agreement will be approximately $21.8 million and the borrowing base will
be approximately $75 million. The borrowing base is scheduled to be redetermined
semiannually every March and September.
The Credit Agreement and the Subordinated Notes require the Company to
comply with certain covenants including, but not limited to, restrictions on
indebtedness, investments, payment of dividends and lease commitments and a
requirement to maintain a minimum net worth of $64.6 million. Cash dividends are
restricted on the Common Stock, and preferred dividends are limited to $2
million in any one year. In addition, these agreements contain cross-default
provisions.
Proceeds from the sale of oil and gas properties, net of post-closing
adjustments, totaled $63.5 million, $2.6 million and $35.7 million in 1995, 1994
and 1993, respectively. Property sales in 1995 primarily included the Sawyer
Sale with proceeds of $64 million, as well as other minor properties. The
significant reduction of the Company's bank debt as a result of such sales
strengthened the Company's financial position. Divestitures in 1994 were
comprised of non-strategic, low-value properties while the most significant 1993
sales included the sale of the Company's Canadian assets and the conveyance of a
40% interest in the Henderson Canyon Field to certain investment programs
managed by the Company.
During the first nine months of 1996, capital expenditures for the
acquisition of oil and gas properties totaled $62.8 million, compared to $11.1
million for the same period of 1995. Through September 30, 1996, the Company
invested $53 million, net of interests being sold to a third party, to acquire
interests in seven blocks in the Gulf of Mexico, four of which are operated by
the Company. In aggregate, the March 1996 Acquisition and the September 1996
Acquisition added estimated proved reserves of approximately 4.2 MMBbls of oil
and 28.2 Bcf of natural gas (as estimated by the Company as of the date of each
acquisition). Other acquisition expenditures in 1996 primarily related to
leasehold additions in South Texas and the Gulf of Mexico. Acquisition
expenditures in 1995 primarily related to the APPL Consolidation.
Capital expenditures for the cash acquisition of oil and gas properties
totaled $16.0 million, $28.4 million and $4.3 million in 1995, 1994 and 1993,
respectively. Acquisition expenditures in 1995 included $9.0 million
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<PAGE> 32
related to the APPL Consolidation, $2.4 million for certain interests in the
Buckner Field in Arkansas and the purchase of several offshore blocks in the
Gulf of Mexico. Acquisitions in 1994 primarily related to the APPL
Consolidation.
Development and exploration expenditures for the first nine months of 1996
and 1995 totaled $29.3 million and $20.1 million, respectively. Significant
development activity in 1996 included a successful well at High Island Block
13-L and eleven completions at the Bradshaw Field in Kansas. The Company is
conducting additional development activity in the Gulf of Mexico and in various
fields in South Texas. The Company participated in the completion of 16
exploratory wells during the first nine months of 1996, of which five wells were
successful, including four prospects in South Texas. Through September 1996, the
Company participated in 50 gross wells (18.7 net), with a success rate of
approximately 70%. The Company plans to invest approximately $15 million and to
drill over 20 wells during the fourth quarter of 1996. There can be no
assurances regarding the success of any wells drilled, and exploratory wells
involve greater risks than development wells. Under successful efforts
accounting, the costs incurred for the drilling of unsuccessful exploratory
wells are recorded as exploration expense and negatively impact net income in
the period in which incurred.
Development and exploration expenditures totaled $27.5 million in 1995
compared to $20.9 million and $18.7 million in 1994 and 1993, respectively.
Significant projects in 1995 included drilling in the Gulf of Mexico in the
Vermilion, West Cameron and Brazos blocks. The Company also conducted
development activity in several fields, including the Midway Field in Arkansas,
the West McAllen Field in South Texas and the Bradshaw Field in Kansas. The
Company drilled three unsuccessful exploratory wells in 1995, of which two were
offshore in the Gulf of Mexico.
The Company's capital commitments for 1996 totaled $8.1 million, including
$2.4 million for operating lease obligations, $1.8 million for preferred
dividends and $3.9 million for interest payments on the Subordinated Notes.
Under the terms of an amendment to the Credit Agreement dated October 15, 1996,
the Company is scheduled to begin the repayment of principal under the Credit
Agreement over ten quarterly installments commencing in September 1999.
Principal payments under the Credit Agreement had previously been scheduled to
begin in September 1997. In September 1996, holders of the Subordinated Notes
agreed to an extension of the principal payment dates of the notes, which were
scheduled to begin in December 1997, in exchange for a reduction in the exercise
price from $22.95 per share to $15.53 per share of warrants to purchase shares
of Common Stock that were issued to the holders of the notes contemporaneously
with the issuance of such notes. As a result of this extension, annual principal
payments of $11.7 million on the Subordinated Notes will begin in December 2002.
The Company's ratio of current assets to current liabilities was 0.67:1 at
the end of 1995 compared to 0.86:1 at year-end 1994. The Company historically
has operated with a working capital deficit primarily due to timing differences
between the receipt of reimbursements from other working interest owners in the
properties operated by the Company and the payment of expenses with respect to
such properties.
The Company expects its 1997 capital expenditures for development and
exploration activities to range from $50 million to $75 million depending on
various factors, including the level of exploration success and subsequent
development activity. Following the Offering, the Company intends to fund its
planned capital expenditures, commitments and working capital requirements
through cash flows from operations and borrowings under the Credit Agreement.
However, if there are changes in oil and gas prices, which correspondingly
affect cash flows and bank borrowings, or if additional development and
exploration opportunities arise, the Company may adjust its capital budget
accordingly. Other potential sources of capital for the Company include property
sales and financings through the issuance of debt or equity securities.
Management believes that the Company will have sufficient capital resources and
liquidity to fund its capital expenditures and meet its financial obligations as
they are due.
As a result of the Offering, the Company will be subject to revised
individual annual and cumulative net operating loss carryforward ("NOL") limits
for federal income tax purposes. Prior to the Offering, the Company's annual and
cumulative NOL limits totaled approximately $13.7 million and approximately
$76.3 million, respectively. Upon completion of the Offering, the Company's
annual and cumulative NOL
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<PAGE> 33
limits will each be approximately $10 million due to changes in the Company's
ownership over the last three years.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local laws and
regulations governing the discharge of materials into the environment or
otherwise relating to the protection of the environment, which have become
increasingly stringent. The Company has conducted a review of its operations
with particular attention to environmental compliance. The Company believes it
has acted as a prudent operator and is in substantial compliance with
environmental laws and regulations. The Company recorded site remediation costs
of $541,000 and $2.4 million in 1995 and 1994, respectively. The site
remediation costs incurred in 1994 primarily related to certain lawsuits. Prior
to 1994, the Company's cost to comply with environmental provisions was not
material. The Company cannot predict what impact environmental laws and
regulations will have on its future performance, but does not currently
anticipate material environmental expenditures. However, the Company believes
that such laws do not affect the Company in a materially different manner from
other similarly situated companies in the oil and gas industry.
As discussed in Note 14 to the Consolidated Financial Statements included
in this Prospectus, during 1995, the Company was a defendant in five lawsuits
alleging the presence of naturally occurring radioactive materials ("NORM") and
other hazardous substances as a result of oil and gas operations conducted on
properties operated or owned by the Company and its predecessors in title or as
a result of NORM-contaminated pipe delivered to a pipe cleaning facility, of
which the Company contributed a minor amount of pipe. Three of the lawsuits have
been dismissed. The Company has remediated several of these properties and
believes these remediation efforts will significantly reduce the basis for the
plaintiffs' damage claims. Although the Company cannot predict the outcome of
these proceedings, management does not expect the outcome of the two remaining
cases to have a material adverse impact on the Company's financial position or
results of operations.
HEDGING ACTIVITY
The Company's derivative financial instruments are used solely to manage
the risk associated with fluctuations in oil and gas prices. The following table
details the commodity price swap agreements in effect at September 30, 1996.
<TABLE>
<CAPTION>
AVERAGE MARKET PRICE
PRODUCT CONTRACT PERIOD DAILY PRODUCTION FIXED PRICE REFERENCE
- ------- ---------------------------- ---------------- ----------- --------------------
<S> <C> <C> <C> <C>
Gas June 1996 - May 1997 20,000 MMBtu $ 1.86 Houston Ship Channel
Gas June 1996 - May 1997 2,000 MMBtu 2.13 Henry Hub
Oil January 1996 - December 1996 1,000 barrels 17.00 NYMEX WTI
Oil April 1996 - March 1997 400 barrels 18.22 NYMEX WTI
Oil July 1996 - December 1996 2,000 barrels 17.80 NYMEX WTI
Oil January 1997 - December 1997 3,000 barrels 19.48 NYMEX WTI
</TABLE>
With regard to the production hedged under each commodity price swap
agreement, if the market price is above the fixed price, the Company will pay to
the counterparty the difference between the fixed price and the market price;
and if the market price is below the fixed price, the Company will receive that
difference from the counterparty. The Company is exposed to credit loss in the
event of nonperformance by the other party to each swap agreement. However, the
Company anticipates that the counterparty will be able to fully satisfy its
obligation under each agreement.
Additionally, the Company purchased put options for 2,000 MMbtu per day of
gas with an average floor price of $1.90 per MMbtu (based on the Tennessee Gas
Pipeline Co., Louisiana and Offshore reference price) for the period from April
1996 through April 1997.
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<PAGE> 34
BUSINESS
GENERAL
American Exploration is an independent company engaged in the exploration,
development, acquisition and production of oil and natural gas. The Company's
operations are conducted in the United States with exploration, development and
acquisition activities primarily concentrated in the Gulf of Mexico, South Texas
and the Smackover Trend in southwestern Arkansas.
On a pro forma basis as of June 30, 1996, the Company's proved reserves
totaled 13 MMBbls of oil and 145 Bcf of natural gas, or an aggregate of 37
MMBOE, with an SEC-10 Value of $225 million. Approximately 70% of these reserves
are developed, and approximately 62% are attributable to properties operated by
the Company. The Company also holds in excess of 200,000 net acres of
undeveloped properties and owns approximately 1,300 square miles of 3-D seismic
data and approximately 79,000 linear miles of 2-D seismic data. On a pro forma
basis, the Company's net production for the month of September 1996 averaged
5,100 Bbls of oil and 80,100 Mcf of natural gas per day, representing a 28%
increase over average daily BOE production for the second quarter of 1996.
Over the past four years, the Company has implemented a series of steps
that has resulted in a significant improvement in its oil and gas operating and
exploration capabilities, overhead and production costs, financial position and
cash operating margins. These steps include (i) hiring experienced personnel in
key management and operating positions, (ii) focusing exploration and
development activities in areas in which the Company believes it has competitive
advantages, (iii) acquiring properties held by the APPL Programs and (iv)
disposing of over 250 properties, including the sale of the Company's interest
in the Sawyer Field in West Texas for $64 million in July 1995. Largely as a
result of these steps, the Company's operating margin has increased from $2.72
per BOE for the year ended December 31, 1992 to $6.02 per BOE for the nine
months ended September 30, 1996. In addition, the Company's ratio of total debt
to total capitalization has decreased from 60% at December 31, 1992 to 32% on a
pro forma basis at September 30, 1996.
BUSINESS STRATEGY
American Exploration's strategy is to increase per share reserves,
production, cash flow and earnings through exploration, development and
selective acquisitions within its core operating areas. The Company's strategy
is designed to capitalize on its competitive strengths, including the experience
and technical expertise of its operating personnel, a substantial seismic
database and a concentration of developed and undeveloped acreage in its core
operating areas. The principal features of this strategy are set forth below.
GEOGRAPHIC FOCUS. The Company's exploration, development and acquisition
activities are primarily focused in the Gulf of Mexico (with an emphasis on the
Texas State Waters area), South Texas (with an emphasis on the Wilcox Trend) and
the Smackover Trend in southwestern Arkansas. The Company believes that by
focusing its operations, it can achieve cost efficiencies and enhance its
ability to add new reserves. For 1996, over 90% of the Company's exploration and
development budget and all of its acquisition activities have been concentrated
in its core operating areas. The Company is also in the process of divesting
certain properties that are not consistent with its geographic focus (see
"Prospectus Summary -- Recent Developments and Results") and is reviewing the
feasibility of divesting various additional non-strategic properties.
ACTIVE DRILLING PROGRAM. The Company is engaged in an active drilling
program and attempts to maintain a project portfolio consisting of both high
risk, high potential exploration prospects and lower risk development projects.
The Company's exploration activities are generally concentrated in areas where
in-house geological knowledge and 2-D seismic data can be used to identify
prospect leads. The Company then attempts to establish large lease positions and
generally initiates or acquires 3-D seismic data to confirm prospects prior to
drilling. The Company typically shares the risks associated with its exploration
prospects with industry partners. In addition to internally generated
exploration prospects, the Company selectively participates in exploration
prospects initiated by other oil and gas companies. For 1996, the Company has
budgeted approximately $40 million for exploration and development and intends
to drill approximately 40 gross (17 net) exploratory wells and 45 gross (21 net)
development wells. Of the $40 million,
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<PAGE> 35
approximately $20 million is budgeted for exploration activities and
approximately $20 million is budgeted for development activities. During the
first nine months of 1996, the Company spent approximately $18 million on
exploration and drilled 16 gross (7.0 net) wells, 31% of which were successfully
completed. During the same period, the Company spent approximately $12 million
on development and drilled 34 gross (11.7 net) wells, 85% of which were
successfully completed.
SELECTIVE ACQUISITIONS. The Company's acquisition strategy is to acquire
producing properties within its core operating areas that enhance its
competitive position, offer economies of scale and provide further development
and/or exploration potential. The Company seeks to acquire properties in which
it can obtain a significant ownership percentage and become the operator.
Through September 1996, the Company has invested $53 million, net of interests
being sold to a third party, to acquire interests in seven Gulf of Mexico
fields, four of which are operated by the Company. See "Prospectus
Summary -- Recent Developments" and the Pro Forma Condensed Consolidated
Financial Statements.
ADVANCED TECHNICAL CAPABILITIES. The Company makes extensive use of
advanced technologies, most notably 3-D seismic, computer-aided exploration and
specialized drilling applications such as short radius horizontal wells, to
better delineate or produce oil and gas reserves. The Company's experienced
staff of geologists and geophysicists performs all interpretation and seismic
mapping on in-house 3-D seismic workstations.
FINANCIAL FLEXIBILITY. The Company is committed to maintaining financial
flexibility in order to pursue its existing exploration and development projects
and to take advantage of future opportunities. The Company has taken a number of
steps over the past few years to reduce debt and improve its liquidity and
financial flexibility. As a result, the Company's ratio of total debt to EBITDA
(see Note 4 to "Prospectus Summary -- Summary Financial Data") for the prior 12
months decreased from 5.2 as of December 31, 1992 to 1.4 on a pro forma basis as
of September 30, 1996. The Company intends to use the net proceeds from the
Offering to reduce its outstanding bank debt. After giving effect to the
proceeds from the Offering, the Company's pro forma ratio of total debt to total
capitalization as of September 30, 1996 is expected to be 32%. See "Use of
Proceeds," "Capitalization" and the Pro Forma Condensed Consolidated Financial
Statements.
34
<PAGE> 36
PRIMARY OPERATING AREAS
Set forth below is information concerning certain of the Company's most
significant fields on a pro forma basis.
<TABLE>
<CAPTION>
PRO FORMA AS OF JUNE 30, 1996
PRO FORMA --------------------------------------------------------------
AVERAGE DAILY PRESENT VALUE
PRODUCTION PROVED RESERVES OF ESTIMATED
AVERAGE DURING ----------------------------------------------- FUTURE NET
WORKING SEPTEMBER 1996 OIL GAS REVENUES
OPERATOR INTEREST (BOEPD) (MBBL) (MMCF) MBOE (IN THOUSANDS)
--------- ------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gulf of Mexico
High Island Block 116..... Other 45% 3,100 250 16,678 3,030 $ 27,275
East Cameron Block 328.... AX 100% 400 3,626 2,236 3,999 21,832
High Island Block 45...... AX 21% 900 64 6,075 1,077 10,642
High Island Block 98-L.... Other 22% --(1) -- 4,671 779 3,886
Brazos Complex............ AX 50% 1,000 2 3,766 630 3,613
Other..................... AX/Other Varies 2,000 435 5,842 1,407 11,330
------ ------ ------- ------- ---------
7,400 4,377 39,268 10,922 78,578
------ ------ ------- ------- ---------
South Texas
AWP Field................. AX 51% 700 593 3,600 1,193 6,170
West McAllen Field........ AX 66% 500 1 2,371 396 2,982
Provident City Area....... Other Varies 400 37 1,788 335 2,808
Other..................... AX/Other Varies 500 467 2,074 813 5,249
------ ------ ------- ------- ---------
2,100 1,098 9,833 2,737 17,209
------ ------ ------- ------- ---------
Smackover Trend
Buckner Field............. AX 100% 200 1,541 -- 1,541 7,049
Midway Field.............. AX 64% 500 913 -- 913 4,061
Other..................... AX/Other Varies -- 29 260 73 846
------ ------ ------- ------- ---------
700 2,483 260 2,527 11,956
------ ------ ------- ------- ---------
Other
Bowdoin Field............. Other 17% 400 -- 15,407 2,568 21,168
Bradshaw Field............ AX 87% 2,100(2) -- 36,967 6,161 20,295
Henderson Canyon Area..... AX 34% 400 56 11,150 1,915 9,224
Other..................... AX/Other Varies 5,300 5,233 32,296 10,614 66,618
------ ------ ------- ------- ---------
8,200 5,289 95,820 21,258 117,305
------ ------ ------- ------- ---------
Total............. 18,400 13,247 145,181 37,444 $ 225,048
====== ====== ======= ======= =========
</TABLE>
- ---------------
(1) High Island Block 98-L is a 1996 discovery not yet placed on production.
(2) Based on 23 days of production as the Bradshaw Field was shut in for seven
days in September due to maintenance at the purchaser's gas plant.
GULF OF MEXICO
The Gulf of Mexico is the Company's most significant area of exploration,
development and acquisition activity and represents approximately 60% of the
Company's 1996 exploration and development budget. On a pro forma basis,
approximately 40% of total oil and gas production during September 1996 and
approximately 29% of the Company's total proved reserves as of June 30, 1996
were attributable to properties in the Gulf of Mexico. As of June 30, 1996, the
Company held working interests in 41 offshore blocks covering 76,515 gross
(28,788 net) undeveloped acres.
35
<PAGE> 37
A description of American Exploration's major Gulf of Mexico properties
follows.
High Island Block 116. High Island Block 116 is located in shallow federal
waters, offshore Texas. The Company acquired a 45% working interest in the block
in September 1996. The block was placed on production in August 1996 and for the
month of September 1996 was producing approximately 45,000 gross (17,000 net)
Mcf of gas and approximately 800 gross (300 net) barrels of oil per day from the
Lower Miocene sands at an approximate depth of 10,000 feet. The producing well
has three additional behind pipe intervals which are classified as proved.
East Cameron Block 328. East Cameron Block 328 is located in approximately
240 feet of water in federal waters, offshore Louisiana. The block is located on
the flank of a large salt feature with multiple sands located in several major
fault blocks. The Company acquired a 100% working interest in the block in
September 1996 and is the operator. Initial production on the block was
established in the Trim 'A' and 'S' sands in the early 1970s and in 1995, a
subsequent operator re-established production in the Trim 'A' sand and
discovered oil and gas in the HB-1 sand. The block is currently producing
approximately 500 gross (400 net) barrels of oil per day from two wells, one
each in the Trim 'A' and HB-5 sands. Over the next year, the Company plans to
complete a subsea discovery in the HB-1 sand and will drill several development
wells which offset existing production.
High Island Block 45. High Island Block 45 is located in shallow federal
waters, offshore Texas. The Company holds a 21% working interest in the block
and is the operator. The block was placed on production in March 1995 and during
September 1996 produced approximately 4,800 net Mcf of gas and 53 net Bbls of
oil per day from the Miocene sands at an approximate depth of 11,000 feet. Gas
from the block is sold under a two-year, fixed price contract entered into in
April 1995 at an average price of approximately $2.00 per MMbtu.
High Island Block 98-L. High Island Block 98-L is located in shallow
federal waters, offshore Texas. The Company holds a 22% working interest in the
block, where a discovery well was drilled in August 1996. The well logged 153
net feet of productive sand in the Lower Miocene formation at an approximate
depth of 10,000 feet and flow tested at a rate of 9,100 Mcf of gas and 87 Bbls
of condensate per day. The well is expected to be placed on production around
year-end 1996.
Brazos Complex. The Brazos Complex consists of the Brazos Blocks 440-L and
446-L and adjoining undeveloped blocks, located in shallow state waters,
offshore Matagorda County, Texas. The Company is the operator of these blocks
and holds an average working interest of 50% in existing developed acreage and a
75% working interest in several undeveloped blocks. During September 1996, the
Brazos Complex produced approximately 5,700 net Mcf of gas per day from Miocene
sands. In 1995, the Company increased its leasehold position in the Brazos
Complex area and participated in a 400 square mile 3-D seismic survey. Since
January 1, 1994, the Company has drilled five wells on its Brazos acreage, three
of which were successful, and as of September 30, 1996 it was drilling a sixth
well.
SOUTH TEXAS
Approximately 30% of the Company's 1996 exploration and development budget
is allocated to its South Texas operating area. On a pro forma basis, South
Texas represented approximately 10% of total oil and natural gas production
during September 1996 and approximately 7% of the Company's total proved
reserves at June 30, 1996.
A description of American Exploration's major South Texas properties
follows.
AWP Field. The AWP Field is located in McMullen County, Texas and produces
oil and gas from the Olmos sand at an average depth of 9,700 feet. Due to the
tightness of the producing formation, wells require fracturing to produce at
economic rates. The Company operates 102 wells with an average net working
interest of 51%. Two proved undeveloped locations remain to be drilled on the
Company's acreage.
West McAllen Field. The West McAllen Field is located in Hidalgo County,
Texas and produces from a number of Frio sands at depths ranging from 5,800 feet
to 7,500 feet. The Company acquired its interest in the
36
<PAGE> 38
field in December 1993 and entered into a joint venture with Fina Oil and
Chemical to use 3-D seismic data to exploit undrained fault blocks on adjoining
acreage owned by both companies. A total of four wells have been drilled since
1994, three of which were operated by the Company and all of which were
successfully completed. September 1996 production was approximately 2,700 Mcf of
gas per day, net to the Company's average working interest of 66%.
Provident City Area. The Provident City Area is located in Lavaca County,
Texas and has been the primary focus of the Company's South Texas activity since
early 1995. In addition to owning a 30% interest in 13,000 gross acres in the
Provident City Yegua Field, the Company has participated in two Lower Wilcox
discoveries, one in late 1995 and one in 1996, and two Frio discoveries. The
Company also holds a 52.5% working interest in the Yoakum Gorge 3-D project,
located in Lavaca County, where the Company controls over 55,000 acres and is
nearing completion of a 152-square-mile proprietary 3-D survey. The initial
phase of the 3-D data has confirmed over 20 prospects in the shallow Frio and
Yegua formations as well as the deeper Upper and Lower Wilcox formations. The
Company plans to commence drilling 16 of these prospects in the fourth quarter
of 1996.
SMACKOVER TREND
American Exploration's operations in the Smackover Trend of southwestern
Arkansas are focused primarily in the Midway and Buckner fields, both of which
are operated by the Company. The Company's ongoing strategy in this area is to
capitalize on the horizontal drilling expertise it has developed in exploiting
the Midway Field by applying this technology to other Smackover fields.
Buckner Field. The Buckner Field is located approximately 11 miles
southeast of the Midway Field in Lafayette and Columbia Counties, Arkansas. In
1995, the Company acquired a majority of the leases comprising the field and
became operator of 16 wells which produce oil from the Travis Peak and Smackover
formations at depths of less than 7,500 feet. The Company holds a 100% working
interest in the acquired leases, which represent approximately 75% of the total
field area. Oil production for September 1996 averaged approximately 210 barrels
of oil per day, net to the Company's interest. The Buckner Field, which is
geologically similar to Midway, has never been unitized and waterflooded and has
cumulatively produced approximately 12 million barrels of oil from the Smackover
formation, or approximately 30% of estimated original oil in place. The Company
believes that the Buckner Field has significant additional reserve potential and
is currently working to unitize the field and plans to initiate a horizontal
drilling program and waterflood project in 1997.
Midway Field. The Midway Field is located in Lafayette County, Arkansas,
and produces oil from the Smackover Formation at an average depth of 6,500 feet.
The Company became the operator of the field in 1989 and owns an average 64% net
working interest in 49 active wells. The field is a mature waterflood unit that
has produced approximately 80 million barrels of oil since 1942, or
approximately 50% of estimated original oil in place. Since assuming operations,
the Company has been able to increase oil recoveries by drilling horizontal
wells in the uppermost section of the productive formation. Oil production for
September 1996 averaged approximately 500 barrels of oil per day, net to the
Company's interest.
OTHER OPERATING AREAS
In addition to the Company's core operating areas, the Company owns
producing properties and reserves in other areas. The Company seeks to manage
these properties and reserves in a manner which maximizes cash flow available
for reinvestment in the Company's primary areas.
A description of American Exploration's significant properties in other
areas follows.
Bowdoin Field. The Bowdoin Field is located in northern Montana in Phillips
and Valley Counties. The structure was discovered in 1913 by using surface
geology. Gas is trapped in over 400 feet of closure in sandstones at depths less
than 1,500 feet. The Company owns an average net working interest of 17% in
approximately 500 active wells. Another 245 proved undeveloped locations have
been identified, and the Company intends to drill in these locations as
necessary to maintain production capacity at current levels.
37
<PAGE> 39
Gas produced from the Bowdoin Field is sold under a life of lease contract
to KN Gas Supply Services, Inc., a subsidiary of KN Energy, Inc. Pursuant to a
1992 settlement agreement, KN Energy, Inc. prepaid the Company approximately
$2.0 million which was used to repay a long-term production payment that
burdened the field. The Company realized an average price of $3.59 per Mcf for
gas produced from this field during 1995. In February 1995, the Company was
served with a lawsuit requesting a reduction of the contract price to market
levels. See "-- Legal Proceedings."
Bradshaw Field. The Bradshaw Field encompasses approximately 250 square
miles and is located approximately ten miles northwest of the Hugoton Field in
Hamilton County, Kansas. The field produces gas from the Winfield, Fort Riley
and Towanda sands of the Chase Group at depths ranging from 2,600 feet to 2,900
feet. The Company operates 129 active wells with an average net working interest
of 87%. In late 1995, the Company and a subsidiary of KN Energy, Inc., the gas
gatherer in the field, installed additional compression and pipeline facilities
in the field so as to increase production capacity. During the first nine months
of 1996, the Company completed 11 gross (8.7 net) development wells in the field
and completed workovers on three wells. This activity has increased the
Company's net gas production by approximately 56% from an average of
approximately 8,000 Mcf per day in January 1996 to approximately 12,500 Mcf per
day in September 1996.
Henderson Canyon Area. The Henderson Canyon Area includes the Henderson
Canyon Field and the Angus Strawn Field in Crockett County, Texas. The Company
has a 34% average working interest in 73 active wells. Most of the production is
from a single stratigraphically trapped sand body that has a maximum sand
thickness of 160 feet. A total of 12 proved undeveloped locations have been
identified for future drilling.
RESERVES
The following table sets forth summary data with respect to the estimated
proved oil and gas reserves and related present value of estimated future net
revenues of the Company's properties as of June 30, 1996 on a historical basis
and on a pro forma basis after giving effect to the September 1996 Acquisition
and the 1996 Sales. Such estimates on a historical basis are based upon (i) the
quantities of reserves set forth in a reserve report prepared by Netherland,
Sewell & Associates, Inc., independent petroleum engineers, as of December 31,
1995 with respect to the properties owned by the Company as of such date, (ii)
adjustments to such December 31, 1995 reserves made by the Company to reflect
production and drilling activity after such date, which adjustments have been
audited by Netherland, Sewell & Associates, Inc. as set forth in their report
dated October 8, 1996 and included in Appendix A hereto, and (iii) reserve
estimates set forth in the Cobb Report, a copy of which is included in Appendix
A hereto, with respect to the properties acquired in the March 1996 Acquisition.
Such estimates on a pro forma basis are based on (i) the historical basis
estimates as of June 30, 1996 as described above, (ii) adjustments to such June
30, 1996 estimates made by the Company to remove reserves attributable to the
1996 Sales and (iii) reserve estimates set forth in the Cobb Report with respect
to the properties acquired in the September 1996 Acquisition. The estimates of
the SEC-10 Value of the reserves are based upon prices as of June 30, 1996,
except in those instances in which fixed and determinable gas price escalations
are covered by contracts. The prices used as of June 30, 1996 averaged $18.19
per Bbl of oil and $2.25 per Mcf of natural gas.
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production and
future net cash flows. The quantities of oil and gas that are ultimately
recovered, production and operating costs, the amount and timing of future
development expenditures and future oil and gas sales prices may all differ from
those assumed in these estimates. Reserve assessment is a subjective process of
estimating recovery from underground accumulations of oil and gas that cannot be
measured precisely, and estimates of other persons might differ from the data
presented herein. Accordingly, reserve estimates may differ significantly from
the quantities of oil and gas that are ultimately recovered. Moreover, the
discounted present value shown below should not be construed as the current
market value of the estimated oil and gas reserves attributable to the Company's
properties. A market value determination would take into account additional
factors including, but not limited to, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
38
<PAGE> 40
Although the Company prepares an annual estimate of proved oil and gas
reserves, no estimate of total proved net oil and gas reserves of the Company
has been filed with or included in reports to any federal authority or agency,
other than estimates previously filed with the Securities and Exchange
Commission. Except as described above, the Company is not aware of any major
discovery or the occurrence of any other favorable or adverse event since June
30, 1996 that would cause material changes in the quantities of proved reserves
owned by the Company as of such date. The information in this section should be
read in conjunction with the Consolidated Financial Statements of the Company,
including the Notes thereto, included in this Prospectus.
The Company's estimated proved oil and gas reserves at June 30, 1996 on a
historical and pro forma basis are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------
HISTORICAL PRO FORMA
--------------------- ---------------------
OIL GAS OIL GAS
RESERVES RESERVES RESERVES RESERVES
(MBBLS) (MMCF) (MBBLS) (MBBLS)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Proved developed............................. 9,165 112,911 8,857 104,542
Proved undeveloped........................... 1,351 22,428 4,390 40,639
------ ------- ------ -------
Total proved....................... 10,516 135,339 13,247 145,181
====== ======= ====== =======
</TABLE>
The Company's estimated future net cash flows from proved and proved
developed oil and gas reserves at June 30, 1996 and the discounted present value
of such cash flows (before income taxes) on a historical basis and pro forma
basis as described above are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------------------
HISTORICAL PRO FORMA
----------------------- -----------------------
PROVED DEVELOPED PROVED DEVELOPED
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
1996................................. $ 25,767(1) $ 27,095 $ 27,853 $ 26,348
1997................................. 42,176(1) 42,552 44,423 40,886
1998................................. 34,125 31,811 43,060 29,445
Remainder............................ 210,724 158,709 241,578 153,624
-------- -------- -------- --------
Total future net cash flows.......... $312,792 $ 260,167 $356,914 $ 250,303
======== ======== ======== ========
Present value before income taxes
(discounted 10%)................... $190,776 $ 168,513 $225,048 $ 162,303
======== ======== ======== ========
</TABLE>
- ---------------
(1) For 1996 and 1997, estimated pre-tax future net cash flows from proved
reserves are projected to be lower than estimated pre-tax future net cash
flows from proved developed reserves due to capital expenditures associated
with proved undeveloped reserves during 1996 and 1997 of approximately $2.6
million and $6.5 million, respectively, for development wells.
39
<PAGE> 41
DRILLING
The following table sets forth the results of drilling activity by the
Company for the three years in the period ended December 31, 1995 and for the
nine months ended September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1993(1) 1994 1995(2) 1996
------- ----- ------- ------------
<S> <C> <C> <C> <C>
DEVELOPMENT WELLS
Gross:
Productive................................ 80 89 40 29
Dry Holes................................. 8 6 7 5
----- ----- ----- -----
Total............................. 88 95 47 34
===== ===== ===== =====
Net:
Productive................................ 11.61 31.52 17.22 10.33
Dry Holes................................. 2.17 1.48 2.18 1.40
----- ----- ----- -----
Total............................. 13.78 33.00 19.40 11.73
===== ===== ===== =====
EXPLORATORY WELLS
Gross:
Productive................................ 2 3 -- 5
Dry Holes................................. 6 3 3 11
----- ----- ----- -----
Total............................. 8 6 3 16
===== ===== ===== =====
Net:
Productive................................ 0.28 0.14 -- 1.59
Dry Holes................................. 1.72 1.11 1.93 5.37
----- ----- ----- -----
Total............................. 2.00 1.25 1.93 6.96
===== ===== ===== =====
</TABLE>
- ---------------
(1) Drilling activity for 1993 included six gross (3.19 net) development wells
in Canada, of which 50% were successful, and two gross (0.70 net)
unsuccessful international exploratory wells. The Company sold its Canadian
properties in mid-1993 and sold its other international interests during
1994.
(2) Development wells drilled during 1995 include nine gross (5.99 net)
productive wells and two gross (1.33 net) dry holes drilled in the Sawyer
Field prior to the sale of that field in July 1995.
40
<PAGE> 42
PRODUCTION
The following table summarizes the average prices received with respect to
oil and gas produced and sold from, the net volumes of oil and gas produced and
sold from and certain additional information relating to all properties in which
the Company held an interest during the three years in the period ended December
31, 1995 and for the nine months ended September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- ------------
<S> <C> <C> <C> <C>
AVERAGE SALES PRICE(1):
Gas ($/Mcf).............................. $ 1.92 $ 1.90 $ 1.74 $ 1.88
Oil($/Bbl)............................... 16.01 15.39 16.83 16.87
BOE ($/BOE).............................. 12.99 12.67 12.30 13.17
PRODUCTION DATA:
Gas (MMcf)............................... 15,336 16,241 24,450 15,772
Oil (MBbls).............................. 1,261 1,241 1,680 1,340
MBOE..................................... 3,817 3,948 5,755 3,969
AVERAGE COST ($/BOE) DATA:
Production and operating costs(2)........ $ 4.19 $ 5.40 $ 4.26 $ 3.89
Taxes other than income.................. 1.21 1.45 1.00 1.07
Depreciation, depletion and
amortization.......................... 6.19 7.50 5.34 5.26
</TABLE>
- ---------------
(1) Prices reflect impact of hedging gains and losses.
(2) The amount for 1993 reflects reclassifications of the Company's share of
producing overhead well costs from general and administrative expense to
production and operating costs in order to conform with current
classifications.
PRODUCTIVE WELLS
The following table sets forth information regarding the number of
productive wells in which the Company held a working interest as of June 30,
1996. Productive wells are either producing wells or wells capable of production
although currently shut-in. One or more completions in the same well bore are
counted as one well.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------
GROSS NET
----- ---
<S> <C> <C>
Oil................................................ 2,562 384
Gas................................................ 2,002 367
----- ---
Total...................................... 4,564 751
===== ===
</TABLE>
ACREAGE
The following table sets forth the approximate developed and undeveloped
acreage in which the Company held a leasehold, mineral or other interest as of
June 30, 1996.
Undeveloped acreage includes leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage contains
proved reserves. A gross acre is an acre in which an interest is owned by the
Company. A net acre is deemed to exist when the sum of the Company's fractional
ownership interests in gross acres equals one. The number of net acres is the
sum of the fractional interests owned in gross acres. Included in the following
table are 315,491 gross (16,297 net) developed mineral acres and 789,566 gross
(90,807 net) undeveloped mineral acres, all located in the United States. A
mineral acre is an acre in which the Company
41
<PAGE> 43
has a perpetual interest, as contrasted to a leased acre in which the Company's
interest is typically limited to the life of production or otherwise limited in
time.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
------------------- -------------------
GROSS NET GROSS NET
--------- ------- --------- -------
<S> <C> <C> <C> <C>
United States:
Arkansas..................................... 12,703 4,111 27,127 3,817
Kansas....................................... 157,647 68,336 24,298 6,216
Louisiana.................................... 15,133 2,045 1,554 169
Mississippi.................................. 27,092 4,274 178,428 45,373
Montana...................................... 254,613 33,193 155,535 52,237
New Mexico................................... 16,366 3,020 272,438 38,416
North Dakota................................. 19,929 1,620 7,007 599
Oklahoma..................................... 163,328 22,661 112,700 12,667
Texas........................................ 338,705 41,954 421,769 37,806
Utah......................................... 5,002 1,820 21,160 6,123
Wyoming...................................... 8,505 2,318 14,774 2,308
Eleven other states.......................... 13,462 4,926 55,984 12,152
Gulf of Mexico............................... 71,534 15,457 76,515 28,788
--------- ------- --------- -------
Total United States.................. 1,104,019 205,735 1,369,289 246,671
--------- ------- --------- -------
International:
Canada (1)................................... 22,240 112 149,055 658
New Zealand (1).............................. -- -- 725,992 32,307
--------- ------- --------- -------
Total International.................. 22,240 112 875,047 32,965
--------- ------- --------- -------
Total................................ 1,126,259 205,847 2,244,336 279,636
========= ======= ========= =======
</TABLE>
- ---------------
(1) Acreage relates to overriding royalty interests.
TITLE TO PROPERTIES
The Company's properties are subject to customary royalty interests, liens
incident to operating agreements, liens for taxes and other burdens, including
other mineral encumbrances and restrictions. The Company does not believe that
any of these burdens materially interfere with the use of such properties in the
operation of its business. In addition, substantially all of the properties in
which the Company or its subsidiaries own a direct interest are subject to
mortgages granted to secure credit facilities.
A thorough examination of title has been performed with respect to
substantially all of the Company's producing properties, and the Company
believes that it generally holds satisfactory title to such properties. As is
customary in the oil and gas industry, little or no investigation of title is
made at the time of acquisition of undeveloped properties (other than a
preliminary review of local mineral records). Investigations of title are
generally made before commencement of drilling operations and, in most cases,
include the receipt of a title opinion of local counsel.
FOREIGN AND DOMESTIC OPERATIONS
The Company's only industry segment is oil and gas exploration and
production. Since mid-1993, all of the Company's operations have been conducted
in the United States. Certain information concerning the Company's operations by
geographic area is set forth in Note 16 to the Consolidated Financial Statements
included in this Prospectus, which information is incorporated herein by
reference.
OIL AND GAS MARKETING AND COMPETITION
The natural gas produced from the Company's properties is generally sold at
the wellhead under contracts which provide for market-sensitive pricing. The
price of natural gas is influenced by many factors including the
42
<PAGE> 44
state of the economy, weather and competition from other fuels, including oil
and coal. The Company's revenues, cash flows and the value of its gas reserves
are all affected by the level of gas prices.
The crude oil and condensate produced from the Company's properties are
generally sold to other companies at field prices posted by the principal
purchasers of crude oil in the areas where such properties are located. As is
customary in the industry, this production is generally sold pursuant to
short-term contracts.
In the year ended December 31, 1995, sales to Enron Corp. and certain
subsidiaries of KN Energy, Inc. accounted for approximately 19% and 10%,
respectively, of the Company's oil and gas revenues. Because of the availability
of other customers, management does not believe that the loss of any single
customer would adversely affect the Company's operations.
The oil and gas industry is highly competitive. Major oil and gas
companies, independent producers, drilling and production purchase programs and
individual producers and operators are active competitors for desirable oil and
gas properties, as well as for the equipment and labor required to develop and
operate such properties. Many competitors have financial resources, staffs and
facilities substantially larger than those of the Company. The availability of a
ready market for the oil and gas production of the Company depends in part on
the cost and availability of alternative fuels, the level of consumer demand,
the extent of other domestic production of oil and gas, the extent of imports of
foreign oil and gas, the cost of and proximity to pipelines and other
transportation facilities, regulations by state and federal authorities and the
cost of complying with applicable environmental regulations.
EMPLOYEES
As of September 30, 1996, the Company had 162 full-time employees, none of
whom is represented by any labor union.
REGULATION
The following discussion of the regulation of the oil and gas industry is
necessarily brief and is not intended to constitute a complete discussion of the
various statutes, rules, regulations or governmental orders which affect the
Company or to which operations of the Company may be subject.
Federal Regulation of Natural Gas. Certain sales and the transportation of
natural gas in interstate commerce are regulated under various federal laws
including, but not limited to, the Natural Gas Act of 1938 ("NGA") and the
Natural Gas Policy Act of 1978 ("NGPA"), both of which are administered by the
Federal Energy Regulatory Commission ("FERC"). Under these acts, producers and
marketers have historically been required to obtain from the FERC certificates
to make so-called "first sales" and abandonment authority to discontinue such
sales. Additionally, first sales have been subject to maximum lawful price
regulation. However, the NGPA provided for phased-in price deregulation of most
new gas production and, as a result of the enactment of the Natural Gas Wellhead
Decontrol Act of 1989, the remaining regulations imposed by the NGA and the NGPA
with respect to first sales, including price controls and certificate and
abandonment authority regulations, were terminated on January 1, 1993. The
FERC's jurisdiction over transportation and sales other than first sales has not
been affected, although the FERC has effectively deregulated even these
non-first sales by granting the pipeline companies and local distribution
companies so-called "blanket certificates" to make sales at negotiated market
prices.
Commencing in the mid-1980s, the FERC promulgated several orders designed
to make gas markets more competitive by, among other things, inducing or
requiring interstate natural gas pipeline companies to provide transportation
services on an open and nondiscriminatory basis. These orders have had a
profound influence upon natural gas markets in the United States and have, among
other things, encouraged many new marketing entities to enter the market and
fostered the development of a large spot market for gas.
In April 1992, the FERC issued the latest in this series of orders, Order
No. 636. Order No. 636 further restructured the sales and transportation
services provided by interstate pipeline companies. The FERC considered these
changes necessary to improve the competitive structure between interstate
pipelines and other gas merchants, including producers, and to create a
regulatory framework that would allow more gas
43
<PAGE> 45
sellers to contract directly with gas buyers. Order No. 636 was implemented on a
pipeline-by-pipeline basis through negotiated settlements in individual pipeline
service restructuring proceedings, designed specifically to "unbundle" those
services (e.g., transportation, sales and storage) provided by many interstate
pipelines. As a result, in many instances, the interstate pipelines themselves
are no longer wholesalers of natural gas, but instead provide only natural gas
storage and transportation services. On rehearing before the FERC, the agency
made relatively minor modifications. In addition, the FERC has issued orders in
individual pipeline restructuring proceedings which were the subject of further
rehearing. Order No. 636 and certain related proceedings were the subject of an
appeal to the United States Court of Appeals for the District of Columbia
Circuit. That court recently issued its decision in the appeal of Order No. 636
and largely upheld the fundamental tenets of the order. The court's decision is
still subject to further action, including potential applications for a writ of
certiorari to the United States Supreme Court. In addition, several appeals in
individual pipeline proceedings and as to related issues remain pending. It is
therefore not possible for the Company to predict what effect, if any, the
ultimate outcome of this regulatory and judicial review process will have on the
FERC's open-access regulations.
Order No. 636 does not regulate gas producers such as the Company. To date,
management of the Company believes Order No. 636 has not had any significant
impact on the Company as a producer or on the Company's gas marketing efforts.
The FERC is currently considering several other rules intended to
streamline its regulation of the industry and promote competition. One such rule
under consideration concerns pipeline rates. For decades, the principal
methodology used to set interstate pipeline rates has been based on the actual
costs to provide that service. In recent years, regulators have concluded that
sufficient competition may exist in certain markets to allow a relaxation of
this historic approach. In January 1996, the FERC issued a statement of policy
and request for comments concerning alternatives to its traditional
cost-of-service ratemaking methodology and set forth the criteria that the FERC
will use to evaluate proposals to charge market-based rates for the
transportation of natural gas. The FERC also requested comments on whether it
should allow gas pipelines the flexibility to negotiate the terms and conditions
of transportation service with prospective shippers. In another rulemaking, the
FERC is considering how to alter its regulations to promote the fair and
effective release and recontracting of pipeline capacity from one shipper to
another, and to what extent such transactions should be regulated where the
market is demonstrably competitive. In this regard, an experimental pilot
program implementing certain new procedures will be implemented in the 1996-1997
winter heating season. Lastly, the FERC has issued a policy statement on how
interstate pipelines can recover in rates the costs of new facilities. While the
policy may affect the Company and other producer-shippers only indirectly, the
policy should enhance competition in new markets and encourage the construction
of gas supply laterals. As to all of these matters, the Company cannot predict
what further action the FERC will take; however, the Company does not believe
that it will be affected by any action taken materially differently than other
natural gas producers, gatherers and marketers with which it competes.
Commencing in May 1994, the FERC began to delineate a new gathering policy
in light of Order No. 636. As a general matter, gathering, which is the
transportation of gas in or near the field where produced to points of
interconnect with large diameter, high pressure transportation pipelines, is
exempt from the FERC's jurisdiction; however, where the gathering is performed
by the interstate pipelines in association with the pipeline's jurisdictional
transportation activities, the FERC retains regulatory control over the
associated gathering services to prevent abuses. Except in situations in which
the gatherer acts in concert with an interstate pipeline affiliate to frustrate
the FERC's transportation policies, the FERC does not generally have
jurisdiction. In addition, the FERC has approved several transfers proposed by
interstate pipelines of gathering facilities to unregulated independent or
affiliated gathering companies. The FERC's policy of approving the interstate
pipeline's proposed "spindown" of its gathering facilities to an unregulated
affiliate company has recently been upheld on judicial review, but the court
reversed and remanded that portion of the FERC's orders by which the unregulated
affiliate was obligated to continue existing gathering services to producers
under "default contracts" for up to two years after spindown. It remains unclear
whether the FERC will attempt to reimpose such conditions or will otherwise act
in response to producer requests for additional protection against perceived
monopolistic action by pipeline-related gatherers. While changes to the FERC's
44
<PAGE> 46
gathering policy affect the Company only indirectly, such changes could affect
the price and availability of capacity on certain gathering facilities, and thus
access to certain interstate pipelines, which, in turn, could affect the price
of gas at the wellhead and in markets in which the Company competes. However,
the Company does not believe that it will be affected by these changes to the
FERC's gathering policy materially differently than other natural gas producers
with which it competes.
Regulation of Drilling and Production. Exploration and production
operations of the Company are subject to various types of regulation at the
federal, state and local levels. Such regulation includes requiring drilling
permits, requiring the maintenance of bonds in order to drill or operate wells
and regulating the location of wells, the method of drilling and casing wells,
the surface use and restoration of properties upon which wells are drilled and
the plugging and abandoning of wells. The operations of the Company are also
subject to various conservation regulations, including regulation of the size of
drilling and spacing units or proration units, the density of wells that may be
drilled and the unitization or pooling of oil and gas properties. In this
regard, some states, including states in which the Company operates, allow the
forced pooling or integration of lands and leases. In addition, state
conservation laws establish maximum rates of production from oil and gas wells,
generally prohibit the venting or flaring of gas and impose certain requirements
regarding the ratability of production. The effect of these regulations is to
limit the amount of crude oil and natural gas the Company can produce from its
wells and the number of wells or the locations at which the Company can drill.
Future Legislation and Regulation. The Company's business is and will
continue to be affected from time to time in varying degrees by political
developments and federal, state and local laws and regulations. The Company is
not able to predict the terms of any future legislation or regulations that
might ultimately be enacted or the effects of any such legislation or
regulations on the Company.
ROYALTY MATTERS
By a letter in May 1993 directed to thousands of producers holding
interests in federal leases, the United States Department of the Interior (the
"Department") announced its interpretation of certain administrative regulations
to require the payment of royalties on natural gas contract settlements to
resolve, among other things, take-or-pay and minimum take claims by producers
against pipelines and other buyers. The Department's letter set forth various
theories of liability, all founded on the Department's interpretation of the
term "gross proceeds" as used in federal leases and pertinent federal
regulations. In an effort to ascertain the amount of such potential royalties,
the Department sent a letter to producers in 1993 requiring producers to provide
data on natural gas contract settlements where gas produced from federal or
Indian leases was involved in the settlement. The Company received a copy of
this information demand letter and responded appropriately in May 1994. To date,
the Company has received one order to pay additional royalties based on the
information supplied to the Department.
In response to the Department's action, various industry associations,
including the Independent Petroleum Association of America, and others filed
suit seeking an injunction to prevent the collection of royalties on natural gas
contract settlement amounts under the Department's theories. At the federal
district court level, the court ruled in favor of the government's position.
However, on appeal to the United States Court of Appeals for the District of
Columbia Circuit, the federal appellate court on August 27, 1996 overturned the
lower court's opinion and held that the government's position was contrary to
certain prior court precedents and inconsistent with the government's prior
position in response to those precedents. In October 1996, the Department filed
a Petition for Rehearing and Suggestion for Rehearing in Banc with the federal
appellate court. Notwithstanding the recent outcome that was favorable to the
industry, the Company cannot predict what further action will be taken by the
appellate courts and what effect, if any, the Department's claims will have on
the Company. Furthermore, even if the Department's claims are reestablished by
further appellate decision, certain of the Company's natural gas contract
settlements provide for the buyer to reimburse the Company for any excess or
additional payments to royalty owners required as a result of the Company's
receipt of the settlement amounts.
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<PAGE> 47
ENVIRONMENTAL MATTERS
The Company and its operations are subject to a number of federal, state
and local laws and regulations governing the discharge of materials into the
environment or otherwise relating to the protection of the environment. These
environmental provisions may, among other things, impose liabilities for the
cost of pollution clean-up resulting from drilling operations, prohibit drilling
on certain lands and impose restrictions on the injection of liquids into
underground water sources that may, in turn, contaminate groundwater.
The Company believes it has acted as a prudent operator and is in
substantial compliance with environmental laws and regulations. The Company has
incurred and will continue to incur costs in its efforts to comply with these
environmental standards. Although the costs incurred by the Company to date
solely to comply with environmental laws and regulations have not had a material
adverse effect upon capital expenditures, earnings or the competitive position
of the Company, the trend toward stricter environmental laws and regulations is
expected to have an increasingly significant impact on the conduct of the
Company's business. The cost of expenditures to comply with evolving regulations
and the related future impact on the Company's business cannot be predicted at
this time because of the uncertainties regarding future environmental standards,
advances in technology, the timing for expending funds and the availability of
insurance and third-party indemnification. However, the Company believes that
the evolving environmental standards do not affect the Company in a materially
different manner from other similarly situated companies in the oil and gas
industry.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's operations are subject to all of the risks normally incident
to the exploration for and the development and production of oil and gas,
including blowouts, cratering, uncontrollable flows of oil, gas or well fluids,
fires, pollution and other environmental risks. These hazards could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property and equipment, pollution and other environmental
damage and suspension of operations. Although the Company is not fully insured
against certain of these risks, it maintains insurance coverage considered to be
customary in the industry.
LEGAL PROCEEDINGS
NYLOG Litigation. The Company and its subsidiary, American Exploration
Production Company ("AEPCO" and, together with the Company, the "American
Parties"), along with New York Life and several of its subsidiaries, were named
as defendants in a class action complaint filed in the United States District
Court for the Southern District of Florida on March 18, 1996, styled Shea et al.
v. New York Life Insurance Co., et al. (Civil Action No. 96-0746), alleging
generally that the defendants engaged in fraudulent activities in connection
with the marketing and sale of interests in, and the subsequent operation of,
various limited partnerships, breached implied covenants and fiduciary duties
and violated various federal securities and state laws and rules. A subsidiary
of New York Life ("NYLIFE") agreed to indemnify the American Parties from and
against any and all judgments or settlements entered or reached in this
litigation and certain related litigation, or any subsequent lawsuits by
investors in the NYLOG Programs based on substantially similar claims and
factual allegations. The defendants expressly denied any wrongdoing alleged in
the complaints and conceded no liability or wrongdoing. Nevertheless, to reduce
the burden of protracted litigation, the defendants entered into a Stipulation
of Settlement (the "Settlement Agreement") with the approval of the Florida
court, providing for the liquidation of the NYLOG Programs and the release and
discharge of the defendants and various other related parties. Pursuant to the
Settlement Agreement, each limited partner of a limited partnership who
participated in the settlement received or will receive from an affiliate of New
York Life a cash payment that, together with prior distributions to such
settling limited partner from such limited partnership, will result in the
settling limited partner having received in the aggregate an amount at least
equal to his total investment in such partnership. In July 1996, the limited
partners of the NYLOG Programs approved the liquidation of the partnerships, and
the Company anticipates that the liquidating sales of the properties held by the
NYLOG Programs will be completed during the fourth quarter of 1996.
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<PAGE> 48
New York Life and certain of its subsidiaries and AEPCO have also been
named as defendants in a lawsuit relating to the NYLOG Programs styled Billy H.
Mancil and Mary M. Mancil v. New York Life Insurance Company, et al., Civil
Action No. CV-95-2595 GR, Circuit Court of Montgomery County, Alabama (the
"Mancil Litigation"). The complaint in the Mancil Litigation alleges various
causes of action arising out of Mancil's purchase of interests in certain NYLOG
Programs including, among other things, fraud, reckless and negligent
misrepresentations, and negligence in hiring, training and/or supervising a
sales agent involved in the sale of the NYLOG interests. Plaintiffs seek an
unspecified amount of compensatory and punitive damages and costs. The Mancil
Litigation is covered by the indemnification agreement described in the
foregoing paragraph.
KN Litigation. In February 1995, two Company affiliates were served with a
lawsuit styled KN Gas Supply Services, Inc. v. American Production
Partnership-V, Ltd. and Ninian Oil Finance Corp., filed in United States
District Court in Denver, Colorado, requesting declaratory judgment that KN Gas
Supply Services, Inc. ("KNGSS") had the right to reduce the contract price for
gas produced from the Bowdoin Field to market levels from October 1, 1993
forward. KNGSS also requested declaratory judgment that it has a right to relief
from the contract price due to regulatory changes, which it alleges renders the
contract commercially impracticable, and that FERC Order No. 636 is a condition
subsequent that excuses performance under the contract. KNGSS alleges that it
has overpaid the Company's affiliates and seeks a refund of approximately $5.6
million for the period through December 1995. A Motion for Summary Judgment was
filed by the Company in July 1996 and is currently pending before the court.
Trial is currently scheduled to begin in January 1997. Although the Company
cannot predict the outcome of this proceeding, the Company will vigorously
defend its interest in this case and does not expect the outcome of the case to
have a material adverse impact on its financial position or results of
operations.
Other. The Company has been named as a defendant in certain other lawsuits
arising in the ordinary course of business. While the outcome of these other
lawsuits cannot be predicted with certainty, the Company does not expect these
other lawsuits to have a material adverse effect on the financial position,
results of operations or liquidity of the Company.
47
<PAGE> 49
MANAGEMENT
Set forth below is certain information regarding the directors and
executive officers of the Company, together with their ages (as of September 30,
1996). All directors and executive officers are elected for a term of one year
and serve until their successors are elected and have qualified.
<TABLE>
<CAPTION>
NAME OFFICE AGE
- ------------------------------- ------------------------------------------------------ ---
<S> <C> <C>
Mark Andrews................... Chairman of the Board and Chief Executive Officer 46
John M. Hogan.................. Senior Vice President and Chief Financial Officer 52
Harold M. Korell............... Senior Vice President -- Operations 51
Cindy L. Gerow................. Vice President and Controller 32
Harry C. Harper................ Vice President -- Land 57
Robert R. McBride, Jr. ........ Vice President -- Production Operations 40
T. Frank Murphy................ Vice President -- Corporate Finance and Secretary 41
Elliott Pew.................... Vice President -- Exploration 41
Harry W. Colmery, Jr. ......... Director 72
Irvin K. Culpepper, Jr. ....... Director 48
Walter J.P. Curley, Jr. ....... Director 74
Robert M. Danos................ Director 66
Phillip Frost, M.D. ........... Director 59
Peter G. Gerry................. Director 51
H. Phipps Hoffstot, III........ Director 40
John H. Moore.................. Director 70
Peter P. Nitze................. Director 61
</TABLE>
Mark Andrews, Chairman of the Board and Chief Executive Officer, founded
the Company in 1980. Mr. Andrews is also a director of IVAX Corporation.
John M. Hogan, Senior Vice President and Chief Financial Officer, who had
previously served as Senior Vice President -- Finance of the Company during 1985
and 1986, rejoined the Company in August 1992. From 1987 until 1992, Mr. Hogan
owned an accounting firm that provided tax, accounting and management services.
Harold M. Korell, Senior Vice President -- Operations, joined the Company
in June 1992. He was Executive Vice President of McCormick Resources, a private
independent oil and gas company, from 1989 until 1992. From 1973 to 1989, Mr.
Korell was with Tenneco Oil Company where he served in various positions and
eventually as Vice President of Production.
Cindy L. Gerow, Vice President and Controller, joined the Company in
October 1990. She served in a number of managerial positions with responsibility
for various accounting and finance functions. She was appointed Controller of
the Company in April 1994 and was appointed Vice President in August 1995.
Harry C. Harper, Vice President -- Land, joined the Company in 1990 when
the Company acquired Hershey Oil Corporation. He had been Senior Vice President,
Secretary and General Counsel of Hershey since 1973.
Robert R. McBride, Jr., Vice President -- Production Operations, joined the
Company in August 1992. From 1988 to 1992, he served in various capacities with
British Gas plc, most recently as Exploitation Manager.
T. Frank Murphy, Vice President -- Corporate Finance and Secretary, joined
the Company in 1989. He served in a variety of financial positions until
December 1991 when he was appointed Vice President -- Investor Relations. He was
appointed Vice President -- Corporate Finance in March 1993 and was appointed
Secretary in October 1993.
Elliott Pew, Vice President -- Exploration, joined the Company in October
1992 as a senior geophysicist. He was appointed Vice President -- Exploration in
July 1993. From 1989 to 1992, he was employed by FINA, Inc. as a division
geologist and then as Exploration Manager -- South Texas Division.
48
<PAGE> 50
Harry W. Colmery, Jr. has served as a director of the Company since 1990.
Mr. Colmery has been a Vice President of Capital Guardian Trust Company of Los
Angeles since 1986.
Irvin K. Culpepper, Jr. has served as a director of the Company since 1989
and is a Vice President of Kelso & Company, a merchant banking firm engaged in
the leveraged buyout business. Mr. Culpepper joined Kelso & Company in 1988.
Prior thereto, he was Vice President in charge of Private Finance for New York
Life Insurance Company. Mr. Culpepper is also a director of Pepper Co., Inc. and
is a director of the New York City Industrial Development Agency.
Walter J. P. Curley, Jr. has been a director of the Company since March
1993 and previously served as a director from 1982 to 1988. Ambassador Curley
was Ambassador to France from 1989 to 1993 and Ambassador to Ireland from 1975
to 1977. He is Principal of W.J.P. Curley, a venture capital company. Ambassador
Curley is also a director of Sothebys Inc. and France Growth Fund and serves on
the international Board of Directors of Banque Paribas. He is president of
Curley Land Company and Trustee of the Frick Collection in New York City.
Robert M. Danos was appointed as a director of the Company in September
1996. Mr. Danos retired in January 1995 from his position as President and a
director of Plains Petroleum Company, an oil and gas exploration company. He
served as the President from October 1994 to January 1995 and as a director from
1989 to January 1995 of Plains Petroleum Company, and from January 1989 to
October 1994 served as the President and Chief Operating Officer of Plains
Petroleum Operating Company, its operating subsidiary. Previously, he was
President of McMoRan Oil and Gas Company, President and Chief Executive Officer,
Midlands Energy and Senior Vice President, KN Energy.
Phillip Frost, M.D., has served as a director of the Company since 1983.
Dr. Frost has been Chairman of the Board and Chief Executive Officer of IVAX
Corporation, a pharmaceutical, medical diagnostic and specialty chemical
company, since March 1987. He is the Vice Chairman of the Board of Directors of
North American Vaccine, Inc. Dr. Frost was also Chairman of the Department of
Dermatology of Mount Sinai Medical Center of Greater Miami from 1972 to 1990. He
is also a director of NAPRO Therapeutics, Inc. and Whitman Education Group, Inc.
Dr. Frost is a trustee of the University of Miami and a governor of the AMEX.
Peter G. Gerry has been a director of the Company since 1983. He has served
as Managing Director of Sycamore Management Corporation, an investment
management firm, since 1995. Mr. Gerry is also Chairman of Seven Up/RC Bottling
Company of Southern California, Inc. and is a former President of Citicorp
Venture Capital Ltd. and director of Pond Hill Homes, Ltd.
H. Phipps Hoffstot, III has served as a director of the Company since 1983.
Mr. Hoffstot is Chief Financial Officer of Pittsburgh History & Landmarks
Foundation and subsidiaries. Mr. Hoffstot has also been engaged as a private
investor since 1979.
John H. Moore was appointed as a director of the Company in 1989. He has
been primarily engaged as a petroleum consultant since 1988. Mr. Moore was
Chairman of the Board and Chief Executive Officer of Ladd Petroleum Corporation
from 1986 to 1988. He is also a former director of First Interstate Bank of
Denver and is a former director of General Atlantic Resources.
Peter P. Nitze has served as a director of the Company since 1983. He has
served as Chairman of Nitze-Stagen & Company, Inc., a real estate and financial
consulting firm, since 1970.
The Board of Directors of the Company has four standing committees: the
Executive Committee, the Audit Committee, the Compensation Committee and the
Nominating Committee. During 1995, the Executive Committee was composed of
Messrs. Andrews, Culpepper, Gerry, Moore and Nitze; the Audit Committee was
composed of Messrs. Nitze, Gerry and Moore; the Compensation Committee was
composed of Messrs. Culpepper and Hoffstot and Ambassador Curley; and the
Nominating Committee was composed of Messrs. Nitze, Andrews and Moore and
Ambassador Curley.
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<PAGE> 51
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The table below sets forth information concerning (i) the only persons
known by the Company, based on statements filed by such persons pursuant to
Section 13(d) or 13(g) of the Exchange Act, to own beneficially in excess of 5%
of the Common Stock as of September 30, 1996 and (ii) the shares of Common Stock
beneficially owned, as of September 30, 1996, by each director, the Chief
Executive Officer and the four other most highly compensated officers who were
serving at the end of the Company's last fiscal year and all directors and
executive officers as a group. Pursuant to Rule 13d-3(d)(1) under the Exchange
Act, the table includes shares of Common Stock that can be acquired through the
exercise of options, warrants or convertible securities within 60 days. The
percent of the class owned by each such person has been computed assuming the
exercise of all such options, warrants and convertible securities deemed to be
beneficially owned by such person, and assuming that no options, warrants or
convertible securities held by any other person have been exercised. Except as
indicated, each person has sole voting power and sole investment power over all
shares listed opposite his or its name.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
OF COMMON STOCK OF CLASS
--------------- --------
<S> <C> <C>
General Electric Pension Trust............................... 1,995,559(1) 16.4%
3003 Summer Street
Stamford, Connecticut 06904
New York Life Insurance Company+............................. 1,148,196(2) 9.6
51 Madison Avenue
New York, New York 10010
Massachusetts Mutual Life Insurance Company.................. 973,972(3) 8.0
1295 State Street
Springfield, Massachusetts 01111
UNUM Corporation............................................. 799,438(4) 6.8
2211 Congress Street
Portland, Maine 04122
Mark Andrews................................................. 272,326(5) 2.3
Harry W. Colmery, Jr.*....................................... 9,557 **
Irvin K. Culpepper, Jr.*..................................... 3,000 **
Walter J.P. Curley, Jr.*..................................... 14,000 **
Robert M. Danos*............................................. 2,600 **
Phillip Frost, M.D.*......................................... 241,946(6) 2.0
Peter G. Gerry*.............................................. 4,125 **
H. Phipps Hoffstot, III*..................................... 59,613(7) **
John H. Moore*............................................... 4,531 **
Peter P. Nitze*.............................................. 42,509(8) **
John M. Hogan................................................ 30,759(9) **
Harold M. Korell............................................. 51,475(10) **
Robert R. McBride, Jr. ...................................... 10,199(11) **
Elliott Pew.................................................. 12,615(12) **
All directors and executive officers as a group (17
persons)................................................... 788,675(13) 6.6
</TABLE>
- ---------------
+ See "Selling Stockholders."
* Amounts include 3,000 shares issuable upon exercise of stock options,
except that the amount for Mr. Danos includes 2,500 such shares and the
amounts for Messrs. Curley and Moore each include 4,531 such shares.
** Less than one percent.
50
<PAGE> 52
(1) Includes 333,333 shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock, represented by 200,000 depositary shares (the
"Depositary Shares"), each representing a 1/200 interest in a share of the
Convertible Preferred Stock.
(2) Includes shares held by a subsidiary of New York Life and 166,667 shares
issuable upon conversion of Convertible Preferred Stock represented by
100,000 Depositary Shares.
(3) Includes 629,500 shares of Common Stock and 344,472 shares issuable upon
exercise of warrants to purchase Common Stock.
(4) Based upon a Schedule 13G, as amended, filed by UNUM Corporation with the
Securities and Exchange Commission (the "Commission" or the "SEC").
(5) Includes 55,848 shares held directly or indirectly by Mr. Andrews' children
and a company of which Mr. Andrews' wife is a principal shareholder and a
director, and as to which shares he disclaims beneficial ownership. Also
includes 64,100 shares issuable upon exercise of stock options and 1,420
shares allocated to Mr. Andrews under the American Exploration 401(k) Plan
(the "401(k) Plan").
(6) Includes 66,667 shares issuable upon conversion of Convertible Preferred
Stock represented by 40,000 Depositary Shares.
(7) Includes 40,113 shares over which Mr. Hoffstot shares investment and voting
power and as to which shares he disclaims beneficial ownership.
(8) Includes 28,842 shares owned by general partnerships of which Mr. Nitze is
a general partner and over which he shares voting and investment power and
6,667 shares issuable upon conversion of Convertible Preferred Stock
represented by 4,000 Depositary Shares.
(9) Includes 16,625 shares issuable upon exercise of stock options and 572
shares allocated to Mr. Hogan under the 401(k) Plan.
(10) Includes 1,667 shares issuable upon conversion of Convertible Preferred
Stock represented by 1,000 Depositary Shares, 26,625 shares issuable upon
exercise of stock options and 374 shares allocated to Mr. Korell under the
401(k) Plan.
(11) Includes 6,375 shares issuable upon exercise of stock options and 386
shares allocated to Mr. McBride under the 401(k) Plan.
(12) Includes 6,375 shares issuable upon exercise of stock options and 427
shares allocated to Mr. Pew under the 401(k) Plan.
(13) These shares include, for all executive officers other than the Chief
Executive Officer and the four other most highly compensated officers,
15,425 shares issuable upon exercise of stock options and 5,664 shares
allocated to officers under the 401(k) Plan.
51
<PAGE> 53
SELLING STOCKHOLDERS
In connection with the Offering, New York Life and one of its subsidiaries
(collectively referred to in this section as "New York Life") and The Prudential
Insurance Company of America ("Prudential Insurance" and, together with New York
Life, the "Selling Stockholders") are exercising their rights to include in the
Offering 379,229 shares and 200,000 shares of Common Stock, respectively,
pursuant to certain registration rights previously granted by the Company (the
"Registration Rights"). New York Life has also granted the Underwriters an
over-allotment option to purchase 56,884 additional shares. Prior to the
Offering, New York Life beneficially owned 1,148,196 shares of Common Stock.
Upon completion of the Offering, New York Life will own 768,967 shares of Common
Stock (712,083 shares if the over-allotment options are exercised in full)
representing approximately 5.1% of the total shares outstanding (approximately
4.8% if the over-allotment options are exercised in full). Prior to the
Offering, Prudential Insurance beneficially owned 200,000 shares of Common Stock
and warrants for the purchase of approximately 325,000 shares of Common Stock.
Upon completion of the Offering, Prudential Insurance will own such warrants,
representing beneficial ownership of approximately 2.1% of the total shares
outstanding. For additional information concerning the Selling Stockholders, see
"Security Ownership of Management and Certain Beneficial Owners," "Certain
Transactions and Related Transactions" and "Underwriting."
Pursuant to the Registration Rights, the Company is paying all the expenses
of the Offering, including the expenses attributable to the shares being sold by
the Selling Stockholders, other than underwriting discounts and commissions, any
transfer taxes attributable to such shares, and any fees or expenses of counsel
for one of the Selling Stockholders.
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<PAGE> 54
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation for the years 1995, 1994 and 1993 for the Company's Chief Executive
Officer and the four highest paid executive officers other than the Chief
Executive Officer who were serving at the end of the Company's last fiscal year.
All 1993 and 1994 share amounts and prices are adjusted for the 1995 one-for-ten
reverse stock split of the Common Stock.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
-------------------------
SECURITIES
UNDERLYING
ANNUAL COMPENSATION RESTRICTED OPTIONS/SARS
NAME AND -------------------- STOCK (OPTION UNITS) ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(1) (SHARES) COMPENSATION(2)
- --------------------------- ---- -------- -------- -------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Mark Andrews............... 1995 $286,662 $200,000 None 120,000(3) $ 6,900
Chairman and Chief 1994 270,000 75,000 None None 210,316
Executive Officer 1993 270,000 60,000 430,513 68,200(4) 147,919
John M. Hogan.............. 1995 189,583 100,000 None 20,000(3) 1,050
Senior Vice President and 1994 175,000 65,000 None None 5,437
Chief Financial Officer 1993 150,000 50,000 146,766 23,250(4) 1,318
Harold M. Korell........... 1995 202,500 100,000 None 60,000(3) 1,050
Senior Vice President -- 1994 190,000 50,000 None None 5,437
Production 1993 183,413 57,000 146,766 23,250(4) 1,318
Robert R. McBride, Jr...... 1995 140,000 35,000 None 10,000(3) 1,050
Vice President -- 1994 140,000 30,000 None None 2,261
Production Operations 1993 137,804 28,000 48,922 7,750(4) 1,050
Steven L. Mueller.......... 1995 140,000 35,000 None 10,000(3) 1,050
Vice President --
Exploitation.............. 1994 140,000 30,000 None None 2,512
1993 137,804 28,000 48,922 7,750(4) 1,050
</TABLE>
- ---------------
(1) Granted in October 1993 under the Company's Stock Compensation Plan (the
"1983 Plan"). One-third of the shares vested on the second anniversary of
the grant, one-third of the shares vested on the third anniversary of the
grant and one-third of the shares will vest on the fourth anniversary of the
grant. The total number of shares of Restricted Common Stock held by the
named officers as of December 31, 1995 and the total value thereof based on
the $13.125 per share closing price of the Common Stock on the AMEX at the
grant date were as follows: Mr. Andrews -- 34,100 shares: $447,563; Mr.
Korell -- 11,625 shares: $152,578; Mr. Hogan -- 11,625 shares: $152,578; Mr.
McBride -- 2,583 shares: $33,901; and Mr. Mueller -- 3,870 shares: $50,859.
The aggregate number and value of all Restricted Common Stock Awards totaled
79,725 shares and $1,046,391. To the extent paid on shares of Common Stock,
dividends will also be paid on Restricted Common Stock.
(2) All other compensation for 1995 consisted of the following: (i) Company
contributions to the 401(k) Plan of $1,050 for each of the named officers;
and (ii) Company-paid life insurance premiums for Mr. Andrews of $5,850.
(3) Amounts represent options granted under the 1994 Stock Compensation Plan
(the "1994 Plan") which was approved by stockholders at the 1995 Annual
Meeting. The numbers of options granted under the 1994 Plan were as follows:
Mr. Andrews -- 40,000 shares; Mr. Hogan -- 20,000 shares; Mr. Korell --
20,000 shares; Mr. McBride -- 10,000 shares; and Mr. Mueller -- 10,000
shares. In addition, Mr. Andrews was permitted to purchase up to 10,000
shares of Common Stock, the purchase of which would provide options with a
$12.50 exercise price at a rate of eight options for each share of Common
Stock purchased during a specified period. Mr. Andrews has purchased the
full 10,000 shares. In addition, Mr. Hogan and Mr. Korell were each
permitted to purchase up to 5,000 shares of Common Stock, the purchase of
which would provide options with a $12.50 exercise price at a rate of eight
options
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<PAGE> 55
for each share of Common Stock purchased during a specified period. Mr.
Hogan elected not to purchase shares and Mr. Korell has purchased the full
5,000 shares.
(4) Amounts represent option units granted in October 1993 under the Company's
Phantom Stock Plan (the "Phantom Plan"). One quarter of the option units
vest on each anniversary of the grant. In June 1995, the option units were
converted to options with the same option price and vesting period as the
original option units.
OPTION/SAR GRANTS
The following table sets forth certain information with respect to options
granted under the 1994 Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
NUMBER GRANTED TO EXERCISE FOR TERM
OF OPTIONS PARTICIPANTS PRICE EXPIRATION ---------------------
NAME AND POSITION GRANTED IN 1995 ($/UNIT) DATE(1) 5% 10%
- ------------------------------- ---------- ----------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mark Andrews(2)................ 120,000 27.5% $12.50 10/31/2004 $2,443,342 $3,890,614
Chairman of the Board and
Chief Executive Officer
John M. Hogan(3)............... 20,000 4.6% 12.50 10/31/2004 407,224 648,436
Senior Vice President and
Chief Financial Officer
Harold M. Korell(4)............ 60,000 13.7% 12.50 10/31/2004 1,221,671 1,945,307
Senior Vice President --
Operations
Robert R. McBride, Jr. ........ 10,000 2.3% 12.50 10/31/2004 203,612 324,218
Vice President -- Production
Operations
Steven L. Mueller.............. 10,000 2.3% 12.50 10/31/2004 203,612 324,218
Vice President -- Exploitation
</TABLE>
- ---------------
(1) Granted on November 1, 1994 subject to stockholder approval which was
received on June 13, 1995. No more than one quarter of the options vest on
each anniversary date of the grant; the options remain outstanding for a
period of ten years.
(2) Includes 80,000 options awarded to Mr. Andrews with a $12.50 exercise price
at a rate of eight options for each share of Common Stock purchased during a
specified period. Mr. Andrews has purchased the full 10,000 shares of Common
Stock.
(3) In addition, Mr. Hogan was awarded up to 40,000 options with a $12.50
exercise price at a rate of eight options for each share of Common Stock
purchased during a specified period. Mr. Hogan elected not to exercise his
right to purchase shares of Common Stock.
(4) Includes 40,000 options awarded to Mr. Korell with a $12.50 exercise price
at a rate of eight options for each share of Common Stock purchased during a
specified period. Mr. Korell has purchased the full 5,000 shares of Common
Stock.
In addition to the options granted above, at the election of the employees,
the employees were permitted to convert their remaining option units granted
under the Phantom Plan in 1993 to Incentive Stock Options under the 1994 Plan to
the extent permitted and Nonqualified Stock Options at the original option unit
price. The options will vest at the same rate as the option units with a term of
ten years from the original option units award date. The 1994 Plan was approved
at the 1995 Annual Meeting and approximately 154,113 additional options were
issued under the 1994 Plan, including 113,775 options to the Executive Group and
40,338 to the Non-Executive Officer Employee Group. See "-- Summary Compensation
Table" for option units granted under the Phantom Plan.
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<PAGE> 56
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table provides information with respect to the unexercised
options to purchase the Common Stock held by the executive officers named in the
Summary Compensation Table at December 31, 1995. None of these executive
officers exercised any stock options during 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS HELD AT OPTIONS/SARS AT
DECEMBER 31, 1995 DECEMBER 31, 1995 (1)
------------------ ---------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Mark Andrews....................................... 83,550 126,600 $ 0 $ 0
Harold M. Korell................................... 42,687 62,250 0 0
John M. Hogan...................................... 28,687 31,250 0 0
Robert R. McBride, Jr.............................. 10,312 13,000 0 0
Steven L. Mueller.................................. 10,312 13,000 0 0
</TABLE>
- ---------------
(1) Based on the closing price of the Common Stock on the AMEX on December 31,
1995 of $11.375.
AGREEMENTS WITH CERTAIN EXECUTIVE OFFICERS AND KEY EMPLOYEES
After consultations by the Compensation Committee with its independent
compensation consultant regarding current practices by companies surveyed by
such consultant with respect to severance and employment agreements, upon the
Committee's recommendation, the Company has entered into new severance
agreements with eight of its executive officers and key employees and an
employment agreement with the Chief Executive Officer providing for certain
payments and other benefits upon the involuntary termination of the employment
of such persons, including their constructive termination following a Change in
Control, as defined in such agreements, of the Company. The severance and
employment agreements are intended to promote the retention of such persons in
the service of the Company by providing them with an extra measure of financial
security. The agreements provide that, upon involuntary termination, Mark
Andrews, the Chief Executive Officer, shall receive cash payments equal to three
times an amount equal to the sum of his base annual salary plus the average
amount of the bonuses paid to him in the last three fiscal years of the Company;
each of John Hogan and Harold Korell, Senior Vice Presidents, shall receive cash
payments equal to two times (three times in the event of a Change in Control) an
amount equal to the sum of their respective base annual salaries plus the
average amount of the bonuses paid to each individual in the last three fiscal
years of the Company; and each of Cindy Gerow, Harry Harper, Robert McBride,
Steve Mueller, Frank Murphy and Elliott Pew, Vice Presidents, shall receive cash
payments equal to one times (two times in the event of Change in Control) an
amount equal to the sum of their respective base annual salaries plus the
average of the bonuses paid to each individual in the last three fiscal years of
the Company. Such persons will also receive: (i) six months of medical and
dental insurance benefits (except disability coverage) at the expense of the
Company followed by 18 months of reimbursement for payments made by such persons
for medical and dental insurance continuation coverage in connection with rights
conferred under the Consolidated Omnibus Budget Reconciliation Act of 1985, (ii)
vesting of awards under the Company's stock compensation plans and Phantom Plan
and (iii) extension by six months of the exercise period for options. In
addition to the termination benefits described above, the employment agreement
with Mr. Andrews: (i) provides for an initial term of three years which
automatically renews for one-year periods unless the Board of Directors gives
written notice or the agreement is otherwise terminated in accordance with its
provisions, (ii) summarizes Mr. Andrews' duties, which may be changed with the
mutual consent of the Board of Directors and Mr. Andrews, (iii) sets his base
salary at $310,000, (iv) entitles him to participate in the bonus and other
benefits plans available to executives of the Company, (v) entitles him to
$2,500,000 of life insurance at the Company's expense and (vi) provides that Mr.
Andrews may, under certain circumstances, perform post-employment consulting
services and receive a reduced severance payment. The agreements do not provide
for any benefits in the event of a termination for cause. The severance
agreements provide for
55
<PAGE> 57
reduction of benefits under certain circumstances to avoid excise tax under
Section 4999 of the Internal Revenue Code of 1986, as amended.
COMPENSATION OF DIRECTORS
Each director, other than Mr. Andrews, received compensation of $2,000 per
year for his services as a member of the Board of Directors. Effective July
1995, this amount was increased to $10,000 per year payable quarterly beginning
with the third quarter of 1995. In addition, each director, other than Mr.
Andrews, receives $1,000 for each Board or Committee meeting attended and is
reimbursed for certain expenses incurred in attending meetings of the Board of
Directors and committees thereof. Each Committee chairman also receives $10,000
per year payable quarterly.
In addition, each director, other than Mr. Andrews, receives an initial
award of 2,500 stock options in his initial year of service, and receives annual
awards of 500 stock options, pursuant to the 1994 Stock Compensation Plan, for
as long as he remains a director.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
New York Life, the beneficial owner of 9.6% of the outstanding Common
Stock, as calculated pursuant to Rule 13d-3(d)(1) under the Exchange Act, and
one of its wholly owned subsidiaries were investors in the APPL Programs which
were dissolved in 1995. In connection with the APPL Consolidation, New York
Life, as an investor in the APPL Programs, acquired an aggregate of 379,229
shares of Common Stock in exchange for certain of its interests in the APPL
Programs and certain registration rights relating to such shares. Further, in
April 1994, New York Life established a $40.0 million nonrecourse secured credit
facility in favor of a wholly owned subsidiary of the Company to be used to
acquire interests in the APPL Programs. Under the terms of the facility, the
Company's subsidiary paid a commitment fee of $200,000 and financing fees of
1.25% of funds advanced and advances accrue interest at rates varying from 3% to
6% over the 30-day AI/PI commercial paper rate over the one-year term of
borrowings under the facility. During 1994, the Company's subsidiary borrowed
approximately $32.0 million under this facility and made interest and financing
fee payments aggregating $1.4 million. In early 1995, this facility was retired
using existing capacity on the Company's bank credit facility.
In mid-1990, the Company agreed to act as liquidator for New York Life in
connection with New York Life's investment in a partnership managed by another
oil company. In December 1993, the Company and New York Life's subsidiary, New
York Life Resources, Inc., formed Ancon Partnership Ltd., a Texas limited
partnership ("Ancon"), into which New York Life Resources, Inc., as a limited
partner, contributed these properties and the Company, as general partner,
purchased a 20% interest for $1.5 million. In May 1995, New York Life and
certain affiliates transferred certain of their limited partner interests in the
APPL Programs to Ancon. The Company acquired a 20% interest in these properties
for approximately $6.7 million in cash. The Company anticipates that New York
Life and various affiliates will contribute additional properties to Ancon. The
Company is obligated to purchase a 1% interest in such additional properties and
will have the option to purchase an additional 19% interest therein.
In connection with litigation relating to the NYLOG Programs (see
"Business -- Legal Proceedings"), the Company, a subsidiary of the Company and
NYLIFE entered into an indemnity agreement (the "Indemnity Agreement"), pursuant
to which NYLIFE agreed to indemnify the American Parties from and against any
and all judgments or settlements entered or reached in such litigation or any
subsequent lawsuits by investors in the NYLOG Programs, based on claims and
factual allegations substantially similar to those contained in the original
complaints filed. Pursuant to the Indemnity Agreement, NYLIFE assumed control of
the joint defense of this litigation at NYLIFE's expense. Additionally, pursuant
to the Indemnity Agreement, in connection with the liquidation sale of the
assets of the NYLOG Programs, the American Parties will be allocated only 5%
(which represents the American Parties' initial capital contribution percentage)
of revenues and net proceeds from the sale of properties effective from and
after February 1, 1996.
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<PAGE> 58
In connection with the stock purchase program adopted by the Compensation
Committee pursuant to which members of management were granted Restricted Common
Stock and option units based, in the case of senior management, upon the number
of shares of Common Stock acquired, the Company permitted senior officers the
right to finance with the Company a portion of the shares acquired. In this
connection, Mr. Andrews financed a portion of the shares acquired through an
amortizing loan from the Company with an interest rate of 3.91% in the original
principal amount of $112,219. Mr. Andrews subsequently repaid his loan in early
1996.
During 1995, Nitze-Stagen & Company, Inc., of which Peter P. Nitze, a
director of the Company, is Chairman, performed financial consulting services
for the Company. The Company paid this company $20,000 for such services
rendered during 1995. During 1995, the Company paid John H. Moore, a director of
the Company, $11,250 for petroleum consulting services. O. Donaldson Chapoton, a
director of the Company through June 1995, is a partner in the law firm of Baker
& Botts, L.L.P. During 1995, Baker & Botts, L.L.P. received $285,000 from the
Company for legal services which it provided to the Company, although Mr.
Chapoton has no direct or indirect material interest in such amount.
57
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
PREFERRED STOCK
The Company's Restated Certificate of Incorporation (the "Restated
Certificate") authorizes the Company to issue, without any action on the part of
its stockholders, an aggregate of 100,000 shares of preferred stock, par value
$1.00 per share. The Board of Directors has authority to divide such preferred
stock into one or more series and has broad authority to fix and determine the
relative rights and preferences, including the voting rights, of the shares of
each such series. As of September 30, 1996, an aggregate of 85,000 shares of
preferred stock of the Company had been reserved for issuance upon exercise of
the Rights described below under "-- Stockholder Rights Plan."
In addition, the Company's currently outstanding Convertible Preferred
Stock represents 4,000 shares of preferred stock. In December 1993, the Company
privately placed 800,000 Depositary Shares, each representing a 1/200 interest
in a share of the Convertible Preferred Stock. The Convertible Preferred Stock
has a stated value of $5,000 per share, with dividends payable quarterly at the
annual rate of $450 per share. The Convertible Preferred Stock is convertible at
any time at the option of the holders into shares of Common Stock at a
conversion price of $15.00 per share, subject to adjustment in certain
circumstances. Beginning December 31, 1997, the Convertible Preferred Stock will
be redeemable at the option of the Company, in whole or in part, at any time.
The initial redemption price is $5,270 per share, declining ratably on December
31 of each year to a redemption price of $5,000 per share on and after December
31, 2003, plus accrued and unpaid dividends.
The Convertible Preferred Stock has a special conversion right that becomes
effective upon the occurrence of certain types of significant transactions
affecting ownership or control of the Company. If the special conversion right
becomes effective, the then-prevailing conversion price would be reduced to the
market value of the Common Stock, not to be reduced below a minimum conversion
price of $11.25 per share of Common Stock.
In the event of liquidation, the holders of the Convertible Preferred Stock
will receive a preferred liquidation payment equal to $5,000 per share plus
accrued and unpaid dividends. The holders of the Convertible Preferred Stock are
entitled to vote on all matters submitted to a vote of the holders of the Common
Stock. Each holder of a share of Convertible Preferred Stock is entitled to one
vote for each share of Common Stock into which a share of Convertible Preferred
Stock could be converted. The holders of the Convertible Preferred Stock are
entitled to separate class voting in certain circumstances, including (i) if
dividends on such stock are in arrears for six fiscal quarters, (ii) the
creation of any class or series of stock ranking prior to the Convertible
Preferred Stock and (iii) any amendment or alteration of the Company's Restated
Certificate that adversely affects the preferences, special rights or powers of
the Convertible Preferred Stock.
COMMON STOCK
As of September 30, 1996, the Company was authorized to issue 50,000,000
shares of Common Stock. As of September 30, 1996, an aggregate of 11,807,741
shares were outstanding and an aggregate of 4,357,423 shares were reserved for
issuance upon exercise of outstanding options and warrants and upon conversion
(including conversion pursuant to special conversion rights) of the Convertible
Preferred Stock. All shares of Common Stock have equal rights to participate in
dividends and, in the event of liquidation, assets, subject to all preferences
established with respect to the Company's preferred stock. Each holder of Common
Stock is entitled to one vote for each share held on all matters submitted to a
vote of stockholders. The Common Stock does not have cumulative voting rights.
Shares of Common Stock carry no conversion, preemptive or subscription rights
and are not subject to redemption. All outstanding shares of Common Stock are
fully paid and nonassessable. The Company currently pays no dividends on Common
Stock but is authorized to pay such dividends when, as and if declared by the
Board of Directors. Dividends may be declared in the discretion of the Board of
Directors from funds legally available therefor, subject to restrictions in the
Company's Credit Agreement and the agreements relating to its Subordinated
Notes.
The transfer agent and registrar of the Common Stock is KeyCorp Shareholder
Services, Inc., 1201 Elm Street, Dallas, Texas 75270.
58
<PAGE> 60
STOCKHOLDER RIGHTS PLAN
General. In September 1993, the Board of Directors declared a distribution
of one right ("Right") for each outstanding share of Common Stock outstanding to
stockholders of record at the close of business on October 8, 1993 and for each
share of Common Stock issued by the Company (including shares issued upon
conversion of the Convertible Preferred Stock) thereafter and prior to the
Distribution Date (as described below). Each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share (a "Unit") of
Series B Preferred Stock, par value $1.00 per share (the "Series B Preferred
Stock"), at a purchase price of $7.50 per Unit, subject to adjustment (the
"Purchase Price"). The following summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement between the Company and Society National Bank dated September
28, 1993 (the "Rights Agreement"), as supplemented by the Amendment to Rights
Agreement dated August 3, 1994, copies of which have been filed with the
Commission as exhibits to the Company's Current Reports on Form 8-K dated
September 28, 1993 and August 31, 1994, respectively.
The Rights Agreement. Initially, a Right will attach to each certificate
representing a share of outstanding Common Stock, and no separate certificates
for the Rights ("Rights Certificates") will be distributed. Each Right will
separate from the Common Stock and a "Distribution Date" will occur upon the
earlier of (i) ten business days following a public announcement that a Person
(as such term is defined in the Rights Agreement) or group of affiliated or
associated persons (other than the Company, any subsidiary of the Company or any
employee benefit plan of the Company or such subsidiary or certain former
investors in certain of the Company's institutional oil and gas programs by
virtue of their exchange of interests in such programs for Common Stock) (an
"Acquiring Person") has acquired, obtained the right to acquire or otherwise
obtained beneficial ownership of 15% or more of the then outstanding shares of
Common Stock (the date of the announcement being the "Stock Acquisition Date"),
and (ii) ten business days (or such later date as may be determined by action of
the Board of Directors before any person becomes an Acquiring Person) following
the commencement of a tender offer or exchange offer that would result in a
person or group beneficially owning 30% or more of the then outstanding shares
of Common Stock.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on the tenth anniversary of the Rights Agreement unless
earlier redeemed by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of business
on the Distribution Date and, thereafter, the separate Rights Certificates alone
will represent the Rights.
In the event that (i) the Company is the surviving corporation in a merger
with an Acquiring Person and shares of Common Stock remain outstanding, (ii) a
Person becomes the beneficial owner of 15% or more of the then outstanding
shares of Common Stock, (iii) an Acquiring Person engages in one or more "self-
dealing" transactions as set forth in the Rights Agreement or (iv) during such
time as there is an Acquiring Person, an event occurs that results in such
Acquiring Person's ownership interest being increased by more than 1% (e.g., by
means of a reverse stock split or recapitalization), then, in each such case,
each holder of a Right will thereafter have the right to receive, upon exercise,
Units of Series B Preferred Stock (or, in certain circumstances, Common Stock,
cash, property or other securities of the Company) having a value equal to two
times the amount payable upon exercise of the Right. The amount payable upon
exercise is the then current Purchase Price multiplied by the number of Units of
Series B Preferred Stock issuable upon exercise of a Right immediately prior to
the events described in this paragraph. Notwithstanding any of the foregoing,
following the occurrence of any of the events set forth in this paragraph, all
Rights that are, or were (under certain circumstances specified in the Rights
Agreement), beneficially owned by any Acquiring Person will be null and void.
In the event that at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction and
the Company is not the surviving corporation (other than a merger described in
the preceding paragraph), (ii) any Person consolidates or merges with the
Company and all or part of the Common Stock is converted or exchanged for
securities, cash or property of any other Person or (iii) 50% or more of the
Company's assets or earning power is sold or transferred, each holder of a Right
(except Rights that previously have been voided as described above) will
thereafter have the
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<PAGE> 61
right to receive, upon exercise, common stock of the Acquiring Person having a
value equal to two times the amount payable upon exercise of the Right.
The amount payable, and the number of Units of Series B Preferred Stock
issuable, upon exercise of the Rights is subject to adjustment from time to time
to prevent dilution upon the occurrence of certain events.
At any time until ten business days following the Stock Acquisition Date, a
majority of the Independent Directors (as such term is defined in the Rights
Agreement) may redeem the Rights in whole, but not in part, at a price of $.10
per Right, subject to adjustment upon the occurrence of certain events (the
"Redemption Price"), payable, at the election of such majority of the
Independent Directors, in cash or shares of Common Stock. Immediately upon the
action of a majority of Independent Directors ordering the redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. Holders of Common Stock or of Convertible
Preferred Stock may, depending upon the circumstances, recognize taxable income
in the event that the Rights become exercisable for Units of Series B Preferred
Stock (or other consideration).
Description of the Series B Preferred Stock. The Units of Series B
Preferred Stock that may be acquired upon exercise of the Rights will be
nonredeemable and subordinate to any other shares of preferred stock that may be
issued by the Company. Each Unit of Series B Preferred Stock will have a minimum
preferential quarterly dividend of $0.01 per Unit or any higher per share
dividend declared on the Common Stock.
The holder of each Unit of Series B Preferred Stock will be entitled to one
vote for each Unit held, voting together with the Common Stock. The holders of
Units of Series B Preferred Stock, voting as a separate class, will be entitled
to elect two directors if dividends on the Series B Preferred Stock are in
arrears for six fiscal quarters.
In the event of any merger, consolidation or other transaction in which
shares of Common Stock are exchanged, each Unit of Series B Preferred Stock will
be entitled to receive the per share amount paid in respect of each share of
Common Stock. In the event of liquidation, the holder of a Unit of Series B
Preferred Stock will receive a preferred liquidation payment equal to the
greater of $0.10 per Unit plus accrued and unpaid dividends and the per share
amount paid in respect of a share of Common Stock. Certain rights of the holders
of the Preferred Stock, including voting rights, rights upon liquidation and
rights upon merger, consolidation or other transactions in which shares of
Common Stock are exchanged, are subject to adjustment upon the occurrence of
certain events.
PROVISIONS OF THE COMPANY'S BYLAWS
Certain provisions of the Company's Bylaws establish time periods during
which appropriate stockholder proposals must be delivered to the Company for
consideration at special and annual meetings called by the Company. The Bylaws
provide, among other things, that (i) only the Board of Directors may call
special meetings of stockholders, (ii) stockholders making nominations for the
Board of Directors at, or bringing other business before, an annual meeting of
stockholders must provide timely written notice to the Company thereof (timely
notice being required to be no later than 60 days before the first anniversary
of the preceding year's annual meeting or, in the event the date of an annual
meeting is advanced by more than 30 days, or delayed by more than 60 days, from
such anniversary date, no later than 60 days before the date of such annual
meeting or ten days following the day on which the date of such meeting is
publicly announced) and (iii) stockholders making nominations for the Board of
Directors at a special meeting of stockholders must provide timely written
notice to the Company thereof (timely notice being required to be no later than
60 days before such special meeting or ten days following the day on which the
date of such special meeting is publicly announced).
WARRANTS
As of September 30, 1996, there were warrants outstanding to purchase an
aggregate of up to approximately 1.5 million shares of Common Stock. In December
1991, the Company issued warrants to certain institutional investors
contemporaneously with the issuance of its Subordinated Notes (the
"Institutional Warrants"). The Institutional Warrants granted the right to
purchase approximately 1.2 million shares
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<PAGE> 62
(as adjusted for subsequent events) of Common Stock at an exercise price of
$15.53 per share, subject to adjustment, on or before December 30, 2004. In
connection with an acquisition of Common Stock in September 1992, Prudential
Insurance acquired warrants to purchase approximately 0.3 million shares (as
adjusted) of Common Stock at an exercise price of $22.19 per share, subject to
adjustment, on or before April 30, 1999 (the "Prudential Warrants" and,
collectively with the Institutional Warrants, the "Warrants").
The Warrants contain certain provisions for adjustment of exercise prices
in certain events, including sales of Common Stock at less than the exercise
price or fair market value thereof, stock dividends, stock splits,
reorganizations, reclassifications and mergers.
Holders of the Warrants are also entitled to certain registration rights
with respect to Common Stock issued upon the exercise thereof.
The Company may at its option redeem (i) any or all of the outstanding
Institutional Warrants for cash on or after December 30, 1996 at $10.35 per
share of Common Stock issuable upon the exercise of such warrants, subject to
adjustment, and (ii) all of the outstanding Prudential Warrants at any time
after October 1, 1994 at the exercise price in effect on the date of redemption,
provided in each case that the Common Stock has traded at specified prices above
the then current exercise price for a specified period.
LIMITATION ON DIRECTORS' LIABILITY
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The Restated
Certificate limits the liability of directors of the Company to the Company or
its stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by Delaware law. Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law ("DGCL") or (iv) for any
transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Restated Certificate may have the
effect of reducing the likelihood of derivative litigation against directors and
may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an action,
if successful, might otherwise have benefited the Company and its stockholders.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL. Generally, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) prior to such date, either the
business combination or such transaction is approved by the board of directors
of the corporation, (ii) upon consummation of the transaction that resulted in
the stockholder becoming an interested stockholder, the interested stockholder
owns at least 85% of the outstanding voting stock or (iii) on or after such
date, the business combination is approved by the board and by the affirmative
vote of at least 66 2/3% of the outstanding voting stock that is not owned by
the interested stockholder. A "business combination" includes mergers, asset
sales and other transactions resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's outstanding voting stock.
LIMITATION ON CHANGES IN CONTROL
The Rights and Rights Agreement, certain provisions of the Company's Bylaws
and the provisions of Section 203 of the DGCL could have the effect of delaying,
deferring or preventing a change in control of the Company. This could be the
case, notwithstanding that a majority of the stockholders might benefit from
such a change in control or offer.
61
<PAGE> 63
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Dillon, Read & Co. Inc. and A. G. Edwards & Sons, Inc.
are acting as representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company and the Selling Stockholders the number of shares of
Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
----------------------------------------------------------------- --------
<S> <C>
Prudential Securities Incorporated...............................
Dillon, Read & Co. Inc. .........................................
A.G. Edwards & Sons, Inc. .......................................
---------
Total.................................................. 3,579,229
=========
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share; and that such dealers may reallow a concession of $ per
share to certain other dealers. After the public offering, the offering price
and the concessions may be changed by the Representatives.
The Company and one of the Selling Stockholders have granted to the
Underwriters options, exercisable for 30 days from the date of this Prospectus,
to purchase up to 480,000 and 56,884 additional shares of Common Stock,
respectively, at the initial public offering price, less underwriting discounts
and commissions, as set forth on the cover page of this Prospectus. The
Underwriters may exercise such options solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such options to purchase are exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number of shares set forth
next to such Underwriter's name in the preceding table bears to 3,579,229.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act. Prudential Insurance, one of the
Selling Stockholders, is an affiliate of Prudential Securities Incorporated. See
"Selling Stockholders."
The Company, its directors and executive officers, the Selling Stockholders
and certain other stockholders holding an aggregate of approximately 5,300,000
shares of Common Stock (exclusive of shares of Common Stock being sold by the
Selling Stockholders) have agreed that they will not, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock, without the prior
written consent of Prudential Securities Incorporated on behalf of the
Underwriters, for a period of 90 days after the date of this Prospectus, except
for shares offered pursuant to the Offering and issuances pursuant to the
exercise of options granted under employee benefit plans existing as of the date
of this Prospectus or pursuant to the terms of convertible securities or
warrants of the Company outstanding as of the date of this Prospectus.
62
<PAGE> 64
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby are being passed upon for the Company by Baker & Botts, L.L.P., Houston,
Texas and Patterson, Belknap, Webb & Tyler LLP, New York, New York and for the
Underwriters by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The audited consolidated financial statements of the Company included in
this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The statement of oil and gas revenues and direct lease operating expenses
of the Zilkha II Properties for the year ended December 31, 1995, and the
statements of oil and gas revenues and direct lease operating expenses of the
Zilkha I Properties for each of the years in the three-year period ended
December 31, 1995, have been included herein and in the registration statement
in reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The letter reports of Netherland, Sewell & Associates, Inc. and William M.
Cobb & Associates, Inc. set forth in Appendix A have been included herein in
reliance upon the authority of each such firm as experts in estimating proved
oil and gas reserves.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected at, and upon payment of the
Commission's customary charges copies may be obtained from, the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549. Such reports, proxy statements and other
information are also available for inspection and copying at prescribed rates at
the Commission's regional offices at Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, New
York, New York 10048. The Commission maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission
(http://www.sec.gov). The Common Stock is listed on the AMEX. Documents filed by
the Company may also be inspected at the offices of the AMEX, 86 Trinity Place,
New York, New York 10006.
The Company has filed a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with the Commission with
respect to the Offering. This Prospectus, filed as a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, or the exhibits and schedules thereto, in accordance with the rules
and regulations of the Commission, and reference is hereby made to such omitted
information. Statements made in this Prospectus concerning any document filed as
an exhibit to the Registration Statement are not necessarily complete, and in
each instance reference is made to such exhibit for a complete statement of its
provisions. The Registration Statement and the exhibits and schedules thereto
may be inspected at, and upon payment of the Commission's customary charges
copies may be obtained from, the public reference facilities maintained by the
Commission as provided in the preceding paragraph.
63
<PAGE> 65
GLOSSARY OF CERTAIN OIL AND GAS TERMS
The following are abbreviations and definitions of terms commonly used in
the oil and gas industry and this Prospectus. Unless otherwise indicated in this
Prospectus, natural gas volumes are stated at the legal pressure base of the
state or area in which the reserves are located and at 60(++) Fahrenheit. BOEs
are determined using the ratio of six Mcf of natural gas to one Bbl of oil.
"BBL" means a barrel of 42 U.S. gallons of oil.
"BCF" means billion cubic feet of natural gas.
"BOE" means barrels of oil equivalent.
"BOEPD" means barrels of oil equivalent per day.
"BBTU" means one billion British Thermal Units.
"BTU" or "BRITISH THERMAL UNIT" means the quantity of heat required to
raise the temperature of one pound of water by one degree Fahrenheit.
"COMPLETION" means the installation of permanent equipment for the
production of oil or gas.
"CONDENSATE" means a hydrocarbon mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.
"DEVELOPMENT WELL" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
"GROSS" when used with respect to acres or wells refers to the total acres
or wells in which the Company has a working interest.
"MBBLS" means thousand of barrels of oil.
"MBOE" means thousand barrels of oil equivalent.
"MCF" means thousand cubic feet of natural gas.
"MMBBLS" means million barrels of oil.
"MMBOE" means million barrels of oil equivalent.
"MMBTU" means one million British Thermal Units.
"MMCF" means million cubic feet of natural gas.
"NET" when used with respect to acres or wells refers to gross acres of
wells multiplied, in each case, by the percentage working interest owned by the
Company.
"NET PRODUCTION" means production that is owned by the Company less
royalties and production due others.
"OIL" means crude oil or condensate.
"OPERATOR" means the individual or company responsible for the exploration,
development and production of an oil or gas well or lease.
"PROVED DEVELOPED RESERVES" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
64
<PAGE> 66
"PROVED RESERVES" means the estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation testing. The
area of a reservoir considered proved includes (a) that portion delineated
by drilling and defined by gas-oil and/or oil-water contacts, if any; and
(b) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
ii. Reserves that can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for
the engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (a)
oil that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (b) crude oil, natural gas
and natural gas liquids the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics or
economic factors; (c) crude oil, natural gas and natural gas liquids that
may occur in undrilled prospects; and (d) crude oil, natural gas and
natural gas liquids that may be recovered from oil shales, coal, gilsonite
and other such sources.
"PROVED UNDEVELOPED RESERVES" means reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
"RECOMPLETION" means the completion for production of an existing well bore
in another formation from that in which the well has been previously completed.
"RESERVES" means proved reserves.
"SEC-10 VALUE" means the present value of estimated future revenues to be
generated from the production of proved reserves calculated in accordance with
Commission guidelines, net of estimated production and future development costs,
using prices and costs as of the date of estimation without future escalation,
without giving effect to non-property related expenses such as general and
administrative expenses, debt service, future income tax expense and
depreciation, depletion and amortization, and discounted using an annual
discount rate of 10%.
"3-D SEISMIC" or "3-D DATA" means seismic data that are acquired and
processed to yield a three-dimensional picture of the subsurface.
"2-D SEISMIC" or "2-D DATA" means seismic data that are acquired and
processed to yield a two-dimensional cross section of the subsurface.
"WATERFLOOD" means the injection of water into a reservoir to fill pores
vacated by produced fluids, thus maintaining reservoir pressure and assisting
production.
"WORKING INTEREST" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will
65
<PAGE> 67
always be smaller than the share of costs that the working interest owner is
required to bear, with the balance of the production accruing to the owners of
royalties. For example, the owner of a 100% working interest in a lease burdened
only by a landowner's royalty of 12.5% would be required to pay 100% of the
costs of a well but would be entitled to retain 87.5% of the production.
"WORKOVER" means operations on a producing well to restore or increase
production.
66
<PAGE> 68
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of American Exploration Company and Subsidiaries
Report of Independent Public Accountants........................................... F- 2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and as of September
30, 1996........................................................................ F- 3
Consolidated Statements of Operations for the Three Years in the Period Ended
December 31, 1995 and for the Nine Months Ended September 30, 1995 and 1996..... F- 4
Consolidated Statements of Cash Flows for the Three Years in the Period Ended
December 31, 1995 and for the Nine Months Ended September 30, 1995 and 1996..... F- 5
Consolidated Statements of Stockholders' Equity for the Three Years in the Period
Ended December 31, 1995 and the Nine Months Ended September 30, 1996............ F- 6
Notes to Consolidated Financial Statements......................................... F- 7
Supplemental Information on Oil and Gas Producing Activities....................... F-33
The Zilkha I Properties -- Statements of Oil and Gas Revenues and Direct Lease
Operating Expenses
Independent Auditors' Report....................................................... F-37
Statements of Oil and Gas Revenues and Direct Lease Operating Expenses for the
Years Ended December 31, 1993, 1994 and 1995 and the Period January 1, 1996
through February 29, 1996 (unaudited)........................................... F-38
Notes to Statements of Oil and Gas Revenues and Direct Lease Operating Expenses.... F-39
The Zilkha II Properties -- Statements of Oil and Gas Revenues and Direct Lease
Operating Expenses
Independent Auditors' Report....................................................... F-42
Statements of Oil and Gas Revenues and Direct Lease Operating Expenses for the Year
Ended December 31, 1995 and the Period January 1, 1996 through June 30, 1996
(unaudited)..................................................................... F-43
Notes to Statements of Oil and Gas Revenues and Direct Lease Operating Expenses.... F-44
</TABLE>
F-1
<PAGE> 69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors,
American Exploration Company:
We have audited the accompanying consolidated balance sheets of American
Exploration Company (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Exploration Company and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As explained in Note 1 to the consolidated financial statements, in 1994,
the Company changed its method of accounting for impairments of proved oil and
gas properties.
ARTHUR ANDERSEN LLP
Houston, Texas
March 22, 1996
F-2
<PAGE> 70
CONSOLIDATED BALANCE SHEETS
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
---------------------- 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments...................... $ 9,973 $ 7,496 $ 6,780
Accounts receivable...................................... 10,652 14,520 11,203
Receivable from partnerships............................. 4,488 429 --
Assets held for sale..................................... -- -- 14,384
Other current assets..................................... 1,014 966 2,158
--------- --------- -----------
Total current assets............................. 26,127 23,411 34,525
--------- --------- -----------
Property, plant and equipment:
Oil and gas properties, based on successful efforts
accounting............................................ 343,453 292,027 337,881
Other property and equipment............................. 12,530 13,036 13,365
--------- --------- -----------
355,983 305,063 351,246
Less: Accumulated depreciation, depletion and
amortization.......................................... 160,578 154,646 155,396
--------- --------- -----------
Property, plant and equipment, net.................... 195,405 150,417 195,850
--------- --------- -----------
Other assets............................................... 2,362 2,202 2,988
--------- --------- -----------
Total assets..................................... $ 223,894 $ 176,030 $ 233,363
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 14,391 $ 18,149 $ 15,670
Payable to partnerships.................................. -- -- 1,678
Accrued liabilities...................................... 15,838 16,953 18,800
--------- --------- -----------
Total current liabilities........................ 30,229 35,102 36,148
--------- --------- -----------
Long-term debt............................................. 69,582 40,000 105,000
--------- --------- -----------
Note payable to related party.............................. 31,128 -- --
--------- --------- -----------
Other liabilities.......................................... 5,245 6,448 4,709
--------- --------- -----------
Commitments and contingencies (Note 14)....................
Stockholders' equity:
Preferred stock, $1.00 par value; authorized: 100,000
shares (1994, 1995 and 1996); issued and outstanding:
Convertible Preferred Stock, 4,000 shares (1994, 1995
and 1996)............................................. 4 4 4
Common stock, $.05 par value; authorized: 50,000,000
shares (1994, 1995 and 1996); issued: 11,477,500
shares (1994), 11,812,483 shares (1995) and 11,807,741
shares (1996); outstanding: 11,468,313 shares (1994),
11,812,483 shares (1995) and 11,807,741 shares
(1996)................................................ 574 591 590
Additional paid-in capital............................... 272,817 276,713 276,658
Accumulated deficit...................................... (184,676) (182,543) (189,664)
Treasury stock, at cost; 9,187 shares (1994)............. (342) -- --
Unearned compensation.................................... (525) (219) (79)
Notes receivable from officers........................... (142) (66) (3)
--------- --------- -----------
Total stockholders' equity............................ 87,710 94,480 87,506
--------- --------- -----------
Total liabilities and stockholders' equity....... $ 223,894 $ 176,030 $ 233,363
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 71
CONSOLIDATED STATEMENTS OF OPERATIONS
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales.......................... $ 49,589 $ 50,033 $70,768 $55,049 $52,263
Gain (loss) on sales of oil and gas
properties.............................. (6,894) 1,110 10,230 9,674 801
Other revenues, net........................ 15,463 216 936 678 111
-------- -------- ------- ------- -------
Total revenues..................... 58,158 51,359 81,934 65,401 53,175
-------- -------- ------- ------- -------
Costs and expenses:
Production and operating................... 15,998 21,302 24,515 19,079 15,421
Depreciation, depletion and amortization... 23,635 29,616 30,726 22,446 20,871
General and administrative................. 7,413 10,035 7,472 4,683 4,450
Taxes other than income.................... 4,601 5,710 5,760 4,413 4,254
Exploration................................ 7,554 2,559 4,826 3,269 9,152
Impairment................................. 10,975 33,570 1,822 43 1,841
-------- -------- ------- ------- -------
Total costs and expenses........... 70,176 102,792 75,121 53,933 55,989
-------- -------- ------- ------- -------
Income (loss) from operations................ (12,018) (51,433) 6,813 11,468 (2,814)
-------- -------- ------- ------- -------
Other income (expense):
Interest expense........................... (6,847) (6,638) (5,481) (4,853) (2,894)
Other income (expense), net................ 184 (2,619) 24 (59) (63)
-------- -------- ------- ------- -------
Total other expense................ (6,663) (9,257) (5,457) (4,912) (2,957)
-------- -------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item......................... (18,681) (60,690) 1,356 6,556 (5,771)
Income tax benefit (provision)............... (505) 455 121 (46) --
-------- -------- ------- ------- -------
Income (loss) before extraordinary item...... (19,186) (60,235) 1,477 6,510 (5,771)
Extraordinary gain on extinguishment of
debt....................................... -- 5,419 2,456 2,456 --
-------- -------- ------- ------- -------
Net income (loss)............................ (19,186) (54,816) 3,933 8,966 (5,771)
Preferred stock dividends.................... (75) (1,800) (1,800) (1,350) (1,350)
-------- -------- ------- ------- -------
Net income (loss) to common stock............ $(19,261) $(56,616) $ 2,133 $ 7,616 $(7,121)
======== ======== ======= ======= =======
Net income (loss) per common share:
Primary and fully diluted:
Loss before extraordinary item.......... $ (2.77) $ (7.70) $ (0.03) $ 0.43 $ (0.60)
Extraordinary item...................... -- 0.68 0.21 0.21 --
-------- -------- ------- ------- -------
Net income (loss) per common
share............................ $ (2.77) $ (7.02) $ 0.18 $ 0.64 $ (0.60)
======== ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 72
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $(19,186) $(54,816) $ 3,933 $ 8,966 $ (5,771)
Adjustments to arrive at net cash
provided by operating activities:
Depreciation, depletion and
amortization....................... 23,635 29,616 30,726 22,446 20,871
Loss (gain) on sales of oil and gas
properties......................... 6,894 (1,110) (10,230) (9,674) (801)
Exploration expense.................. 4,720 1,888 4,760 3,208 9,152
Impairment expense................... 10,975 33,570 1,822 43 1,841
Extraordinary gain................... -- (5,419) (2,456) (2,456) --
Other, net........................... (150) 2,909 759 531 343
Changes in operating working capital:
Accounts receivable.................. 411 (2,899) (574) (1,971) 5,216
Other current assets................. 920 (320) (144) (472) 214
Accounts payable and accrued
liabilities........................ (1,939) 1,874 5,760 2,457 (3,053)
Other operating......................... (1,563) 2,454 (1,051) 659 (903)
-------- -------- -------- -------- --------
Net cash provided by operating
activities...................... 24,717 7,747 33,305 23,737 27,109
-------- -------- -------- -------- --------
Cash flows from investing activities:
Acquisition of oil and gas properties... (4,273) (28,387) (15,972) (11,087) (62,832)
Development and exploration
expenditures......................... (18,675) (20,944) (27,480) (20,142) (29,284)
Other capital expenditures.............. (1,219) (558) (763) -- --
Sales of oil and gas properties......... 35,666 2,638 63,488 62,218 1,194
Other investing......................... (2,488) (3,683) 2,308 1,585 (415)
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities............ 9,011 (50,934) 21,581 32,574 (91,337)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Bank debt borrowings.................... 12,500 23,000 50,500 43,500 74,000
Bank debt repayments.................... (60,000) (1,500) (73,500) (69,500) (9,000)
Borrowings under bridge credit
facility............................. -- 32,078 -- -- --
Repayments under bridge credit
facility............................. -- (950) (31,128) (31,128) --
Repayments of other debt................ (4,001) (8,622) (1,141) -- --
Issuance of equity securities........... 21,348 2,100 -- -- --
Preferred stock dividends............... (75) (1,800) (1,800) (1,350) (1,350)
Debt and equity issuance costs and
other................................ (2,161) (3,382) (294) (1,363) (138)
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities............ (32,389) 40,924 (57,363) (59,841) 63,512
-------- -------- -------- -------- --------
Net increase (decrease) in cash and
temporary cash investments.............. 1,339 (2,263) (2,477) (3,530) (716)
Cash and temporary cash investments at
beginning of period..................... 10,897 12,236 9,973 9,973 7,496
-------- -------- -------- -------- --------
Cash and temporary cash investments at end
of period............................... $ 12,236 $ 9,973 $ 7,496 $ 6,443 $ 6,780
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 73
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT
------------ ------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1992........................................... $ -- $ 348 $ 195,674 $ (108,799)
Sale of convertible preferred stock................................ 4 -- 19,996 --
Sale of common stock............................................... -- 5 1,435 --
Stock issuance costs............................................... -- -- (1,508) --
Dividends on preferred stock ($18.75 per share).................... -- -- -- (75)
Unearned compensation on restricted common stock................... -- -- -- --
Amortization of unearned compensation.............................. -- -- -- --
Issuance of notes receivable from officers......................... -- -- -- --
Sale of Canadian companies......................................... -- -- -- --
Translation adjustment............................................. -- -- -- --
Net loss........................................................... -- -- -- (19,186)
------------ ------- ---------- -----------
Balance, December 31, 1993........................................... 4 353 215,597 (128,060)
Issuance of shares in APPL Consolidation........................... -- 213 56,017 --
Sale of common stock............................................... -- 8 2,092 --
Stock issuance costs............................................... -- -- (889) --
Dividends on preferred stock ($450.00 per share)................... -- -- -- (1,800)
Amortization of unearned compensation.............................. -- -- -- --
Repayments of notes receivable from officers....................... -- -- -- --
Net loss........................................................... -- -- -- (54,816)
------------ ------- ---------- -----------
Balance, December 31, 1994........................................... 4 574 272,817 (184,676)
Issuance of shares in APPL Consolidation........................... -- 17 4,309 --
Reverse stock split costs.......................................... -- -- (71) --
Cancellation of treasury shares.................................... -- -- (342) --
Dividends on preferred stock ($450.00 per share)................... -- -- -- (1,800)
Amortization of unearned compensation.............................. -- -- -- --
Repayments of notes receivable from officers....................... -- -- -- --
Net income......................................................... -- -- -- 3,933
------------ ------- ---------- -----------
Balance, December 31, 1995........................................... 4 591 276,713 (182,543)
Cancellation of shares............................................. -- (1) (55) --
Dividends on preferred stock ($450.00 per share)................... -- -- -- (1,350)
Amortization of unearned compensation.............................. -- -- -- --
Repayments of notes receivable from officers....................... -- -- -- --
Net loss........................................................... -- -- -- (5,771)
------------ ------- ---------- -----------
Balance, September 30, 1996 (Unaudited).............................. $ 4 $ 590 $ 276,658 $ (189,664)
============ ======= ========== ===========
<CAPTION>
FOREIGN NOTES
CURRENCY RECEIVABLE
TRANSLATION TREASURY UNEARNED FROM
ADJUSTMENT STOCK COMPENSATION OFFICERS
----------- -------- ------------ ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1992........................................... $ (1,721) $ (342) $ -- $ --
Sale of convertible preferred stock................................ -- -- -- --
Sale of common stock............................................... -- -- -- --
Stock issuance costs............................................... -- -- -- --
Dividends on preferred stock ($18.75 per share).................... -- -- -- --
Unearned compensation on restricted common stock................... -- -- (1,007) --
Amortization of unearned compensation.............................. -- -- 91 --
Issuance of notes receivable from officers......................... -- -- -- (230)
Sale of Canadian companies......................................... 1,754 -- -- --
Translation adjustment............................................. (33) -- -- --
Net loss........................................................... -- -- -- --
----------- -------- ------------ ----------
Balance, December 31, 1993........................................... -- (342) (916) (230)
Issuance of shares in APPL Consolidation........................... -- -- -- --
Sale of common stock............................................... -- -- -- --
Stock issuance costs............................................... -- -- -- --
Dividends on preferred stock ($450.00 per share)................... -- -- -- --
Amortization of unearned compensation.............................. -- -- 391 --
Repayments of notes receivable from officers....................... -- -- -- 88
Net loss........................................................... -- -- -- --
----------- -------- ------------ ----------
Balance, December 31, 1994........................................... -- (342) (525) (142)
Issuance of shares in APPL Consolidation........................... -- -- -- --
Reverse stock split costs.......................................... -- -- -- --
Cancellation of treasury shares.................................... -- 342 -- --
Dividends on preferred stock ($450.00 per share)................... -- -- -- --
Amortization of unearned compensation.............................. -- -- 306 --
Repayments of notes receivable from officers....................... -- -- -- 76
Net income......................................................... -- -- -- --
----------- -------- ------------ ----------
Balance, December 31, 1995........................................... -- -- (219) (66)
Cancellation of shares............................................. -- -- -- --
Dividends on preferred stock ($450.00 per share)................... -- -- -- --
Amortization of unearned compensation.............................. -- -- 140 --
Repayments of notes receivable from officers....................... -- -- -- 63
Net loss........................................................... -- -- -- --
----------- -------- ------------ ----------
Balance, September 30, 1996 (Unaudited).............................. $ -- $ -- $ (79) $ (3)
========= ======= =========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 74
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
American Exploration Company and its majority-owned subsidiaries (collectively
referred to as "American Exploration" or the "Company"). American Exploration is
an independent company engaged in exploration, development and production of oil
and natural gas. American Exploration's oil and gas operations are conducted in
the United States with exploration and development activities concentrated
onshore in the Gulf Coast region of Texas and Louisiana and offshore in the Gulf
of Mexico. In addition to conducting oil and gas operating activities on its own
behalf, the Company manages certain producing oil and gas properties through
various limited partnerships.
The Company's investments in associated oil and gas programs are accounted
for using the proportionate consolidation method, whereby the Company's
proportionate share of each program's assets, liabilities, revenues and expenses
is included in the appropriate accounts in the consolidated financial
statements. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain amounts in prior years' consolidated
financial statements have been reclassified to conform with current
classifications.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The effect of exchange
rate changes on cash was not significant during 1993, the last year during which
the Company conducted foreign operations.
Property, Plant and Equipment
The Company accounts for its oil and gas exploration and production
activities using the successful efforts method of accounting. Under this method,
acquisition costs for proved and unproved properties are capitalized when
incurred. Exploration costs, including geological and geophysical costs and
costs of carrying and retaining unproved properties, are charged to expense as
incurred. The costs of drilling exploratory wells are capitalized pending
determination of whether each well has resulted in the discovery of proved
reserves. If proved reserves are not discovered, such drilling costs are charged
to expense. Costs incurred to drill and equip development wells, including
unsuccessful development wells, are capitalized. Internal costs related to the
acquisition, development and exploration of oil and gas properties are expensed
as incurred. Interest is capitalized on qualifying assets, primarily unproved
and unevaluated properties.
Depletion of the cost of producing oil and gas properties is computed on
the unit-of-production method. The Company also accrues for platform abandonment
costs related to its offshore platform facilities on the unit-of-production
method. The Company anticipates total abandonment costs to be approximately $8.5
million. As of December 31, 1995, the Company had accrued $6.1 million, which is
included in accumulated depreciation, depletion and amortization ("DD&A").
Unproved properties are assessed periodically, and any impairment in value is
recognized currently as impairment expense. In 1995, the Company recorded a $1.8
million impairment of an unproved property on which no further exploration is
planned.
F-7
<PAGE> 75
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
Effective March 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". Under the provisions of the new
statement, if the net book value of an individual proved oil or gas field is
greater than its undiscounted future net cash flow from proved reserves, then an
impairment is recognized for the difference between the net book value and the
fair value. The fair value used to calculate the impairment for an individual
field is equal to the present value of its future net cash flows. In 1994,
American Exploration recorded a noncash impairment charge of $25.0 million when
the Company changed its impairment policy to one consistent with that required
by SFAS No. 121. Previously, the Company's impairment policy was to recognize an
impairment of proved oil and gas property costs if, on a company-wide basis,
those costs exceeded the undiscounted after-tax future net cash flows from
proved reserves.
Property, plant and equipment other than oil and gas properties are
depreciated by the straight-line method at rates based on the estimated useful
lives of the assets. Repairs and maintenance are charged to expense as incurred;
renewals and betterments are capitalized.
Investment Programs
The Company manages various investment programs which were formed to
acquire interests in producing oil and gas properties. The Company charges each
investment program fees for reimbursement of expenses incurred in managing the
program's operations and certain fees for services provided by technical
employees of the Company. Such fees are recorded as reductions to general and
administrative expense. (See Notes 11 and 18.)
Assets Held for Sale
In July 1996, the limited partners of the New York Life Oil and Gas
Producing Properties Programs (the "NYLOG Programs"), a series of publicly
registered limited partnerships of which a Company subsidiary is a co-general
partner, approved the liquidation of the partnerships. The Company is in the
process of selling interests in approximately 70 properties, including those
properties owned by the NYLOG Programs and certain related properties (the "1996
Sales"), and expects to complete the sales by year-end 1996. The Company's
interests in the properties that are expected to be sold in the 1996 Sales have
been classified as assets held for sale in the accompanying balance sheet as of
September 30, 1996. Although there can be no assurance as to the amount of
proceeds to be derived from such sales, the Company believes that the net
proceeds from the property dispositions will exceed the current carrying value
of the properties. Accordingly, the assets held for sale are stated at net book
value. (See Note 18.)
Assets held for sale also include certain interests in High Island Block
116 that were acquired by the Company in September 1996 and that are expected to
be sold to a third party during the fourth quarter of 1996. (See Note 3.)
Financial Instruments
The Company periodically enters into commodity price swap agreements in
order to hedge against volatility in oil and gas prices. Gains or losses on
these transactions are reported as a component of oil and gas sales in the
period during which the related production occurs. (See Note 13.)
Gas Balancing
The Company utilizes the sales method of accounting for natural gas
revenues whereby revenues are recognized based on the amount of gas sold to
purchasers. The amount of gas sold may differ from the amount to which the
Company is entitled based on its working interests in the properties. At
December 31, 1994 and
F-8
<PAGE> 76
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
1995, the Company had recorded a liability of $3.7 million and $3.6 million,
respectively, for properties having insufficient reserves from which to recover
the gas imbalance.
Foreign Currency Translation
The results of operations attributable to the Company's Canadian
operations, which were sold in mid-1993, were measured using the local currency
as the functional currency. The adjustments resulting from the translation of
the assets and liabilities and income statement accounts of the Canadian
operations were accumulated in the foreign currency translation adjustment
component of stockholders' equity. In conjunction with the sales of the
Company's Canadian operations, the Company wrote off the foreign currency
translation adjustment balance of approximately $1.8 million to loss on sales of
oil and gas properties. (See Note 4.) The U.S. dollar was the functional
currency for the Company's other foreign operations. Foreign currency
transaction gains and losses were recognized currently in other income and were
not material for 1993. The Company had no foreign operational activity during
1994 or 1995.
Income Taxes
The income tax provision (benefit) reflects income taxes currently payable
and income taxes deferred due to temporary differences between the financial
statement and tax bases of assets and liabilities. Deferred tax assets and
liabilities are determined using enacted tax rates in effect for the year in
which the temporary differences are expected to reverse. The adoption of SFAS
No. 109, "Accounting for Income Taxes", effective January 1, 1993, did not have
a material impact on the Company's financial position or results of operations.
(See Note 12.)
Net Income (Loss) Per Common Share
Net income (loss) per common share has been computed by dividing net income
or loss, after reductions for certain preferred stock dividends, by the weighted
average number of common shares and common share equivalents outstanding during
each year. Common share equivalents include the average shares issuable upon
assumed exercise of stock options and warrants which would have a dilutive
effect in the respective periods. Any assumed exercises of stock options or
warrants were antidilutive for all three years presented. In addition, any
assumed conversion of convertible preferred stock was antidilutive for 1994 and
1995. The weighted average shares used in the primary earnings per share
calculations were 6,961,600, 8,060,800 and 11,811,500 in the years ended
December 31, 1993, 1994 and 1995, respectively, and were 11,812,000 and
11,811,000 in the nine months ended September 30, 1995 and 1996, respectively.
Weighted average shares for prior periods have been retroactively restated to
reflect the one-for-ten reverse split of the Company's common stock. (See Note
2.)
Interim Financial Statements
The consolidated financial statements for the nine months ended September
30, 1995 and 1996 have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial statements
reflect adjustments of a normal recurring nature which are, in the opinion of
management, necessary to present fairly such information. Results for the
interim periods are not necessarily indicative of the results which may be
achieved for an entire year.
(2) REVERSE STOCK SPLIT
In June 1995, American Exploration's stockholders approved an amendment to
the Company's Restated Certificate of Incorporation which effected a one-for-ten
reverse split of its common stock (the "Reverse Stock Split") and also reduced
the number of authorized shares of common stock from 200,000,000 to
F-9
<PAGE> 77
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
50,000,000. As a result of the Reverse Stock Split, the number of outstanding
shares of common stock was reduced to approximately 11.8 million shares
outstanding from approximately 118.1 million shares outstanding immediately
prior to the Reverse Stock Split. In addition, approximately $5.3 million was
reclassified on the consolidated balance sheet from common stock to additional
paid-in capital. The remaining shares of treasury stock held by American
Exploration prior to the Reverse Stock Split were cancelled. The stockholders'
equity accounts on the accompanying balance sheets have been restated to give
retroactive recognition to the Reverse Stock Split for all periods presented. In
addition, all references to numbers of shares of common stock and per share
amounts have been restated throughout this report.
(3) ACQUISITIONS
APPL CONSOLIDATION
During the period 1983-1990, American Exploration obtained long-term
funding for many of its oil and gas property acquisitions through a series of
investment programs formed primarily with institutional investors ("APPL
Programs"). As of December 31, 1993, institutional investors had committed
$507.7 million to these programs, while the Company had committed $54.7 million.
The APPL Programs consisted primarily of limited partnerships ("APPL
Partnerships") in which the Company acted as general partner and the
institutions invested as limited partners. To meet the needs of tax-exempt
investors, the Company also formed programs structured as secured debt
financings ("APPL Debt Programs") and programs which invested in net profits
interests.
During 1994 and 1995, the Company purchased limited partners' interests in
the APPL Partnerships and net profits interests and debt interests in the APPL
Debt Programs (the "APPL Consolidation"). The consideration paid for the
acquisition of the APPL interests in 1994 was a combination of $31.1 million in
cash and 4.3 million shares of the Company's common stock. In connection with
the transaction, $13.6 million in nonrecourse debt was eliminated, resulting in
an extraordinary gain totaling $5.4 million. In 1995, the Company repurchased
the remaining investors' interests in the APPL Programs for a combination of
$2.3 million in cash and the issuance of 346,000 shares of the Company's common
stock, thereby eliminating the remaining $6.6 million of nonrecourse debt
outstanding at year-end 1994. The elimination of the APPL debt in 1995 resulted
in an extraordinary gain of $2.5 million. No income tax expense has been
recognized on the extraordinary gains.
In May 1995, New York Life Insurance Company ("New York Life") transferred
certain of its limited partner's interests not acquired in the APPL
Consolidation to ANCON Partnership Ltd. ("ANCON"). The Company acquired a 20%
interest in these properties for approximately $6.7 million in cash. (See Note
11.)
The Company financed the cash portion of the APPL Consolidation primarily
through a $40.0 million nonrecourse secured credit facility ("bridge facility")
extended by New York Life. In February 1995, the Company refinanced the amount
outstanding on the bridge facility using excess borrowing capacity under its
bank credit facility. (See Note 7.)
1996 ACQUISITIONS
On March 15, 1996, the Company and Dominion Reserves, Inc. acquired
interests in five offshore blocks in the Gulf of Mexico from a private company
for a purchase price of approximately $56.0 million (the "March 1996
Acquisition"). American Exploration's 25% share of the acquisition was funded
through $14.0 million in borrowings under the Company's bank credit facility.
On September 27, 1996, the Company acquired interests in two blocks in the
Gulf of Mexico, High Island Block 116 and East Cameron Block 328, for a purchase
price of approximately $39 million, net of
F-10
<PAGE> 78
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
interests being sold to a third party (the "September 1996 Acquisition"). The
September 1996 Acquisition was funded through borrowings under the Company's
revolving bank credit agreement.
(4) DIVESTITURES
The Company received cash proceeds, net of post-closing adjustments, of
$35.7 million, $2.6 million and $63.5 million from the sales of oil and gas
properties in 1993, 1994 and 1995, respectively, resulting in a loss of $6.9
million in 1993 and gains of $1.1 million in 1994 and $10.2 million in 1995. The
1993 sales related primarily to the Company's divestiture of its Canadian
operations and the sale of a partial interest in the Henderson Canyon Field.
Property sales in 1994 related to the divestiture of low-value properties and
sales in 1995 related primarily to the sale of the Sawyer Field.
In March 1993, American Exploration sold approximately 40% of its interest
in the Henderson Canyon Field to several of the Company's investment programs
for proceeds of approximately $8.7 million. In June and July 1993, the Company
sold its Canadian foothill properties (while retaining a 4% overriding royalty
interest in these properties) and also sold its 90% equity interest in Canadian
Conquest Exploration, Inc. and its wholly owned subsidiary, Conquest Ventures
Canada, Inc., for aggregate proceeds of $26.1 million. The Company recognized
losses totaling $4.0 million on the sales of the Canadian assets. In conjunction
with the sales of the Canadian subsidiaries, the Company also recognized a $1.8
million loss related to the elimination of the foreign currency translation
adjustment balance which was previously recorded as a component of stockholders'
equity. The remaining $1.1 million loss on sales of oil and gas properties for
1993 related to the sale of minor properties sold at auction in July 1993.
In July 1995, the Company sold its interest in the Sawyer Field to Louis
Dreyfus Natural Gas Corp. for a purchase price of $64.0 million. As part of the
sale, the Company also sold its interest in the field that was acquired through
the APPL Consolidation in early 1995. (See Note 3.) American Exploration's share
of the net proceeds from the sale was applied to eliminate $62.5 million of the
Company's outstanding bank debt. The Company recorded a gain on the sale of the
Sawyer Field of approximately $10.6 million in 1995. Sales of various other
fields in 1995 resulted in a net loss of approximately $400,000.
(5) PRO FORMA INFORMATION (UNAUDITED)
The following pro forma summary of consolidated results of operations for
the years ended December 31, 1994 and 1995 gives effect to the APPL
Consolidation and the sale of the Sawyer Field as if these transactions had
occurred as of January 1, 1994. The pro forma data also reflects the impact of
the 1995 sales of interests in several other fields for proceeds of
approximately $2.5 million. The pro forma data does not reflect the nonrecurring
gain of approximately $10.6 million on the sale of the Sawyer Field.
F-11
<PAGE> 79
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
As a result of the APPL Consolidation in 1994 and 1995, American
Exploration acquired significant additional interests in the Sawyer Field,
increasing its working interest ownership from approximately 12.5% at the
beginning of 1994 to approximately 65% at the date of the sale. Therefore, the
pro forma data reflects the sale of the 65% interest in the Sawyer Field, after
giving effect to the APPL Consolidation.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1994 1995
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Pro forma revenues.............................................. $ 63,234 $ 62,090
Pro forma loss before extraordinary item........................ (53,480) (8,672)
Pro forma net loss to common stock.............................. (44,688) (10,472)
Pro forma net loss per common share:
Primary and fully diluted:
Loss before extraordinary item............................. $ (4.71) $ (0.89)
Net loss................................................... (3.81) (0.89)
Weighted average shares outstanding:
Primary and fully diluted..................................... 11,726 11,811
</TABLE>
The following pro forma summary of consolidated results of operations for
the nine months ended September 30, 1995 and 1996 gives effect to: (i) the
completion of the APPL Consolidation in the first half of 1995 for a purchase
price of approximately $9.0 million; (ii) the sale of the Sawyer Field in July
1995; (iii) the 1995 sales of interests in several other fields for
approximately $2.5 million; (iv) the March 1996 Acquisition; (v) the September
1996 Acquisition; and (vi) the 1996 Sales, as if these transactions had occurred
as of January 1, 1995.
The pro forma results for the nine-month period of 1996 include only two
months of results from the High Island 116 well acquired in the September 1996
Acquisition, and the pro forma results for the nine-month period of 1995 do not
include any results from that well because the well did not produce during the
applicable period. The well commenced production in August 1996 at a net
production rate of approximately 300 Bbls of oil per day and approximately
17,100 Mcf of natural gas per day. Similarly, the 1995 pro forma results include
only seven months of results from the East Cameron 328 well, also purchased in
the September 1996 Acquisition, which commenced production in March 1995. In
addition, the 1995 pro forma results have been adjusted to eliminate the
nonrecurring gain on the sale of the Sawyer Field of approximately $10 million.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1996
------- -------
(IN THOUSANDS
EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Pro forma revenues................................................ $48,950 $53,840
Pro forma loss before extraordinary item.......................... (5,303) (9,027)
Pro forma net loss to common stock................................ (2,847) (9,027)
Pro forma net loss per common share:
Primary and fully diluted:
Loss before extraordinary item............................... $ (0.45) $ (0.76)
Net loss..................................................... (0.24) (0.76)
Weighted average shares outstanding:
Primary and fully diluted....................................... 11,812 11,811
</TABLE>
F-12
<PAGE> 80
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
The pro forma amounts do not purport to be indicative of the results of
operations of American Exploration that may be reported in the future or that
would have been reported had these transactions occurred as of the dates
indicated above.
(6) NYLOG PROGRAMS
From 1985 until early 1992, subsidiaries of the Company and New York Life
formed the NYLOG Programs. The NYLOG Programs invest in the acquisition and
further development of producing oil and gas properties acquired by the Company.
A total of $229.1 million has been invested by the limited partners in these
programs since inception. (See Note 11.)
New York Life and the Company, in their capacity as co-general partners,
each pay 5% of property acquisition costs of the NYLOG Programs, and each
receives 7.5% of net revenues until payout. Payout occurs when the limited
partners receive distributions equal to their initial investment. After payout,
the Company's and New York Life's interests in capital costs and net revenues
each increase to 12.5%. As of December 31, 1995, two of the NYLOG Programs had
reached payout. For the other NYLOG Programs, it is difficult to predict when or
if payout will occur due to the uncertainty of future energy prices, oil and gas
production, and operating and administrative costs.
Reference is made to Note 18 for a discussion of certain litigation against
the co-general partners and the proposed liquidation of the NYLOG Programs.
(7) DEBT
The following table details the components of the Company's debt (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- ------- ------------
<S> <C> <C> <C>
Bank credit agreement........................ $ 28,000 $ 5,000 $ 70,000
11% senior subordinated notes................ 35,000 35,000 35,000
Note payable to related party................ 31,128 -- --
APPL Debt promissory notes................... 6,582 -- --
-------- ------- ------------
Total long-term debt............... $100,710 $40,000 $105,000
======== ======= =========
</TABLE>
BANK DEBT
In December 1994, the Company entered into a new long-term revolving bank
credit agreement which replaced the bank credit agreement previously in effect.
The borrowing base, or amount available, under the new bank credit facility is
currently $40.0 million. The reduction of the borrowing base from $65.0 million
at year-end 1994 reflects the decrease in the value of the Company's oil and gas
properties due to the sale of the Sawyer Field. Outstanding borrowings of $5.0
million under the facility at December 31, 1995 were classified as long-term
debt. The Company also had $1.2 million in letters of credit outstanding at
December 31, 1995 which are collateralized by the Company's borrowing base. The
borrowing base under this facility is scheduled to be redetermined semiannually
every March and September. Management expects that the borrowing base will be
increased to give effect to the acquisition of certain interests in the Gulf of
Mexico in March 1996. (See Note 18.)
As of September 30, 1996, the borrowing base under the bank credit
agreement was $90 million, reflecting the increase in the aggregate value of the
Company's oil and gas properties due to the March 1996 Acquisition and the
September 1996 Acquisition. The Company has filed a registration statement with
the Securities and Exchange Commission regarding the proposed sale by the
Company of 3,000,000 shares of the
F-13
<PAGE> 81
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
Company's common stock for estimated net proceeds of approximately $33.8
million. If the common stock offering is completed and the net proceeds are
applied to reduce bank debt, the Company anticipates that the amount outstanding
under the bank credit agreement will be approximately $21.8 million and the
borrowing base will be approximately $75 million.
The borrowings under this facility during 1995 were used to refinance the
$31.1 million balance outstanding under the bridge facility and to fund capital
projects. In July 1995, American Exploration repaid $62.5 million of outstanding
bank debt using proceeds from the sale of the Company's interest in the Sawyer
Field.
Borrowings under this facility are secured by substantially all of the
assets of the Company. At the option of the Company, borrowings bear interest at
(i) LIBOR plus 1.50% or 1.75% or (ii) the higher of (a) the prime rate plus
0.50% or 0.75% or (b) the federal funds rate plus 1.00% or 1.25%. If the total
amounts outstanding are less than or equal to 60% of the borrowing base, the
lower margins are added to the respective interest rates and vice versa. The
weighted average interest on the Company's bank debt outstanding at December 31,
1995 was 8.2%. During 1995, the Company paid, on a quarterly basis, a 0.50%
annual commitment fee on the difference between the aggregate commitment of
$90.0 million and the daily average amount outstanding under this facility,
including letters of credit. In January 1996, the Company renegotiated the
annual commitment fee to be 0.50% of the difference between the availability
limit of $40.0 million and the average amount outstanding, including letters of
credit. Principal on the remaining long-term portion of the facility is
scheduled to be repaid over ten quarterly installments commencing September 30,
1997. Interest is payable quarterly or upon maturity of the borrowing, if
shorter, in the case of Eurodollar loans and monthly in the case of prime rate
or federal funds rate loans.
Under the terms of an amendment to the bank credit agreement dated October
15, 1996, principal payments under the facility were rescheduled to be repaid in
ten quarterly installments commencing September 30, 1999.
11% SENIOR SUBORDINATED NOTES
In December 1991, the Company privately placed $35.0 million in senior
subordinated notes and immediately exercisable detachable warrants with three
institutional investors. The notes bear interest at 11% payable semiannually
every June and December. The Company is required to begin repaying principal
with annual installments of $5.6 million in December 1997. The final principal
payment of $12.6 million is payable in December 2001. The warrants grant the
holders the right to purchase approximately 1.2 million shares, as adjusted for
issuances of stock and warrants subsequent to 1991, of the Company's common
stock at an exercise price of $22.37 per share, subject to adjustment. In
addition, each holder of the warrants has the option to tender the notes in lieu
of cash as consideration for the exercise price.
In September 1996, holders of the senior subordinated notes agreed to an
extension of the principal payment dates of the notes, which were scheduled to
begin in December 1997, in exchange for a reduction in the exercise price, from
$22.95 per share to $15.53 per share, of the warrants. As a result of this
extension, annual principal payments of approximately $11.7 million on the notes
will begin in December 2002.
NOTE PAYABLE TO RELATED PARTY
In April 1994, New York Life extended to the Company a $40.0 million bridge
facility to provide bridge financing for the APPL Consolidation. In February
1995, the Company used excess borrowing capacity under the bank credit facility
to refinance the $31.1 million balance outstanding under the bridge facility.
F-14
<PAGE> 82
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
APPL DEBT PROMISSORY NOTES
During 1987 and 1988, wholly owned subsidiaries of the Company financed 90%
of the cost of certain property acquisitions by selling promissory notes and
production payments to the investors in the APPL Debt Programs. The Company
eliminated $13.6 million of the APPL debt in 1994 and $6.6 million of the APPL
debt in 1995. The elimination of the APPL debt through the APPL Consolidation
resulted in an extraordinary gain on extinguishment of debt of $5.4 million in
1994 and $2.5 million in 1995. No income tax expense has been recognized on the
extraordinary gains. (See Note 3.)
FEES RELATED TO DEBT INSTRUMENTS
The Company incurs fees related to existing and new credit facilities which
are reported as other expense. During 1993, 1994 and 1995, these fees totaled
$739,000, $2.3 million and $951,000, respectively. Fees paid in 1994 included
$2.1 million incurred in connection with the new bank credit agreement and the
bridge facility.
DEBT COVENANTS
The bank credit agreement and the 11% senior subordinated notes require the
Company to comply with certain covenants including, but not limited to,
restrictions on indebtedness, investments, payment of dividends and lease
commitments. Cash dividends are prohibited on the Company's common stock, and
preferred dividends are limited to the lesser of 10% of the preferred stock
offering proceeds or $7.5 million in any one year. These agreements also include
net worth covenants which were amended effective July 1994 in conjunction with
the issuance of American Exploration common stock related to the APPL
Consolidation. At December 31, 1995, the Company's calculated net worth
requirement was $64.6 million and the Company's stockholders' equity was $94.5
million. In addition, these agreements contain cross-default provisions.
ANNUAL MATURITIES
Based on the amounts outstanding at December 31, 1995, the aggregate
maturities of debt for the next five years are as follows: 1996 -- $-0-;
1997 -- $6.6 million; 1998 -- $7.6 million; 1999 -- $7.6 million and
2000 -- $5.6 million.
(8) PREFERRED STOCK
The Company has authorized 100,000 shares of preferred stock, par value
$1.00 per share. The Board of Directors has authority to divide such preferred
stock into one or more series and has authority to fix and determine the
relative rights and preferences of each such series. At December 31, 1995,
American Exploration had 4,000 shares of convertible preferred stock outstanding
and an additional 85,000 shares of preferred stock reserved under the Company's
Stockholder Rights Plan.
CONVERTIBLE PREFERRED STOCK
In December 1993, the Company privately placed 800,000 depositary shares,
each representing a 1/200 interest in a share of $450 Cumulative Convertible
Preferred Stock, Series C (the "Convertible Preferred Stock"). The Convertible
Preferred Stock has a stated value of $5,000 per share, with dividends payable
quarterly at the annual rate of $450 per share. The Convertible Preferred Stock
is convertible at any time at the option of the holders into shares of the
Company's common stock at a conversion price of $15.00 per share, subject to
adjustment in certain circumstances. Beginning December 31, 1997, the
Convertible Preferred Stock will be redeemable at the option of the Company, in
whole or in part, at any time. The initial redemption price is $5,270 per share,
declining ratably on December 31 of each year to a redemption price of $5,000
per share on and after December 31, 2003, plus accrued and unpaid dividends.
F-15
<PAGE> 83
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
The Convertible Preferred Stock has a special conversion right that becomes
effective upon the occurrence of certain types of significant transactions
affecting ownership or control of the Company. If the special conversion right
becomes effective, the then-prevailing conversion price would be reduced to the
market value of the common stock, not to be reduced below a minimum conversion
price of $11.25 per share of common stock.
STOCKHOLDER RIGHTS PLAN
In September 1993, the Board of Directors of the Company declared a
distribution of one right ("Right") for each outstanding share of common stock
to stockholders of record at the close of business on October 8, 1993 and for
each share of common stock issued by the Company thereafter and prior to the
"Distribution Date", as defined. Each Right entitles the registered holder to
purchase one one-thousandth of a share (a "Unit") of Series B Preferred Stock at
a price of $7.50 per Unit, subject to adjustment.
The Rights are exercisable only upon the occurrence of certain triggering
events, including the acquisition by a person or group of 15% or more of the
Company's outstanding common stock, other than those persons that acquired
common stock through the APPL Consolidation. If a triggering event occurs,
holders of each Right would be entitled to receive, upon exercise, the Units of
Series B Preferred Stock (or stock of the acquiring entity, as the case may be)
having a value equal to two times the exercise price of the Right. Such Rights
do not extend to any holder whose action triggered the Right.
The Rights may be redeemed in whole by American Exploration at $0.10 per
Right any time until the tenth business day following public announcement that a
person or group, other than those persons that acquired common stock through the
APPL Consolidation, has acquired, obtained the right to acquire or otherwise
obtained beneficial ownership of 15% or more of the Company's outstanding common
stock.
(9) COMMON STOCK
The Company has authorized 50,000,000 shares of common stock, of which
11,812,483 shares were issued and outstanding at December 31, 1995. A schedule
of the changes in the Company's common stock is provided below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- ---------- ----------
<S> <C> <C> <C>
Outstanding shares at beginning of year........... 6,941,723 7,051,350 11,468,313
Issuance of shares in APPL Consolidation (see Note
3).............................................. -- 4,266,963 346,094
Issuance of shares in private offering............ -- 150,000 --
Issuance of shares to key officers................ 109,588 -- --
Other issuances (retirements)..................... 39 -- (1,924)
--------- ---------- ----------
Outstanding shares at end of year............ 7,051,350 11,468,313 11,812,483
======== ========= =========
</TABLE>
At the Company's annual meeting held in June 1995, American Exploration
obtained stockholder approval to effect the Reverse Stock Split and to decrease
the number of authorized shares of common stock from 200,000,000 shares to
50,000,000 shares. (See Note 2.)
At December 31, 1995, the Company had outstanding two series of warrants to
purchase common stock. The first series of warrants, issued in conjunction with
the private placement of 11% senior subordinated notes in 1991, expires in 2001
(the "2001 Warrants"). At year-end 1995, the 2001 Warrants were exercisable at a
price of $22.37 per share and are callable by the Company beginning in December
1996, but only in the event
F-16
<PAGE> 84
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
that the Company's common stock has traded at a specified price above the
exercise price for a specified period.
The second series of warrants, which expire in 1999, was issued to an
institutional investor in conjunction with the 1992 recapitalization of a
Canadian subsidiary (the "1999 Warrants"). At year-end 1995, the 1999 Warrants
were exercisable at a price of $22.95 per share and are callable by the Company
at the current exercise price per warrant, but only in the event that the
Company's common stock has traded at a specified price above the current
exercise price for a specified period.
Both the 2001 Warrants and the 1999 Warrants contain provisions which would
adjust the exercise price and number of warrants under certain circumstances,
most of which have a dilutive effect on equity.
Shares of common stock reserved for future issuance as of December 31, 1995
were as follows:
<TABLE>
<S> <C>
Exercise of stock options........................................ 1,384,443
Exercise of 2001 Warrants........................................ 1,166,740
Exercise of 1999 Warrants........................................ 313,726
Conversion of Convertible Preferred Stock........................ 1,333,333
Special conversion rights of Convertible Preferred Stock......... 444,444
---------
Total shares reserved.................................. 4,642,686
========
</TABLE>
(10) EMPLOYEE BENEFIT PLANS
STOCK COMPENSATION PLANS
The American Exploration Company Stock Compensation Plan established in
1983 (the "1983 Plan") provides for the issuance of up to 500,000 shares of the
Company's common stock. The 1983 Plan also authorizes the issuance of stock
appreciation rights in conjunction with stock options and the granting of
restricted common stock and performance shares. In 1993, the executive officers
of the Company purchased 79,725 shares of restricted common stock for $.50 per
share. The difference between the aggregate fair market value of the restricted
shares purchased and the purchase price was considered unearned compensation at
the time of grant, and compensation is being earned ratably over the vesting
period at 33 1/3% per year commencing with the first anniversary of grant. In
1995 and 1994, $306,000 and $391,000 of restricted stock compensation expense
was recognized. During the three-year reporting period, no other restricted
common stock was issued nor were any stock appreciation rights or performance
shares granted under the 1983 Plan.
In November 1994, the Board of Directors adopted the 1994 American
Exploration Company Stock Compensation Plan (the "1994 Plan"), which was
approved by American Exploration's stockholders in June 1995. Under the 1994
Plan, 900,000 shares of the Company's common stock are available for the
granting of stock options, restricted common stock and performance shares. In
addition, performance units may be awarded and stock appreciation rights may be
issued in conjunction with the stock options.
The exercise price, term and other conditions applicable to each option
granted under the 1983 Plan and the 1994 Plan are determined at the time of the
grant of each option and may vary with each option granted. No option may be
granted at a price less than the stock's fair market value on the date of grant.
The purchase price of the shares as to which an option is exercised is payable
in cash, the Company's common stock or a combination of cash and stock.
In conjunction with the acquisition of Hershey Oil Corporation ("Hershey")
in 1990, the Company assumed the obligation for the stock options outstanding
under the Hershey plans at the acquisition date. At December 31, 1995, there
were 37,295 options outstanding under the amended and restated Hershey plans.
F-17
<PAGE> 85
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
Detailed information on stock option transactions is provided below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Options outstanding at beginning of year.... 562,458 374,258 289,653
Options granted............................. 1,020 -- 593,321
Options terminated.......................... (189,200) (84,605) (99,108)
Options exercised........................... (20) -- (20)
------------ ------------ ------------
Options outstanding at end of year.......... 374,258 289,653 783,846
=========== =========== ===========
Options exercisable at end of year.......... 271,190 242,466 361,633
=========== =========== ===========
Option price range:
Options granted........................... $12.50-14.38 $ -- $ 8.75-15.00
Options terminated........................ 18.13-50.00 18.13-50.00 12.50-47.50
Options exercised......................... 12.50-14.38 -- 8.75
Options outstanding at end of year........ 13.13-50.00 13.13-47.50 11.87-40.00
</TABLE>
PHANTOM STOCK PLAN
In September 1993, the Board of Directors of the Company adopted the
Phantom Stock Plan. The purpose of the Phantom Stock Plan is to provide a
further means of motivating and retaining key employees of the Company by
providing rewards for past performance and incentives for future service. These
rewards had previously included restricted units and option units; however, in
1995, all participants exercised their right to convert outstanding option units
to stock options under the 1994 Plan.
In 1993, the executive officers of the Company purchased 29,863 shares of
common stock, purchased 79,725 shares of restricted common stock under the 1983
Plan and were awarded 159,450 option units under the Phantom Stock Plan. The
remaining key employees were granted 650 restricted units and 1,300 option units
in 1995, 5,650 restricted units and 11,300 option units in 1994, and 33,791
restricted units and 67,581 option units in 1993. In each case, the price for
the option units equaled the fair market value of the Company's common stock on
the date of the awards. The grant price for the restricted units to the
remaining key employees was below market value.
The restricted units awarded vest at 33 1/3% per year commencing with the
first anniversary of grant. Upon vesting, a participant receives a cash payment
for the difference between the grant price for the restricted units and the
then-market value of the common stock. Such cash payments totaled $44,000 and
$24,000 for 1995 and 1994, respectively. Under the Phantom Stock Plan,
participants do not receive shares of the Company's common stock. The Company
recognizes compensation expense ratably over the vesting period of the
restricted units for the difference between the grant price and the then-market
value of the common stock. Such expense totaled $25,000, $22,000 and $59,000 in
1993, 1994 and 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The employee stock ownership plan was a noncontributory plan to acquire
shares of the Company's common stock for the benefit of all employees. At the
discretion of the Compensation Committee of the Board of Directors, there have
been no Company contributions to the plan since 1992. In September 1994, the
Board of Directors voted to terminate the plan. A favorable ruling on the plan's
termination was received from the Internal Revenue Service in November 1995, and
distributions to the plan's participants were made in February 1996.
F-18
<PAGE> 86
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
(11) RELATED-PARTY TRANSACTIONS
NOTES RECEIVABLE FROM OFFICERS
At December 31, 1995, the Company held $66,000 of notes receivable from
executive officers of the Company. The Company provided loans to the executive
officers to purchase a portion of the common stock issued in September 1993 in
conjunction with the Phantom Stock Plan. The notes bear interest at 3.9% and are
payable in equal installments through October 1996.
NEW YORK LIFE
As of December 31, 1995, New York Life was the second largest stockholder
of the Company, owning approximately 9.6% of its voting stock. Since 1983, New
York Life had been a substantial investor in each of the Company's APPL
Programs, providing 35% of the amount committed by co-investors. New York Life
made no investments in the APPL Programs during the past three years. In
conjunction with the APPL Consolidation, New York Life sold certain of its APPL
Program interests to the Company and transferred its remaining interests to
ANCON. (See Note 3.)
During the period 1985-1992, the Company and a subsidiary of New York Life,
as co-general partners, formed the NYLOG Programs, which were sold to the public
by New York Life agents and independent broker-dealers. New York Life
contributed $1.3 million, $74,000 and $29,000 for development and acquisition
activity by the NYLOG Programs for the years ended December 31, 1993, 1994 and
1995, respectively. (See Notes 6 and 18.)
In December 1993, American Exploration and a subsidiary of New York Life
established ANCON, a new partnership formed to consolidate New York Life's other
oil and gas holdings. New York Life contributed net assets to the partnership
totaling $56.7 million in 1995, consisting primarily of its remaining APPL
Program interests, and $9.6 million in 1993. American Exploration acquired a 20%
interest in these net assets for cash consideration of $1.5 million in 1993 and
$6.7 million in 1995. No properties were contributed to the partnership in 1994.
Capital contributions by New York Life to ANCON for development activity totaled
$813,000 in 1994. No capital contributions were made for development activity in
1995.
In April 1994, New York Life extended to the Company a $40.0 million bridge
facility. (See Note 7.) American Exploration paid interest, commitment and
financing fees on this facility totaling $1.6 million in 1994. At December 31,
1994, the Company had $31.1 million outstanding under this facility. In February
1995, the Company refinanced this amount using excess borrowing capacity under
its bank credit facility.
INVESTMENT PROGRAMS
The Company is the operator of certain properties owned by the NYLOG
Programs, ANCON and joint ventures and, accordingly, charges technical fees to
these entities and third party joint interest owners. The Company is also
reimbursed for costs incurred in managing the operations of the NYLOG Programs
and ANCON. Administrative and technical fees charged by the Company to the
investment programs and ANCON totaled $8.2 million, $7.6 million and $3.9
million for 1993, 1994 and 1995, respectively. These fees also include amounts
related to the APPL Programs which were consolidated into American Exploration's
operations during 1994 and early 1995.
OTHER TRANSACTIONS
Legal fees incurred for services by a law firm in which a partner was a
director of the Company until June 1995 totaled $243,000, $377,000 and $285,000
in 1993, 1994 and 1995, respectively.
F-19
<PAGE> 87
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
(12) INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109. The prior
year's financial statements were not adjusted to reflect the new accounting
method, and the cumulative effect related to the adoption of SFAS No. 109 had no
material effect on the Company's financial position or results of operations.
SFAS No. 109 requires the use of an asset and liability approach under which
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
The Company reported income before income taxes and extraordinary items
totaling $1.4 million in 1995, which related entirely to domestic operations.
The Company's income tax provision (benefit) for the years ended December 31,
1993, 1994 and 1995 is detailed below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................................... $ 150 $ -- $ 58
State...................................... 476 39 (18)
-------- -------- --------
626 39 40
-------- -------- --------
Deferred:
Federal.................................... -- -- --
State...................................... (121) (494) (161)
-------- -------- --------
(121) (494) (161)
-------- -------- --------
Total.............................. $ 505 $ (455) $ (121)
======== ======== ========
</TABLE>
The difference between the provision (benefit) for income taxes and the
amount which would be determined by applying the statutory federal income tax
rate to income (loss) before income taxes and extraordinary items for the years
ended December 31, 1993, 1994 and 1995 is analyzed below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes
and extraordinary item..................... $(18,674) $(60,690) $ 1,356
======== ======== ========
Income tax provision (benefit)
at the statutory rate...................... $ (6,536) $(21,242) $ 475
Change in valuation allowance................ (1,133) 22,203 (75)
Federal alternative minimum tax.............. 150 -- 58
State income tax............................. 476 39 (18)
Other........................................ 7,548 (1,455) (561)
-------- -------- --------
Income tax provision (benefit)..... $ 505 $ (455) $ (121)
======== ======== ========
</TABLE>
F-20
<PAGE> 88
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
The Company's deferred income tax liability at December 31, 1994 and 1995
is comprised of the tax benefit (cost) associated with the following items (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards.................... $ 95,732 $ 95,869
State income tax.................................... 3,203 2,790
Investment tax credit carryforwards................. 1,873 1,873
Minimum tax carryforwards........................... 479 559
-------- --------
Gross deferred tax asset......................... 101,287 101,091
Valuation allowance................................... (93,221) (93,146)
-------- --------
8,066 7,945
-------- --------
Deferred tax liability:
Acquisition, exploration and development costs...... (8,066) (7,945)
State income tax.................................... (336) (175)
-------- --------
Gross deferred tax liability..................... (8,402) (8,120)
-------- --------
Net deferred tax liability............................ $ (336) $ (175)
======== ========
</TABLE>
As of December 31, 1995, the Company had cumulative net operating loss
carryforwards ("NOL's") for federal income tax purposes of approximately $274.0
million. Unless utilized, approximately 42% of this amount will expire in the
next five years. Included in the total NOL's are approximately $71.5 million
which arose through an acquisition completed in 1987, and $143.7 million which
arose through the acquisition of Conquest Exploration Company in 1991. These
acquired NOL's may be used to offset the respective subsidiaries' taxable income
subject to individual annual and cumulative limits. In addition to the
individual limitations, changes in the Company's ownership have resulted in an
overall limitation on the amount of benefit to be realized from the NOL's in the
amount of approximately $13.7 million annually. Any unused portion of the
benefit is carried forward. For 1995, the cumulative limit for utilization of
available NOL's is $76.3 million. The Company's $2.8 million state tax deferred
asset is primarily the result of separate company NOL's in individual states.
The Company also has investment tax credit carryforwards of approximately $1.9
million, which expire in the amount of approximately $11,000 annually through
1998 and will be fully expired by 2001. The Company has an alternative minimum
tax credit carryforward of approximately $559,000 which does not expire and is
available to offset regular income taxes in future years, but only to the extent
that regular income taxes exceed the alternative minimum tax in such years.
The deferred tax asset valuation allowance of $93.1 million reflects the
amounts for which utilization of the asset is not assured due to the expiration
of NOL's and the effects of future drilling costs.
F-21
<PAGE> 89
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
(13) FINANCIAL INSTRUMENTS
DERIVATIVES
The Company's derivative financial instruments are used solely to manage
the risk associated with fluctuations in oil and gas prices. The following table
details the commodity price swap agreements in effect at December 31, 1995:
<TABLE>
<CAPTION>
AVERAGE MARKET PRICE
PRODUCT CONTRACT PERIOD DAILY PRODUCTION FIXED PRICE REFERENCE
- -------- ------------------------------ ---------------- ----------- ---------------------
<C> <C> <S> <C> <C> <C>
Gas January 1996 - April 1996 10,000 MMbtu $ 1.84 Houston Ship Channel
Gas January 1996 - April 1996 5,000 MMbtu 1.88 Henry Hub
Gas January 1996 - May 1996 20,000 MMbtu 1.85 Houston Ship Channel
Gas January 1996 - May 1996 10,000 MMbtu 1.88 Henry Hub
Oil January 1996 - June 1996 2,000 barrels $ 17.50 NYMEX WTI
Oil January 1996 - December 1996 1,000 barrels 17.00 NYMEX WTI
</TABLE>
With regard to the production hedged under the commodity price swap
agreements, if the market price is above the fixed price, the Company will pay
to the counterparty the difference between the fixed price and the market price;
and if the market price is below the fixed price, the Company will receive that
difference from the counterparty. The Company is exposed to credit loss in the
event of nonperformance by the other party to the swap agreements. However, the
Company anticipates that the counterparty will be able to fully satisfy its
obligation under the agreements.
During January 1996, the Company eliminated the effect of certain of its
Henry Hub gas price swap agreements by entering into offsetting positions
covering 10,000 MMbtu per day for the period from February 1996 to May 1996.
Subsequent to December 31, 1995, the Company entered into several
additional commodity price swap agreements:
<TABLE>
<CAPTION>
AVERAGE MARKET PRICE
PRODUCT CONTRACT PERIOD DAILY PRODUCTION FIXED PRICE REFERENCE
- -------- ------------------------------ ---------------- ----------- ---------------------
<C> <C> <S> <C> <C> <C>
Gas June 1996 - May 1997 20,000 MMbtu $ 1.86 Houston Ship Channel
Gas June 1996 - May 1997 2,000 MMbtu 2.13 Henry Hub
Oil April 1996 - March 1997 400 barrels $ 18.22 NYMEX WTI
Oil July 1996 - December 1996 2,000 barrels 17.80 NYMEX WTI
</TABLE>
Additionally, the Company purchased put options for 2,000 MMbtu per day of
gas with an average floor price of $1.90 per MMbtu (based on the Tennessee Gas
Pipeline Co., Louisiana and Offshore reference price) for the period from April
1996 through April 1997.
F-22
<PAGE> 90
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values
of the Company's financial instruments at December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- --------
<S> <C> <C>
Long-term debt (a)...................................... $(40,000) $(40,000)
Commodity price swap agreements (b)..................... (700) (2,600)
</TABLE>
- ---------------
(a) Fair value equals carrying value for the Company's long-term debt.
(b) The carrying value represents a liability recorded in December 1995 to
recognize the loss of correlation between actual cash prices and the prices
under the swap agreements at the Henry Hub market reference price. The fair
value of the swap agreements represents the estimated amount the Company
would pay to terminate all of the agreements at December 31, 1995, based on
the closing prices for NYMEX futures contracts on the last trading date in
December. Management believes that the Company's risk of loss on the price
swap agreements due to inflated market reference prices in 1996 will be
mitigated by the receipt of actual cash prices in excess of the fixed price
under the swap agreements.
The carrying amounts of cash and cash equivalents, trade receivables and
trade payables approximate fair value because of the short maturity of these
instruments.
(14) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has operating leases, primarily for office space, which expire
over the next six years. These operating leases frequently include renewal
options at the then-fair rental value and require that the Company pay a pro
rata share of executory costs (including taxes, maintenance and utility
expenses) incurred by the landlord. Future minimum payments under all
noncancelable operating lease obligations, including an estimated pro rata share
of operating expenses, as of December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996............................................................... $ 2,396
1997............................................................... 2,371
1998............................................................... 2,740
1999............................................................... 2,737
2000............................................................... 2,737
Thereafter......................................................... 1,762
-------
Total minimum lease payments............................. $14,743
=======
</TABLE>
The Company had no minimum rentals under noncancelable subleases as of
December 31, 1995. Rent expense totaled $4.6 million, $3.9 million and $2.7
million in 1993, 1994 and 1995, respectively, which includes the Company's share
of executory costs associated with its office leases. Sublease rentals received
during the past three years were not material.
PARTNERSHIP COMMITMENTS
The Company and certain of its subsidiaries act as general partner of a
number of limited partnerships. In such capacity, the Company and such
subsidiaries are generally liable for the obligations of the partnerships to the
extent that partnership assets are insufficient to discharge liabilities.
Several of the investment programs formed by the Company or its subsidiaries
require certain levels of insurance to cover operating and other risks
F-23
<PAGE> 91
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
inherent in the production of oil and gas. Under the terms of these programs,
the Company would be liable for any costs or damages incurred by a program
resulting from the Company's failure to carry the required insurance. The
Company believes its insurance coverage is sufficient as required by the program
agreements.
At December 31, 1995, the Company had remaining capital commitments to the
NYLOG Programs of $59,000. Under the terms of the NYLOG Programs' partnership
agreements, the Company is also obligated to repurchase certain units of limited
partner interests in the NYLOG Programs. These annual repurchase commitments are
based on formulas contained in the underlying partnership agreements and totaled
approximately $250,000 as of December 31, 1995. Reference is made to Note 18 for
a discussion of the proposed liquidation of the NYLOG Programs. If the proposed
liquidation of the NYLOG Programs is approved, the Company would no longer be
obligated to repurchase the NYLOG units of limited partner interests.
In addition, the Company has a commitment to purchase a 1% interest in any
properties transferred to ANCON by New York Life.
CONCENTRATION OF RISKS
American Exploration's revenues are derived principally from
uncollateralized sales of the Company's oil and gas production to customers in
the oil and gas industry. Market prices for oil and gas may fluctuate;
accordingly, decreases in market prices could adversely affect American
Exploration's net operating revenues and cash flows from operating activities.
In addition, 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.
In the year ended December 31, 1995, sales to Enron Corp. and certain
subsidiaries of KN Energy, Inc. accounted for approximately 19% and 10%,
respectively, of the Company's oil and gas revenues. Because of the availability
of other customers, management does not believe that the loss of any single
customer would adversely affect the Company's operations.
LEGAL PROCEEDINGS
In addition to certain legal proceedings arising in the ordinary course of
its oil and gas business, the Company is involved in the following matters.
Bowdoin Field, Phillips and Valley Counties, Montana. In February 1995,
two Company affiliates were served with a lawsuit filed by KN Gas Supply
Services, Inc. ("KNGSS") in Federal District Court in Denver, Colorado,
requesting declaratory judgment that KNGSS had the right to reduce the contract
price for gas produced from the Bowdoin Field to market levels from October 1,
1993 forward. KNGSS also requested declaratory judgment that it has a right to
relief from the contract price due to regulatory changes, which it alleges
renders the contract commercially impracticable, and that Federal Energy
Regulatory Commission Order No. 636 is a condition subsequent which excuses
performance under the contract. KNGSS alleges that it has overpaid the Company's
affiliates and seeks a refund of approximately $2.8 million for the period
through September 1995. Although the Company cannot predict the outcome of this
proceeding, American Exploration will vigorously defend its interests in this
case and does not expect the outcome of the case to have a material adverse
impact on its financial position or results of operations.
In April 1995, the Company's affiliates filed counterclaims against KNGSS
in the lawsuit described above alleging that KNGSS failed to take and pay for
certain minimum volumes of gas, failed to pay for certain volumes of gas taken,
failed to schedule nominations and recorded improper deductions for fuel and
other losses. The Company has dismissed all of its counterclaims, except for the
claim alleging the improper
F-24
<PAGE> 92
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
deductions, for a payment from KNGSS of approximately $2.2 million and KNGSS
dismissing its commercial impracticability and condition subsequent claims.
American Exploration's share of the cash settlement totaled $1.7 million and is
primarily reflected as oil and gas revenues in the accompanying 1995 statement
of operations.
Sawyer Field -- Sutton County, Texas. The Company and an affiliated
partnership are defendants in a property damage lawsuit filed in December 1994
in the 112th Judicial District Court in Sutton County, Texas styled Claire J.
Powers, et al. vs. Don R. Giller, et al. Four related personal injury suits are
also pending against the Company and the affiliated partnership. These suits are
styled as Jane Giller, et al. vs. Enron Corp., et al. in the 113th Judicial
District Court in Harris County, Texas; Jane Giller, et al. vs. Fisher Controls
International, Inc., et al. in the 200th Judicial District Court in Travis
County, Texas; and Lynn Cooper, et al. vs. Enron Corp., et al. and Donna Lynn
Pretzer vs. Enron Corp., et al., both in the United States District Court for
the Eastern District of Texas, Marshall Division. All of these lawsuits are
related to a fire in December 1994 at a cabin owned by a landowner in the Sawyer
Field. As a result of the fire, two hunters died and a third hunter suffered
serious burns.
Pursuant to an arrangement made by the previous operator of the field, the
landowner supplied the cabin with natural gas from a nearby well as to which the
Company subsequently became the operator. The Company is alleged to have been
negligent or grossly negligent in failing to properly supply gas to the cabin.
The Company has denied that it was negligent or grossly negligent and will
vigorously defend its interests.
By agreement dated February 20, 1996 and entered into the record on March
5, 1996, the Sutton County landowners and all non-injured hunters settled out of
court. All remaining parties have agreed to litigate the case in the Travis
County suit and dismiss all other suits. Since the plaintiffs have not specified
the amount of damages being sought against the Company, it is not possible to
quantify what liabilities, if any, the Company might incur.
Public Partnership Litigation. In February 1995, the Company and American
Exploration Production Company, a subsidiary of the Company ("AEPCO"), were
served with a lawsuit instituted in October 1994 styled Richard Riley and
Frances Riley v. Leroy Wolf, New York Life Insurance Company, NYLIFE Equity,
Inc., NYLIFE Realty Income Partners I, L.P., New York Life Oil and Gas Producing
Properties II-E, L.P., Linclay Investment Properties, Inc., American Exploration
Production Company, John Does (1-10) and A.B.C. Corp. (1-10), Civil Action No.
94-5827 (HAA) in the United States District Court, District of New Jersey. The
plaintiffs alleged various causes of action, including inefficient and wasteful
management of partnership assets relating to their investment in real estate and
oil and gas limited partnerships. AEPCO acts as a co-general partner in the oil
and gas limited partnership. The plaintiffs sought a rescission of their
investments, compensatory and punitive damages, and other relief. This case was
dismissed with prejudice as to all defendants in December 1995. The Company did
not bear any costs in the settlement of this litigation.
See Note 18 for a discussion of certain litigation filed against the
co-general partners of the NYLOG Programs in 1996 and the proposed liquidation
of the NYLOG Programs.
Cement I Unit -- Caddo County, Oklahoma. In 1991, an administrative
hearing was held by the Oklahoma Corporation Commission ("OCC") to establish the
cause of the saltwater contamination of the municipal water supply of the city
of Cyril, Oklahoma and to formulate a plan of abatement of the pollution.
Parties to the hearing included the current and former operators of the Cement I
Unit as well as the Company. The Company owns an 18.56% interest in the Cement I
Unit and controls an additional 6.42% interest through investment programs. In
August 1992, the administrative law judge granted the Company's motion to
dismiss on the grounds that the Company had not violated any statute, rule or
regulation of the OCC and that the evidence did not establish that the Company
caused any contamination of the aquifer. The ruling was subsequently affirmed by
the OCC in December 1992.
F-25
<PAGE> 93
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
In April 1995, the Court of Appeals issued a ruling affirming the Company's
dismissal from the proceeding. In rendering its April 1995 judgment, the Court
stated, however, that any claims which an operator wishes to make against any
non-operator (which could include the Company) pursuant to the plan of
unitization, for the non-operator's proportionate share of any costs incurred
pursuant to any remediation ultimately ordered, must be brought in District
Court in a new proceeding. To date, no such claims have been brought against the
Company.
In September 1995, the Supreme Court of Oklahoma granted a Writ of
Certiorari to review the case. However, in December 1995, the court reversed its
ruling and denied the petitions for certiorari. The dismissal of the Company
from this action is now final.
NORM RELATED PROCEEDINGS
The Company and certain subsidiaries, among other operators, have been
named as defendants in two lawsuits in Mississippi and three lawsuits in
Louisiana alleging various causes of action due to the alleged presence of
naturally occurring radioactive materials ("NORM") and other hazardous
substances. The plaintiffs allege that the NORM contamination is a result of oil
and gas operations conducted on properties operated or owned by the Company, its
subsidiaries and their predecessors in title, or NORM contaminated pipe
delivered to a pipe cleaning facility by the Company or its subsidiaries.
The Company has conducted a review of its operations with particular
attention to environmental compliance. The Company believes it has acted as a
prudent operator and is in compliance in all material respects with
environmental regulations. As part of the Company's continuing operations, the
Company has recorded site remediation costs of $541,000 and $2.4 million in 1995
and 1994, respectively. The Company anticipates it will incur additional costs
from time to time related to the continued assessment, testing, disposal, site
restoration and other activities in connection with the Company's environmental
proceedings. The Company will continue to vigorously contest liability under the
pending proceedings and seek to apportion any resulting liability under such
proceedings among the Company, its predecessor operators and other working
interest owners.
A brief summary of each of the lawsuits is presented below.
Bay Springs Field -- Jasper County, Mississippi. In May 1994, the Company
was served with a lawsuit filed by private landowners against the Company and
other defendants in the Circuit Court of Jasper County, Mississippi, First
Judicial District, based on the presence of NORM on the plaintiffs' property.
The plaintiffs allege that the NORM contamination is a result of oil and gas
operations conducted on properties operated by the Company and its predecessors
in title and on properties in which the Company does not own an interest. The
Company removed the lawsuit to federal court and obtained a ruling from the
court that allowed remediation of the property operated by the Company. The
lawsuit has since been remanded back to the Circuit Court of Jasper County.
The Company successfully obtained an order severing the claims against it
from claims against properties in which the Company does not own an interest.
The amount of damages sought against the Company is not known at this time since
the plaintiffs have failed to quantify such damages.
The Company has completed a NORM remediation program on the property and
the site has been restored. The Company believes that the completion of the
remediation effort has significantly reduced any basis for the plaintiffs'
damage claims and, although the Company cannot predict the outcome of this
proceeding, American Exploration does not expect the outcome of the case to have
a material adverse impact on its financial position or results of operations.
F-26
<PAGE> 94
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
Diamond Field -- Wayne County, Mississippi. The Company and a subsidiary
were served in May 1994 with a lawsuit in the Circuit Court of Wayne County,
Mississippi based on the presence of NORM and other hazardous materials arising
from oil and gas activities on certain tracts in the Diamond Field. Injunctive
relief and monetary and punitive damages are sought; however, the plaintiffs do
not specify the amount of damages being sought. In November 1994, the Court
denied a motion by the plaintiffs to enjoin the Company from remediating the
property without approval by the plaintiffs and issued a ruling that allowed the
Company to remediate the property without interference. The Company completed
remediation in February 1995. In January 1996, the plaintiffs dropped all
allegations of personal injury from their claims. The Company believes that the
completion of the remediation effort has significantly reduced any basis for the
plaintiffs' damage claims and, although the Company cannot predict the outcome
of this proceeding, American Exploration does not expect the outcome of the case
to have a material adverse impact on its financial position or results of
operations.
Fordoche Field -- Point Coupee Parish, Louisiana. In August 1994, a
Company subsidiary and affiliate were served with a lawsuit in the 18th Judicial
District Court, Point Coupee Parish, Louisiana. The plaintiffs alleged they
represented a class of plaintiffs damaged by oil and gas activities, including
damages caused by NORM, elevated levels of chlorides and other hazardous oil
field wastes and substances in the Fordoche Field and other fields operated by a
third party near Lottie, Louisiana. The class certification was never approved
by the court. The plaintiffs sought unspecified compensation for actual and
exemplary damages. The Company owns a minority interest and does not operate
this property. In January 1996, the case was dismissed with
prejudice against the Company and its affiliate at no cost to the Company.
51 Oil Corp. Facility. A Company subsidiary was served with two lawsuits
relating to the 51 Oil Corp. Facility near Lafayette, Louisiana. In 51 Oil Corp.
v. Adobe Resources Corp., et al., Civil Action No. 93-08548, filed in Civil
District Court in Orleans Parish, Louisiana, the plaintiff alleged that the
Company's subsidiary, among 65 other defendants, supplied pipe contaminated with
NORM to the plaintiff. The plaintiff alleged that the defendants failed to warn
the plaintiff of this condition, among other allegations, and sought
contribution by the defendants for the cost of remediation of its property as
well as other damages. The plaintiff's records indicate that the Company's
subsidiary supplied about one-half of one percent of the pipe to the facility.
The lawsuit was settled for $25,000 as to the Company's subsidiary in March 1995
and was dismissed with prejudice on April 12, 1995.
In Danny Broussard, et al. v. Adobe Resources Corp., et al., Civil Action
No. 94-8019, filed in July 1994 in Civil District Court in Orleans Parish,
Louisiana, the plaintiffs, an employee of 51 Oil Corp. and his family, alleged
that a Company subsidiary delivered pipe contaminated with NORM to 51 Oil Corp.
and that such actions caused the plaintiff to suffer various personal injuries.
The plaintiffs sought compensatory and punitive damages for both medical
expenses and other damages; however, the plaintiffs did not specify the amount
of damages being sought. The lawsuit was settled for $3,000 against the
Company's subsidiary, and the case was dismissed with prejudice on February 5,
1996.
F-27
<PAGE> 95
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
(15) CASH FLOW INFORMATION
Supplemental cash flow information is presented below (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -------------------
1993 1994 1995 1995 1996
------ -------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
CASH PAYMENTS:
Interest, net of amounts capitalized
(a)............................... $6,931 $ 6,528 $ 5,638 $4,062 $ 1,854
Income taxes......................... 567 39 40 47 --
NONCASH INVESTING AND FINANCING
ACTIVITIES:
APPL Consolidation:
Acquisition of oil and gas
properties...................... $ -- $ 52,222 $ 1,198 $ -- $ 1,198
Other assets...................... -- 2,287 -- -- --
Liabilities assumed............... -- 535 -- -- --
Debt retired...................... -- 1,612 4,680 -- 4,680
American Exploration common stock
issued.......................... -- (56,230) (4,326) -- (4,326)
Gain on extinguishment of debt.... -- (426) (1,552) -- (1,552)
Issuance of common stock to
officers.......................... $1,237(b) $ -- $ -- $ -- $ --
</TABLE>
- ---------------
(a) The Company capitalized interest totaling $2.3 million in 1993 and $1.5
million in both 1994 and 1995, based on the Company's weighted average bank
borrowing rate for the period. Capitalized interest totaled $1.0 million and
$1.5 million for the first nine months of 1995 and 1996, respectively.
(b) Amount consists of notes receivable from officers totaling approximately
$230,000 and unearned compensation of approximately $1.0 million, which are
both recorded as reductions of stockholders' equity.
F-28
<PAGE> 96
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
(16) INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
The Company's only industry segment is oil and gas exploration and
production. Information regarding the Company's operations by geographic area
for the last three years is presented below (in thousands):
<TABLE>
<CAPTION>
UNITED OTHER
STATES(A) CANADA(B) FOREIGN(C) CONSOLIDATED
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1993
Sales to unaffiliated customers.................. $ 44,334 $ 5,255 $ -- $ 49,589
Income (loss) from operations.................... 844 822 (13,684) (12,018)
Identifiable assets.............................. 178,642 -- 6,956 185,598
Year Ended December 31, 1994
Sales to unaffiliated customers.................. $ 50,033 $ -- $ -- $ 50,033
Loss from operations............................. (44,727) -- (6,706) (51,433)
Identifiable assets.............................. 223,894 -- -- 223,894
Year Ended December 31, 1995
Sales to unaffiliated customers.................. $ 70,768 $ -- $ -- $ 70,768
Income from operations........................... 6,813 -- -- 6,813
Identifiable assets.............................. 176,030 -- -- 176,030
</TABLE>
- ---------------
(a) In 1994, the Company reported an impairment charge of $25.0 million related
to a change in accounting policy for impairment of proved oil and gas
properties. (See Note 1.)
(b) The Company sold all of its Canadian assets in mid-1993.
(c) Net losses related to the Company's leasehold interests in Oman and Tunisia
primarily reflect the write-off of these assets, which were sold in 1994.
F-29
<PAGE> 97
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
(17) QUARTERLY RESULTS -- (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Year Ended December 31, 1994 (a)
Oil and gas sales................................... $ 9,366 $11,145 $13,355 $ 16,167
Total revenues...................................... 9,433 11,442 13,831 16,653
Loss from operations................................ (11,329) (2,413) (4,035) (33,656)
Loss before extraordinary item...................... (12,809) (4,273) (5,608) (37,545)
Net loss............................................ (12,809) (2,231) (2,657) (37,119)
Net loss per common share:
Loss before extraordinary item...................... $ (1.88) $ (.67) $ (.78) $ (3.68)
Extraordinary gain on extinguishment of debt........ -- .29 .38 .04
-------- ------- ------- --------
Net loss per common share................... $ (1.88) $ (.38) $ (.40) $ (3.64)
======== ======= ======= ========
Year Ended December 31, 1995 (b)
Oil and gas sales................................... $ 17,832 $20,327 $16,890 $ 15,719
Total revenues...................................... 18,837 20,725 25,839 16,533
Income (loss) from operations....................... 1,308 2,897 7,263 (4,655)
Income (loss) before extraordinary item............. (495) 990 6,015 (5,033)
Net income (loss)................................... 1,961 990 6,015 (5,033)
Net income (loss) per common share:
Income (loss) before extraordinary item............. $ (.08) $ .05 $ .47 $ (.46)
Extraordinary gain on extinguishment of debt........ .21 -- -- --
-------- ------- ------- --------
Net income (loss) per common share.......... $ .13 $ .05 $ .47 $ (.46)
======== ======= ======= ========
</TABLE>
- ---------------
(a) In the first quarter of 1994, the Company recorded impairment expense of
$6.4 million for the write-off of American Exploration's remaining leasehold
interest in Tunisia. During the fourth quarter, the Company reported an
impairment charge of $25.0 million related to the change in accounting
policy for impairment of proved oil and gas properties. Also in the fourth
quarter, the Company recorded additional impairment expense of $1.4 million
associated with several properties on which no further exploratory work is
planned and a $2.0 million severance charge as a result of the APPL
Consolidation. In the second, third and fourth quarters of 1994, the Company
recorded extraordinary gains of $2.0 million, $3.0 million and $426,000,
respectively, which resulted from the elimination of nonrecourse debt
through the APPL Consolidation.
(b) In the first quarter of 1995, the Company recorded an extraordinary gain of
$2.5 million resulting from the elimination of debt through the APPL
Consolidation. In the third quarter of 1995, the Company recorded a gain on
the sale of the Sawyer Field of approximately $10.6 million, offset in part
by recognition of $2.8 million of dry hole expense on two wells. In the
fourth quarter of 1995, the Company recorded an impairment charge of $1.8
million related to impairment of an unproved property and recorded
additional dry hole expense of $1.3 million primarily related to one
offshore well.
Quarterly earnings per common share are based on the weighted average
number of shares outstanding during the quarter, and the sum of the quarters may
not equal annual earnings per common share. Earnings per common share have been
retroactively restated to reflect the one-for-ten reverse split of the Company's
common stock. (See Note 2.)
F-30
<PAGE> 98
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
(18) SUBSEQUENT EVENTS
NYLOG LITIGATION AND PROPOSED LIQUIDATION
The Company and its subsidiary, American Exploration Production Company
(together, the "American Exploration Parties"), along with New York Life and
several of its subsidiaries, have been named as defendants in a class action
complaint filed in the United States District Court for the Southern District of
Florida on March 18, 1996, styled Shea et al. v. New York Life Insurance Co., et
al. (Civil Action No. 96-0746) alleging generally that the defendants engaged in
fraudulent activities in connection with the marketing and sale of interests in
various limited partnerships, including the NYLOG Programs, and the subsequent
operation of such partnerships, breached implied covenants and fiduciary duties
owed to investors and violated various federal securities and state laws and
rules. The plaintiffs purport to represent a class of all persons who purchased
or otherwise assumed rights and title to interests in the partnerships that were
created, sponsored, marketed, sold, operated or managed by the defendants from
January 1, 1985 through March 18, 1996. The plaintiffs have asked for
compensatory damages for their lost original investment, plus interest, costs
(including attorneys' fees), punitive damages, disgorgement of any earnings,
compensation and benefits received by the defendants as a result of the alleged
actions and other unspecified relief to which plaintiffs may be entitled. The
lawsuit was preceded by two similar but separate lawsuits filed by the
plaintiffs in the District Courts in Harris County, Texas on January 11, 1996.
The defendants expressly deny any wrongdoing alleged in the complaints and
do not concede any liability or wrongdoing in connection with any of the facts
or claims that have been alleged against them in the lawsuits described above,
including any liability or wrongdoing in connection with the sale of the units
of limited partner interest in the partnerships. Nevertheless, to reduce the
burden of protracted litigation, the defendants have entered into a Stipulation
of Settlement (the "Settlement Agreement") with the plaintiffs because, in their
opinion, the settlement would (i) provide substantial benefits to the limited
partners in a manner consistent with New York Life's prior determination to wind
up the NYLOG Programs through orderly liquidation because the continuation of
the business no longer served the intended objectives of either the limited
partners or the defendants and to offer the limited partners an enhancement to
the liquidating distribution they would otherwise receive, (ii) provide an
opportunity to wind up the partnerships on a schedule favorable to the limited
partners and to resolve the issues raised by the lawsuits and (iii) reduce the
burdens and uncertainties associated with protracted litigation of the claims
underlying the lawsuits.
If the Settlement Agreement is approved by the Florida court and becomes
final, a limited partner of a limited partnership who participates in the
settlement will receive from an affiliate of New York Life a cash payment that,
together with prior distributions to such settling limited partner from such
limited partnership, will result in the settling limited partner having received
in the aggregate an amount at least equal to his total investment in such
partnership. If the proposed settlement becomes final, the defendants and
various other related parties will be released and discharged from any and all
claims a limited partner may have against the defendants in connection with the
partnerships. The American Exploration Parties will not be liable for any
payment of advances or refunds to the NYLOG investors.
On March 19, 1996, the Florida federal district court issued a hearing
order and certified the class for settlement purposes only and directed the
defendants to cause a class notice to be mailed to potential class members. The
Settlement Agreement is not yet final, is subject to a number of conditions and
may be terminated in certain circumstances.
New York Life and certain of its subsidiaries and AEPCO have also been
named as defendants in a lawsuit relating to the NYLOG Programs styled Billy H.
Mancil and Mary M. Mancil v. New York Life Insurance Company, et al., Civil
Action No. CV-95-2595 GR, Circuit Court of Montgomery County, Alabama (the
"Mancil Litigation"). The complaint in the Mancil Litigation alleges various
causes of action
F-31
<PAGE> 99
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED.)
arising out of Mancil's purchase of interests in certain NYLOG Programs
including, among other things, fraud, reckless and negligent misrepresentations,
and negligence in hiring, training and/or supervising a sales agent involved in
the sale of the NYLOG interests. Plaintiffs seek an unspecified amount of
compensatory and punitive damages and costs.
The American Exploration Parties and NYLIFE Inc. ("NYLIFE"), a subsidiary
of New York Life, have entered into an indemnity agreement (the "Indemnity
Agreement") pursuant to which NYLIFE has agreed to indemnify the American
Exploration Parties from and against any and all judgments or settlements
entered or reached in the NYLOG litigation described above, or any subsequent
lawsuits by investors in the NYLOG Programs based on claims and factual
allegations substantially similar to those contained in the original complaints
filed in state district court in Texas (collectively with the Mancil Litigation,
the "NYLOG Litigation"). Pursuant to the Indemnity Agreement, NYLIFE has assumed
control of the joint defense of the NYLOG Litigation at NYLIFE's expense
including, but not limited to, any settlement discussions or settlements.
Additionally, pursuant to the Indemnity Agreement, the American Exploration
Parties have agreed that if a settlement of the NYLOG Litigation occurs and in
connection therewith the assets of the NYLOG Programs are sold in liquidation of
the partnerships, the American Exploration Parties will be allocated 5% (which
represents AEPCO's initial capital contribution percentage) of revenues and net
proceeds from the sale of properties effective from and after February 1, 1996.
Based upon the terms of the Indemnity Agreement, the Company does not believe
that the NYLOG Litigation will have a material adverse impact on its financial
position or results of operations.
F-32
<PAGE> 100
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
CAPITALIZED COSTS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Proved properties........................................................ $319,048 $265,953
Unproved oil and gas interests........................................... 24,405 26,074
-------- --------
Total capitalized costs................................................ 343,453 292,027
Less: Accumulated depreciation, depletion and amortization............. 153,509 146,188
-------- --------
Net capitalized costs.................................................. $189,944 $145,839
======== ========
</TABLE>
COSTS INCURRED IN OIL AND GAS ACQUISITION, EXPLORATION
AND DEVELOPMENT ACTIVITIES
<TABLE>
<CAPTION>
UNITED
STATES FOREIGN TOTAL
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year Ended December 31, 1993
Proved property acquisition costs........................... $ 4,596 $ 1,011 $ 5,607
Exploration costs........................................... 6,103 5,006 11,109
Development costs........................................... 8,786 686 9,472
Capitalized interest........................................ 1,390 956 2,346
-------- -------- --------
Total costs incurred................................ $ 20,875 $ 7,659 $ 28,534
======== ======== ========
Year Ended December 31, 1994
Proved property acquisition costs........................... $ 81,385 $ -- $ 81,385
Exploration costs........................................... 2,583 -- 2,583
Development costs........................................... 15,804 -- 15,804
Capitalized interest........................................ 1,496 -- 1,496
-------- -------- --------
Total costs incurred................................ $101,268 $ -- $101,268
======== ======== ========
Year Ended December 31, 1995
Property acquisition costs:
Proved................................................... $ 14,491 $ -- $ 14,491
Unproved................................................. 2,642 -- 2,642
Exploration costs........................................... 2,449 -- 2,449
Development costs........................................... 23,089 -- 23,089
Capitalized interest........................................ 1,468 -- 1,468
-------- -------- --------
Total costs incurred................................ $ 44,139 $ -- $ 44,139
======== ======== ========
</TABLE>
F-33
<PAGE> 101
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES -- (CONTINUED)
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
UNITED
STATES FOREIGN TOTAL
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year Ended December 31, 1993
Revenues.................................................... $ 44,334 $ 5,255 $ 49,589
Production and operating costs.............................. 14,088 1,910 15,998
Exploration expense......................................... 4,219 3,335 7,554
Depreciation, depletion and amortization.................... 20,192 1,861 22,053
Impairment expense.......................................... 773 10,202 10,975
Taxes other than income..................................... 3,687 42 3,729
Income tax expense.......................................... 505 -- 505
-------- -------- --------
Results of operations for producing activities...... $ 870 $(12,095) $ (11,225)
======== ======== ========
Year Ended December 31, 1994
Revenues.................................................... $ 50,033 $ -- $ 50,033
Production and operating costs.............................. 21,302 -- 21,302
Exploration expense......................................... 2,569 (10) 2,559
Depreciation, depletion and amortization.................... 28,062 -- 28,062
Impairment expense.......................................... 27,127 6,443 33,570
Taxes other than income..................................... 4,630 -- 4,630
Income tax benefit.......................................... (455) -- (455)
-------- -------- --------
Results of operations for producing activities...... $(33,202) $ (6,433) $(39,635)
======== ======== ========
Year Ended December 31, 1995
Revenues.................................................... $ 70,768 $ -- $ 70,768
Production and operating costs.............................. 24,515 -- 24,515
Exploration expense......................................... 4,826 -- 4,826
Depreciation, depletion and amortization.................... 29,100 -- 29,100
Impairment expense.......................................... 1,822 -- 1,822
Taxes other than income..................................... 4,928 -- 4,928
Income tax benefit.......................................... (121) -- (121)
-------- -------- --------
Results of operations for producing activities...... $ 5,698 $ -- $ 5,698
======== ======== ========
</TABLE>
OIL AND GAS RESERVE INFORMATION -- (UNAUDITED)
The following information summarizes the policies used by the Company in
preparing the accompanying oil and gas reserve disclosures, standardized measure
of discounted future net cash flows relating to proved oil and gas reserves and
the reconciliation of such standardized measure from period to period.
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves that can
reasonably be expected to be recovered through existing wells with existing
equipment and operating methods.
The standardized measure of discounted future net cash flows from
production of proved reserves was developed by first estimating the quantities
of proved reserves and the future periods during which they are expected to be
produced based on year-end economic conditions. The estimated future cash flows
from proved reserves were then determined based on year-end prices, except in
those instances where fixed and determinable price escalations are included in
existing contracts. The effects of derivative transactions did not
F-34
<PAGE> 102
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES -- (CONTINUED)
materially impact oil and gas prices as of December 31, 1995. Finally, future
cash flows were reduced by estimated production costs, costs to develop and
produce the proved reserves, and certain abandonment costs, all based on
year-end economic conditions and the estimated effect of future income taxes
based on the current tax law.
The standardized measure of discounted future net cash flows does not
purport to present, nor should it be interpreted to present, the fair value of
the Company's oil and gas reserves. An estimate of fair value would also take
into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES -- (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows........................................ $ 326,768 $ 502,989 $ 454,508
Future production and development costs.................... (147,481) (258,711) (209,094)
--------- --------- ---------
Future net cash flows before income taxes.................. 179,287 244,278 245,414
Future income taxes........................................ (4,528) (2,109) (2,892)
--------- --------- ---------
Future net cash flows after income taxes................... 174,759 242,169 242,522
Discount at 10% annual rate................................ (71,489) (101,463) (98,628)
--------- --------- ---------
Standardized measure of discounted future net cash flows... $ 103,270 $ 140,706 $ 143,894
========= ========= =========
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS -- (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................................... $180,812 $103,270 $140,706
Sales and transfers of oil and gas produced, net of production
costs....................................................... (31,818) (24,101) (41,325)
Net changes in prices and production costs.................... (19,870) (67,753) 9,959
Extensions, discoveries and improved recoveries, net of future
production and development costs............................ 12,780 3,822 22,867
Purchases of minerals in place................................ 7,203 115,379 15,162
Sales of minerals in place.................................... (48,521) (451) (33,672)
Changes in estimated future development costs................. (5,325) 4,997 3,222
Development costs incurred during the year.................... 7,931 11,518 11,592
Revisions of previous quantity estimates...................... (15,967) (7,826) 3,857
Accretion of discount......................................... 18,269 10,476 14,230
Net change in future income taxes............................. 386 117 (444)
Changes in production rates (timing) and other................ (2,610) (8,742) (2,260)
-------- -------- --------
Balance, end of year.......................................... $103,270 $140,706 $143,894
======== ======== ========
</TABLE>
F-35
<PAGE> 103
AMERICAN EXPLORATION COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES -- (CONTINUED)
RESERVE QUANTITY INFORMATION -- (UNAUDITED)
<TABLE>
<CAPTION>
UNITED STATES CANADA TOTAL
------------------ ------------------- -------------------
OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES
Balance at December 31, 1992............... 8,031 123,373 1,392 120,713 9,423 244,086
Purchases of minerals in place........... 107 10,029 51 7,182 158 17,211
Extensions, discoveries and other
additions.............................. 326 10,157 -- 544 326 10,701
Revisions of previous estimates.......... (1,127) (13,642) -- -- (1,127) (13,642)
Sales of minerals in place............... (253) (13,400) (1,371) (124,897) (1,624) (138,297)
Production............................... (1,189) (11,794) (72) (3,542) (1,261) (15,336)
------ ------- ------ -------- ------ --------
Balance at December 31, 1993............... 5,895 104,723 -- -- 5,895 104,723
Purchases of minerals in place........... 5,153 108,075 -- -- 5,153 108,075
Extensions, discoveries and other
additions.............................. 128 12,825 -- -- 128 12,825
Revisions of previous estimates.......... (197) (22,467) -- -- (197) (22,467)
Sales of minerals in place............... (78) (235) -- -- (78) (235)
Production............................... (1,241) (16,241) -- -- (1,241) (16,241)
------ ------- ------ -------- ------ --------
Balance at December 31, 1994............... 9,660 186,680 -- -- 9,660 186,680
Purchases of minerals in place........... 1,225 18,846 -- -- 1,225 18,846
Extensions, discoveries and other
additions.............................. 1,435 17,318 -- -- 1,435 17,318
Revisions of previous estimates.......... 616 1,270 -- -- 616 1,270
Sales of minerals in place............... (792) (73,650) -- -- (792) (73,650)
Production............................... (1,680) (24,450) -- -- (1,680) (24,450)
------ ------- ------ -------- ------ --------
Balance at December 31, 1995............... 10,464 126,014 -- -- 10,464 126,014
====== ======= ====== ======== ====== ========
PROVED DEVELOPED RESERVES
Balance at December 31, 1993............... 5,018 71,623 -- -- 5,018 71,623
====== ======= ====== ======== ====== ========
Balance at December 31, 1994............... 8,697 127,838 -- -- 8,697 127,838
====== ======= ====== ======== ====== ========
Balance at December 31, 1995............... 9,474 98,590 -- -- 9,474 98,590
====== ======= ====== ======== ====== ========
</TABLE>
F-36
<PAGE> 104
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
American Exploration Company:
We have audited the accompanying statements of oil and gas revenues and
direct lease operating expenses attributable to certain oil and gas properties,
acquired by American Exploration Company from Zilkha Energy Company (the Zilkha
I Properties), for each of the years in the three-year period ended December 31,
1995. These statements of oil and gas revenues and direct lease operating
expenses are the responsibility of American Exploration Company's management.
Our responsibility is to express an opinion on these statements of oil and gas
revenues and direct lease operating expenses 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 statements of oil and gas revenues and
direct lease operating expenses are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statements of oil and gas revenues and direct lease operating
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statements of oil and gas revenues and direct lease
operating expenses. We believe that our audits of the statements of oil and gas
revenues and direct lease operating expenses provide a reasonable basis for our
opinion.
The accompanying statements were prepared as described in note 1 for the
purpose of complying with certain rules and regulations of the Securities and
Exchange Commission (SEC) for inclusion in certain SEC regulatory reports and
filings and are not intended to be a complete financial presentation.
In our opinion, the accompanying statements of oil and gas revenues and
direct lease operating expenses present fairly, in all material respects, the
oil and gas revenues and direct lease operating expenses of the Zilkha I
Properties for each of the years in the three-year period ended December 31,
1995, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
September 26, 1996
F-37
<PAGE> 105
THE ZILKHA I PROPERTIES
STATEMENTS OF OIL AND GAS REVENUES AND
DIRECT LEASE OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE PERIOD
JANUARY 1, 1996 THROUGH FEBRUARY 29, 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1996 THROUGH
---------------------------- FEBRUARY 29,
1993 1994 1995 1996
---- ------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Oil and gas revenues............................... $358 $1,291 $7,513 $1,964
Direct lease operating expenses.................... 35 148 662 109
---- ------ ------ ------------
Oil and gas revenues in excess of direct lease
operating expenses............................... $323 $1,143 $6,851 $1,855
==== ====== ====== ============
</TABLE>
See accompanying notes to the Statements of Oil and Gas Revenues and
Direct Lease Operating Expenses.
F-38
<PAGE> 106
THE ZILKHA I PROPERTIES
NOTES TO STATEMENTS OF OIL AND GAS REVENUES AND
DIRECT LEASE OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE PERIOD JANUARY 1, 1996 THROUGH FEBRUARY 29, 1996 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
During March 1996, American Exploration Company (the "Company") purchased
from Zilkha Energy Company ("Zilkha") 25% of Zilkha's working interest in
certain oil and gas properties (the "Zilkha I Properties") located in the Gulf
of Mexico.
The statements of oil and gas revenues and direct lease operating expenses
include only the oil and gas revenues and direct lease operating expenses
attributable to the purchased interest in the Zilkha I Properties and are not
intended to be a complete set of financial statements. Oil and gas revenues and
direct lease operating expenses included herein are not necessarily
representative of future operations.
The accompanying statements of oil and gas revenues and direct lease
operating expenses were derived from the historical accounting records. Direct
lease operating expenses include payroll, lease and well repairs, maintenance
and other direct operating expenses.
In the opinion of management, the unaudited statement of oil and gas
revenues and direct lease operating expenses for the period January 1, 1996
through February 29, 1996 includes all material adjustments, which consist only
of normal recurring adjustments necessary for a fair presentation, and is not
necessarily indicative of the results for the entire year.
Omitted Historical Financial Information
Full historical financial statements, including general and administrative
expenses, interest expense and income tax expense, have not been presented
historically because the above properties were not accounted for or operated as
a separate division. Historical depletion expense has also not been included as
the basis in the properties has been adjusted in the purchase price allocation;
therefore, historical depletion will no longer be relevant.
Gas Imbalances
The sales method is used for accounting for gas imbalances. Under the sales
method, gas revenues are recorded when received; no adjustment is made for any
resulting imbalance positions.
(2) CAPITAL EXPENDITURES (UNAUDITED)
Development expenditures related to the Zilkha I Properties totaled
approximately $116,000 during the period January 1, 1996 through February 29,
1996 and $1,917,000, $16,709,000 and $8,944,000 for the years ended December 31,
1993, 1994 and 1995, respectively.
(3) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Oil and Gas Reserves
The following table shows estimates of proved reserves, net of royalty
interests, at December 31, 1993, 1994 and 1995 which were acquired by the
Company from Zilkha during March 1996. The information was compiled from reserve
reports prepared by William M. Cobb & Associates, Inc., Independent Petroleum
Engineering Consultants, as of January 1, 1996. No comparable estimates were
available for prior periods; therefore, reserves for December 31, 1993, 1994,
and 1995 have been calculated by adjusting the January 1, 1996 amounts only for
producing activities. Consequently, no revisions of previous estimates have been
reflected. Management emphasizes that the volumes of reserves shown below are
estimates, which, by their
F-39
<PAGE> 107
THE ZILKHA I PROPERTIES
NOTES TO STATEMENTS OF OIL AND GAS REVENUES AND
DIRECT LEASE OPERATING EXPENSES -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE PERIOD JANUARY 1, 1996 THROUGH FEBRUARY 29, 1996 (UNAUDITED)
nature, are subject to revision. The estimates are made using all available
geological and reservoir data as well as production performance data. These
estimates are reviewed annually and revised, either upward or downward, as
warranted by additional performance data. The properties are located offshore
Louisiana.
Estimated Quantities of Oil and Gas Reserves:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995
------------------- ------------------- ---------------------
OIL (BBL) GAS (MCF) OIL (BBL) GAS (MCF) OIL (BBL) GAS (MCF)
------- -------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year.......... 955,710 8,577,140 955,658 8,405,273 893,973 8,211,033
Production................. (52) (171,867) (61,685) (194,240) (301,229) (1,507,057)
------- --------- ------- --------- ------- ---------
End of year................ 955,658 8,405,273 893,973 8,211,033 592,744 6,703,976
======= ========= ======= ========= ======= =========
Proved developed reserves:
Beginning of year.......... 652,389 7,202,704 652,337 7,030,837 590,652 6,836,597
======= ========= ======= ========= ======= =========
End of year................ 652,337 7,030,837 590,652 6,836,597 289,423 5,329,540
======= ========= ======= ========= ======= =========
</TABLE>
Discounted Future Net Cash Flows
Estimates of future net cash flows from proved reserves were made in
accordance with Statement of Financial Accounting Standards No. 69, "Disclosures
about Oil and Gas Producing Activities." The amounts are shown in the following
table.
Estimated future cash inflows are computed by applying January 1, 1996
prices of oil and natural gas to year-end quantities of proved reserves. Future
price changes are considered only to the extent provided by contractual
arrangements. Estimated future development and production costs are determined
by estimating the expenditures to be incurred in developing and producing the
proved oil and gas reserves at the end of the year, based on January 1, 1996
costs and assuming continuation of existing economic conditions.
Historical supplemental oil and gas reserve information does not include
estimated future income tax expenses as such amounts are not relevant or
indicative of future taxes to be incurred by the Company.
Because of unpredictable variances in expenses and capital forecasts, crude
oil and natural gas price changes, largely influenced and controlled by U.S. and
foreign governmental actions, and the fact that the basis for such estimates
vary significantly, management believes the usefulness of these projections is
limited. Estimates of future net cash flows presented do not represent
management's assessment of future profitability or future cash flow.
Management's investment and operating decisions are based upon reserve estimates
that include proved reserves, and upon different price and cost assumptions from
those used here.
It should be recognized that applying current costs and prices and a ten
percent standard discount rate does not convey absolute value. The discounted
amounts arrived at are only one measure of the value of proved reserves.
F-40
<PAGE> 108
THE ZILKHA I PROPERTIES
NOTES TO STATEMENTS OF OIL AND GAS REVENUES AND
DIRECT LEASE OPERATING EXPENSES -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE PERIOD JANUARY 1, 1996 THROUGH FEBRUARY 29, 1996 (UNAUDITED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows...................................... $ 35,459 $ 34,168 $ 26,655
Future development costs................................. (28,600) (11,891) (2,947)
Future production costs.................................. (3,368) (3,220) (2,559)
-------- -------- --------
Future net cash inflows before income taxes.............. 3,491 19,057 21,149
10% discount factor...................................... (425) (2,320) (2,574)
-------- -------- --------
Standardized measure of discounted future net cash
inflows, before income taxes........................... $ 3,066 $ 16,737 $ 18,575
======== ======== ========
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of year.................. $ 1,666 $ 3,066 $ 16,737
Changes in future development costs...................... 1,917 16,709 8,944
Sales, net of production costs........................... (323) (1,143) (6,851)
Accretion of discount.................................... 167 307 1,674
Changes in production rates (timing) and other........... (361) (2,202) (1,929)
-------- -------- --------
Standardized measure, end of year........................ $ 3,066 $ 16,737 $ 18,575
======== ======== ========
</TABLE>
F-41
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
The Sole Director
Zilkha Energy Company:
We have audited the accompanying statement of oil and gas revenues and
direct lease operating expenses attributable to certain oil and gas properties
(the Zilkha II Properties) to be acquired by American Exploration Company for
the year ended December 31, 1995. This statement of oil and gas revenues and
direct lease operating expenses is the responsibility of Zilkha Energy Company's
management. Our responsibility is to express an opinion on this statement of oil
and gas revenues and direct lease operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of oil and gas revenues and
direct lease operating expenses is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement of oil and gas revenues and direct lease operating
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement of oil and gas revenues and direct lease operating
expenses. We believe that our audit of the statement of oil and gas revenues and
direct lease operating expenses provides a reasonable basis for our opinion.
The accompanying statement was prepared as described in note 1 for the
purpose of complying with certain rules and regulations of the Securities and
Exchange Commission (SEC) for inclusion in certain SEC regulatory reports and
filings and is not intended to be a complete financial presentation.
In our opinion, the accompanying statement of oil and gas revenues and
direct lease operating expenses presents fairly, in all material respects, the
oil and gas revenues and direct lease operating expenses of the Zilkha II
Properties for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
September 26, 1996
F-42
<PAGE> 110
THE ZILKHA II PROPERTIES
STATEMENTS OF OIL AND GAS REVENUES AND
DIRECT LEASE OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
JANUARY 1, 1996 THROUGH SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1,
YEAR 1996
ENDED THROUGH
DECEMBER 31, SEPTEMBER 30,
1995 1996
--------- -------------
<S> <C> <C>
(UNAUDITED)
Oil and gas revenues............................................... $ 2,886 $ 5,016
Direct lease operating expenses.................................... 1,265 814
------ ------
Oil and gas revenues in excess of direct lease operating
expenses......................................................... $ 1,621 $ 4,202
====== ======
</TABLE>
See accompanying notes to the Statements of Oil and Gas Revenues and
Direct Lease Operating Expenses.
F-43
<PAGE> 111
THE ZILKHA II PROPERTIES
NOTES TO STATEMENTS OF OIL AND GAS REVENUES AND
DIRECT LEASE OPERATING EXPENSES
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying statements present the oil and gas revenues and direct
lease operating expenses of East Cameron 328 and High Island 116 (the Zilkha II
Properties) to be acquired by American Exploration Company (the Company) from
Zilkha Energy Company ("Zilkha"). The Zilkha II Properties are located in the
Gulf of Mexico. High Island 116 did not begin producing until the third quarter
of 1996; East Cameron 328 commenced production in March 1995.
The statements of oil and gas revenues and direct lease operating expenses
include only the oil and gas revenues and direct lease operating expenses
attributable to the Zilkha II Properties to be acquired by the Company and are
not intended to be a complete set of financial statements. Oil and gas revenues
and direct lease operating expenses included herein are not necessarily
representative of future operations.
The accompanying statements of oil and gas revenues and direct lease
operating expenses were derived from the historical accounting records. Direct
lease operating expenses include payroll, lease and well repairs, maintenance
and other direct operating expenses.
In the opinion of management, the unaudited statement of oil and gas
revenues and direct lease operating expenses for the period January 1, 1996
through September 30, 1996 includes all material adjustments, which consist only
of normal recurring adjustments necessary for a fair presentation, and is not
necessarily indicative of the results for the entire year.
Omitted Historical Financial Information
Full historical financial statements, including general and administrative
expenses, interest expense and income tax expense, have not been presented
historically because the above properties were not accounted for or operated as
a separate division. Historical depletion expense has also not been included as
the basis in the properties has been adjusted in the purchase price allocation;
therefore, historical depletion will no longer be relevant.
Gas Imbalances
The sales method is used for accounting for gas imbalances. Under the sales
method, gas revenues are recorded when received; no adjustment is made for any
resulting imbalance position.
(2) CAPITAL EXPENDITURES (UNAUDITED)
Development expenditures related to the Zilkha II Properties totaled
approximately $4,478,000 and $5,052,000 for the year ended December 31, 1995 and
the period January 1, 1996 through September 30, 1996, respectively.
(3) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Oil and Gas Reserves
The following table shows estimates of proved reserves, net of royalty
interests, at December 31, 1995 to be acquired by the Company from Zilkha during
September 1996. The information was compiled from reserve reports prepared by
William M. Cobb & Associates, Inc., Independent Petroleum Engineering
Consultants, as of January 1, 1996. Reserves for January 1, 1995 have been
calculated by adjusting the January 1, 1996 amounts only for producing
activities. Consequently, no revisions of previous estimates have been
reflected. Management emphasizes that the volumes of reserves shown below are
estimates, which, by their nature, are subject to revision. The estimates are
made using all available geological and reservoir data as well as
F-44
<PAGE> 112
THE ZILKHA II PROPERTIES
NOTES TO STATEMENTS OF OIL AND GAS REVENUES AND
DIRECT LEASE OPERATING EXPENSES -- (CONTINUED)
production performance data. These estimates are reviewed semi-annually and
revised, either upward or downward, as warranted by additional performance data.
The properties are located offshore Texas and Louisiana.
Estimated Quantities of Oil and Gas Reserves:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
--------------------------
GAS
OIL (BBL) (MCF)
--------- --------
<S> <C> <C>
Proved reserves:
Beginning of year............................... 3,696,551 741,355
Production...................................... (164,119) (194,342)
--------- --------
End of year..................................... 3,532,432 547,013
========= ========
Proved developed reserves:
Beginning of year............................... -- --
End of year..................................... 290,272 222,798
========= ========
</TABLE>
Discounted Future Net Cash Flows
Estimates of future net cash flows from proved reserves were made in
accordance with Statement of Financial Accounting Standards No. 69, "Disclosures
about Oil and Gas Producing Activities." The amounts are shown in the following
table.
Estimated future cash inflows are computed by applying year-end prices of
oil and natural gas to year-end quantities of proved reserves. Future price
changes are considered only to the extent provided by contractual arrangements.
Estimated future development and production costs are determined by estimating
the expenditures to be incurred in developing and producing the proved oil and
gas reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions.
Historical supplemental oil and gas reserve information does not include
estimated future income tax expenses as such amounts are not relevant or
indicative of future taxes to be incurred by the Company.
Because of unpredictable variances in expenses and capital forecasts, crude
oil and natural gas price changes, largely influenced and controlled by U.S. and
foreign governmental actions, and the fact that the basis for such estimates
vary significantly, management believes the usefulness of these projections is
limited. Estimates of future net cash flows presented do not represent
management's assessment of future profitability or future cash flow.
Management's investment and operating decisions are based upon reserve estimates
that include proved reserves, and upon different price and cost assumptions from
those used here.
It should be recognized that applying current costs and prices and a ten
percent standard discount rate does not convey absolute value. The discounted
amounts arrived at are only one measure of the value of proved reserves.
F-45
<PAGE> 113
THE ZILKHA II PROPERTIES
NOTES TO STATEMENTS OF OIL AND GAS REVENUES AND
DIRECT LEASE OPERATING EXPENSES -- (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
(IN THOUSANDS)
<S> <C>
Future cash flows................................................................ $ 58,496
Future development costs......................................................... (14,550)
Future production costs.......................................................... (13,327)
--------
Future net cash inflows before income taxes...................................... 30,619
10% discount factor.............................................................. (7,357)
--------
Standardized measure of discounted future net cash inflows, before income
taxes.......................................................................... $ 23,262
========
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
(IN THOUSANDS)
<S> <C>
Standardized measure, beginning of year.......................................... $ 21,092
Changes in estimated future development cost..................................... 4,478
Sales, net of production costs................................................... (1,621)
Accretion of discount............................................................ 2,109
Changes in production rates (timing) and other................................... (2,796)
--------
Standardized measure, end of year................................................ $ 23,262
========
</TABLE>
F-46
<PAGE> 114
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
APPENDIX A
October 8, 1996
Mr. Harold M. Korell
American Exploration Company
1331 Lamar, Suite 900
Houston, Texas 77010-3088
Dear Mr. Korell:
In accordance with your request, we have audited the estimates prepared
by American Exploration Company, as of June 30, 1996, of the proved reserves
and future net revenue to the American Exploration Company interest in certain
oil and gas properties located in the United States. The properties acquired
from Zilkha Energy Company (Zilkha) have not been included in this audit. These
estimates were prepared using constant prices and costs in accordance with the
guidelines of the Securities and Exchange Commission (SEC). The following table
sets forth American Exploration Company's estimates of the proved reserves and
future net revenue for the audited properties as of June 30, 1996:
<TABLE>
<CAPTION>
Net Reserves Future Net Reserve
--------------------------- -----------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ------------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 8,158,296 93,182,487 $216,317,171 $139,725,306
Non-Producing 672,104 13,124,776 27,186,640 14,288,544
Proved Undeveloped 1,208,762 21,165,634 49,176,748 19,232,145
---------- ----------- ------------ ------------
Total Proved 10,039,162 127,472,897 $292,680,559 $173,245,995
</TABLE>
The oil reserves shown include crude oil, condensate, and gas plant
liquids. Oil volumes are expressed in barrels which are equivalent to 42 United
States gallons. Gas volumes are expressed in thousands of standard cubic feet
(MCF) at the contract temperature and pressure bases.
When compared on a field-by-field basis, some of the estimates of
American Exploration Company are greater and some are lesser than the estimates
of Netherland, Sewell & Associates, Inc.; however, in our opinion, the
estimates of American Exploration Company's net proved oil and gas reserves and
future net revenue are in the aggregate reasonable and have been prepared in
accordance with generally accepted petroleum engineering and evaluation
principles. These principles are set forth in the Standards Pertaining to the
Estimating and Auditing of Oil and Gas Reserve Information promulgated by the
Society of Petroleum Engineers. We are satisfied with the methods and procedures
A-1
<PAGE> 115
[NSAI LOGO]
utilized by American Exploration Company in preparing the June 30, 1996
estimates and saw nothing of an unusual nature that would cause us to take
exception with the estimates, in the aggregate, as prepared by American
Exploration Company.
The estimated reserves and future revenue shown herein are for proved
developed producing, proved developed non-producing, and proved undeveloped
reserves. Our audit did not include consideration of probable or possible
reserves which may exist for these properties, nor did it include any
consideration of undeveloped acreage beyond those tracts for which undeveloped
reserves have been estimated.
It should be understood that our audit does not constitute a complete
reserve study of American Exploration Company's oil and gas properties. Our
audit consisted of a detailed review of fields constituting the top 83 percent
of American Exploration Company's total proved present worth discounted at 10
percent, as of June 30, 1996, excluding the March and September 1996 Zilkha
acquisition properties. In our audit, we accepted without independent
verification the accuracy and completeness of the historical information and
data furnished by American Exploration Company with respect to ownership
interest, oil and gas production, well test data, oil and gas prices,
historical costs of operation and development, and any agreements relating to
current and future operations of the properties and sales of production.
However, if in the course of our examination something came to our attention
which brought into question the validity or sufficiency of any such information
or data, we did not rely on such information or data until we had
satisfactorily resolved our questions relating thereto or had independently
verified such information or data.
Oil prices used by American Exploration Company are based on a June
1996 average West Texas Intermediate posted price of $18.93 per barrel,
adjusted by lease for gravity, transportation fees, and regional posted price
differentials, and are held constant in accordance with SEC guidelines.
Gas prices used by American Exploration Company are based on either the
most current price available for each lease, adjusted to a June 1996 regional
spot market price, or the contract price. In accordance with SEC guidelines,
fixed and determinable price increases stipulated by existing contracts are
allowed. Prices used for Bowdoin Field, Montana, are held constant through
December 31, 1996, then escalated 4 percent on January 1 of each year to a
maximum of $7.49 per MMBTU. All other gas prices are held constant throughout
the life of the properties.
Lease and well operating costs are based on operating expense records
of American Exploration Company. These costs include the per-well overhead
expenses allowed under joint operating agreements along with costs estimated to
be incurred at and below the district and field levels. Headquarters general
and administrative overhead expenses of American Exploration Company are not
included. Lease and well operating costs are held constant in accordance with
SEC guidelines. Capital costs are included as required for workovers, new
development wells, and production equipment.
It is our understanding that American Exploration Company's estimates
of reserves and future revenue do not include adjustments for the settlement of
any potential gas volume and value imbalances which may have resulted from
overdelivery or underdelivery to the American Exploration Company
A-2
<PAGE> 116
[NSAI LOGO]
interest. The projections are based on American Exploration Company receiving
its net revenue interest share of estimated future gross gas production.
We are independent petroleum engineers and geologists with respect to
American Exploration Company as provided in the Standards Pertaining to the
Estimating and Auditing of Oil and Gas Reserve Information promulgated by the
Society of Petroleum Engineers. We do not own an interest in these properties
and are not employed on a contingent basis.
Very truly yours,
/s/ CLARENCE NETHERLAND
GLB:DMS
A-3
<PAGE> 117
[WILLIAM M. COBB & ASSOCIATES, INC. LETTERHEAD]
October 4, 1996
Mr. Harold Korell
American Exploration Company
1331 Lamar, Suite 900
Houston, Texas 77010-3088
Dear Mr. Korell:
This summary letter report presents the results of our evaluation of the proved
oil and gas reserves and future net income attributable to the interest of
American Exploration Company (AEC) in seven oil and gas fields located in
Federal Offshore Waters in the Gulf Mexico. The AEC interests were acquired
from Zilkha Energy Company in two separate acquisitions during 1996. The
summary results presented herein were taken from our detailed reserve report
dated October 4, 1996.
Table 1 summarizes our estimate of the proved oil and gas reserves and their
pre-Federal Income Tax values undiscounted and discounted at ten percent for
the combined March and September 1996 acquisitions. Values shown are determined
utilizing June 30, 1996 hydrocarbon prices as required by SEC guidelines. The
discounted present worth of future income values shown in Table 1 or in other
portions of this report are not intended to necessarily represent an estimate
of fair market value.
TABLE 1
AEC NET RESERVES AND VALUE AS OF JUNE 30, 1996
MARCH AND SEPTEMBER 1996 ACQUISITIONS
SEC PRICING
<TABLE>
<CAPTION>
Net Reserves Future Net Pre-Tax Income
--------------------- ----------------------------------
Oil Gas Undiscounted Discounted at 10%
Reserve Category (MBBL) (MMCF) M$ M$
- ---------------- ------ ------ ------------ -----------------
<S> <C> <C> <C> <C>
Proved
Producing 561 6,669 20,343 17,893
Non-Producing 602 60 8,181 4,792
Undeveloped 3,190 20,051 58,348 43,951
----- ------ ------ ------
Total Proved 4,353 26,780 86,872 66,636
</TABLE>
A-4
<PAGE> 118
Page 2
Oil (Condensate) volumes are expressed in thousands of stock tank barrels
(MBBL). A stock tank barrel is equivalent to 42 United States gallons. Gas
volumes are expressed in millions of standard cubic feet (MMCF) as determined
at 60(degrees) Fahrenheit and the legal pressure base prevailing in the state
in which the reserves are located.
Table 2 presents summary reserve and cash flow information for the five
properties acquired in the March 1996 Acquisition.
TABLE 2
AEC NET RESERVES AND VALUE AS OF JUNE 30, 1996
MARCH 1996 ACQUISITION
SEC PRICING
<TABLE>
<CAPTION>
Net Reserves Future Net Pre-Tax Income
--------------- --------------------------------
Oil Gas Undiscounted Discounted at 10%
Reserve Category (MBBL) (MMCF) M$ M$
- ---------------- ------ ------ ------------ -----------------
<S> <C> <C> <C> <C>
Proved
Producing 335 6,604 16,663 14,499
Non-Producing 0 0 0 0
Undeveloped 142 1,262 3,448 3,031
--- ----- ------ ------
Total Proved 477 7,866 20,111 17,530
</TABLE>
Table 3 presents similar information for the September 1996 Acquisition which
includes interests in two properties.
TABLE 3
AEC NET RESERVES AND VALUE AS OF JUNE 30, 1996
SEPTEMBER 1996 ACQUISITION
SEC PRICING
<TABLE>
<CAPTION>
Net Reserves Future Net Pre-Tax Income
--------------- --------------------------------
Oil Gas Undiscounted Discounted at 10%
Reserve Category (MBBL) (MMCF) M$ M$
- ---------------- ------ ------ ------------ -----------------
<S> <C> <C> <C> <C>
Proved
Producing 226 65 3,680 3,394
Non-Producing 602 60 8,181 4,792
Undeveloped 3,048 18,789 54,900 40,920
----- ------ ------ ------
Total Proved 3,876 18,914 66,761 49,106
</TABLE>
A-5
<PAGE> 119
Page 3
DISCUSSION
The AEC properties are located in Federal waters offshore Louisiana and Texas
in the Gulf of Mexico. Interests in E. Cameron 129, W. Cameron 254, High Island
45, S. Marsh Island 133, and N. Padre Island 996 were purchased from Zilkha
Energy Company in March 1996 (March 1996 Acquisition). The AEC interests in
High Island 116 and E. Cameron 328 were purchased from Zilkha Energy Company
effective September 15, 1996 (September 1996 Acquisition). At the request of
AEC, these interests are included in this report as if they were owned on June
30, 1996.
The High Island 116 property was not producing at June 30, 1996. The property
was awaiting the installation of a production platform, and as such, the
reserves were classified as proved undeveloped (PUD). The production platform
has since been installed and the High Island 116 No. A-1 well was placed on
production on July 31, 1996. The well is currently producing at a rate of
47,500 MCF and 712 barrels of condensate per day.
RESERVE METHODOLOGY
Reserve calculations for the AEC properties are based on actual production and
pressure performance when sufficient historical data is available and
applicable. For properties with limited production performance data and for
those producing under a natural water-drive mechanism, reserves are determined
utilizing the volumetric technique. To perform the volumetric calculations, we
analyzed well logs provided by AEC to determine reservoir properties such as
porosity, water saturation, and net pay thickness. Areal extent and reservoir
bulk volume are determined from structure and net pay isopach maps provided by
AEC. We have studied the AEC maps, and in certain instances, we modified the
maps based on our interpretation of available well logs. It is noted that
reserve volumes calculated using the volumetric technique are generally less
reliable than those supported by actual performance trends and, as such, should
be considered to contain a higher element of risk.
ECONOMIC PROJECTIONS
Our detailed reserve report contains reserve and cash flow projections for each
AEC property, the results of which are summarized in Tables 1 through 3 of this
letter. The undiscounted future net pre-tax income presented in these tables is
the future net oil and gas revenue after deducting any applicable severance
taxes, ad valorem taxes, operating costs, and capital costs (including
abandonment costs). All economic evaluations are made without consideration of
Federal Income Taxes.
OTHER
The proved reserves included in this summary letter report conform to the
definition as set forth in the Securities and Exchange Commission's Regulation
S-X Part 210.4-10 (a) as clarified by subsequent Commission Staff Accounting
Bulletins.
A-6
<PAGE> 120
Page 4
We have not made any field examination of the AEC properties. Therefore,
operating ability and condition of the production equipment have not been
considered. No consideration was given in this report to potential
environmental liabilities which may exist, nor were any costs included for
potential liability to restore and clean up damages, if any, caused by past
operating practices.
In evaluating the information at our disposal concerning this appraisal, we
have excluded from our consideration all matters as to which legal or
accounting interpretation, rather than engineering, may be controlling. As in
all aspects of oil and gas evaluation, there are uncertainties inherent in the
interpretation of engineering data and such conclusions necessarily represent
only informed professional judgments.
The reserves included in this summary letter report are estimates only and
should not be construed as being exact quantities. The revenues from such
reserves and the actual costs related thereto could be more or less than the
estimated amounts. Because of governmental policies and uncertainties of
supply and demand, the prices actually received for the reserves included in
this report, and the costs incurred in recovering such reserves, may vary from
the price and cost assumptions in this report. In any case, estimates of
reserves may increase or decrease as a result of future operations.
Titles to the appraised properties have not been examined by William M. Cobb &
Associates, Inc., nor has the actual degree of interest owned been
independently confirmed. The data used in our evaluation were obtained from
American Exploration Company and the nonconfidential files of William M. Cobb &
Associates, Inc. and were considered accurate. Basic field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
WILLIAM M. COBB & ASSOCIATES, INC.
/s/ FRANK J. MAREK
---------------------------------
Frank J. Marek
Vice President
A-7
<PAGE> 121
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 10
The Company........................... 14
Use of Proceeds....................... 14
Price Range of Common Stock and
Dividend Policy..................... 15
Capitalization........................ 16
Pro Forma Condensed Consolidated
Financial Statements................ 17
Selected Financial Data............... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 33
Management............................ 48
Security Ownership of Management and
Certain Beneficial Owners........... 50
Selling Stockholders.................. 52
Executive Compensation................ 53
Certain Relationships and Related
Transactions........................ 56
Description of Capital Stock.......... 58
Underwriting.......................... 62
Legal Matters......................... 63
Experts............................... 63
Available Information................. 63
Glossary of Certain Oil and Gas
Terms............................... 64
Index to Financial Statements......... F-1
Reports of Independent Petroleum
Engineers........................... A-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,579,229 Shares
American Exploration Logo
AMERICAN EXPLORATION
COMPANY
Common Stock
--------------------------
PROSPECTUS
-------------------------
PRUDENTIAL SECURITIES INCORPORATED
DILLON, READ & CO. INC.
A.G. EDWARDS & SONS, INC.
October , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Securities and Exchange Commission filing fee..................... $ 17,047
NASD filing fee................................................... 5,672
American Stock Exchange additional listing fee.................... 17,500
Fees and expenses of accountants.................................. 100,000
Fees and expenses of counsel...................................... 200,000
Fees and expenses of engineers.................................... 30,000
Printing and engraving expenses................................... 250,000
Blue sky fees and expenses........................................ 20,000
Miscellaneous..................................................... 4,781
--------
Total................................................... $645,000
========
</TABLE>
- ---------------
(1) The amounts set forth above, except for the fees for the Securities and
Exchange Commission, for the NASD and for the American Stock Exchange, are
in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL gives corporations the power to indemnify officers
and directors under certain circumstances. The Registrant's Bylaws contain
provisions that provide for indemnification of certain persons (including
officers and directors).
Article IV of the Bylaws of the Registrant contains the following
provisions:
"Section 1. Indemnification Generally. Subject to the provisions of Section
3 of this Article IV, the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee, or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner that he reasonably believed to be in or not opposed to the best interests
of the Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful."
"Section 2. Indemnification for Expenses Only. Subject to the provisions of
Section 3 of this Article IV, the Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee, or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with such action or suit, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interest of the
Corporation and except that no indemnification shall be made in respect to any
claim, issue, or matter as to
II-1
<PAGE> 123
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all of the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper."
"Section 3. Determination. Any indemnification under Sections 1 and 2 of
this Article IV (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee, or agent is proper in the
circumstances because he had met the applicable standard of conduct set forth in
said Sections 1 and 2. Such determination shall be made (a) by the Board, by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit, or proceeding, or (b) if such quorum is not obtainable, or even if
obtainable and a quorum of disinterested directors so directs, by independent
legal counsel (who may be counsel to the Corporation) in a written opinion, or
(c) by the stockholders."
"Section 4. Successful Suit. If a director, officer, employee, or agent of
the Corporation has been successful on the merits or otherwise as a party to any
action, suit, or proceeding, referred to in Sections 1 and 2 of this Article IV,
or with respect to any claim, issue or matter therein (to the extent that a
portion of his expenses can be reasonably allocated thereto), he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith."
"Section 5. Advance Payment. Expenses incurred in connection with a civil,
criminal, administrative, or investigative action, suit, or proceeding, or
threat thereof, shall be paid by the Corporation in advance of the final
disposition of such action, suit, or proceeding upon receipt of an undertaking
by or on behalf of the director, officer, employee, or agent to repay such
amount, unless it shall ultimately be determined that he is entitled to be
indemnified by the Corporation as authorized in this Article IV."
"Section 6. Insurance. By action of the Board, notwithstanding any interest
of the directors in the action, to the full extent permitted by applicable law,
the Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee, or agent of the Corporation, or is or
was serving at the request of the Corporation, as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or other
enterprise, against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article IV or of Section 145 of the General Corporation
Law of the State of Delaware."
"Section 7. Definitions. For purposes of this Article IV, references to the
"Corporation" shall include, in addition to the Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger that, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
and agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, or other enterprise, shall
stand in the same position under the provisions of this Article IV with respect
to the resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued. For purposes of
this Article IV, references to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to any employee benefit plan; and references to "serving
at the request of the Corporation" shall include any service as a director,
officer, employee or agent of the Corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this Article IV."
"Section 8. Other Rights. The indemnification provided pursuant to the
provisions of this Article IV shall not be deemed exclusive of any other rights
that those seeking indemnification may be entitled to under any other By-law,
agreement, contract of insurance, statute, vote of stockholders, or
disinterested directors or
II-2
<PAGE> 124
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent of the Corporation,
or has ceased to be a director, officer, employee, or agent of another
corporation, partnership, joint venture, or other enterprise wherein such person
was serving at the request of the Corporation, and shall inure to the benefit of
the heirs, executors and administrators of such person."
"Section 9. Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Article IV shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification."
In addition to the above recited provisions of the Registrant's Bylaws, the
Registrant's stockholders, pursuant to Section 102(b)(7) of the DGCL, adopted a
new Article SIXTH of the Registrant's Restated Certificate of Incorporation
which has the effect of limiting or eliminating the potential monetary liability
of the directors to the Registrant or its stockholders for breaches of a
director's fiduciary duty of care. The text of Article SIXTH adopted pursuant to
the aforementioned Section 102(b)(7) by the stockholders of the Registrant on
September 8, 1986 is set out in full below:
"SIXTH: No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, provided that this provision shall not
limit the liability of a Director (a) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the Delaware
Corporation Law, or (d) for any transaction from which the Director
derived an improper personal benefit. This Article does not limit the
liability of a Director for any act or omission occurring prior to the
date when this Article becomes effective."
In addition, the Registrant maintains two primary and two excess insurance
policies, which collectively provide insurance coverage in the amount of $10.0
million. The first primary and excess policies insure the Registrant's directors
and officers against liability for their acts in such capacities collectively up
to an aggregate of $6.0 million, subject to specified exclusions, including an
exclusion with respect to liabilities arising out of the Registrant's acting as
a general partner or joint venturer. The second primary and excess policies
insure the Registrant and its directors, subject to specified deductibles and
exclusions, against liability for their acts in connection with the Registrant
acting as a general partner up to an aggregate of $4.0 million. Both of the
primary policies are subject to common acts tie-in endorsements.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following relates to securities of the Company issued or sold within
the past three years which were not registered under the Securities Act:
On December 20, 1993 the Company issued in a private placement 800,000
depositary shares, each such depositary share representing a 1/200 interest in a
share of $450 Cumulative Convertible Preferred Stock, Series C for an aggregate
purchase price of $20 million less customary placement agent fees. Such issuance
was exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof as a transaction not involving any public offering.
In August 1994 the Company issued 150,000 shares of its Common Stock to
Apache Corporation for an aggregate of $2.1 million. Such issuance was exempt
from the registration requirements of the Securities Act by virtue of Section
4(2) thereof as a transaction not involving any public offering.
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In 1994 and 1995, the Company issued 4.6 million shares of Common Stock, in
the aggregate, to a limited number of institutional investors in certain oil and
gas programs, together with $40.1 million in cash consideration, in exchange for
such investors' interests in the programs. Such issuances were exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof as transactions not involving any public offering.
In June 1995 each outstanding share of Common Stock was reclassified into
1/10 of a share of Common Stock (the "Reverse Stock Split"). All share amounts
reflected in the preceding paragraphs of this Item 15 concerning the issuance of
Common Stock have been adjusted to reflect the Reverse Stock Split. The Reverse
Stock Split was exempt from the registration requirements of the Securities Act
as it did not involve a "sale" as defined in Section 2(3) of the Securities Act.
ITEM 16. EXHIBITS
<TABLE>
<S> <C> <C>
1(a) -- Form of Underwriting Agreement.
*3(a) -- Restated Certificate of Incorporation of American Exploration Company,
as supplemented by Certificate of Amendment to Restated Certificate of
Incorporation, effective June 13, 1995 (Form 10-K, December 31, 1995,
Exhibit 3(a)).
*3(b) -- Amended and Restated Bylaws of American Exploration Company (Form
10-K, December 31, 1995, Exhibit 3(b)).
*4(a) -- Rights Agreement, dated as of September 28, 1993, between American
Exploration Company and Society National Bank (Form 8-K, September 28,
1993, Exhibit 4), as supplemented by Amendment to Rights Agreement,
dated as of August 3, 1994, between American Exploration Company and
Society National Bank (Form 8-K, August 31, 1994, Exhibit 4).
*4(b) -- Certificate of Designation of the $450 Cumulative Convertible
Preferred Stock, Series C, dated December 14, 1993 (Form S-3, January
4, 1994, Registration No. 33-51795, Exhibit 4.3), as supplemented by
Certificate of Correction to the Certificate of Designation of the
$450 Cumulative Convertible Preferred Stock, Series C, dated December
29, 1993 (Form S-3, January 4, 1994, Registration No. 33-51795,
Exhibit 4.4).
*4(c) -- Deposit Agreement, dated as of December 10, 1993, by and among
American Exploration Company, Harris Trust and Savings Bank and the
holders from time to time of Depositary Receipts (Form S-3, January 4,
1994, Registration No. 33-51795, Exhibit 4.5).
*4(d) -- Purchase Agreement, dated as of December 10, 1993, by and among
American Exploration Company and each of the purchasers referred to
therein (Form S-3, January 4, 1994, Registration No. 33-51795, Exhibit
4.6).
*4(e) -- Registration Rights Agreement, dated as of December 17, 1993, by and
among American Exploration Company and each of the purchasers referred
to therein (Form S-3, January 4, 1994, Registration No. 33-51795,
Exhibit 4.7).
*4(f) -- Form of Stock Certificate representing shares of Convertible Preferred
Stock (Form 8-A, March 23, 1994, Exhibit 8).
*4(g) -- Form of Depositary Receipt representing Depositary Shares (Form 8-A,
March 23, 1994, Exhibit 9).
5 -- Opinion of Patterson, Belknap, Webb & Tyler LLP.
*10(a) -- American Exploration Company Stock Compensation Plan, effective
December 9, 1988 (Form S-8, September 21, 1989, Registration No.
31-31202, Exhibit 4(c)).
*10(b) -- American Exploration Company Amended and Restated 1978 Hershey Oil
Corporation Non-Qualified Equity Participation Plan (Form S-4, August
8, 1990, Registration No. 33-36268, Exhibit 10(ccc)).
</TABLE>
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<PAGE> 126
<TABLE>
<S> <C>
*10(c) -- American Exploration Company Amended and Restated 1983 Stock Option
Plan of Hershey Oil Corporation (Form S-4, August 8, 1990,
Registration No. 33-36268, Exhibit 10(ddd)).
*10(d) -- American Exploration Company Amended and Restated 1988 Stock Option
Plan of Hershey Oil Corporation (Form S-4, August 8, 1990,
Registration No. 33-36268, Exhibit 10(eee)).
*10(e) -- Office Lease, dated December 12, 1990, between JMB/Houston Center
Partners Limited Partnership and American Exploration Company (Form
S-4, January 9, 1991, Registration No. 33-38546, Exhibit 10(kkk)).
*10(f) -- Master Exchange Agreement, dated as of February 1, 1991, between
American Exploration Company and Morgan Guaranty Trust Company of New
York (Form 10-Q, March 31, 1991, Exhibit 10(a)).
*10(g) -- Note Purchase Agreement, dated as of December 27, 1991, re:
$35,000,000 11% Senior Subordinated Notes due December 30, 2001 (Form
8-K, January 10, 1992, Exhibit 10(a)), as supplemented by the
Amendment to Note Purchase Agreement, dated as of February 16, 1993,
by and among American Exploration Company (the "Company") and the
parties named therein (Form 8-K, February 16, 1993, Exhibit 10(a)), as
supplemented by letter agreement, dated March 22, 1993, by and among
the Company and the parties named therein (Form 10-K, December 31,
1992, Exhibit 10(zz)), as supplemented by Second Amendment to Note
Purchase Agreement, dated as of September 30, 1993, by and among the
Company and the parties named therein (Form 10-Q, September 30, 1993,
Exhibit 10(c)), as supplemented by Third Amendment to Note Purchase
Agreement, dated as of March 18, 1994, by and among the Company and
the parties named therein (Form 10-K, December 31, 1993, Exhibit
10(tt)), as supplemented by Fourth Amendment to Note Purchase
Agreement, dated as of April 28, 1994, by and among the Company and
the parties named therein (Form 10-Q, March 31, 1994, Exhibit 10(c)),
as supplemented by Fifth Amendment to Note Purchase Agreement, dated
as of July 26, 1994, by and among the Company and the parties named
therein (Form 10-Q, September 30, 1994, Exhibit 10(c)), as
supplemented by Sixth Amendment to Note Purchase Agreement, dated as
of September 12, 1996, by and among the Company and the parties named
therein (Form 8-K, September 27, 1996, Exhibit 10(b)).
*10(h) -- Warrant Purchase Agreement and Form of Warrants, dated as of December
27, 1991 (Form 8-K, January 10, 1992, Exhibit 10(b)), as supplemented
by Amendment No. 1 to Warrant Purchase Agreement, dated as of February
16, 1993, by and among American Exploration Company and the parties
named therein (Form 8-K, February 16, 1993, Exhibit 10(b)), as
supplemented by Amendment No. 2 to Warrant Purchase Agreement, dated
as of September 12, 1996, (Form 8-K, September 27, 1996, Exhibit
10(c)).
*10(i) -- Employee Stock Ownership Trust of American Exploration Company, as
Amended and Restated Effective January 1, 1991 (Form 10-Q, June 30,
1992, Exhibit 10(b)).
*10(j) -- Stock Purchase Agreement, dated as of September 3, 1992, between
American Exploration Company and The Prudential Insurance Company of
America (Form 8-K, September 3, 1992, Exhibit 10(a)).
*10(k) -- Stock Purchase Warrant, dated as of September 3, 1992, between
American Exploration Company and The Prudential Insurance Company of
America (Form 8-K, September 3, 1992, Exhibit 10(b)).
</TABLE>
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<TABLE>
<S> <C>
*10(l) -- Registration Rights Agreement, dated as of September 3, 1992, between
American Exploration Company and The Prudential Insurance Company of
America (Form 8-K, September 3, 1992, Exhibit 10(c)).
*10(m) -- Sale of Securities Offer dated June 4, 1993 (Form 8-K, June 14, 1993,
Exhibit 10(a)).
*10(n) -- Phantom Stock Plan of American Exploration Company, effective
September 21, 1993 (Form 10-Q, September 30, 1993, Exhibit 10(b)).
*10(o) -- Agreement of Limited Partnership of Ancon Partnership Ltd., dated
December 10, 1993, by and between American Exploration Company and
NYLIFE Resources, Inc. (Form 10-K, December 31, 1993, Exhibit 10(rr)).
*10(p) -- Amended and Restated Credit Agreement, dated as of December 21, 1994,
among American Exploration Company, the banks listed therein and
Morgan Guaranty Trust Company of New York, as agent, and Bank of
Montreal, as co-agent (Form 10-K, December 31, 1994, Exhibit 10(pp)).
*10(q) -- Amendment No. 1 to Amended and Restated Credit Agreement, dated as of
February 16, 1995, among American Exploration Company, the banks
listed therein and Morgan Guaranty Trust Company of New York, as
agent, and Bank of Montreal, as co-agent (Form 10-K, December 31,
1994, Exhibit 10(qq)).
*10(r) -- American Exploration Stock Compensation Plan, effective June 13, 1995
(Proxy Statement, May 10, 1995, Appendix A).
*10(s) -- Purchase and Sale Agreement, dated June 12, 1995, by and among
American Exploration Company and the partnerships identified on the
signature pages hereof, collectively as Sellers, and Louis Dreyfus
Natural Gas Corp., as Purchaser (Form 10-Q, June 30, 1995, Exhibit
10(a)).
*10(t) -- Amendment No. 2 to Amended and Restated Credit Agreement, dated as of
May 2, 1995, among American Exploration Company, the banks listed
therein and Morgan Guaranty Trust Company of New York, as agent, and
Bank of Montreal, as co-agent (Form 10-K, December 31, 1995, Exhibit
(bb)).
*10(u) -- Employee Stock Ownership Plan of American Exploration Company, as
Amended and Restated, effective November 30, 1995 (Form 10-K, December
31, 1995, Exhibit 10(cc)).
*10(v) -- Employee Agreement between American Exploration Company and Mark An-
drews, effective November 30, 1995 (Form 10-K, December 31, 1995, Ex-
hibit 10(d)).
*10(w) -- Severance Agreements between American Exploration Company and the
executive officers of American Exploration Company, effective November
30, 1995 (Form 10-K, December 31, 1995, Exhibit 10(e)).
*10(x) -- Amendment No. 3 to Amended and Restated Credit Agreement, dated as of
January 19, 1996, among American Exploration Company, the banks listed
therein and Morgan Guaranty Trust Company of New York, as agent, and
Bank of Montreal, as co-agent (Form 10-K, December 31, 1995, Exhibit
10(f)).
*10(y) -- Amendment No. 4 to Amended and Restated Credit Agreement, dated June
5, 1996, among American Exploration Company, the banks listed therein
and Morgan Guaranty Trust Company of New York, as agent, and Bank of
Montreal, as co-agent (Form 10-Q, June 30, 1996, Exhibit 10(a)).
*10(z) -- Purchase and Sale Agreement, dated March 15, 1996, by and among
American Exploration Company and Dominion Resources, Inc.,
collectively as buyers, and a private company, as Seller (Form 8-K,
March 15, 1996, Exhibit 10(a)).
</TABLE>
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<PAGE> 128
<TABLE>
<S> <C> <C>
*10(aa) -- Purchase and Sale Agreement, dated September 27, 1996, by and among
American Exploration Company and Zilkha Energy Company (Form 8-K,
September 27, 1996, Exhibit 10(a)).
*10(bb) -- Amendment No. 5 to Amended and Restated Credit Agreement, dated as of
September 26, 1996, among American Exploration Company, the banks
listed therein and Morgan Guaranty Trust Company of New York, as
agent, and Bank of Montreal, as co-agent (Form 8-K, September 27,
1996, Exhibit 10(d)).
*10(cc) -- Amendment No. 6 to Amended and Restated Credit Agreement, dated
October 15, 1996, among American Exploration Company, the banks listed
therein and Morgan Guaranty Trust Company of New York, as agent, and
Bank of Montreal, as co-agent (Form 10-Q, September 30, 1996, Exhibit
10(a)).
10(dd) -- Agreement dated as of February 15, 1996 by and among American
Exploration Company, American Exploration Production Company, NYLIFE
Inc., and NYLIFE Securities Inc.
10(ee) -- Stockholder and Registration Rights Agreements, dated as of August
1994, between American Exploration Company and the parties identified
on the signature pages thereto.
10(ff) -- Stockholder and Registration Rights Agreements, dated as of November
1994, between American Exploration Company and the parties identified
on the signature pages thereto.
10(gg) -- Letter Agreement, dated as of October 10, 1996 between American
Exploration Company and the parties identified on the signature pages
thereto.
*18 -- Letter from Arthur Andersen LLP, dated March 30, 1995, re: Change in
American Exploration Company's Accounting Policy Related to
Recognizing Impairment of Proved Oil and Gas Properties (Form 10-K,
December 31, 1994, Exhibit 18).
*21 -- Subsidiaries of American Exploration Company (Form 10-K, December 31,
1995, Exhibit 21).
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of KPMG Peat Marwick LLP.
23(c) -- Consent of KPMG Peat Marwick LLP.
23(d) -- Consent of Patterson, Belknap, Webb & Tyler LLP (contained in Exhibit
5).
**23(e) -- Consent of Netherland, Sewell & Associates, Inc.
**23(f) -- Consent of William M. Cobb & Associates, Inc.
**24 -- Powers of Attorney.
</TABLE>
- ---------------
* Incorporated by reference as indicated.
** Previously filed.
NOTE: Copies of Exhibits may be obtained for 30 cents per page, prepaid, by
writing to the Investor Relations Department.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
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<PAGE> 129
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<PAGE> 130
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON,
STATE OF TEXAS, ON THE 25TH DAY OF OCTOBER, 1996.
AMERICAN EXPLORATION COMPANY
By: /s/ MARK ANDREWS
------------------------------
(Mark Andrews)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<S> <C> <C>
/s/ MARK ANDREWS Chairman of the Board and October 25, 1996
- --------------------------------------------- Chief Executive Officer
(Mark Andrews) (Principal Executive Officer)
/s/ JOHN M. HOGAN Senior Vice President and October 25, 1996
- --------------------------------------------- Chief Financial Officer
(John M. Hogan) (Principal Financial and
Accounting Officer)
* Director October 25, 1996
- ---------------------------------------------
(Harry W. Colmery, Jr.)
* Director October 25, 1996
- ---------------------------------------------
(Irvin K. Culpepper, Jr.)
* Director October 25, 1996
- ---------------------------------------------
(Walter J.P. Curley)
* Director October 25, 1996
- ---------------------------------------------
(Robert M. Danos)
* Director October 25, 1996
- ---------------------------------------------
(Phillip Frost, M.D.)
* Director October 25, 1996
- ---------------------------------------------
(Peter G. Gerry)
* Director October 25, 1996
- ---------------------------------------------
(H. Phipps Hoffstot, III)
* Director October 25, 1996
- ---------------------------------------------
(John H. Moore)
</TABLE>
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<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<S> <C> <C>
* Director October 25, 1996
- ---------------------------------------------
(Peter P. Nitze)
*By: /s/ JOHN M. HOGAN October 25, 1996
- ---------------------------------------------
(John M. Hogan, Attorney-in-Fact)
</TABLE>
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<PAGE> 132
INDEX TO EXHIBITS
<TABLE>
<S> <C>
1(a) -- Form of Underwriting Agreement.
*3(a) -- Restated Certificate of Incorporation of American Exploration Company,
as supplemented by Certificate of Amendment to Restated Certificate of
Incorporation, effective June 13, 1995 (Form 10-K, December 31, 1995,
Exhibit 3(a)).
*3(b) -- Amended and Restated Bylaws of American Exploration Company (Form
10-K, December 31, 1995, Exhibit 3(b)).
*4(a) -- Rights Agreement, dated as of September 28, 1993, between American
Exploration Company and Society National Bank (Form 8-K, September 28,
1993, Exhibit 4), as supplemented by Amendment to Rights Agreement,
dated as of August 3, 1994, between American Exploration Company and
Society National Bank (Form 8-K, August 31, 1994, Exhibit 4).
*4(b) -- Certificate of Designation of the $450 Cumulative Convertible
Preferred Stock, Series C, dated December 14, 1993 (Form S-3, January
4, 1994, Registration No. 33-51795, Exhibit 4.3), as supplemented by
Certificate of Correction to the Certificate of Designation of the
$450 Cumulative Convertible Preferred Stock, Series C, dated December
29, 1993 (Form S-3, January 4, 1994, Registration No. 33-51795,
Exhibit 4.4).
*4(c) -- Deposit Agreement, dated as of December 10, 1993, by and among
American Exploration Company, Harris Trust and Savings Bank and the
holders from time to time of Depositary Receipts (Form S-3, January 4,
1994, Registration No. 33-51795, Exhibit 4.5).
*4(d) -- Purchase Agreement, dated as of December 10, 1993, by and among
American Exploration Company and each of the purchasers referred to
therein (Form S-3, January 4, 1994, Registration No. 33-51795, Exhibit
4.6).
*4(e) -- Registration Rights Agreement, dated as of December 17, 1993, by and
among American Exploration Company and each of the purchasers referred
to therein (Form S-3, January 4, 1994, Registration No. 33-51795,
Exhibit 4.7).
*4(f) -- Form of Stock Certificate representing shares of Convertible Preferred
Stock (Form 8-A, March 23, 1994, Exhibit 8).
*4(g) -- Form of Depositary Receipt representing Depositary Shares (Form 8-A,
March 23, 1994, Exhibit 9).
5 -- Opinion of Patterson, Belknap, Webb & Tyler LLP.
*10(a) -- American Exploration Company Stock Compensation Plan, effective
December 9, 1988 (Form S-8, September 21, 1989, Registration No.
31-31202, Exhibit 4(c)).
*10(b) -- American Exploration Company Amended and Restated 1978 Hershey Oil
Corporation Non-Qualified Equity Participation Plan (Form S-4, August
8, 1990, Registration No. 33-36268, Exhibit 10(ccc)).
*10(c) -- American Exploration Company Amended and Restated 1983 Stock Option
Plan of Hershey Oil Corporation (Form S-4, August 8, 1990,
Registration No. 33-36268, Exhibit 10(ddd)).
*10(d) -- American Exploration Company Amended and Restated 1988 Stock Option
Plan of Hershey Oil Corporation (Form S-4, August 8, 1990,
Registration No. 33-36268, Exhibit 10(eee)).
*10(e) -- Office Lease, dated December 12, 1990, between JMB/Houston Center
Partners Limited Partnership and American Exploration Company (Form
S-4, January 9, 1991, Registration No. 33-38546, Exhibit 10(kkk)).
</TABLE>
<PAGE> 133
<TABLE>
<S> <C> <C>
*10(f) -- Master Exchange Agreement, dated as of February 1, 1991, between
American Exploration Company and Morgan Guaranty Trust Company of New
York (Form 10-Q, March 31, 1991, Exhibit 10(a)).
*10(g) -- Note Purchase Agreement, dated as of December 27, 1991, re:
$35,000,000 11% Senior Subordinated Notes due December 30, 2001 (Form
8-K, January 10, 1992, Exhibit 10(a)), as supplemented by the
Amendment to Note Purchase Agreement, dated as of February 16, 1993,
by and among American Exploration Company (the "Company") and the
parties named therein (Form 8-K, February 16, 1993, Exhibit 10(a)), as
supplemented by letter agreement, dated March 22, 1993, by and among
the Company and the parties named therein (Form 10-K, December 31,
1992, Exhibit 10(zz)), as supplemented by Second Amendment to Note
Purchase Agreement, dated as of September 30, 1993, by and among the
Company and the parties named therein (Form 10-Q, September 30, 1993,
Exhibit 10(c)), as supplemented by Third Amendment to Note Purchase
Agreement, dated as of March 18, 1994, by and among the Company and
the parties named therein (Form 10-K, December 31, 1993, Exhibit
10(tt)), as supplemented by Fourth Amendment to Note Purchase
Agreement, dated as of April 28, 1994, by and among the Company and
the parties named therein (Form 10-Q, March 31, 1994, Exhibit 10(c)),
as supplemented by Fifth Amendment to Note Purchase Agreement, dated
as of July 26, 1994, by and among the Company and the parties named
therein (Form 10-Q, September 30, 1994, Exhibit 10(c)), as
supplemented by Sixth Amendment to Note Purchase Agreement, dated as
of September 12, 1996, by and among the Company and the parties named
therein (Form 8-K, September 27, 1996, Exhibit 10(b)).
*10(h) -- Warrant Purchase Agreement and Form of Warrants, dated as of December
27, 1991 (Form 8-K, January 10, 1992, Exhibit 10(b)), as supplemented
by Amendment No. 1 to Warrant Purchase Agreement, dated as of February
16, 1993, by and among American Exploration Company and the parties
named therein (Form 8-K, February 16, 1993, Exhibit 10(b)), as
supplemented by Amendment No. 2 to Warrant Purchase Agreement, dated
as of September 12, 1996, (Form 8-K, September 27, 1996, Exhibit
10(c)).
*10(i) -- Employee Stock Ownership Trust of American Exploration Company, as
Amended and Restated Effective January 1, 1991 (Form 10-Q, June 30,
1992, Exhibit 10(b)).
*10(j) -- Stock Purchase Agreement, dated as of September 3, 1992, between
American Exploration Company and The Prudential Insurance Company of
America (Form 8-K, September 3, 1992, Exhibit 10(a)).
*10(k) -- Stock Purchase Warrant, dated as of September 3, 1992, between
American Exploration Company and The Prudential Insurance Company of
America (Form 8-K, September 3, 1992, Exhibit 10(b)).
*10(l) -- Registration Rights Agreement, dated as of September 3, 1992, between
American Exploration Company and The Prudential Insurance Company of
America (Form 8-K, September 3, 1992, Exhibit 10(c)).
*10(m) -- Sale of Securities Offer dated June 4, 1993 (Form 8-K, June 14, 1993,
Exhibit 10(a)).
*10(n) -- Phantom Stock Plan of American Exploration Company, effective
September 21, 1993 (Form 10-Q, September 30, 1993, Exhibit 10(b)).
*10(o) -- Agreement of Limited Partnership of Ancon Partnership Ltd., dated
December 10, 1993, by and between American Exploration Company and
NYLIFE Resources, Inc. (Form 10-K, December 31, 1993, Exhibit 10(rr)).
</TABLE>
<PAGE> 134
<TABLE>
<S> <C> <C>
*10(p) -- Amended and Restated Credit Agreement, dated as of December 21, 1994,
among American Exploration Company, the banks listed therein and
Morgan Guaranty Trust Company of New York, as agent, and Bank of
Montreal, as co-agent (Form 10-K, December 31, 1994, Exhibit 10(pp)).
*10(q) -- Amendment No. 1 to Amended and Restated Credit Agreement, dated as of
February 16, 1995, among American Exploration Company, the banks
listed therein and Morgan Guaranty Trust Company of New York, as
agent, and Bank of Montreal, as co-agent (Form 10-K, December 31,
1994, Exhibit 10(qq)).
*10(r) -- American Exploration Stock Compensation Plan, effective June 13, 1995
(Proxy Statement, May 10, 1995, Appendix A).
*10(s) -- Purchase and Sale Agreement, dated June 12, 1995, by and among
American Exploration Company and the partnerships identified on the
signature pages hereof, collectively as Sellers, and Louis Dreyfus
Natural Gas Corp., as Purchaser (Form 10-Q, June 30, 1995, Exhibit
10(a)).
*10(t) -- Amendment No. 2 to Amended and Restated Credit Agreement, dated as of
May 2, 1995, among American Exploration Company, the banks listed
therein and Morgan Guaranty Trust Company of New York, as agent, and
Bank of Montreal, as co-agent (Form 10-K, December 31, 1995, Exhibit
(bb)).
*10(u) -- Employee Stock Ownership Plan of American Exploration Company, as
Amended and Restated, effective November 30, 1995 (Form 10-K, December
31, 1995, Exhibit 10(cc)).
*10(v) -- Employee Agreement between American Exploration Company and Mark An-
drews, effective November 30, 1995 (Form 10-K, December 31, 1995, Ex-
hibit 10(d)).
*10(w) -- Severance Agreements between American Exploration Company and the
executive officers of American Exploration Company, effective November
30, 1995 (Form 10-K, December 31, 1995, Exhibit 10(e)).
*10(x) -- Amendment No. 3 to Amended and Restated Credit Agreement, dated as of
January 19, 1996, among American Exploration Company, the banks listed
therein and Morgan Guaranty Trust Company of New York, as agent, and
Bank of Montreal, as co-agent (Form 10-K, December 31, 1995, Exhibit
10(f)).
*10(y) -- Amendment No. 4 to Amended and Restated Credit Agreement, dated June
5, 1996, among American Exploration Company, the banks listed therein
and Morgan Guaranty Trust Company of New York, as agent, and Bank of
Montreal, as co-agent (Form 10-Q, June 30, 1996, Exhibit 10(a)).
*10(z) -- Purchase and Sale Agreement, dated March 15, 1996, by and among
American Exploration Company and Dominion Resources, Inc.,
collectively as buyers, and a private company, as Seller (Form 8-K,
March 15, 1996, Exhibit 10(a)).
*10(aa) -- Purchase and Sale Agreement, dated September 27, 1996, by and among
American Exploration Company and Zilkha Energy Company (Form 8-K,
September 27, 1996, Exhibit 10(a)).
*10(bb) -- Amendment No. 5 to Amended and Restated Credit Agreement, dated as of
September 26, 1996, among American Exploration Company, the banks
listed therein and Morgan Guaranty Trust Company of New York, as
agent, and Bank of Montreal, as co-agent (Form 8-K, September 27,
1996, Exhibit 10(d)).
*10(cc) -- Amendment No. 6 to Amended and Restated Credit Agreement, dated
October 15, 1996, among American Exploration Company, the banks listed
therein and Morgan Guaranty Trust Company of New York, as agent, and
Bank of Montreal, as co-agent (Form 10-Q, September 30, 1996, Exhibit
10(a)).
</TABLE>
<PAGE> 135
<TABLE>
<S> <C>
10(dd) -- Agreement dated as of February 15, 1996 by and among American
Exploration Company, American Exploration Production Company, NYLIFE
Inc., and NYLIFE Securities Inc.
10(ee) -- Stockholder and Registration Rights Agreements, dated as of August
1994, between American Exploration Company and the parties identified
on the signature pages thereto.
10(ff) -- Stockholder and Registration Rights Agreements, dated as of November
1994, between American Exploration Company and the parties identified
on the signature pages thereto.
10(gg) -- Letter Agreement, dated as of October 10, 1996 between American
Exploration Company and the parties identified on the signature pages
thereto.
*18 -- Letter from Arthur Andersen LLP, dated March 30, 1995, re: Change in
American Exploration Company's Accounting Policy Related to
Recognizing Impairment of Proved Oil and Gas Properties (Form 10-K,
December 31, 1994, Exhibit 18).
*21 -- Subsidiaries of American Exploration Company (Form 10-K, December 31,
1995, Exhibit 21).
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of KPMG Peat Marwick LLP.
23(c) -- Consent of KPMG Peat Marwick LLP.
23(d) -- Consent of Patterson, Belknap, Webb & Tyler LLP (contained in Exhibit
5).
**23(e) -- Consent of Netherland, Sewell & Associates, Inc.
**23(f) -- Consent of William M. Cobb & Associates, Inc.
**24 -- Powers of Attorney.
</TABLE>
- ---------------
* Incorporated by reference as indicated.
** Previously filed.
<PAGE> 1
AMERICAN EXPLORATION COMPANY
3,579,229 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
October ___, 1996
PRUDENTIAL SECURITIES INCORPORATED
DILLON, READ & CO., INC.
A.G. EDWARDS & SONS, INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
Each of American Exploration Company, a Delaware corporation (the
"Company"), New York Life Insurance and Annuity Corporation ("New York Life")
and The Prudential Insurance Company of America ("Prudential Insurance" and,
together with New York Life the "Selling Securityholders") hereby confirms its
agreement with the several underwriters named in Schedule 1 hereto (the
"Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacities, the "Representatives"), as set forth
below. If you are the only Underwriters, all references herein to the
Representatives shall be deemed to be to the Underwriters.
1. Securities. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell, and each of New York Life
and Prudential Insurance propose to sell, to the several Underwriters an
aggregate of 3,000,000 shares, 379,229 shares and 200,000 shares, respectively
(the "Firm Securities"), of the Company's Common Stock, par
__________________________________
(1) Plus an option to purchase up to 536,884 additional shares to cover
over-allotments.
-1-
<PAGE> 2
value $.05 per share ("Common Stock"). The Company also proposes to issue and
sell and New York Life proposes to sell, to the several Underwriters not more
than 480,000 and 56,884, respectively, additional shares of Common Stock if
requested by the Representatives as provided in Section 4 of this Agreement.
Any and all shares of Common Stock to be purchased by the Underwriters pursuant
to such option are referred to herein as the "Option Securities", and the Firm
Securities and any Option Securities are collectively referred to herein as the
"Securities".
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the several Underwriters
that:
(a) A registration statement on Form S-1 (File No. 333-13017) with
respect to the Securities, including a prospectus subject to completion, has
been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement may have been so filed.
After the execution of this Agreement, the Company will file with the
Commission either (i) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act,
either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Securities, that shall identify the
Preliminary Prospectus (as hereinafter defined) that it supplements containing
such information as is required or permitted by Rules 434, 430A and 424(b)
under the Act or (B) if the Company does not rely on Rule 434 under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by
Rule 430A under the Act or permitted by Rule 424(b) under the Act, and in the
case of either clause (i)(A) or (i)(B) of this sentence as have been provided
to and approved by the Representatives prior to the execution of this
Agreement, or (ii) if such registration statement, as it may have been amended,
has not been declared by the Commission to be effective under the Act, an
amendment to such registration statement, including a form of prospectus, a
copy of which amendment has been furnished to and approved by the
Representatives prior to the execution of this Agreement. The Company may also
file a related registration statement with the Commission pursuant to Rule
462(b) under the Act for the purpose of registering certain additional
Securities, which registration shall be effective upon filing with the
Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) under the Act (including the Registration Statement and any
Preliminary
-2-
<PAGE> 3
Prospectus or Prospectus incorporated therein at the time such Registration
Statement becomes effective); the term "Registration Statement" includes both
the Original Registration Statement and any Rule 462(b) Registration Statement;
the term "Preliminary Prospectus" means each prospectus subject to completion
filed with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective); the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the
Term Sheet relating to the Securities that is first filed pursuant to
Rule 424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the
Act, the prospectus first filed with the Commission pursuant to Rule
424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act
and if no prospectus is required to be filed pursuant to Rule 424(b)
under the Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or
suspending use of any Preliminary Prospectus. When any Preliminary Prospectus
was filed with the Commission, it (i) contained all statements required to be
stated therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (i) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus
or any Term Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or part thereof or such amendment or supplement is not required to
be so filed, when the
-3-
<PAGE> 4
Registration Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the Firm
Closing Date and any Option Closing Date (both as hereinafter defined), the
Prospectus, as amended or supplemented at any such time, (i) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements of, the
Act and the rules and regulations of the Commission thereunder and (ii) did not
or will not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (b) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein.
(c) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective, (i) the Company
has filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) either the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act, or the Commission has received payment of such filing fee.
(d) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation and are duly qualified
to transact business as foreign corporations and are in good standing under the
laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses requires
such qualification, except where the failure to be so qualified does not amount
to a material liability or disability to the Company and its subsidiaries,
taken as a whole.
(e) The Company and each of its subsidiaries have full power
(corporate and other) to own or lease their respective properties and conduct
their respective businesses as described in the Registration Statement and the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it.
-4-
<PAGE> 5
(f) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and, except for directors' qualifying shares and as otherwise set
forth in the Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus, are owned beneficially by the Company free and
clear of any security interests, liens, encumbrances, equities or claims.
(g) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. The Firm Securities and the Option
Securities have been duly authorized and at the Firm Closing Date or the
related Option Closing Date (as the case may be), after payment therefor in
accordance herewith, will be validly issued, fully paid and nonassessable. No
holders of outstanding shares of capital stock of the Company are entitled as
such to any preemptive or other rights to subscribe for any of the Securities,
and no holder of securities of the Company has any right which has not been
fully exercised or waived to require the Company to register the offer or sale
of any securities owned by such holder under the Act in the public offering
contemplated by this agreement.
(h) The capital stock of the Company conforms to the description
thereof contained in the Prospectus or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus.
(i) Except as disclosed in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to subscribe
for or purchase from the Company or any such subsidiary any such capital stock
or any such convertible or exchangeable securities or obligations, or (C)
obligations of the Company or any such subsidiary to issue any shares of
capital stock, any such convertible or exchangeable securities or obligations,
or any such warrants, rights or options.
(j) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) fairly present the financial position of
the Company and its consolidated subsidiaries and the results of operations and
changes in financial condition as of the dates and periods therein specified.
Such financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved
-5-
<PAGE> 6
(except as otherwise noted therein). The selected financial data set forth
under the caption "Selected Financial Information" in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present, on the basis stated in the Prospectus (or such Preliminary
Prospectus), the information included therein.
(k) Arthur Andersen L.L.P., who have certified certain financial
statements of the Company and its consolidated subsidiaries and delivered their
report with respect to the audited consolidated financial statements and
schedules included in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), are
independent public accountants as required by the Act and the applicable rules
and regulations thereunder.
(l) KPMG Peat Marwick L.L.P., who have certified certain financial
statements relating to properties to properties acquired by the Company from
Zilkha Energy Company and delivered their report with respect to the audited
consolidated financial statements and schedules included in the Registration
Statement and the Prospectus with respect thereto (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), are independent public
accountants as required by the Act and the applicable rules and regulations
thereunder.
(m) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is the valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
that such enforceability is subject to the effect of (i) any applicable
bankruptcy, insolvency, reorganization or other laws relating to or affecting
creditors' rights generally and (ii) general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or at
law) and except as rights to indemnity and contribution thereunder may be
limited by federal and state securities laws.
(n) No legal or governmental proceedings are pending to which the
Company or any of its subsidiaries is a party or to which the property of the
Company or any of its subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not described therein
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and no such proceedings have been threatened against the Company
or any of its subsidiaries or with respect to any of their respective
properties; and no contract or other document is required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement that is not described therein (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) or filed as
required.
-6-
<PAGE> 7
(o) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by the
Company with the other provisions of this Agreement and the consummation of the
other transactions herein contemplated do not (i) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the registration
statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act, or (ii)
conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any material indenture, mortgage,
deed of trust, lease or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective properties are bound, or the charter
documents or by-laws of the Company or any of its subsidiaries, or any statute
or any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Company or any of
its subsidiaries.
(p) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus, neither the Company
nor any of its subsidiaries has sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or any legal or governmental proceeding and there has not been
any material adverse change, or any development involving a prospective
material adverse change, in the condition (financial or otherwise), management,
business prospects, net worth, or results of the operations of the Company and
its subsidiaries, taken as a whole, except in each case as described in or
contemplated by the Prospectus or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus.
(q) The Company has not, directly or indirectly, (i) taken any
action designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Securities or (ii) since the filing of the Registration Statement (A) sold,
bid for, purchased, or paid anyone any compensation for soliciting purchases
of, the Securities or (B) paid or agreed to pay to any person any compensation
for soliciting another to purchase any other securities of the Company (except
for the sale of Securities by the Selling Securityholders under this
Agreement).
(r) The Company and its subsidiaries have (i) generally
satisfactory or good and indefeasible title to all their oil and gas
properties, title investigations having been carried out by the Company in
accordance with the practice in the oil and gas industry, (ii) owned by
-7-
<PAGE> 8
them, good and marketable title in fee simple to all other real property owned
by them and (iii) good and marketable title to all personal property owned by
them, in each case free and clear of all liens, encumbrances and defects except
such as are described in the Prospectus or any Preliminary Prospectus or such
as do not have a material adverse effect in the condition (financial and
other), management, business prospects, net worth or results of operations of
the Company and its subsidiaries, taken as a whole and do not materially
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held under
lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material to
the Company and its subsidiaries taken as a whole and do not materially
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries;
(s) The participation agreements, joint development agreements,
joint operating agreements, farm-out agreements and other agreements described
in the Prospectus or any Preliminary Prospectus relating to the Company's
rights with respect to the ownership, lease or operation of oil and gas
properties, the acquisition of interests in oil and gas properties or the
exploration for, development of or production of oil and gas reserves thereon
constitute valid and binding agreements of the Company and its subsidiaries
that are parties thereto and, to the best knowledge of the Company, of the
other parties thereto, enforceable in accordance with their terms, except that
such enforceability is subject to the effect of (i) any applicable bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights generally and (ii) general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law) and
except as rights to indemnity and contribution thereunder may be limited by
federal and state securities laws;
(t) The information underlying the estimates of the reserves of
the Company and the subsidiaries, which was supplied by the Company to
Netherland, Sewell & Associates ("Netherland Sewell"), independent petroleum
engineers, for purposes of auditing the reserve reports and estimates of the
Company, including, without limitation, production, costs of operation and
development, current prices for production, agreements relating to current and
future operations and sales of production, was true and correct in all material
respects on the dates such estimates were made and such information was
supplied and was prepared in accordance with customary industry practices;
Netherland Sewell and William M. Cobb & Associates, Inc. ("Cobb") are
independent petroleum engineers with respect to the Company; other than normal
production of the reserves and intervening spot market product price
fluctuations described in the Prospectus or any Preliminary Prospectus, the
Company is not aware of any facts or circumstances that would result in a
material adverse change in the reserves, or the present value of future net
cash flows therefrom, as described in the Prospectus or any Preliminary
Prospectus; estimates of such reserves and present values
-8-
<PAGE> 9
as described in the Prospectus or any Preliminary Prospectus comply in all
material respects to the applicable requirements of Regulation S-X and Industry
Guide 2 under the Act;
(u) Except as described or reflected in the financial statements
set forth in the Prospectus or any Preliminary Prospectus, as of the date
hereof, (i) all royalties, rentals, deposits and other amounts due on the oil
and gas properties of the Company have been properly and timely paid, and no
proceeds from the sale or production attributable to the oil and gas properties
of the Company are currently being held in suspense by any purchaser thereof,
except where such amounts due could not, singly or in the aggregate, have a
material adverse effect on the financial condition or results of operations of
the Company and its subsidiaries taken as a whole and (ii) there are no claims
under take-or-pay contracts pursuant to which natural gas purchasers have any
make-up rights affecting the interest of the Company in its oil and gas
properties, except where such claims could not, singly or in the aggregate,
have a material adverse effect on the Company's financial condition or results
of operations;
(v) As of the date hereof, the aggregate undiscounted monetary
liability of the Company for petroleum taken or received under any operating or
gas balancing and storage agreement relating to its oil and gas properties that
permits any person to receive any portion of the interest of the Company in any
petroleum or to receive cash or other payments to balance any disproportionate
allocation of petroleum could not, in the aggregate, have a material adverse
effect on the financial condition or results of operations of the Company and
its subsidiaries, taken as a whole.
(w) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), (1) the Company
and its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock; and (3) there has not been any
material change in the capital stock, short-term debt or long-term debt of the
Company and its consolidated subsidiaries, except in each case as described in
or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(x) No labor dispute with the employees of the Company or any of
its subsidiaries exists or is threatened or imminent that could reasonably be
expected to result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
-9-
<PAGE> 10
(y) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which
they are engaged, except as described in or contemplated by the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus).
(z) No subsidiary of the Company is currently prohibited, directly
or indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except (i) for restrictions imposed by general
corporate law of the jurisdiction in which any such subsidiary may be organized
or (ii) as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) or
(iii) restrictions which would not, singly or in the aggregate, result in a
material adverse change in the condition (financial or otherwise), net worth,
business prospects or results of operations of the Company and its
subsidiaries, taken as a whole.
(aa) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, except
where a failure to possess any such items would not result in a material
adverse change in the condition (financial or otherwise), net worth, business
prospects or results of operations of the Company and its subsidiaries taken as
a whole, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries taken as a whole, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(ab) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company and its subsidiaries taken as a whole) and has
paid all taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is currently
being contested in good faith or as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(ac) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating to occupational
safety and health or to the storage, handling or
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<PAGE> 11
transportation of hazardous or toxic materials; the Company and its
subsidiaries have received all permits, licenses or other approvals required of
them under applicable federal and state occupational safety and health and
environmental laws and regulations to conduct their respective businesses; and
the Company and each such subsidiary is in compliance with all terms and
conditions of any such permit, license or approval, except in each case any
such violation, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such permits,
licenses or approvals which would not, singly or in the aggregate, result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries taken as a whole, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(ad) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each Underwriter
as to the matters covered thereby.
(ae) (i) Except for the shares of capital stock of each of the
subsidiaries owned by the Company and such subsidiaries, (ii) except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and (iii) for investments
that are not material to the Company and its subsidiaries taken as a whole,
neither the Company nor any such subsidiary owns any shares of stock or any
other equity securities of any corporation or has any equity interest in any
firm, partnership, association or other entity.
(af) No default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any indenture,
mortgage, dead of trust, lease or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or any of their respective properties is bound or may be
affected, except for any such default or event that will not, individually or
in the aggregate, result in a material adverse change in the condition
(financial or otherwise), net worth, business prospects or results of
operations of the Company and its subsidiaries taken as a whole.
(ag) The Company has not distributed and, prior to the later of (i)
the Closing Date and (ii) the completion of the distribution of the Securities,
will not distribute any offering material in connection with the offering and
sale of the Securities other than the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or other materials, if any, permitted by the Act.
3. Representations and Warranties of the Selling Securityholders.
Each Selling Securityholder, severally and not jointly, represents and warrants
to, and agrees with, each of the several Underwriters that:
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<PAGE> 12
(a) Such Selling Securityholder has full power (corporate and
other) to enter into this Agreement and to sell, assign, transfer and deliver
to the Underwriters the Securities to be sold by such Selling Securityholder
hereunder in accordance with the terms of this Agreement; the execution and
delivery of this Agreement have been duly authorized by all necessary corporate
action of such Selling Securityholder; and this Agreement has been duly
executed and delivered by such Selling Securityholder.
(b) Such Selling Securityholder has good and marketable title to
the Securities to be sold by such Selling Securityholder hereunder and upon
sale and delivery of, and payment for, such Securities, as provided herein,
such Selling Securityholder will convey good and marketable title to such
Securities, free and clear of any interests, liens, encumbrances, equities,
claims or other defects.
(c) Such Selling Securityholder has not, directly or indirectly,
(i) taken any action designed to cause or result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii) since the filing of the Registration
Statement (A) sold, bid for, purchased, or paid anyone any compensation for
soliciting purchases of, the Securities or (B) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities by the Selling
Securityholders under this Agreement).
(d) Such Selling Securityholder has reviewed the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus)
and the Registration Statement, and the information regarding such Selling
Securityholder set forth therein under the captions "Security Ownership of
Management and Certain Beneficial Owners" and "Selling Stockholders" is
complete and accurate.
(e) The sale by such Selling Securityholder of Securities pursuant
hereto is not prompted by any adverse information concerning the Company that
is not set forth in the Registration Statement or the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(f) The sale of the Securities to the Underwriters by such Selling
Securityholder pursuant to this Agreement, the compliance by such Selling
Securityholder with the other provisions of this Agreement and the consummation
of the other transactions herein contemplated do not (i) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the registration
statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act and the Exchange
Act or (ii) conflict with or result in a breach or
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<PAGE> 13
violation of any of the terms and provisions of, or constitute a default under
any indenture, mortgage, deed of trust, lease or other agreement or instrument
to which such Selling Securityholder or any of its subsidiaries is a party or
by which such Selling Securityholder or any of its subsidiaries or any of such
Selling Securityholder's properties are bound, or the charter documents or
by-laws of such Selling Securityholder or any statute or any judgment, decree,
order, rule or regulation of any court or other governmental authority or any
arbitrator applicable to such Selling Securityholder or any of its
subsidiaries.
(g) Neither of the Selling Securityholders has distributed and,
prior to the later of (i) the Closing Date and (ii) the completion of the
distribution of the Securities, will not distribute any offering material in
connection with the offering and sale of the Securities other than the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or other materials, if
any permitted by the Act.
4. Purchase, Sale and Delivery of the Securities. (a) On the
basis of the representations, warranties, agreements and covenants herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to issue and sell, and each of the Selling Securityholders, severally
and not jointly agrees to sell, to each of the Underwriters, and each of the
Underwriters, severally and not jointly, agrees to purchase from the Company
and each of the Selling Securityholders, severally and not jointly, at a
purchase price of $________ per share, the number of Firm Securities set forth
opposite the name of such Underwriter in Schedule 1 hereto. One or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company and each of the Selling
Securityholders to the Representatives for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters of the
purchase price therefor by wire transfer in same-day funds (the "Wired Funds")
to the accounts designated by the Company and each of the Selling
Securityholders. Such delivery of and payment for the Firm Securities shall be
made at the offices of Andrews & Kurth L.L.P., Texas Commerce Tower, 600
Travis, Suite 4200, Houston, Texas 77002 at 9:30 A.M., New York time, on
November ___, 1996, or at such other place, time or date as the Representatives
and the Company may agree upon or as the Representatives may determine pursuant
to Section 9 hereof, such time and date of delivery against payment being
herein referred to as the "Firm Closing Date". The Company and each of the
Selling Securityholders will make such certificate or certificates for the Firm
Securities available for checking and packaging by the Representatives at the
offices in New York, New York of the Company's transfer agent or registrar or
of Prudential Securities Incorporated at least 24 hours prior to the Firm
Closing Date.
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<PAGE> 14
(b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company and New York Life, severally and not jointly, hereby
grant to the several Underwriters an option to purchase, severally and not
jointly, the Option Securities. The purchase price to be paid for any Option
Securities shall be the same price per share as the price per share for the
Firm Securities set forth above in paragraph (a) of this Section 4, plus if the
purchase and sale of any Option Securities takes place after the Firm Closing
Date and after the Firm Securities are trading "ex-dividend", an amount equal
to the dividends payable on such Option Securities. The option granted hereby
may be exercised as to all or any part of the Option Securities from time to
time within thirty (30) days after the date of the Prospectus (or, if such 30th
day shall be a Saturday or Sunday or a holiday, on the next business day
thereafter when the New York Stock Exchange is open for trading). The
Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representatives may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed in writing) to each of the Company and New York Life
setting forth the aggregate number of Option Securities as to which the several
Underwriters are then exercising the option and the date and time for delivery
of and payment for such Option Securities. Any such date of delivery shall be
determined by the Representatives but shall not be earlier than two business
days or later than five business days after such exercise of the option and, in
any event, shall not be earlier than the Firm Closing Date. The time and date
set forth in such notice, or such other time on such other date as the
Representatives and Company may agree upon or as the Representatives may
determine pursuant to Section 9 hereof, is herein called the "Option Closing
Date" with respect to such Option Securities. Upon exercise of the option as
provided herein, the Company and New York Life shall become obligated to sell
to each of the several Underwriters, and, subject to the terms and conditions
herein set forth, each of the Underwriters (severally and not jointly) shall
become obligated to purchase from the Company and New York Life, the same
percentage of the total number of the Option Securities as to which the several
Underwriters are then exercising the option as such Underwriter is obligated to
purchase of the aggregate number of Firm Securities, as adjusted by the
Representatives in such manner as they deem advisable to avoid fractional
shares. If the option is exercised as to all or any portion of the Option
Securities, one or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
paragraph (a) of this Section 4, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) The Company and each Selling Securityholder hereby acknowledge
that the wire transfer by or on behalf of the Underwriters of the purchase
price for any shares does not constitute closing of a purchase and sale of the
shares. Only execution and delivery of a receipt for shares by the
Underwriters indicates completion of the closing of a purchase of the shares
from the Company and each Selling Securityholder. Furthermore,
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<PAGE> 15
in the event that the Underwriters wire funds to the Company and each Selling
Securityholder prior to the completion of the closing of a purchase of shares,
the Company and each Selling Securityholder hereby acknowledge that until the
Underwriters execute and deliver a receipt for the shares, by facsimile or
otherwise, the Company and each Selling Securityholder will not be entitled to
the wired funds and shall return the wired funds to the Underwriters as soon as
practicable (by wire transfer of same-day funds) upon demand. In the event
that the closing of a purchase of shares is not completed and the wire funds
are not returned by the Company and each Selling Securityholder to the
Underwriters on the same day the wired funds were received by the Company and
each Selling Securityholder, the Company and each Selling Securityholder agree
to pay to the Underwriters in respect of each day the wire funds are not
returned by the Company or either of the Selling Securityholders, as the case
may be, in same-day funds, interest on the amount of such wire funds in an
amount representing the Underwriters' cost of financing as reasonably
determined by Prudential Securities Incorporated.
(d) It is understood that any of you, individually and not as one
of the Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall relieve
such Underwriter or Underwriters from any of its or their obligations
hereunder.
5. Offering by the Underwriters. Upon your authorization of the
release of the Firm Securities, the several Underwriters propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus.
6. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters and each of the Selling Securityholders that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto to become effective as promptly as
possible. If required, the Company will file the Prospectus or any Term Sheet
that constitutes a part thereof and any amendment or supplement thereto with
the Commission in the manner and within the time period required by Rules 434
and 424(b) under the Act. During any time when a prospectus relating to the
Securities is required to be delivered under the Act, the Company (i) will
comply with all requirements imposed upon it by the Act and the rules and
regulations of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and of the Prospectus, as then amended or supplemented, and
(ii) will not file with the Commission the prospectus, Term Sheet or the
amendment referred to in the second sentence of Section 2(a) hereof, any
amendment or supplement to such Prospectus, Term Sheet or any amendment to the
Registration Statement or any Rule 462(b) Registration Statement of which the
Representatives previously have not been advised and furnished with
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<PAGE> 16
a copy for a reasonable period of time prior to the proposed filing and as to
which filing the Representatives shall reasonably object. The Company will
prepare and file with the Commission, in accordance with the rules and
regulations of the Commission, promptly upon request by the Representatives or
counsel for the Underwriters, any amendments to the Registration Statement or
amendments or supplements to the Prospectus that may be reasonably necessary or
advisable in connection with the distribution of the Securities by the several
Underwriters, and will use its reasonable best efforts to cause any such
amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence satisfactory to the Representatives of each
such filing or effectiveness.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, (iii) the institution, threatening or
contemplation of any proceeding for any such purpose or (iv) any request made
by the Commission for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing the Prospectus or
for additional information. The Company will use its reasonable best efforts
to prevent the issuance of any such stop order and, if any such stop order is
issued, to obtain the withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the
Securities for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be reasonably necessary to complete
the distribution of the Securities, provided, however, that in connection
therewith the Company shall not be required to qualify as a foreign corporation
or dealer in securities or to execute a general consent to service of process
or subject itself to taxation as a result of doing business, in any case, in
any jurisdiction in which it was not otherwise required to be so qualified or
so subject to service of process or taxation
(d) If, at any time prior to the later of (i) the final date when
a prospectus relating to the Securities is required to be delivered under the
Act or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or
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<PAGE> 17
supplement the Prospectus to comply with the Act or the rules or regulations of
the Commission thereunder, the Company will promptly notify the Representatives
thereof and, subject to Section 5(a) hereof, will prepare and file with the
Commission, at the Company's expense, an amendment to the Registration
Statement or an amendment or supplement to the Prospectus that corrects such
statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representative and to counsel for the Underwriters a conformed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement, (ii) to each other Underwriter, a conformed copy of
such registration statement or any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as
a prospectus relating to the Securities is required to be delivered under the
Act, as many copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Representatives may reasonably request.
Without limiting the application of clause (iii) of the preceding sentence, the
Company, not later than (A) 6:00 P.M., New York City time, on the date of
determination of the public offering price, if such determination occurred at
or prior to 10:00 A.M., New York City time, on such date or (B) 2:00 P.M., New
York City time, on the business day following the date of determination of the
public offering price, if such determination occurred after 10:00 A.M., New
York City time, on such date, will deliver to the Underwriters, without charge,
as many copies of the Prospectus and any amendment or supplement thereto as the
Representatives may reasonably request for purposes of confirming orders that
are expected to settle on the Firm Closing Date.
(f) The Company, as soon as practicable (it being understood that
the Company shall have until at least 455 days after the end of the Company's
current fiscal quarter), will make generally available to its Securityholders
and to the Representatives a consolidated earnings statement of the Company and
its subsidiaries that satisfies the provisions of Section 11(a) of the Act and
Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
for a period of 90 days after the date hereof, except (i) pursuant to this
Agreement, (ii) for issuances pursuant to the exercise of employee or director
stock options outstanding on the date hereof, (iii) pursuant to the terms
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<PAGE> 18
of convertible securities of the Company outstanding on the date hereof and
(iv) for the grants of options pursuant to option plans existing on the date
hereof.
(i) The Company will not, directly or indirectly, (i) take any
action designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Securities or (ii) (A) sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of, the Securities or any other
securities of the Company.
(j) The Company will obtain the agreements described in Section
9(j) hereof prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after notice from you advising the Company to
the effect set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company
shall both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with Rule
111 promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on
the date of this Agreement and (ii) the time confirmations are sent or given,
as specified by Rule 462(b)(2).
(m) The Company will use its reasonable best efforts to cause the
Securities to be duly authorized for listing by the American Stock Exchange.
7. Covenants of Selling Securityholders.
(a) Each Selling Securityholder will not, directly or indirectly,
without the prior written consent of Prudential Securities Incorporated, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, pledge, offer of sale,
contract of sale, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock legally or beneficially owned by such Selling
Securityholder or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period of 90 days after the date
hereof.
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<PAGE> 19
(b) Such Selling Securityholder will not, directly or indirectly,
(i) take any action designed to cause or result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii) (a) sell, bid for, purchase, or pay anyone
any compensation for soliciting purchases of, the Securities or any other
securities of the Company.
(c) Each of the Selling Securityholders agrees to deliver to you
prior to or at the Firm Closing Date (as hereinafter defined) a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
8. Expenses. The Company will pay all costs and expenses
incident to the performance of its [and the Selling Securityholders']
obligations under this Agreement, whether or not the transactions contemplated
herein are consummated or this Agreement is terminated pursuant to Section 11
hereof, including all costs and expenses incident to (i) the printing or other
production of documents with respect to the transactions, including any costs
of printing the registration statement originally filed with respect to the
Securities and any amendment thereto, any Rule 462(b) Registration Statement,
any Preliminary Prospectus and the Prospectus and any amendment or supplement
thereto, this Agreement and any blue sky memoranda, (ii) all arrangements
relating to the delivery to the Underwriters of copies of the foregoing
documents, (iii) the fees and disbursements of the counsel, the accountants and
any other experts or advisors retained by the Company, (iv) preparation,
issuance and delivery to the Underwriters of any certificates evidencing the
Securities, including transfer agent's and registrar's fees, (v) the
qualification of the Securities under state securities and blue sky laws,
including filing fees and reasonable fees and disbursements of counsel for the
Underwriters relating thereto, (vi) the filing fees of the Commission and the
National Association of Securities Dealers, Inc. relating to the Securities,
(vii) any listing of the Securities on the American Stock Exchange, (viii) any
meetings with prospective investors in the Securities (other than as shall have
been specifically approved by the Representatives to be paid for by the
Underwriters) and, (ix) advertising relating to the offering of the Securities
(other than as shall have been specifically approved by the Representatives to
be paid for by the Underwriters). If the sale of the Securities provided for
herein is not consummated because any condition to the obligations of the
Underwriters set forth in Section 9 hereof is not satisfied or because this
Agreement is terminated pursuant to Section 13(a)(i) or (a)(ii) hereof, or
because of any failure, refusal or inability on the part of the Company to
perform all obligations and satisfy all conditions on its part to be performed
or satisfied hereunder other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters severally upon demand
for all reasonable out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection reasonable
with the proposed purchase and sale of the Securities. The Company shall not
in any event be
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<PAGE> 20
liable to any of the Underwriters for the loss of anticipated profits from the
transactions covered by this Agreement.
9. Conditions of the Underwriters' Obligations. The obligations
of the several Underwriters to purchase and pay for the Firm Securities shall
be subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and each Selling Securityholder
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's and each Selling Securityholder's officers made pursuant to the
provisions hereof, to the performance by the Company and each Selling
Securityholder of its covenants and agreements hereunder and to the following
additional conditions:
(a) If the Original Registration Statement or any amendment
thereto filed prior to the Firm Closing Date has not been declared effective as
of the time of execution hereof, the Original Registration Statement or such
amendment and, if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have been declared effective not later than
the earlier of (i) 11:00 A.M., New York time, on the date on which the
amendment to the registration statement originally filed with respect to the
Securities or to the Registration Statement, as the case may be, containing
information regarding the initial public offering price of the Securities has
been filed with the Commission and (ii) the time confirmations are sent or
given as specified by Rule 462(b)(2), or with respect to the Original
Registration Statement, or such later time and date as shall have been
consented to by the Representatives; if required, the Prospectus or any Term
Sheet that constitutes a part thereof and any amendment or supplement thereto
shall have been filed with the Commission in the manner and within the time
period required by Rules 434 and 424(b) under the Act; no stop order suspending
the effectiveness of the Registration Statement or any amendment thereto shall
have been issued, and no proceedings for that purpose shall have been
instituted or threatened or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission; and the Company shall
have complied with any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an opinion dated the
Firm Closing of Baker & Botts, L.L.P., counsel for the Company, to the effect
that:
(i) the execution and delivery of this Agreement has been
duly authorized by all necessary corporate action of the Company and
this Agreement has been duly executed and delivered by the Company
(ii) the Firm Securities have been duly authorized by all
necessary corporate action of the Company and, when issued and
delivered to and paid for by
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<PAGE> 21
the Underwriters pursuant to this Agreement, will be validly issued,
fully paid and nonassessable;
(iii) the statements set forth under the heading
"Description of Capital Stock" in the Prospectus, insofar as such
statements purport to summarize certain provisions of the capital
stock of the Company, provide a fair summary in all material respects
of such provisions; and the statements set forth under the headings
"Business--Regulation," "Business--Royalty Matters,"
"Business--Environmental Matters," "Business--Legal Proceedings--NYLOG
Litigation" and "Business--Legal Proceedings--KN Litigation" in the
Prospectus, insofar as such statements constitute a summary of the
legal matters, documents or proceedings referred to therein, provide a
fair summary in all material respects of such legal matters, documents
and proceedings;
(iv) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement
and the consummation of the other transactions herein contemplated do
not require the consent, approval, authorization, registration or
qualification of or with any governmental authority of the United
States of America, the State of Texas or the State of Delaware, except
such as have been obtained and as would not prevent or adversely
affect in any material respect the performance of this Agreement or
have a material adverse effect on the Company and its subsidiaries,
taken as a whole;
(v) the Registration Statement is effective under the
Act; any required filing of the Prospectus, or any Term Sheet that
constitutes a part thereof, pursuant to Rules 434 and 424(b) has been
made in the manner and within the time period required by Rules 434
and 424(b); and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose
have been instituted or threatened or are contemplated by the
Commission;
(vi) the Registration Statement originally filed with
respect to the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case, other than
the reserve information, the financial statements and other financial
information contained therein, as to which such counsel need express
no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the rules and regulations of
the Commission thereunder; and
(vii) if the Company elects to rely on Rule 434, the
Prospectus is not "materially different", as such term is used in Rule
434, from the prospectus
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<PAGE> 22
included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto
(including such information that is permitted to be omitted pursuant
to Rule 430A).
Such counsel shall also state that such counsel participated in
conferences with certain officers and other representatives of the Company,
representatives of the independent public accountants of the Company, your
representatives and counsel for the Underwriters at which the contents of the
Registration Statement and Prospectus and related matters were discussed. Such
counsel shall state that although such counsel is not passing upon and does not
assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus (except as
otherwise expressly provided in clause (iii) of such opinion), such counsel
advises the Underwriters that, on the basis of the foregoing (relying as to
materiality to a large extent upon statements and other representations of
officers and other representatives of the Company), no facts have come to their
attention that lead them to believe that the Registration Statement except for
(i) the financial statements and schedules contained therein (including the
notes thereto and the auditors' report thereon), (ii) the other financial,
statistical or reserve information contained therein or (iii) the exhibits
thereto, as to which they have not been asked to comment) of the effective date
of the Registration Statement, contained in untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the Prospectus
(except as indicated above) as of its date or as of the date of such opinion
contained any untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials (provided that they provide you
with copies of such certificates) and in rendering the opinion set forth in
paragraph (v) above, state that they have relied on oral advice of the staff of
the Commission that the Commission has declared the Registration Statement
effective under the Act.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Patterson, Belknap, Webb & Tyler LLP, counsel for the
Company, to the effect that:
(i) the Company and each of the subsidiaries listed on
Schedule 3 hereto (the "Material Subsidiaries") have been duly
organized and are validly existing as
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<PAGE> 23
corporations in good standing under the laws of their respective
jurisdictions of incorporation and are duly qualified to transact
business as foreign corporations and are in good standing under the
laws of all other jurisdictions set forth opposite its name on
Schedule I to such opinion except where the failure to be so qualified
does not amount to a material liability or disability to the Company
and its subsidiaries, taken as a whole;
(ii) the Company and each of the Material Subsidiaries have
corporate power to own or lease their respective properties and
conduct their respective businesses as described in the Registration
Statement and the Prospectus, and the Company has corporate power to
enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it;
(iii) the issued shares of capital stock of each of the
Material Subsidiaries have been duly authorized and validly issued,
are fully paid and nonassessable and, except for directors' qualifying
shares and as otherwise set forth in the Prospectus, are owned
beneficially by the Company free and clear of any perfected security
interests or, to the best knowledge of such counsel, any other
security interests, liens, encumbrances, equities or claims except for
capital stock of the Material Subsidiaries that has been pledged under
the Amended and Restated Credit Agreement dated as of December 21,
1994, between the Company and the banks name therein, as amended;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued
shares of capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities; the Securities have been duly
authorized for listing, subject to official notice of issuance, on the
American Stock Exchange; except for such rights as have been waived as
of the date hereof, no holders of outstanding shares of capital stock
of the Company are entitled as such to any preemptive or other rights
to subscribe for any of the Securities; and, assuming that the Company
has sent written notice to all holders of securities of the Company
who have the right to register the offer or sale of any securities
owned by such holders under the Act in connection with the public
offering contemplated by this Agreement, and except as set forth in
the Prospectus, there is no holder of such securities who has not
waived such registration rights or failed to exercise such
registration rights within the time permitted by the notice;
(v) (A) to such Counsel's knowledge, no legal or
governmental proceedings are pending to which the Company or any of
its subsidiaries is a party or to which the property of the Company or
any of the subsidiaries is subject that
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<PAGE> 24
are required to be described in the Registration Statement or the
Prospectus and are not described therein, and, to the best knowledge
of such counsel, no such proceedings have been threatened against the
Company or any of its subsidiaries or with respect to any of their
respective properties and (B) no contract or other document is
required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
that is not described therein or filed as required;
(vi) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement
and the consummation of the other transactions herein contemplated do
not conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument, known
to such counsel, to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or any of
their respective properties are bound, or the charter documents or
by-laws of the Company or any of the Material Subsidiaries, or any
statute or any judgment, decree, order, rule or regulation of any
court or other governmental authority or any arbitrator known to such
counsel and applicable to the Company or its subsidiaries;
Such counsel shall also state that such counsel participated in a
limited manner in conferences with certain officers and other representatives
of the Company, representatives of the independent public accountants of the
Company, your representatives and counsel for the Underwriters at which the
contents of the Registration Statement and Prospectus and related matters were
discussed. Such counsel shall state that although such counsel is not passing
upon and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, such counsel advises the Underwriters that, on the basis of the
foregoing (relying as too materiality to a large extent upon statements and
other representations of officers and other representatives of the Company), no
facts have come to their attention that lead them to believe that the
Registration Statement except for (i) the operating statistics, financial
statements and schedules contained therein (including the notes thereto and the
auditors' report thereon), (ii) the other financial, statistical or reserve
information contained therein or (iii) the exhibits thereto, as too which they
have not been asked to comment) on the effective date of the Registration
Statement, contained in the untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statement therein not misleading or that the Prospectus (except as indicated
above) as of its date or as of the date of such opinion contained any untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
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<PAGE> 25
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of any jurisdiction other than the States of Texas, New
York or Delaware or the United States, to the extent satisfactory in form and
scope to counsel for the Underwriters, upon the opinion of local counsel
acceptable to you and your counsel; provided, however, that any such opinion of
local counsel shall also state that the Underwriters are justified in relying
upon such opinion, and copies of such opinion shall be delivered to the
Representatives and counsel for the Underwriters.
References to the Registration Statement and the Prospectus in this
paragraph (c) shall include any amendment or supplement thereto at the date of
such opinion.
(d) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Andrews & Kurth L.L.P., Texas Commerce Tower, 600 Travis,
Suite 4200, Houston, Texas 77002, counsel for the Underwriters, with respect to
the issuance and sale of the Firm Securities, the Registration Statement and
the Prospectus, and such other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may reasonably request for the purpose of enabling them to
pass upon such matters. In rendering such opinion, such counsel may rely as to
all matters of law upon the opinion of Baker & Botts, L.L.P. and Patterson,
Belknap, Webb & Tyler L.L.P. referred to in paragraphs (b) and (c) above.
(e) New York Life and Prudential Insurance shall have furnished to
the Representatives an opinion from John Stine, Esq., General Counsel of New
York Life and Evangeline Wyche Tross, Esq., Assistant General Counsel of
Prudential Insurance, respectively, dated the Closing Date, to the effect that:
(i) Such Selling Securityholder has full corporate power
to enter into this Agreement and to sell, transfer and deliver the
Securities being sold by such Selling Securityholder hereunder in the
manner provided in this Agreement; the execution and delivery of this
Agreement has been duly authorized by all necessary corporate action
of such Selling Securityholder; this Agreement has been duly executed
and delivered by such Selling Securityholder;
(ii) the delivery by such Selling Securityholder to the
several Underwriters of certificates for the Securities being sold
hereunder by such Selling Securityholder against payment therefor as
provided herein, will convey good and marketable title to such
Securities to the several Underwriters, free and clear of all security
interests, liens, encumbrances, equities, claims or other defects,
assuming that the Underwriters are purchasing in good faith and
without notice of any adverse claim,
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<PAGE> 26
as such term is used in Section 8-302 of the Uniform Commercial Code
as in effect in the State of New York;
(iii) the sale of the Securities to the Underwriters by
such Selling Securityholder pursuant to this Agreement, the compliance
by such Selling Securityholder with the other provisions of this
Agreement and the consummation of the other transactions herein
contemplated do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained and such as may be required under
state securities or blue sky laws, or (ii) conflict with or result in
a breach or violation of any of the terms and provisions of, or
constitute a default under (A) any indenture, mortgage, deed of trust,
lease or other agreement or instrument to which such Selling
Securityholder or any of such Selling Securityholder's properties are
bound (other than such conflicts, breaches, defaults or violations
which would not impair such Selling Securityholders obligations
hereunder or have any adverse effect on the Underwriters as such or
the title to the Shares), (B) the charter documents or by-laws of such
Selling Securityholder or (C) any statute or any judgment, decree,
order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to such Selling Securityholder.
In rendering such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Selling Securityholders and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (e) shall include any amendment or supplement thereto at the date of
such opinion.
(f) The Representatives shall have received a certificate from
each Selling Securityholder, signed by an appropriate officer of such Selling
Securityholder, dated the Closing Date, to the effect that:
(i) the representations and warranties of such Selling
Securityholder in this Agreement are true and correct as if made on
and as of the Closing Date;
(ii) to the extent that any statements or omissions are
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto in reliance upon and
in conformity with written information furnished to the Company by
such Selling Securityholder specifically for use therein, the
Registration Statement, as amended as of the Closing Date, does not
include any untrue
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<PAGE> 27
statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Closing Date, does
not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; and
(iii) such Selling Securityholder has performed all
covenants and agreements on its part to be performed or satisfied at
or prior to the Closing Date.
(g) The Representatives shall have received from Arthur Anderson
LLP a letter or letters dated, respectively, the date hereof and the Firm
Closing Date, in form and substance satisfactory to the Representatives, to the
effect that:
(i) they are independent accountants with respect to the
Company and its consolidated subsidiaries within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules and pro forma financial statements examined by them
and included in the Registration Statement and the Prospectus comply in form in
all material respects with the applicable accounting requirements of the Act
and the related published rules and regulations;
(iii) on the basis of a reading of the latest available
interim unaudited consolidated condensed financial statements of the
Company and its consolidated subsidiaries, carrying out certain
specified procedures (which do not constitute an examination made in
accordance with generally accepted auditing standards) that would not
necessarily reveal matters of significance with respect to the
comments set forth in this paragraph (iii), a reading of the minute
books of the shareholders, the board of directors and any committees
thereof of the Company and each of its consolidated subsidiaries, and
inquiries of certain officials of the Company and its consolidated
subsidiaries who have responsibility for financial and accounting
matters, nothing came to their attention that caused them to believe
that:
(A) the unaudited consolidated condensed
financial statements of the Company and its consolidated
subsidiaries included in the Registration Statement and the
Prospectus do not comply in form in all material respects with
the applicable accounting requirements of the Act and the
related published rules and regulations thereunder or are not
in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited consolidated financial statements included in the
Registration Statement and the Prospectus;
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<PAGE> 28
(B) at a specific date not more than five
business days prior to the date of such letter, there were any
changes in the capital stock or long-term debt of the Company
and its consolidated subsidiaries or any decreases in
stockholders' equity of the Company and its consolidated
subsidiaries, in each case compared with amounts shown on the
September 30, 1996 unaudited consolidated condensed balance
sheet included in the Registration Statement and the
Prospectus, or for the period from October 1, 1996 to such
specified date there were any decreases, as compared with
September 30, 1996, in total revenues, net revenues, net
income before income taxes or total or per share amounts of
net income of the Company and its consolidated subsidiaries,
except in all instances for changes, decreases or increases
set forth in such letter; and
(iv) they have carried out certain specified procedures,
not constituting an audit, with respect to certain amounts,
percentages and financial information that are derived from the
general accounting records of the Company and its consolidated
subsidiaries and are included in the Registration Statement and the
Prospectus, and have compared such amounts, percentages and financial
information with such records of the Company and its consolidated
subsidiaries and with information derived from such records and have
found them to be in agreement, excluding any questions of legal
interpretation; and
(v) on the basis of a reading of the unaudited pro forma
consolidated condensed financial statements included in the
Registration Statement and the Prospectus, carrying out certain
specified procedures that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(v), inquiries of certain officials of the Company and its
consolidated subsidiaries who have responsibility for financial and
accounting matters and proving the arithmetic accuracy of the
application of the pro forma adjustments to the historical amounts in
the unaudited pro forma consolidated condensed financial statements,
nothing came to their attention that caused them to believe that the
unaudited pro forma consolidated condensed financial statements do not
comply in form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts
in the compilation of such statements.
In the event that the letter referred to above sets forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letter shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the
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<PAGE> 29
Representatives, make it impractical or inadvisable to proceed with the
purchase and delivery of the Securities as contemplated by the Registration
Statement.
References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(h) The Representatives shall have received from KPMG Peat Marwick
LLP a letter or letter dated, respectively, the date hereof and the Firm
Closing Date, containing, with respect to certain properties acquired by the
Company from Zilkha Energy Company, substantially the same information with
respect to such properties as is contained in the letter described in paragraph
(g) above.
(i) Cobb, an independent petroleum engineering consultant, shall
have delivered to you on the date of this Agreement a letter and also on the
Closing Date a letter dated the Closing Date, in each case in form and
substance reasonably satisfactory to you, stating, as of the date of such
letter (or, with respect to matters involving changes or developments since the
respective dates as of which specified information with respect to the oil and
gas reserves attributable to the Zilkha I Properties and Zilkha II Properties,
as such properties are defined in the Prospectus, is given or incorporated in
the Prospectus or any Preliminary Prospectus as of the date not more than five
days prior to the date of such letter), the conclusions and findings of such
firm with respect to the Company's oil and gas reserves as well as such other
information as the Representatives or their counsel may reasonably request.
(j) Netherland Sewell shall have delivered to you on the date of
this Agreement a letter dated on such date and also on the Closing Date a
letter dated the Closing Date, in each case in form and substance reasonably
satisfactory to you stating (i) that they are independent petroleum engineers,
(ii) that they have conducted an independent audit of the Company's reserve
information presented in the Prospectus or any Preliminary Prospectus (iii)
that the Company's reserve information presented in the Prospectus or any
Preliminary Prospectus (exclusive of any adjustments to give effect to the
acquisition of the Zilkha I Properties and Zilkha II Properties) is based on
such firm's reserve report with respect to the Company's oil and gas reserves
dated as of December 31, 1996, and (iv) that the findings of the Company with
respect to the Company's oil and gas reserves presented in the Prospectus or
any Preliminary Prospectus are reasonable in the aggregate and were prepared in
accordance with generally accepted petroleum engineering principals promulgated
by the Society of Petroleum Engineers.
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<PAGE> 30
(k) The Representatives shall have received a certificate, dated
the Firm Closing Date, of the principal executive officer and the principal
financial or accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in
this Agreement are true and correct as if made on and as of the Firm
Closing Date; the Registration Statement, as amended as of the Firm
Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented
as of the Firm Closing Date, does not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company has
performed all covenants and agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to the Firm Closing
Date;
(ii) no stop order by the Commission suspending the
effectiveness of the Registration Statement or any amendment thereto
has been issued, and no proceedings for that purpose have been
instituted or, to the best of the Company's knowledge, have been
threatened or are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management,
business prospects, net worth or results of operations of the Company
and its subsidiaries taken as a whole, except in each case as
described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto).
(l) The Representatives shall have received from each person who
is a director or officer of the Company an agreement to the effect that such
person will not, directly or indirectly, without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of an option to purchase or other sale or disposition)
of any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of 90 days
after the date of this Agreement, except as provided in such agreements.
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<PAGE> 31
(m) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(n) Prior to the commencement of the offering of the Securities,
the Securities shall have been approved for listing on the American Stock
Exchange, subject to official notice of issuance.
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
10. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Securities Exchange Act of 1934 (the "Exchange Act"), against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made
by the Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto or
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, a material fact required
to be stated therein or necessary to make the statements therein not misleading
or
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<PAGE> 32
(iv) any untrue statement or alleged untrue statement of
any material fact contained in any audio or visual materials used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films and tape recordings,
and will reimburse, promptly (but in no event more than 30 days) after
receipt of invoices in reasonable detail, each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement or any amendment thereto, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representatives specifically for use therein; and
provided, further, that the Company will not be liable to any Underwriter or
any person controlling such Underwriter with respect to any such untrue
statement or omission made in any Preliminary Prospectus that is corrected in
the Prospectus (or any amendment or supplement thereto) if the person asserting
any such loss, claim, damage or liability purchased Securities from such
Underwriter but was not sent or given a copy of the Prospectus (as amended or
supplemented) at or prior to the written confirmation of the sale of such
Securities to such person in any case where such delivery of the Prospectus (as
amended or supplemented) is required by the Act, unless such failure to deliver
the Prospectus (as amended or supplemented) was a result of noncompliance by
the Company with Section 6(d) and (e) of this Agreement. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have. The Company will not, without the prior written consent of the
Underwriter or Underwriters purchasing, in the aggregate, more than fifty
percent (50%) of the Securities, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action, suit or proceeding
in respect of which indemnification may be sought hereunder (whether or not any
such Underwriter or any person who controls any such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party
to such claim, action, suit or proceeding), unless such settlement, compromise
or consent includes an unconditional release of all of the Underwriters and
such controlling persons from all liability arising out of such claim, action,
suit or proceeding.
(b) Each Selling Securityholder, severally and not jointly, agrees
to indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement or any amendment thereto, each
Underwriter and each person who controls the Company or any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any losses, claims, damages or liabilities, joint or several, to which the
Company, any such director, officer, such Underwriter or any such
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<PAGE> 33
controlling person may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or (ii) the omission or the
alleged omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with the written
information furnished to the Company by such Selling Securityholder for use
therein; provided, however, that such Selling Securityholder will not be liable
to any Underwriter or any person controlling such Underwriter with respect to
any such untrue statement or omission made in any Preliminary Prospectus that
is corrected in the Prospectus (or any amendment or supplement thereto) if the
Person asserting any such loss, claim, damage or liability purchased Securities
from such Underwriter but was not sent or given a copy of the Prospectus (as
amended or supplemented) at or prior to the written confirmation of the sale of
such Securities to such person in any case where such delivery of the
Prospectus (as amended or supplemented) is required by the Act, unless such
failure to deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 6(d) and (e) of this Agreement;
provided further, that no Selling Securityholder shall be liable for any untrue
statement, alleged untrue statement, omission or alleged omission of any other
Selling Securityholder. Subject to the limitations set forth in the
immediately preceding sentence, will reimburse, as incurred, any legal or other
expenses reasonably incurred by the Company, any such director, officer, such
Underwriter or any such controlling person in connection with investigating or
defending any such loss, claim, damage, liability or any action in respect
thereof. This indemnity agreement will be in addition to any liability which
any Selling Securityholder may otherwise have. Each Selling Securityholder
will not, without the prior written consent of the Underwriter or Underwriters
purchasing, in the aggregate, more than fifty percent (50%) of the Securities,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such Underwriter or
any person who controls any such Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act is a party to such claim, action,
suit or proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
(c) Each Underwriter will, severally and not jointly,
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement or any amendment thereto, each
Selling Securityholder and each
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<PAGE> 34
person, if any, who controls the Company or such Selling Securityholder within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any losses, claims, damages or liabilities to which the Company, any such
director or officer of the Company, such Selling Securityholder or any such
controlling person of the Company or such Selling Securityholder may become
subject under the Act, the Exchange Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through the Representatives specifically for
use therein; and, subject to the limitation set forth immediately preceding
this clause, will reimburse, as incurred, any legal or other expenses
reasonably incurred by the Company, any such director, officer or controlling
person or such Selling Securityholder in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or any action in respect thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 10 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 10, notify the indemnifying party of the commencement
thereof; but the failure so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party except to the
extent that the indemnifying party has been materially prejudiced by such
failure and, provided further, that the failure to notify the indemnifying
party shall not relieve it from any liability that it may have to an
indemnified party otherwise than under this Section 10. In case any such action
is brought against any indemnified party, and it notifies the indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded, upon advice of counsel, that there are one or more legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnifying party
shall not have the right to direct the defense of such action on behalf of such
indemnified party or parties and such indemnified party or parties shall have
the right to select separate counsel to
-34-
<PAGE> 35
defend such action on behalf of such indemnified party or parties. After
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof and approval by such indemnified party of counsel
appointed to defend such action, the indemnifying party will not be liable to
such indemnified party under this Section 10 for any legal or other expenses,
other than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to no more than one
local counsel) in any one action or separate but substantially similar actions
in the same jurisdiction arising out of the same general allegations or
circumstances, designated by the Representatives in the case of paragraph (a)
of this Section 10, representing the indemnified parties under such paragraph
(a) who are parties to such action or actions) or (ii) the indemnifying party
does not promptly retain counsel reasonably satisfactory to the indemnified
party or (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party. After such
notice from the indemnifying party to such indemnified party, the indemnifying
party will not be liable for the costs and expenses of any settlement of such
action effected by such indemnified party without the consent of the
indemnifying party.
(e) In circumstances in which the indemnity agreement provided for
in the preceding paragraphs of this Section 10 is unavailable or insufficient,
for any reason other than a failure by the indemnified party to give timely
notice as required by this Section 8, to hold harmless an indemnified party in
respect of any losses, claims, damages or liabilities (or actions in respect
thereof), each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
(i) the relative benefits received by the indemnifying party or parties on the
one hand and the indemnified party on the other from the offering of the
Securities or (ii) if the allocation provided by the foregoing clause (i) is
not permitted by applicable law, not only such relative benefits but also the
relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions
or alleged statements or omissions that resulted in such losses, claims,
damages or liabilities (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Selling Securityholders on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Securityholders bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault of the parties
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a
-35-
<PAGE> 36
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Securityholders or
the Underwriters, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission,
and any other equitable considerations appropriate in the circumstances. The
Company, the Selling Securityholders and the Underwriters agree that it would
not be equitable if the amount of such contribution were determined by pro rata
or per capita allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take into
account the equitable considerations referred to above in this paragraph (e).
Notwithstanding any other provision of this paragraph (e), no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (e), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter,
and each director of the Company, each officer of the Company who signed the
Registration Statement or any amendment thereto and each person, if any, who
controls the Company or any Selling Securityholder within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, shall have the same
rights to contribution as the Company or such Selling Securityholder, as the
case may be.
(f) The liability of each Selling Securityholder under this
Section 10 shall not exceed the total public offering price of the Shares sold
by such Selling Securityholder, less applicable underwriting discounts and
commissions. Further, the provisions of this Section 10 shall not affect any
other agreement among the Company and the Selling Securityholders with respect
to indemnification and contribution.
11. Default of Underwriters. If one or more Underwriters default
in their obligations to purchase Firm Securities or Option Securities hereunder
and the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
-36-
<PAGE> 37
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or
Option Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase. If one or more Underwriters so default with respect to an
aggregate number of Securities that is more than ten percent of the aggregate
number of Firm Securities or Option Securities, as the case may be, to be
purchased by all of the Underwriters at such time hereunder, and if
arrangements satisfactory to the Representatives are not made within 36 hours
after such default for the purchase by other persons (who may include one or
more of the non-defaulting Underwriters, including the Representatives) of the
Securities with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or
the Company other than as provided in Section 12 hereof. In the event of any
default by one or more Underwriters as described in this Section 11, the
Representatives shall have the right to postpone the Firm Closing Date or the
Option Closing Date, as the case may be, established as provided in Section 4
hereof for not more than seven business days in order that any necessary
changes may be made in the arrangements or documents for the purchase and
delivery of the Firm Securities or Option Securities, as the case may be. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section 11. Nothing herein shall relieve any
defaulting Underwriter from liability for its default.
12. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers, the Selling Securityholders and the several Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, any Selling Securityholder, any Underwriter or any controlling
person referred to in Section 10 hereof and (ii) delivery of and payment for
the Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 8 and 10 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
13. Termination. (a) This Agreement may be terminated with
respect to the Firm Securities or any Option Securities in the sole discretion
of the Representatives by notice to the Company and each of the Selling
Securityholders given prior to the Firm Closing Date or the related Option
Closing Date, respectively, in the event that the Company or either of the
Selling Securityholders shall have failed, refused or been unable to perform
all obligations and satisfy all conditions on its part to be performed or
satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing
Date or such Option Closing Date, respectively,
-37-
<PAGE> 38
(i) the Company or any of its subsidiaries shall have, in
the sole judgment of the Representatives, sustained any material loss
or interference with their respective businesses or properties from
fire, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal or
governmental proceeding or there shall have been any material adverse
change, or any development involving a prospective material adverse
change (including without limitation a change in management or control
of the Company), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries taken as a whole, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(ii) trading in the Common Stock shall have been suspended
by the Commission or the American Stock Exchange;
(iii) trading generally on the New York or American Stock
Exchange shall have been suspended or minimum or maximum prices shall
have been established on either such exchange;
(iv) a banking moratorium shall have been declared by New
York or United States authorities; or
(v) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended
as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 13
shall be without liability of any party to any other party except as provided
in Section 12 hereof.
14. Information Supplied by Underwriters. The statements set
forth in the last paragraph on the front cover page, in the stabilization
legend on the inside cover page, and under the heading "Underwriting" in any
Preliminary Prospectus or the Prospectus (to the extent such statements relate
to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2(b) and 10 hereof. The Underwriters confirm that such statements (to
such extent) are correct.
-38-
<PAGE> 39
15. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to Prudential
Securities Incorporated, One New York Plaza, New York, New York 10292,
Attention: Equity Transactions Group (facsimile: (212) 778- 4312); if sent to
the Company, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to the Company at 1331 Lamar Street,
Suite 900, Houston, Texas 77010-3088, Attention: John M. Hogan, Senior Vice
President and Chief Financial Officer (facsimile: (713) 659-5620); if sent to
the New York Life, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to New York Life at Office of the General
Counsel, 51 Madison Avenue, New York, New York, Attention: John Stine, Esq.
(facsimile: (212) 576-8340); and if sent to Prudential Insurance, shall be
delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to Prudential Insurance at Four Gateway Center, 6th Floor, 100 Mulberry
Street, Newark, New Jersey 07102-4069, Attention: Evangeline Wyche Tross, Esq.
(facsimile: (201) 802-3853).
16. Successors. This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company, the Selling
Securityholders and their respective successors and legal representatives, and
nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or
claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities of the
Company contained in Section 10 of this Agreement shall also be for the benefit
of any person or persons who control any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, (ii) the indemnities
of the Underwriters contained in Section 10 of this Agreement shall also be for
the benefit of the directors of the Company, the officers of the Company who
have signed the Registration Statement and any person or persons who control
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and shall also be for the benefit of any person or persons who
control any Selling Securityholder within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, and (iii) the indemnities of the Selling
Securityholders contained in Section 10 of this Agreement shall also be for the
benefit of the directors of the Company, the officers of the Company who have
signed the Registration Statement and any person or persons who control the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and shall also be for the benefit of any person or persons who
control any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act. No purchaser of Securities from any Underwriter shall
be deemed a successor because of such purchase.
17. Applicable Law. The validity and interpretation of this
Agreement, and the terms and conditions set forth herein, shall be governed by
and construed in accordance with the
-39-
<PAGE> 40
laws of the State of New York, without giving effect to any provisions relating
to conflicts of laws.
18. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-40-
<PAGE> 41
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and
each of the several Underwriters.
Very truly yours,
AMERICAN EXPLORATION COMPANY
By:
----------------------------------------
NEW YORK LIFE INSURANCE AND ANNUITY
CORPORATION
By:
----------------------------------------
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By:
----------------------------------------
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
DILLON, READ & CO., INC.
A.G. EDWARDS & SONS, INC.
By: PRUDENTIAL SECURITIES INCORPORATED
By:
-------------------------------------
Jean-Claude Canfin
Director
For itself and on behalf of the Representatives.
-41-
<PAGE> 42
SCHEDULE 1
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Securities to
Underwriter be Purchased
- ----------- -------------
<S> <C>
Prudential Securities Incorporated . . . . . . . . . . . . . . . .
Dillon, Read & Co., Inc. . . . . . . . . . . . . . . . . . . . . .
A.G. Edwards & Sons, Inc. . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
----------
3,579,229
</TABLE>
-42-
<PAGE> 43
SCHEDULE 2
<TABLE>
<CAPTION>
Number of Optional
Number of Shares to be Sold if
Firm Shares Maximum Option
Name to be Sold Exercised
---- ---------- ---------
<S> <C> <C>
The Company 3,000,000 480,000
New York Life Insurance 379,229 56,884
Company
The Prudential Insurance 200,000 0
Company of America
--------- -------
Total 3,579,229 536,884
========= =======
</TABLE>
-43-
<PAGE> 44
SCHEDULE 3
SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME INCORPORATION STATES QUALIFIED TO DO BUSINESS IN
<S> <C> <C>
AMERICAN EXPLORATION COMPANY DE AL, AR, CO, DE, KS, LA, MS, MT, NE, NM, ND, OK, SD,
TX, UT, WY
AMERICAN EXPLORATION GAS SYSTEMS CORPORATION DE CO, DE, KS, LA, MS, NM, OK, TX
AMERICAN EXPLORATION PRODUCTION COMPANY TX CO, KS, MT, NE, NM, ND, OK, TX, UT
AUSTRAL OIL COMPANY, INCORPORATED DE CO, DE, KS, LA, MI, OK, TX, WY
CONQUEST EXPLORATION COMPANY DE CA, CO, DE, KS, LA, MS, MT, NV, NM, ND, OK, TX, UT, WY
CONQUEST EXPLORATION TUNISIA, INC. DE DE
CONQUEST OVERSEAS EXPLORATION COMPANY DE DE, TX
CONQUEST TEXAS, INC. DE DE, TX
SOURGASCO, INC. NV MS, NV
SOUTH STATES OIL & GAS COMPANY TX TX
3300 CORPORATION NV MS, NV
AMERICAN MINERALS CORP. DE DE,
AMERICAN EXPLORATION AUSTRALIA, INC. DE DE
BOUNDARY PROPERTIES, INC. DE DE, KY, MS, OK, TX
AMERICAN RESERVE CORP. TX LA, TX
AXSIMAL COMPANY DE DE
AXMISAL COMPANY DE DE
MATAGORDA BAY PIPELINE COMPANY TX TX
500 CORP. NV NV
CONQUEST TRANSMISSION COMPANY DE DE, TX
ANM SERVICES CORPORATION DE DE, TX
</TABLE>
-44-
<PAGE> 1
PATTERSON, BELKNAP, WEBB & TYLER LLP
1133 Avenue of the Americas
New York, NY 10036-6710
212-336-2000
Christopher C. Angell Jeffrey I.D. Lewis Of Counsel
Douglas E. Barzelay Robert P. LoBue
Susan F. Bloom Mary M. Luria Harold R. Tyler, Jr.
Henry P. Bubel Ellen M. Martin __________
William F. Cavanaugh, Jr. Maureen W. McCarthy
Lisa E. Cleary Thomas C. Morrison Herbert H. Chaice
John Delli Venneri Bernard F. O'Hare Michael Finkelstein
Gregory L. Diskant Peter J. Pettibone Robert M. Pennoyer
David F. Dobbins Thomas W. Pippert Robert B. Shea
David W. Dykhouse Andrew D. Schau C. Sidamon-Eristoff
Robert J. Egan John E. Schmeltzer, III Ira T. Wender, P.C.
Robert H. M. Ferguson John P. Schmitt _________
Philip R. Forlenza Stephen W. Schwarz
Eugene M. Gelernter Arthur D. Sederbaum Fax
Alan Gettner Karl E. Seib, Jr. 212-336-2222
David M. Glaser Richard R. Upton
Antonia M. Grumbach Theodore B. Van Itallie, Jr. Writer's direct line
Scott Horton John D. Winter 212-336-2580
Jane B. Jacobs Stephen P. Younger
Jeffrey E. LaGueux Steven A. Zalesin
Kim J. Landsman
October 22, 1996
American Exploration Company
1331 Lamar, Suite 900
Houston, Texas 77010-3088
Dear Sirs:
Reference is made to the proposed registration by American
Exploration Company, a Delaware corporation (the "Company"), of
3,579,229 shares (the "Shares") of common stock, par value $.05 per
share ("Common Stock"), as contemplated by the Company's Registration
Statement on Form S-1, filed with the Securities and Exchange Commission
(the "Commission"), under the Securities Act of 1933, as amended (the
"Registration Statement"), consisting of 3,000,000 shares of Common
Stock to be issued and sold by the Company and 579,229 shares of Common
Stock, in the aggregate, to be sold by the Selling Stockholders
identified in the Registration Statement (the "Selling Stockholders"),
together with up to 536,884 additional shares of Common Stock (the
"Additional Shares"), 480,000 of which may be issued and sold by the
Company, and 56,884 of which may be sold by one of the Selling
Stockholders, pursuant to the underwriters' over-allotment options as
described in the Registration Statement.
As set forth in the Registration Statement, certain legal matters
are being passed on for you by this firm. At your request, this opinion
of counsel is being furnished to you for filing as Exhibit 5 to the
Registration Statement. In such capacity, we have examined the Restated
Certificate of Incorporation and the Bylaws of the Company, as amended
to date and have examined all statutes and other records, instruments
and documents pertaining to the Company that we have deemed necessary to
examine for the purposes of this opinion.
Based upon such examination, we are of the opinion that:
1. The Company is a corporation duly incorporated,
validly existing and in
<PAGE> 2
October 22, 1996
Page 2
good standing under the laws of the State of Delaware.
2. Upon the issuance and sale by the Company of the Shares and any
Additional Shares that may be purchased pursuant to the Underwriting Agreement
from the Company for the consideration provided for in the Underwriting
Agreement, such Shares and any such Additional Shares will be duly authorized,
validly issued, fully paid and nonassessable.
3. The Shares and the Additional Shares, if any, to be sold by the
Selling Stockholders have been duly authorized and validly issued and are fully
paid and nonassessable.
The opinions expressed in this letter are solely for use by the Company
in filing the Registration Statement and these opinions may not be relied on by
any other person without our prior written approval.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement.
PATTERSON, BELKNAP, WEBB & TYLER LLP
By: /s/ JOHN E. SCHMELTZER, III
---------------------------------
<PAGE> 1
EXHIBIT 10(dd)
AGREEMENT
THIS AGREEMENT (this "Agreement") entered into this 15th day
of February, 1996, by and among American Exploration Company, a Delaware
corporation ("AX"), American Exploration Production Company, a Texas
corporation and a wholly-owned subsidiary of AX ("AEPCO," and together with AX,
the "American Parties"), NYLIFE Inc., a Delaware corporation ("NYLIFE") and,
for the limited purposes described in Paragraph 13 and Paragraph 16, NYLIFE
Securities Inc. (for itself and as successor to New York Life Securities
Corp.).
W I T N E S S E T H:
WHEREAS, AEPCO and NYLIFE Equity Inc., a wholly-owned
subsidiary of NYLIFE, are general partners in a series of oil and gas
partnerships generally known as the "NYLOG" programs or partnerships, a list of
which partnerships is set forth on Schedule I attached hereto (the "NYLOG
Partnerships"); and
WHEREAS, one or more of the American Parties, NYLIFE and
certain affiliates of NYLIFE have been named as defendants in three complaints
as follows: Billy H. Mancil and Mary M. Mancil v. New York Life Insurance
Company, et al., Civil Action No. CV-95-2595 GR, Circuit Court of Montgomery
County, Alabama (the "Mancil litigation"); Ann Grimshawe v. New York Life
Insurance Company, NYLIFE, Inc., NYLIFE Equity, Inc., NYLIFE Securities, Inc.,
American Exploration Company and American Exploration Production Company, No.
96-001188, 113th District Court of
<PAGE> 2
Harris County, Texas (the "Grimshawe litigation"); and Evelyn Shea v. New York
Life Insurance Company, NYLIFE, Inc., NYLIFE Equity, Inc., NYLIFE Securities,
Inc., American Exploration Company and American Exploration Production Company,
No. 96-001189, 151st District Court of Harris County, Texas (the "Shea
litigation" and, together with the Grimshawe litigation and the Mancil
litigation, the "NYLOG Litigation"); and
WHEREAS, NYLIFE Equity, Inc. and AEPCO are exploring the
feasibility of dissolving and liquidating all the NYLOG Partnerships and, in
connection therewith, NYLIFE is exploring the possibility of settling the Shea
litigation and the Grimshawe litigation; and
WHEREAS, the American Parties, on the one hand, and NYLIFE, on
the other hand, desire to set forth certain agreements as to certain matters
relating to the NYLOG Litigation and the prospective dissolution and
liquidation of the NYLOG Partnerships;
NOW, THEREFORE, in consideration of the premises and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
1. INDEMNIFICATION
(a) NYLIFE hereby agrees to indemnify and hold
harmless each of the American Parties, their affiliates, their respective
officers, directors, agents, employees and controlling persons (within the
meaning of each of Section 20 of the
2
<PAGE> 3
Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933)
(each of the foregoing being hereinafter referred to as an "American
Indemnified Person") from and against any and all judgments or settlements
entered or reached in the NYLOG Litigation, or subsequent lawsuits by investors
in the NYLOG Partnerships that name any American Indemnified Person as a
defendant, based on claims and factual allegations substantially similar to
those contained in the original complaints filed in the NYLOG Litigation (all
of the foregoing being hereinafter collectively referred to as "Indemnified
Liabilities").
(b) If claims and factual allegations that are not
Indemnified Liabilities are asserted in the NYLOG Litigation or in one or more
later investor lawsuits naming any American Indemnified Person, the
indemnification and costs of defense provided under Paragraphs 1(a) and 2 shall
continue to be available as to, and only as to, the Indemnified Liabilities
asserted therein.
(c) (i) Any issue or dispute between the parties as
to (A) whether claims or allegations made in the NYLOG Litigation or in one or
more subsequent lawsuits by investors in the NYLOG Partnerships constitute
"Indemnified Liabilities" and (B) the allocation of any judgment, settlement or
costs of defense between Indemnified Liabilities and non-Indemnified
Liabilities shall first be referred to senior executives of the parties for
resolution between them, if possible. Those executives may, if they desire,
consult outside experts or a mutually respected disinterested person for
assistance in arriving at a resolution.
3
<PAGE> 4
(ii) The senior executives also may, if
they desire, agree to undertake mediation and may, if they choose, do so in
accordance with the commercial mediation rules of the American Arbitration
Association ("AAA"), either as written or as modified by mutual agreement. A
written agreement to undertake mediation may be made at any time. If
arbitration proceedings have been instituted, they shall be stayed until the
mediation process is terminated.
(iii) Any issue or dispute between the parties
of the type referred to in subparagraph (c)(i) that is not resolved pursuant to
this paragraph 1(c) shall be referred to arbitration pursuant to paragraph 9.
(d) NYLIFE shall provide to the American Parties
copies of all papers filed in the NYLOG Litigation or any later investor
lawsuit relating to the NYLOG Partnerships that names an American Indemnified
Person as a defendant. NYLIFE shall also promptly notify the American Parties
whenever it has concluded that a plaintiff in any NYLOG Litigation or any such
investor lawsuit is asserting non-Indemnified Liabilities.
(e) During the term of this Agreement, NYLIFE shall
maintain assets sufficient to meet its obligations hereunder. NYLIFE shall
provide, on a confidential basis, to the American Parties from time to time
such quarterly financial statements of NYLIFE as the American Parties may
reasonably request for the purpose of verifying the ability of NYLIFE to meet
its obligations hereunder.
4
<PAGE> 5
(f) If the indemnification of an American Indemnified
Person provided for in this Agreement is finally judicially determined by a
court of competent jurisdiction to be unenforceable, then NYLIFE agrees, in
lieu of indemnifying such American Indemnified Person, to contribute to the
amount paid or payable by such American Indemnified Person such that the
aggregate amount paid or payable by the American Indemnified Persons with
respect to amounts indemnifiable pursuant to the terms of this Agreement
(whether or not held enforceable) does not exceed the obligations imposed on
the American Parties pursuant to this Agreement.
2. DEFENSE OF NYLOG LITIGATION.
(a) With respect to the Shea litigation and the
Grimshawe litigation, NYLIFE shall assume the complete defense thereof at its
expense, except as otherwise provided herein.
(b) NYLIFE and the American Parties agree that,
except as otherwise provided herein, NYLIFE shall at all times control any and
all decisions relating to the defense of the NYLOG Litigation including, but
not limited to, any settlement discussions or settlement.
(c) In connection with the Shea litigation and the
Grimshawe litigation, NYLIFE will pay for and, subject to the American Parties'
reasonable approval (but without regard to the provisions of any insurance
policy), select counsel to represent the American Parties (which counsel may or
may not be the same counsel as that selected by NYLIFE to represent NYLIFE). The
parties herein acknowledge and
5
<PAGE> 6
reaffirm their prior agreement that, in connection with the Mancil litigation,
separate counsel will represent NYLIFE and the American Parties, and that
NYLIFE will reimburse reasonable attorneys' fees incurred by the American
Parties in defending the causes of action currently stated in that complaint,
or as it may be amended to assert substantially similar claims and factual
allegations. If NYLIFE does not so assume the defense, or pay for the costs of
the defense, of any litigation involving Indemnified Liabilities as herein
provided, the American Parties shall have the right to assume the defense of
the litigation or litigations (as the case may be) at the expense of NYLIFE
with counsel chosen by the American Parties. Any American Indemnified Person
may at its own expense retain separate counsel, which counsel may consult with
NYLIFE in respect to defense of the NYLOG Litigation, although NYLIFE shall
continue to control the defense of the NYLOG Litigation.
(d) Notwithstanding the foregoing, if (i) a
plaintiff in the NYLOG Litigation, or in any later investor lawsuit that names
an American Party as defendant, asserts non-Indemnified Liabilities and (ii) in
the reasonable opinion of counsel to the American Parties the complaint in such
litigation or litigations (as the case may be) asserts new allegations or new
claims that would make continued joint representation inappropriate, then the
American Parties shall have the right to employ separate counsel at their
expense and to control the American Parties' defense of the litigation or
litigations (as the case may be).
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<PAGE> 7
(f) In the case of the NYLOG Litigation, or any
later investor lawsuit that names an American Party as defendant, in which
counsel chosen by NYLIFE is representing an American Party, no settlement shall
be agreed to by NYLIFE, and NYLIFE shall not permit any affiliate to agree to
any settlement, (i) in which the aggregate, cumulative financial contribution
of the American Indemnified Persons would exceed the obligations imposed on the
American Parties under this Agreement and under the various NYLOG Partnership
agreements as they may be amended, unless the American Parties otherwise agree,
(ii) absent a release of claims at least as broad as that obtained for any
other defendant, and (iii) with respect to any settlement of Indemnified
Liabilities in a manner that would compromise an American Party's defense to
any non-Indemnified Liabilities arising out of the NYLOG Litigation or any
other lawsuits by investors in the NYLOG Partnerships that name any American
Indemnified Person as a defendant, absent the American Parties' consent.
3. PRESERVATION OF INSURANCE COVERAGE.
The parties agree that the American Parties shall
have a period of 15 days from the date hereof to obtain the approval of any
insurance carrier which has issued any insurance policy pursuant to the terms
of which the American Parties may seek reimbursement of losses or costs which
may not be covered by NYLIFE's indemnification pursuant to Paragraphs 1 and 2
above, in order to preserve the American Parties' rights under such policy to
the maximum extent possible, including rights to retain and be reimbursed for
costs of counsel and rights to coverage for non-Indemnified
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<PAGE> 8
Liabilities. For purposes of obtaining such approval, the American Parties may
present a copy of this Agreement to their insurance broker and to such
insurance carrier in strict confidence and in furtherance of the joint defense
of the NYLOG Litigation after obtaining the written agreement of the insurance
broker and insurance carrier to so regard the existence and terms of this
Agreement and to hold this Agreement and its terms in strict confidence.
4. COOPERATION OF PARTIES.
(a) The American Parties hereby agree to provide
full and prompt cooperation to NYLIFE and NYLIFE's counsel in the defense of
the NYLOG Litigation. Such obligation shall continue through to the final
disposition of all the NYLOG Litigation and shall include, without limitation,
(i) full and complete access to records and materials; (ii) preparing any and
all defenses; (iii) analyzing or summarizing records and materials; (iv)
preparing for or participating in depositions; (v) participating in settlement
negotiations; (vi) providing all necessary consents and approvals to any
settlement of the NYLOG Litigation provided that the American Parties shall not
be obligated to provide any such consent or approval of a settlement that is
not consistent with the provisions of Paragraph 2(f); and (vii) subject to the
proviso in clause (vi), full and complete access to, and cooperation from,
employees, agents, officers, directors, accountants, attorneys and
attorneys-in-fact of the American Parties in connection with the foregoing.
8
<PAGE> 9
(b) Notwithstanding the foregoing, the American
Parties reserve the right to assert the attorney-client privilege with respect
to written and oral communications with counsel and may withhold certain
correspondence and other documents if in good faith the American Parties, after
consultation with their counsel, believe that the assertion of this privilege
is well-founded as a matter of law and necessary to preserve the privilege.
(c) The American Parties agree to hold all
information about the NYLOG Litigation, including without limitation any
settlement discussion and terms of any settlement, confidential unless NYLIFE
consents in writing to the disclosure of such information, except that (i) the
American Parties may disclose any information disclosed in any court-approved
notice to investors in the NYLOG Partnerships or any other information
distributed generally to such investors in connection with the NYLOG Litigation;
(ii) the American Parties may disclose such information if sought to be
compelled by court order or administrative subpoena, provided that the American
Parties promptly notify NYLIFE of the issuance or receipt of any such process
and cooperate with NYLIFE to quash or otherwise seek the withdrawal of such
process should NYLIFE determine to take such action; (iii) the American Parties
shall have the right to make any disclosure required under applicable law as
determined by their counsel, Baker & Botts, L.L.P. or, with respect to the
financial statements of the American Parties, as determined by their auditors,
Arthur Andersen LLP, in either of which case the American Parties shall give
prompt prior notice to NYLIFE of their intention to
9
<PAGE> 10
disclose, and an opportunity to NYLIFE to review with the American Parties'
counsel and/or auditors, as the case may be, the propriety of disclosure; and
(iv) the American Parties may disclose such information (A) to their respective
officers, directors, representatives, counsel, auditors and advisors who need
to know such information for purposes of carrying out their duties and
responsibilities to, or representation of, the American Parties and (B) if and
to the extent that the failure to disclose such information would subject any
of the American Parties to contempt or any other censure, penalty or similar
liability.
(d) The American Parties hereby agree and
acknowledge that any failure to provide, in all material respects, the full and
prompt cooperation in the defense of the NYLOG Litigation, or any material
breach of the confidentiality agreement as set forth in this Paragraph 4, shall
be considered a complete breach of this Agreement and will void in its entirety
the indemnification of judgments, settlements and costs of defense described in
this Agreement, provided, however, that NYLIFE shall give written notice to the
American Parties as provided herein of any such breach and the American Parties
shall not be deemed to have breached this Agreement, and no provision of this
Agreement shall be voided or terminated, unless the American Parties have
failed or been unable to cure such breach within five (5) business days after
receipt of such notice.
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<PAGE> 11
5. LIQUIDATION OF THE NYLOG PARTNERSHIPS.
(a) If the general partners of the NYLOG
Partnerships elect to dissolve and liquidate the NYLOG Partnerships, both AEPCO
and AX will cooperate fully in the orderly liquidation of the assets of the
NYLOG Partnerships and the winding up of the affairs of those partnerships.
Until any such liquidation process is complete, AEPCO shall remain as a general
partner of the NYLOG Partnerships pursuant to the terms of the existing NYLOG
partnership agreements, except as modified by the reduction of AEPCO's general
partner interest to 5% and the elimination of the AEPCO's "promote," as
described in paragraph 6. Furthermore, AX shall remain as operator of certain
wells in which the NYLOG Partnerships own interests, performing all of the
respective duties and obligations required of it under the pertinent
agreements.
(b) In connection with any liquidation of the NYLOG
Partnerships, either of the American Parties may make offers to purchase any or
all of the properties of the NYLOG Partnerships, and, subject to (i) any
procedures (including, without limitation, receipt of any consents it deems
necessary) and advice of investment bankers, legal counsel, petroleum engineers
or other experts which NYLIFE or NYLIFE Equity Inc. may choose to consult, and
(ii) NYLIFE Equity Inc.'s conclusive judgment as general partner of each NYLOG
Partnership from which any American Party desires to purchase properties, any
such sale and purchase shall be permitted if NYLIFE Equity Inc. determines it
to be in the best interests of the partnership.
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<PAGE> 12
6. WAIVED RIGHTS.
(a) In connection with any settlement reached in the
Shea litigation and the Grimshawe litigation the American Parties agree that,
upon a sale of the assets of any of the NYLOG Partnerships in connection with
the liquidation of those partnerships, AEPCO agrees, subject to paragraph 5
relating to AEPCO continuing as a general partner pursuant to the terms of the
existing NYLOG partnership agreements, to, and hereby does, relinquish and
waive any and all rights which it may have under the partnership agreements of
the NYLOG Partnerships or otherwise, to receive any allocation of income or
expense from any NYLOG Partnership attributable to AEPCO's interest as a
general partner in such partnership, other than an allocation of 5% of all
revenues (including revenues and related expenses attributable to all sales of
partnership assets) from and after February 1, 1996. By this agreement, and
subject to Paragraph 6(d), AEPCO acknowledges it relinquishes its "promoted
interest" in revenues, from and after February 1, 1996, of each of the NYLOG
Partnerships, whether "pre-Payout" or "post-Payout."
(b) In the event that the settlement of the NYLOG
Litigation limits the distribution to AEPCO of any or all of the amount
realized upon sale of the assets of the NYLOG Partnership that exceeds the
portion of the settlement amount allocated to those assets as of the date
agreed upon in the settlement, the American Parties hereby agree that AEPCO's
interest in the portion of liquidation proceeds to which it may be entitled
shall be reduced commensurately, provided, however, that in no case will
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<PAGE> 13
AEPCO receive an amount less than 5% of the lesser of (i) the aggregate portion
of the settlement amount allocated to the NYLOG assets and (ii) the aggregate
amount (net of selling expenses) realized from the sale of such assets in
liquidation of the NYLOG Partnerships.
(c) Without regard to the terms of any settlement
agreement which may be entered into with respect to the NYLOG Litigation, the
American Parties, do hereby relinquish and waive any and all rights which they
may otherwise have arising from their ownership of interests as a limited
partner (or assignee of a limited partner) in any NYLOG Partnership, other than
the proportionate allocation of income and expense and proportionate
distributions(s) of cash to which such limited partner would be entitled
pursuant to the terms of any partnership agreement of a NYLOG Partnership upon
liquidation of such NYLOG Partnership. The American Parties do hereby indicate
their understanding that the benefit of any such settlement may not be extended
to their officers and directors.
(d) The obligations set forth in Paragraph 6(a)
shall be effective immediately upon the execution of a Memorandum of
Understanding or a Stipulation of Settlement (whichever comes first) among
counsel for the parties in the Shea litigation or Grimshawe litigation relating
to the settlement of such litigation. In the event that the settlement of
those actions is not consummated and/or not finalized for any reason, of which
event NYLIFE shall give prompt, written notice to the American Parties, then
the American Parties' obligations under Paragraphs 6(a), 6(b) and 6(c) hereof
will terminate
13
<PAGE> 14
within three business days of the receipt of such notice, and the American
Parties will thereupon revert to their right to revenues and expenses as
provided in the respective NYLOG Partnership agreements and all waivers and
relinquishments made by any of the American Parties shall terminate and be null
and void as if they had never taken effect.
7. LIMITED INDEMNITY IN LIEU OF LIQUIDATION RESERVE.
(a) In lieu of the establishment by any NYLOG
Partnership, or the general partners thereof, of any reserve for contingent
liabilities in connection with any dissolution and liquidation of the NYLOG
Partnerships, as contemplated by this Agreement, NYLIFE agrees to provide to
the American Parties a limited indemnity, extending only to any and all
matters for which any of the American Parties would be entitled to
indemnification pursuant to (i) the terms of any partnership agreement of a
NYLOG Partnership, or (ii) any valid and binding operating agreement to which
either of the American Parties and any NYLOG Partnership are parties; provided,
however, NYLIFE may determine to create a liquidation reserve in accordance
with the Partnership Agreement of any of the NYLOG partnerships and applicable
law.
The limited indemnity offered hereby shall commence, with respect to the NYLOG
Partnerships as a group, on the date of the first sale of partnership assets
in connection with any liquidation of such partnerships (the "First Sale Date")
and shall, with respect to the indemnity offered hereby, be limited to a
maximum amount equal to the sum of (i) one-half of the liabilities listed on
Schedule II hereto that exist at the First Sale Date
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<PAGE> 15
and have not been satisfied, but not to exceed $1,250,000, and (ii) 5% of the
aggregate liquidation sales price received (after selling expenses) for all
properties and assets of the partnerships unless, at the time of the
liquidation, NYLIFE and the American Parties agree on a different amount. It
is understood and agreed that if the Schedule II liabilities of the American
Parties exceed $1,250,000, such "excess" liabilities may be charged against the
indemnification provided in clause (ii) of the preceeding sentence. If NYLIFE
agrees to create a liquidation reserve to pay amounts otherwise indemnifiable
under Paragraph 7(a) out of the available working capital or proceeds from the
sale of assets, then its obligations to indemnify the American Parties of this
Paragraph 7(a) shall be reduced commensurately. The limited indemnity provided
for in this Paragraph 7 shall apply to (i) any actual or potential claims
arising out of the items listed on Schedule II or as to which written notice is
given to NYLIFE within 12 months of the final sale of partnership assets in
connection with any liquidation of the NYLOG Partnerships, and (ii) as to
claims relating to representations and warranties and/or indemnities, if any,
made to purchasers in the liquidation sale of properties and assets, the period
of time provided to such purchasers for making claims of indemnity, but in no
case shall such period of limited indemnity extend longer than 18 months
following the final sale of partnership assets in connection with any
liquidation of the NYLOG Partnerships.
(b) Notwithstanding anything to the contrary
contained herein, the indemnities contained in this Agreement are not intended
to, and shall not be deemed to, cover any liabilities arising from, or any
costs or expenses of defending or responding
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<PAGE> 16
to, any investigations or inquiries conducted by state or federal regulatory
agencies, departments or other governmental authorities, environmental claims,
or any claims by vendors, purchasers of production or of third party producers
(including, without limitation, claims of insufficient deliveries of production
and gas imbalances), beyond the limited indemnity provided in Paragraph 7(a)
hereof. In addition, nothing contained in this Agreement shall be construed to
relinquish or waive any right or claim that any party hereto, or any of their
affiliates, may have against any other party with respect to any matters
relating to the NYLOG Partnerships. Nothing herein shall preclude the parties
from agreeing, as part of a joint defense agreement, to defer and toll the time
for asserting any such claims.
8. GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE WITHOUT REFERENCE TO CHOICE OF
LAW RULES.
9. ARBITRATION.
(a) Subject to Paragraph 1(c), any controversy or claim
arising out of or relating to this Agreement, or the breach thereof,
shall be settled by arbitration in New York, New York administered by
the AAA under its Commercial Arbitration Rules, to the extent such
rules are not inconsistent with the provisions
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<PAGE> 17
of this article, and judgment on the award rendered by the arbitrators
may be entered in any court having jurisdiction thereof.
(b) The arbitration shall be submitted to a panel (the
"Panel") consisting of three neutral arbitrators.
(c) The arbitrators shall be selected my mutual agreement
of the parties, if possible. If the parties fail to reach agreement
upon appointment of the arbitrators within 30 days following receipt
by one party of the other party's notice of arbitration, the
arbitrators shall be selected from a list or lists of proposed
arbitrators submitted by the AAA. The selection process shall be that
which is set forth in the AAA commercial arbitration rules in effect
on the date of this Agreement, except that, if the parties fail to
select three arbitrators from one or more panels, AAA shall not have
the power to make appointments but shall continue to submit additional
panels until all three arbitrators have been selected. Initially,
however, promptly following its receipt of a request to submit a list
of proposed arbitrators, AAA shall convene the parties in person or by
telephone and attempt to facilitate their selection of the arbitrators
by agreement. If an arbitrator should die, withdraw or otherwise
become incapable of serving, a replacement shall be selected and
appointed in a like manner.
(d) The arbitrators shall be persons who are experienced
and knowledgeable in the business of oil and gas production.
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<PAGE> 18
(e) The Panel may issue restraining orders or grant other
equitable relief to maintain the status quo of a party pending the
decision and award of the Panel or to prevent any party from incurring
any irreparable harm or damage prior to the decision and award of the
Panel. Nothing herein shall be construed to prevent any party from
applying to a court of competent jurisdiction to confirm such
restraining orders or other equitable relief.
(f) The parties may mutually agree as to pre-hearing
discovery or, in the absence of such agreement, upon the request of
any party, pre-hearing discovery may be conducted as the Panel shall
determine.
(g) At a time fixed by the Panel, each party shall submit
to the Panel a pre-hearing brief setting forth the issues in dispute
and the basis, authority and reasons for its position. Each party
shall submit to the Panel a reply brief within 30 days after
submission of the other party's brief.
(h) The Panel shall not have the authority to award
punitive, exemplary or treble damages under any circumstances.
(i) Each of NYLIFE, on the one hand, and the American
Parties, on the other hand, shall bear one-half of the expense of
the arbitration.
(j) The parties agree to instruct the Panel to render its
decision within 30 days after termination of the hearing, which
decision shall be in writing, stating the reasons therefor and
including a brief description of each element of
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<PAGE> 19
any damages awarded. The decision of the majority of the Panel shall
be final and binding.
10. AMENDMENTS.
This Agreement may not be amended or otherwise
modified except by an instrument signed by all of the parties hereto.
11. COUNTERPARTS.
This Agreement may be executed by one or more of the
parties to this Agreement on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
12. NOTICES.
All notices and other communications pursuant to this
Agreement shall be in writing (including by telecopy) and shall be deemed to
have been duly given or made when delivered by hand, or three business days
after being deposited in the mail, postage prepaid, or, in the case of telecopy
notice, when received, addressed to each of the parties as set forth on the
signature pages to this Agreement or to such other address as may be hereafter
notified by the respective parties thereto.
13. SUPERSEDING OF PRIOR AGREEMENTS.
NYLIFE Securities Inc. (successor to New York Life
Securities Corp.) is executing this Agreement solely to evidence its agreement
that this Agreement shall supersede and amend, for the limited purpose of
effectuating the intent of this Agreement, any contrary or inconsistent
obligation to indemnify that NYLIFE Securities
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may owe to any of the American Parties, or vice versa, under any of the Sales
Distribution Agreements executed by NYLIFE Securities Inc., NYLIFE Equity Inc.
and American Exploration Production Company, with respect to any of the
Indemnified Liabilities or obligations set forth by Paragraphs 1 and 2 above.
14. ENTIRE AGREEMENT.
This written agreement represents the final and
entire agreement between the parties and may not be contradicted by evidence of
prior, contemporaneous or subsequent oral agreements of the parties.
15. SEVERABILITY. If any provision of this Agreement
shall be determined to be invalid or unenforceable in any respect, such
determination shall not affect such provision in any other respect or any other
provision of this Agreement, which shall remain in full force and effect.
16. ENFORCEABILITY.
Each of NYLIFE, NYLIFE Securities Inc., AX and AEPCO
represents and warrants that it has duly executed and delivered this Agreement;
each of NYLIFE and NYLIFE Securities Inc. represents and warrants that it has
duly authorized this Agreement; and each of NYLIFE, NYLIFE Securities, AX and
AEPCO represents and warrants that this Agreement constitutes its valid and
binding obligation, and further that it will not (i) contest the validity or
enforceability of this Agreement, (ii) take the position that this Agreement is
not valid or enforceable, (iii) deny generally its liability under this
Agreement or (iv) seek to have any provision of this Agreement declared
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<PAGE> 21
invalid or illegal. The parties further agree that specific performance of
this Agreement may be sought in any state or federal court having jurisdiction
to hear any dispute relating to this Agreement, and that any party may seek to
enjoin any actual or threatened breach of this Agreement by order of any court.
17. NO WAIVER OR ADMISSION BY AX OR NYLIFE.
AX and NYLIFE are entering into this Agreement because they
are each a named defendant in certain of the NYLOG Litigation and, in
connection therewith, they desire to enter into the obligations provided for
each, respectively, and to enjoy the benefit of the rights in favor of each,
respectively, provided pursuant to this Agreement. Notwithstanding the
foregoing, the parties acknowledge that neither AX nor NYLIFE is a general
partner to any of the NYLOG Partnerships and that, by its execution, delivery
and performance of this Agreement, AX does not assume any obligations of AEPCO
as a corporate general partner, nor does NYLIFE assume any obligations of
NYLIFE Equity, Inc. as a corporate general partner, of the NYLOG Partnerships.
Nothing contained in this Agreement is intended to nor shall be construed to
negate the separate corporate existence of AEPCO and AX and/or of NYLIFE
Equity, Inc. and NYLIFE.
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IN WITNESS WHEREOF, the parties have entered into this
Agreement as of the date first written above.
AMERICAN EXPLORATION COMPANY
By: /s/ MARK ANDREWS
------------------------------------
Name: Mark Andrews
Title: Chairman and CEO
Address: 1331 Lamar, Suite 900
Houston, Texas 77010
Telecopy No. (713)
------------
Attention:
--------------------
AMERICAN EXPLORATION PRODUCTION
COMPANY
By: /s/ MARK ANDREWS
-------------------------------------
Name: Mark Andrews
Title: Chairman and CEO
Address: 1331 Lamar, Suite 900
Houston, Texas 77010
Telecopy No. (713)
-------------
Attention:
--------------------
22
<PAGE> 23
NYLIFE INC.
By: /s/ ALICE T. KANE
------------------------------------
Name: Alice T. Kane
Title: Executive Vice President
Address: 51 Madison Avenue
New York, New York 10010
Telecopy No. (212)
------------
Attention:
--------------------
NYLIFE SECURITIES INC.
By: /s/ RICHARD A. TOPP
-------------------------------------
Name: Richard A. Topp
Title: President and CEO
Address: 51 Madison Avenue
New York, New York 10010
Telecopy No. (212)
------------
Attention:
--------------------
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SCHEDULE I
LIST OF NYLOG PARTNERSHIPS
1. NYLOG I a. New York Life Oil & Gas Producing Properties
I-A, Ltd. ("NYLOG I-A");
b. New York Life Oil & Gas Producing Properties
I-B, Ltd. ("NYLOG I-B");
c. New York Life Oil & Gas Producing Properties
I-C, Ltd. ("NYLOG I-C");
d. New York Life Oil & Gas Producing Properties
I-D, Ltd. ("NYLOG I-D");
2. NYLOG II a. New York Life Oil & Gas Producing Properties
II-A, Limited Partnership ("NYLOG II-A");
b. New York Life Oil & Gas Producing Properties
II-B, Limited Partnership ("NYLOG II-B");
c. New York Life Oil & Gas Producing Properties
II-C, Limited Partnership ("NYLOG II-C");
d. New York Life Oil & Gas Producing Properties
II-D, Limited Partnership ("NYLOG II-D");
e. New York Life Oil & Gas Producing Properties
II-E, Limited Partnership ("NYLOG II-E");
f. New York Life Oil & Gas Producing Properties
II-F, Limited Partnership ("NYLOG II-F");
g. New York Life Oil & Gas Producing Properties
II-G, Limited Partnership ("NYLOG II-G");
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<PAGE> 25
3. NYLOG III a. New York Life Oil & Gas Operating Producing
Properties III-A, Limited Partnership and New
York Life Oil & Gas Net Profits Producing
Properties III-A, Limited Partnership (jointly
"NYLOG III-A");
b. New York Life Oil & Gas Operating Producing
Properties III-B, Limited Partnership and New
York Life Oil & Gas Net Profits Producing
Properties III-B, Limited Partnership
(jointly "NYLOG III-B");
c. New York Life Oil & Gas Operating Producing
Properties III-C, Limited Partnership and New
York Life Oil & Gas Net Profits Producing
Properties III-C, Limited Partnership
(jointly "NYLOG III-C");
d. New York Life Oil & Gas Operating Producing
Properties III-D, Limited Partnership and New
York Life Oil & Gas Net Profits Producing
Properties III-D, Limited Partnership
(jointly "NYLOG III-D");
e. New York Life Oil & Gas Operating Producing
Properties III-E, Limited Partnership and New
York Life Oil & Gas Net Profits Producing
Properties III-E, Limited Partnership
(jointly "NYLOG III-E");
f. New York Life Oil & Gas Operating Producing
Properties III-F, Limited Partnership and New
York Life Oil & Gas Net Profits Producing
Properties III-F, Limited Partnership
(jointly "NYLOG III-F");
g. New York Life Oil & Gas Operating Producing
Properties III-G, Limited Partnership and New
York Life Oil & Gas Net Profits Producing
Properties III-G, Limited Partnership
(jointly "NYLOG III-G");
h. New York Life Oil & Gas Operating Producing
Properties III-H, Limited Partnership and New
York Life Oil & Gas Net Profits Producing
Properties III-H, Limited Partnership
(jointly "NYLOG III-H");
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<PAGE> 26
LIST OF NYLOG PRODUCTION PARTNERSHIPS
1. NYLOG I a. New York Life Oil & Gas Production
Partnership I-A ("Production Partnership
I-A");
b. New York Life Oil & Gas Production
Partnership I-B ("Production Partnership I-B");
c. New York Life Oil & Gas Production
Partnership I-C ("Production Partnership I-C");
d. New York Life Oil & Gas Production
Partnership I-D ("Production Partnership I-D");
2. NYLOG II a. New York Life Oil & Gas Production
Partnership II-A ("Production Partnership II-A");
b. New York Life Oil & Gas Production
Partnership II-B ("Production Partnership II-B");
c. New York Life Oil & Gas Production
Partnership II-C ("Production Partnership II-C");
d. New York Life Oil & Gas Production
Partnership II-D ("Production Partnership II-D");
e. New York Life Oil & Gas Production
Partnership II-E ("Production Partnership II-E");
f. New York Life Oil & Gas Production
Partnership II-F ("Production Partnership II-F");
g. New York Life Oil & Gas Production
Partnership II-G ("Production Partnership II-G");
3. NYLOG III a. New York Life Oil & Gas Operating Production
Partnership III-A ("Operating Production
III-A") and New York Life Oil & Gas Net
Profits Production Partnership III-A ("Net
Profits Production III-A");
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<PAGE> 27
b. New York Life Oil & Gas Operating Production
Partnership III-B ("Operating Production III-B")
and New York Life Oil & Gas Net Profits
Production Partnership III-B ("Net Profits
Production III-B");
c. New York Life Oil & Gas Operating Production
Partnership III-C ("Operating Production
III-C") and New York Life Oil & Gas Net
Profits Production Partnership III-C ("Net
Profits Production III-C");
d. New York Life Oil & Gas Operating Production
Partnership III-D ("Operating Production
III-D") and New York Life Oil & Gas Net
Profits Production Partnership III-D ("Net
Profits Production III-D");
e. New York Life Oil & Gas Operating Production
Partnership III-E ("Operating Production
III-E") and New York Life Oil & Gas Net
Profits Production Partnership III-E ("Net
Profits Production III-E");
f. New York Life Oil & Gas Operating Production
Partnership III-F ("Operating Production
III-F") and New York Life Oil & Gas Net
Profits Production Partnership III-F ("Net
Profits Production III-F");
g. New York Life Oil & Gas Operating Production
Partnership III-G ("Operating Production
III-G") and New York Life Oil & Gas Net
Profits Production Partnership III-G ("Net
Profits Production III-G");
h. New York Life Oil & Gas Operating Production
Partnership III-H ("Operating Production
III-H") and New York Life Oil & Gas Net
Profits Production Partnership III-H ("Net
Profits Production III-H").
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SCHEDULE II
Set forth below is a description of liabilities, contingent liabilities and
claims, pending or threatened, of which the American Parties are aware on the
date hereof relating to the NYLOG Partnerships. By the listing of such
contingent liabilities and claims, the American Parties are in no way admitting
the validity of such contingent liabilities or claims or otherwise admitting
they, the NYLOG partnerships, or the general partners thereof, are responsible
for such contingent liabilities or claims.
The description below does not attempt to list those items properly chargeable
to the NYLOG partnerships pursuant to the terms of the NYLOG partnership
agreements, including but not limited to capital expenditures, operating
expenses (including general and administrative expenses and production related
expenses) and liquidation-related expenses.
<PAGE> 1
EXHIBIT 10(ee)
ATTACHMENT III
STOCKHOLDER AND REGISTRATION RIGHTS AGREEMENT
This Stockholder and Registration Rights Agreement, executed as
of August 1994, between AMERICAN EXPLORATION COMPANY, a Delaware corporation
("American"), and the parties identified on the signature pages hereto as the
"Holders" (each, a "Holder" and collectively, the "Holders");
W I T N E S S E T H:
WHEREAS, American is offering to purchase the Holders' limited
partner interests in, and net profit interests (all such limited partner and
net profits interests being collectively referred to as the "Interests") carved
out of American's working interest in certain properties that are related to,
American Production Partnership-VII, Ltd., American Net Profits
Partnership-VII, Ltd. and American Production Partnership-VIII, Ltd. pursuant
to Offers to Purchase and Exchange Offers dated July 25, 1994 (the "Offers");
and
WHEREAS, pursuant to the Offers shares of American Common Stock,
par value $.05 per share (the "Common Stock"), have been or will be issued to
the Holders in the amounts set forth opposite the Holders' names on the
signature pages hereto; and
WHEREAS, American desires to provide the Holders with an
opportunity to achieve liquidity in their respective investments in American by
granting the Holders certain registration rights relating to the Common Stock.
NOW, THEREFORE, American and the Holders agree as follows:
1. Definitions. As used in this Agreement, the following
terms shall have the respective meanings set forth below (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
"American" has the meaning specified in the preamble.
"Closing Price" means, with respect to the Common Stock, the last
reported sales price of the Common Stock on the New York Stock Exchange, the
American Stock Exchange, the NASDAQ National Market System or any similar
system of automated dissemination of quotations of securities prices in the
United States.
"Common Stock" has the meaning specified in the recitals.
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<PAGE> 2
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fundamental Change" shall mean (i) the occurrence of any
transaction or event in connection with which all or substantially all of the
shares of Common Stock are exchanged for, converted into, acquired for or
constitute solely the right to receive cash, securities, property or other
assets (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification or otherwise) or (ii) the
conveyance, sale, lease, assignment, transfer or other disposal of all or
substantially all of American's property, business or assets; provided,
however, that a Fundamental Change shall not be deemed to have occurred by
reason of the occurrence of any reverse stock split proposed by American.
"Holder" has the meaning specified in the preamble.
"Indemnified Party" has the meaning specified in Section 4(d).
"Indemnifying Party" has the meaning specified in Section 4(d).
"Initiating Holders" means any Holders who propose to have
American register their Restricted Stock, which Restricted Stock shall have an
aggregate market value, determined by reference to the Closing Price of the
Common Stock on the date such request is received, of at least $2,000,000.
"Interests" has the meaning specified in the recitals.
"Offers" has the meaning specified in the recitals.
"person" means any individual, firm, corporation, partnership or
other entity, unless the context otherwise requires.
"Requesting Holders" has the meaning specified in Section
4(b)(ii) hereof.
"Restricted Stock" means any shares of Common Stock acquired by
any Holders in connection with the Offers, including any such shares acquired
pursuant to Section 9 of the Offer to Purchase and Exchange Offer relating to
the Offers.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Termination Date" has the meaning specified in Section 5(a)
hereof.
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2. Covenants of the Holders.
(a) Each Holder covenants and agrees that it shall not sell,
transfer any beneficial interest in, or otherwise dispose of any shares
of Restricted Stock otherwise than pursuant to (i) an effective
registration statement under the Securities Act, (ii) Rule 144 of the
general rules and regulations under the Securities Act or (iii) an
exemption from registration under the Securities Act determined to be
available in the opinion of counsel reasonably acceptable to American.
(b) All certificates representing ownership of shares of
Restricted Stock shall include the following legend until such
securities have been transferred in accordance with the provisions
hereof:
"These shares have not been registered under the Securities Act
of 1933, as amended, or any applicable state securities laws, and
such shares may not be offered, sold or otherwise transferred,
pledged or hypothecated unless and until registered or qualified
under such Act or state laws, or unless such offer, sale,
transfer, pledge or hypothecation is exempt from registration or
is otherwise in compliance with such Act or state laws."
3. Covenants of American.
Prior to the Termination Date and subject to the provisions
hereof:
(a) For as long as any Holder shall continue to hold any
Restricted Stock, American shall file, on a timely basis, all annual,
quarterly and other reports required to be filed by it under Section 13
or 15(d) of the Exchange Act and the rules and regulations thereunder,
as amended from time to time.
(b) If a Fundamental Change (the date of occurrence of such
Fundamental Change being the "Fundamental Change Date") shall occur at
any time after the Expiration Date (as defined in the Offers) and the
issuance of the Initial Shares but before the issuance of the Subsequent
Shares (as such capitalized terms are defined in the Offers), each
Holder of Interests that were tendered for exchange in the Offers but
that have, at the time of such Fundamental Change Date, not been
exchanged for shares of Common Stock, shall have the right to require
that American or its successor purchase, in which event American or its
successor shall be obligated to purchase, such Interests at a purchase
price equal to the same consideration, or the cash equivalent, that such
Holder would have been entitled to receive if such shares of Common
Stock had been issued on or before the Fundamental Change Date (the
"Purchase Price"), in accordance with the procedures set forth in
Subsections (c) and (d) of this Section; provided, however, that such
holders shall not have such right, and American or its successor shall
not have such obligation, if at the special meeting of stockholders of
American called to consider a proposal to approve the issuance
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of the Subsequent Shares Stockholder Approval (as such capitalized terms
are defined in the Offers) of such proposal is not obtained.
(c) Within 30 days following any Fundamental Change Date,
American or its successor shall send by first class mail, postage
prepaid, to each Holder of such Interests, at his address appearing in
the corporate records of American or its successor, a notice stating:
(i) that a Fundamental Change has occurred and that
such Holder has the right to require American or its successor to
purchase such Interests at the Purchase Price;
(ii) the circumstances and relevant facts regarding such
Fundamental Change;
(iii) a purchase date (the "Purchase Date"), which shall
be no fewer than 30 days nor more than 60 days from the date such
notice is mailed or if not a business day, the next following
business day;
(iv) the Purchase Price; and
(v) the place at which notice to exchange such
Interests is to be presented.
(d) Notwithstanding anything to the contrary herein, American
or its successor shall not be obligated to give notice to Holders of
such Interests or to purchase such Interests with respect to more than
one Fundamental Change.
(e) Notwithstanding anything to the contrary herein, the
purchase rights and obligations set forth in Section 3(b) and Section
3(c) with respect to any shares of Restricted Stock shall terminate and
be of no further force or effect upon the sale of such Shares pursuant
to a registered underwritten public offering of Common Stock effected
pursuant to Section 4.
4. Registration Rights.
(a) Required Registration. The Initiating Holders may request
that American effect an underwritten registration with respect to any
Restricted Stock as follows:
(i) Request for Registration of Restricted Stock. In
the event that American shall receive from the Initiating Holders
a written request that American effect registration of an
underwritten public offering with respect to all or any part of
the Restricted Stock, American will: (A) promptly give written
notice of the
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proposed registration to all other Holders; and (B) as soon as
practicable use its diligent best efforts to effect all such
registration, qualification and compliance (including, without
limitation, the execution of an undertaking to file
post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under
the Securities Act) as may be so requested and as would permit or
facilitate the underwritten offering of all or such portion of
such Restricted Stock as is specified in such request, together
with all or such portion of the Restricted Stock of any Holder or
Holders thereof joining in such request as are specified in a
written request given within 30 days after receipt of such
written notice from American; provided that American shall not be
obligated to take any action to effect any such registration,
qualification or compliance pursuant to this Section 4(a)(i) if:
(A) American has effected one previous registration pursuant to
this Section 4(a)(i) during the preceding twelve-month period,
(B) American has effected two previous registrations pursuant to
this Section 4(a)(i) or (C) reputable counsel designated by
American delivers an opinion to such Initiating Holders, in form
and substance satisfactory to such Initiating Holders, to the
effect that the Restricted Stock specified in the request for
registration may be sold or distributed as planned by the
Initiating Holders without registration.
(ii) Underwriting. American shall (together with all
Holders proposing to sell their Restricted Stock in the
underwritten public offering) enter into an underwriting
agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting by
American. Notwithstanding any other provision of this Section
4(a), if the representative determines, in good faith and
independent of any request by American, that marketing factors
require a limitation of the number of shares to be underwritten,
the representative may limit the number of shares of Restricted
Stock to be included in the registration and underwriting to the
extent such representative deems necessary. American shall so
advise all Holders, and the number of shares of Restricted Stock
that may be included in the registration and underwriting shall
be allocated among all Holders thereof in proportion, as nearly
as practicable, to the respective amounts of Restricted Stock
entitled to inclusion in such registration held by such Holders
at the time of filing the registration statement. If any Holder
disapproves of the terms of the underwriting, such person may
elect to withdraw therefrom by written notice to American, the
underwriter and the Initiating Holders and the Restricted Stock
so withdrawn shall also be withdrawn from registration but shall
be entitled to such registration rights granted to such
Restricted Stock pursuant to this Section 4(a) as may thereafter
remain in effect.
American and the holders of Common Stock of American to
whom American has granted registration rights substantially
identical to those granted hereunder may include their respective
shares of Common Stock for their own
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accounts in such registration if the representative of the
underwriters so agrees and if the number of shares of Restricted
Stock and other Common Stock that would otherwise have been
included in such registration and underwriting will not thereby
be limited and if such inclusion will not otherwise adversely
affect the offering.
(iii) Expenses of Requested Registration. American shall
bear all expenses incurred in connection with each registration,
qualification or compliance pursuant to Section 4(a)(i),
including, without limitation, all registration, filing and
qualification fees, printing expenses, audit fees and fees and
disbursements of counsel for American (but excluding
underwriters' commissions and fees and any reimbursable
disbursements and expenses of the underwriters allocable to the
Restricted Stock of the Holders, which commissions, fees,
disbursements and expenses shall be borne pro rata (by share) by
the Holders electing to participate in such requested
registration).
(b) Company Registration.
(i) Registration Initiated by American. In the event
American shall determine at any time prior to the expiration of
two years following the later of (i) the Expiration Date or (ii)
the date of issuance of the Subsequent Shares following
Stockholder Approval thereof (as such capitalized terms are
defined in the Offers) to register any of its Common Stock under
the Securities Act for sale in an underwritten offering, either
for its own account or for the account of a holder or holders of
Common Stock exercising their respective demand registration
rights (but specifically excluding any registration relating to
employee benefit plans, or the acquisition or purchase by or
combination by merger or otherwise of American with another
company or business entity or partnership or a registration
pursuant to Section 4(a)), American will:
(A) promptly give to each Holder written notice
thereof (which shall include a list of the jurisdictions
in which American intends to attempt to qualify such
Common Stock under the applicable blue sky or other state
securities laws); and
(B) include in such registration (and any
related qualification under blue sky laws or other
compliance), all the Restricted Stock specified in a
written request or requests, made within 30 days after
receipt of such written notice from American, by any
Holder or Holders, except as set forth in Sections
4(b)(ii) and 4(b)(iii) below.
(ii) Amount to be Included. Notwithstanding any other
provision of Section 4(b), in the event that Restricted Stock is
requested to be included in any registration initiated pursuant
to Section 4(b)(i), and if, in the good faith judgment
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of the representative of the underwriters and independent of any
request by American, the inclusion of all of the Restricted Stock
originally covered by a request for registration, together with
the number of shares to be offered by American or other holders
of Common Stock who hold similar registration rights, would
interfere with the successful marketing of such shares, then such
representative may limit the number of shares of Common Stock to
be included in the registration such that the Holders of shares
of Restricted Stock together with other holders of Common Stock
who hold similar registration rights who have requested
registration (collectively, the "Requesting Holders") shall
participate in the underwritten public offering pro rata based
upon the total number of shares of Common Stock held by each
Requesting Holder (including the number of shares of Common Stock
that each such holder may then be entitled to receive upon the
exercise of any option or warrant, or the exchange or conversion
of any security, held by such holder). If any such holder would
thus be entitled to include more shares than such holder
requested to be registered, the excess shall be allocated among
other Requesting Holders pro rata in a manner similar to that
described in the previous sentence.
(iii) Underwriting. The right of any Holder to
registration pursuant to this Section 4(b) shall be conditioned
upon such Holder's participation in the underwriting and the
inclusion of such Holder's Restricted Stock in the underwriting
to the extent provided herein. All Holders proposing to sell
their Restricted Stock through such underwriting shall (together
with American and the other holders (if any) selling their shares
of Common Stock through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by American. If any
Holder disapproves of the terms of any such underwriting, he may
elect to withdraw therefrom by written notice to American and the
underwriter. Any Restricted Stock excluded or withdrawn from
such underwriting shall be withdrawn from such registration.
(iv) Expenses of Registration by American. American
shall bear all expenses incurred in connection with each
registration, qualification or compliance pursuant to this
Section 4(b), including, without limitation, all registration,
filing and qualification fees, printing expenses, audit fees and
fees and disbursements of counsel for American (but excluding
underwriters' commissions and fees and any reimbursable
disbursements and expenses of the underwriters allocable to the
Restricted Stock of the Holders, which commissions, fees,
disbursements and expenses shall be borne pro rata (by share) by
the Holders electing to participate in such requested
registration).
(c) Registration Procedures. In the case of each
registration, qualification or compliance effected by American pursuant
to this Section 4 pursuant to which Restricted
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<PAGE> 8
Stock for a Holder is included therein, American will keep such Holder
advised as to the initiation of each registration, qualification and
compliance and as to the completion thereof. At its expense, American
will:
(i) furnish such number of prospectuses and other
documents incident thereto as such Holder from time to time may
reasonably request; and
(ii) list such Restricted Stock on each securities
exchange (if any) on which the Common Stock is listed.
(d) Indemnification.
(i) American will, if Restricted Stock held by a Holder
is included in the shares of Common Stock as to which such
registration, qualification or compliance is being effected,
indemnify such Holder, each of its officers and directors, and
each person controlling such Holder, with respect to which
registration, qualification or compliance has been effected
pursuant to Section 4(a) or (b), and each underwriter, and each
person who controls any underwriter, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus,
offering circular or other document (including any related
registration statement, notification or the like) incident to any
such registration, qualification or compliance, or based on any
omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements
not misleading, or any violation by American of any rule or
regulation promulgated under the Securities Act, or of any other
federal, state or common law, applicable to American and relating
to any action or inaction required of American in connection with
any such registration, qualification or compliance, and will
reimburse each such Holder, each of its officers and directors,
and each person controlling such Holder, each such underwriter
and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage,
liability or action, provided that American will not be liable in
any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue
statement or omission based upon written information furnished to
American by an instrument duly executed by such Holder or
underwriter and stated to be specifically for use therein. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such party and shall
survive the subsequent transfer of shares of Common Stock by the
seller thereof and the transfer of any shares of Common Stock of
American that were the subject of such registration,
qualification or listing.
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(ii) Each Holder will, if Restricted Stock held by such
Holder is included in the shares of Common Stock as to which such
registration, qualification or compliance is being effected,
indemnify American, each of its directors and officers, each
underwriter of American's Common Stock covered by such a
registration statement, each person who controls American or such
underwriter within the meaning of the Securities Act, and each
other Holder registering Restricted Stock, each of its officers
and directors and each person controlling such Holder, against
all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any
such registration statement, prospectus, offering circular or
other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will
reimburse American, such Holders, such directors, officers,
persons, underwriters or control persons for any legal or any
other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information
furnished to American by such Holder specifically for use
therein; provided, however, that (i) the obligations of such
Holders hereunder shall be limited to an amount equal to the
proceeds to each such Holder of Restricted Stock sold as
contemplated herein and (ii) the indemnity for untrue statements
or omissions described above shall not apply if the Holder
providing such written information provides American with such
additional written information prior to the effectiveness of the
registration as is required to make the previously supplied
written information true and complete, together with a
description in reasonable detail of the information previously
supplied that was untrue or incomplete.
(iii) Each party entitled to indemnification under this
Section 4(d) (the "Indemnified Party") shall give notice to the
party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual
knowledge of any claim as to which indemnity may be sought, and
shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that
counsel for the Indemnifying Party, who shall conduct the defense
of such claim or litigation, shall be approved by the Indemnified
Party (whose approval shall not unreasonably be withheld), and
the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this
Section 4(d). After notice from the Indemnifying Party to the
Indemnified Party of its election to assume the defense of such
claim or litigation, the Indemnifying Party will not be liable to
such Indemnified Party for any legal or
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other expenses subsequently incurred by such Indemnified Party in
connection with the defense thereof other than reasonable costs
of investigation, unless the Indemnifying Party abandons the
defense of such claim or litigation. No Indemnifying Party, in
the defense of any such claim or litigation, shall, except with
the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation.
(e) Information by Holder. The Holder or Holders of
Restricted Stock included in any registration shall furnish to American
such information regarding such Holder or Holders and the distribution
proposed by such Holder or Holders as American may reasonably request,
and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 4.
(f) Postponement of Requested Registration. If, within ten
days of American's receipt of a registration request from Initiating
Holders, American notifies such Initiating Holders in writing that
effecting the requested registration would materially and adversely
affect a material transaction then under current consideration by
American, then American may postpone its performance of its obligations
hereunder for a period not to exceed 90 days.
(g) Term. Notwithstanding any other provision of this
Agreement, the respective covenants and agreements contained in this
Section 4 shall continue for a period of two years following the later
of (i) Expiration Date (as such term is defined in the Offers) and (ii)
the date of the issuance of the Subsequent Shares following Stockholder
Approval thereof (as such capitalized terms are defined in the Offers),
and with respect to any request for registration made prior to the end
of such two-year period, shall continue in effect until all obligations
hereunder with respect thereto are fulfilled, provided that the
indemnification obligations contained in Section 4(d) shall survive
forever.
5. Termination.
(a) Subject to Section 4(g), this Agreement shall terminate
two years following the later of (i) the Expiration Date (as such term
is defined in the Offers) and (ii) the date of the issuance of the
Subsequent Shares following Stockholder Approval thereof (as such
capitalized terms are defined in the Offers) (the "Termination Date").
6. Miscellaneous.
(a) The Holders, on the one hand, and American, on the other,
acknowledge and agree that irreparable damage would occur in the event
any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise
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<PAGE> 11
breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of the provisions of
this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state thereof having
jurisdiction, in addition to any other remedy to which they may be
entitled at law or equity.
(b) If requested in writing by American, each Holder shall
present or cause to be presented promptly all certificates representing
Restricted Stock now owned for the placement thereon of the following
legend, which will remain on such certificates as long as such
Restricted Stock are subject to the restrictions contained in this
Agreement:
"The securities represented by this certificate are
subject to the provisions of a Stockholder and Registration
Rights Agreement, dated as of _______________ ___, 1994, between
the registered owner of the shares represented by this
certificate and American Exploration Company (the 'Agreement').
These securities may not be sold or transferred except in
accordance with the Agreement. A copy of the Agreement is on
file at the office of the Corporate Secretary of American
Exploration Company."
American may enter a stop transfer order with the transfer agent
or agents of American prohibiting the transfer of Restricted Stock
except in compliance with the requirements of this Agreement. American
agrees to remove promptly any stop transfer order with respect to, and
issue promptly unlegended certificates in substitution for, certificates
for any shares of Restricted Stock that are no longer subject to the
restrictions contained in this Agreement.
(c) All notices and other communications hereunder shall be in
writing and shall be deemed given (i) when delivered personally, (ii)
when received if sent by registered or certified mail, return receipt
requested, or delivery service or (iii) when received by facsimile
transmission, in each case to the parties at the following addresses (or
at such other address as a party may specify by like notice):
(A) If to American, to:
American Exploration Company
1331 Lamar Street, Suite 900
Houston, Texas 77010
Attention: James P. Ulm, II
Fax: (713) 659-5620
Telephone confirmation: (713) 756-6000
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<PAGE> 12
With a copy (which shall not constitute notice) to:
Baker & Botts, L.L.P.
910 Louisiana
Houston, Texas 77002
Attention: Joe S. Poff
Fax: (713) 229-1522
(B) If to any Holder, to the address maintained in the
records of American.
(d) This Agreement supersedes all prior agreements between the
parties (written or oral) and is intended as a complete and exclusive
statement of the terms of the agreement between the parties.
(e) This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware and shall be construed
and enforced in accordance with the laws of such state without regard to
principles of conflicts of laws thereof.
(f) The headings and table of contents contained in this
Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
(g) Any term or provision of this Agreement may be waived at
any time by an instrument in writing signed by the party that is
entitled to the benefits thereof, and this Agreement may be amended or
supplemented at any time by an instrument in writing signed by both
parties hereto.
(h) Except as otherwise provided herein, no party hereto shall
assign this Agreement or any part thereof without the prior written
consent of the other parties. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns. No such assignment
shall release any party of any of its obligations under this Agreement.
(i) If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is
not affected in any manner adverse to either party. Upon such
determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good
faith to modify this Agreement so as to effect the original intent of
the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the extent
possible.
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<PAGE> 13
(j) This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute but one and the same agreement.
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<PAGE> 14
IN WITNESS WHEREOF, the Holders and American have caused this
Agreement to be duly executed by their respective officers, each of whom is
duly authorized, all as of the day and year first above written.
AMERICAN EXPLORATION COMPANY
By:
-------------------------------
Name:
Title:
Number of Shares: [HOLDER]
(issue date)
By:
- -------------------- -------------------------------
Name:
Title:
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<PAGE> 15
SCHEDULE
American Exploration Company has entered into agreements identical to
the foregoing with respect to the following parties, with the number of shares
subject to each agreement set forth opposite such party's name:
GEAPPL Corp. 7,047,093
Massachusetts Mutual 2,697,382
Life Insurance Company
Principal Mutual Life 2,045,843
Insurance Company
UNUM Life Insurance 1,923,010
Co. of America
First UNUM Life Insurance 286,672
Company
<PAGE> 1
EXHIBIT 10(ff)
ATTACHMENT III
STOCKHOLDER AND REGISTRATION RIGHTS AGREEMENT
This Stockholder and Registration Rights Agreement, executed as
of November 1994, between AMERICAN EXPLORATION COMPANY, a Delaware
corporation ("American"), and the parties identified on the signature pages
hereto as the "Holders" (each, a "Holder" and collectively, the "Holders");
W I T N E S S E T H:
WHEREAS, American is offering to purchase the Holders' (a)
limited partner interests in (i) Amex Production Partnership Ltd., a Texas
limited partnership ("APPL-I"), (ii) American Production Partnership-II, Ltd.,
a Texas limited partnership ("APPL-II"), (iii) American Production
Partnership-III, Ltd., a Texas limited partnership ("APPL-III"), (iv) American
Production Partnership-IV, Ltd., a Texas limited partnership ("APPL-IV"), (v)
American Production Partnership-V, Ltd., a Texas limited partnership ("APPL-V")
or American Production Partnership-VI, Ltd., a Texas limited partnership
("APPL-VI"), and (b) notes and net profit production payments issued by (i)
Ameriplor Corp., a Delaware corporation, (ii) Ninian Oil Finance Corp., a
Delaware corporation, or (iii) American Exploration Acquisition-VI Corp., a
Delaware corporation (all such limited partner interests, notes and net profit
production payments being collectively referred to as the "Interests"),
pursuant to Offers to Purchase and Exchange Offers dated August 12, 1994 (the
"Offers"); and
WHEREAS, pursuant to the Offers shares of American Common Stock,
par value $.05 per share (the "Common Stock"), have been issued to the Holders
in the amounts set forth opposite the Holders' names on the signature pages
hereto; and
WHEREAS, American desires to provide the Holders with an
opportunity to achieve liquidity in their respective investments in American by
granting the Holders certain registration rights relating to the Common Stock.
NOW, THEREFORE, American and the Holders agree as follows:
1. Definitions. As used in this Agreement, the following
terms shall have the respective meanings set forth below (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
"American" has the meaning specified in the preamble.
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"Closing Price" means, with respect to the Common Stock, the last
reported sales price of the Common Stock on the New York Stock Exchange, the
American Stock Exchange, the NASDAQ National Market System or any similar
system of automated dissemination of quotations of securities prices in the
United States.
"Common Stock" has the meaning specified in the recitals.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fundamental Change" shall mean (i) the occurrence of any
transaction or event in connection with which all or substantially all of the
shares of Common Stock are exchanged for, converted into, acquired for or
constitute solely the right to receive cash, securities, property or other
assets (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification or otherwise) or (ii) the
conveyance, sale, lease, assignment, transfer or other disposal of all or
substantially all of American's property, business or assets; provided,
however, that a Fundamental Change shall not be deemed to have occurred by
reason of the occurrence of any reverse stock split proposed by American.
"Holder" has the meaning specified in the preamble.
"Indemnified Party" has the meaning specified in Section 4(d).
"Indemnifying Party" has the meaning specified in Section 4(d).
"Initiating Holders" means any Holders who propose to have
American register their Restricted Stock, which Restricted Stock shall have an
aggregate market value, determined by reference to the Closing Price of the
Common Stock on the date such request is received, of at least $2,000,000.
"Interests" has the meaning specified in the recitals.
"Offers" has the meaning specified in the recitals.
"person" means any individual, firm, corporation, partnership or
other entity, unless the context otherwise requires.
"Requesting Holders" has the meaning specified in Section
4(b)(ii) hereof.
"Restricted Stock" means any shares of Common Stock acquired by
any Holders in connection with the Offers, including any such shares acquired
pursuant to Section 9 of the Offer to Purchase and Exchange Offer relating to
the Offers.
"SEC" means the Securities and Exchange Commission.
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<PAGE> 3
"Securities Act" means the Securities Act of 1933, as amended.
"Termination Date" has the meaning specified in Section 5(a)
hereof.
2. Covenants of the Holders.
(a) Each Holder covenants and agrees that it shall not sell,
transfer any beneficial interest in, or otherwise dispose of any shares
of Restricted Stock otherwise than pursuant to (i) an effective
registration statement under the Securities Act, (ii) Rule 144 of the
general rules and regulations under the Securities Act or (iii) an
exemption from registration under the Securities Act determined to be
available in the opinion of counsel reasonably acceptable to American.
(b) All certificates representing ownership of shares of
Restricted Stock shall include the following legend until such
securities have been transferred in accordance with the provisions
hereof:
"These shares have not been registered under the Securities Act
of 1933, as amended, or any applicable state securities laws, and
such shares may not be offered, sold or otherwise transferred,
pledged or hypothecated unless and until registered or qualified
under such Act or state laws, or unless such offer, sale,
transfer, pledge or hypothecation is exempt from registration or
is otherwise in compliance with such Act or state laws."
3. Covenants of American.
Prior to the Termination Date and subject to the provisions
hereof:
(a) For as long as any Holder shall continue to hold any
Restricted Stock, American shall file, on a timely basis, all annual,
quarterly and other reports required to be filed by it under Section 13
or 15(d) of the Exchange Act and the rules and regulations thereunder,
as amended from time to time.
(b) If a Fundamental Change (the date of occurrence of such
Fundamental Change being the "Fundamental Change Date") shall occur at
any time after the Expiration Date (as defined in the Offers) and the
issuance of the Initial Shares but before the issuance of the Subsequent
Shares (as such capitalized terms are defined in the Offers), each
Holder of Interests that were tendered for exchange in the Offers but
that have, at the time of such Fundamental Change Date, not been
exchanged for shares of Common Stock, shall have the right to require
that American or its successor purchase, in which event American or its
successor shall be obligated to purchase, such Interests at a purchase
price equal to the same consideration, or the cash equivalent, that such
Holder would have been entitled to receive if such shares of Common
Stock had been issued on or before the Fundamental
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<PAGE> 4
Change Date (the "Purchase Price"), in accordance with the procedures
set forth in Subsections (c) and (d) of this Section; provided, however,
that such holders shall not have such right, and American or its
successor shall not have such obligation, if at the special meeting of
stockholders of American called to consider a proposal to approve the
issuance of the Subsequent Shares Stockholder Approval (as such
capitalized terms are defined in the Offers) of such proposal is not
obtained.
(c) Within 30 days following any Fundamental Change Date,
American or its successor shall send by first class mail, postage
prepaid, to each Holder of such Interests, at his address appearing in
the corporate records of American or its successor, a notice stating:
(i) that a Fundamental Change has occurred and that
such Holder has the right to require American or its successor to
purchase such Interests at the Purchase Price;
(ii) the circumstances and relevant facts regarding such
Fundamental Change;
(iii) a purchase date (the "Purchase Date"), which shall
be no fewer than 30 days nor more than 60 days from the date such
notice is mailed or if not a business day, the next following
business day;
(iv) the Purchase Price; and
(v) the place at which notice to exchange such
Interests is to be presented.
(d) Notwithstanding anything to the contrary herein, American
or its successor shall not be obligated to give notice to Holders of
such Interests or to purchase such Interests with respect to more than
one Fundamental Change.
(e) Notwithstanding anything to the contrary herein, the
purchase rights and obligations set forth in Section 3(b) and Section
3(c) with respect to any shares of Restricted Stock shall terminate and
be of no further force or effect upon the sale of such Shares pursuant
to a registered underwritten public offering of Common Stock effected
pursuant to Section 4.
4. Registration Rights.
(a) Required Registration. The Initiating Holders may request
that American effect an underwritten registration with respect to any
Restricted Stock as follows:
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<PAGE> 5
(i) Request for Registration of Restricted Stock. In
the event that American shall receive from the Initiating Holders
a written request that American effect registration of an
underwritten public offering with respect to all or any part of
the Restricted Stock, American will: (A) promptly give written
notice of the proposed registration to all other Holders; and (B)
as soon as practicable use its diligent best efforts to effect
all such registration, qualification and compliance (including,
without limitation, the execution of an undertaking to file
post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under
the Securities Act) as may be so requested and as would permit or
facilitate the underwritten offering of all or such portion of
such Restricted Stock as is specified in such request, together
with all or such portion of the Restricted Stock of any Holder or
Holders thereof joining in such request as are specified in a
written request given within 30 days after receipt of such
written notice from American; provided that American shall not be
obligated to take any action to effect any such registration,
qualification or compliance pursuant to this Section 4(a)(i) if:
(A) American has effected one previous registration pursuant to
this Section 4(a)(i) during the preceding twelve-month period,
(B) American has effected two previous registrations pursuant to
this Section 4(a)(i), (C) American has effected during the
preceding six-month period one previous registration statement
pursuant to any other exercise by a holder or holders of Common
Stock of demand registration rights in which the Holders were
entitled to include their Restricted Stock pursuant to Section
4(b) or (D) reputable counsel designated by American delivers an
opinion to such Initiating Holders, in form and substance
satisfactory to such Initiating Holders, to the effect that the
Restricted Stock specified in the request for registration may be
sold or distributed as planned by the Initiating Holders without
registration.
(ii) Underwriting. American shall (together with all
Holders proposing to sell their Restricted Stock in the
underwritten public offering) enter into an underwriting
agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting by
American. Notwithstanding any other provision of this Section
4(a), if the representative determines, in good faith and
independent of any request by American, that marketing factors
require a limitation of the number of shares to be underwritten,
the representative may limit the number of shares of Restricted
Stock to be included in the registration and underwriting to the
extent such representative deems necessary. American shall so
advise all Holders, and the number of shares of Restricted Stock
that may be included in the registration and underwriting shall
be allocated among all Holders thereof in proportion, as nearly
as practicable, to the respective amounts of Restricted Stock
entitled to inclusion in such registration held by such Holders
at the time of filing the registration statement. If any Holder
disapproves of the terms of the underwriting, such person may
elect to withdraw
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<PAGE> 6
therefrom by written notice to American, the underwriter and the
Initiating Holders and the Restricted Stock so withdrawn shall
also be withdrawn from registration but shall be entitled to such
registration rights granted to such Restricted Stock pursuant to
this Section 4(a) as may thereafter remain in effect.
American and the holders of Common Stock of American to
whom American has granted registration rights substantially
identical to those granted hereunder may include their respective
shares of Common Stock for their own accounts in such
registration if the representative of the underwriters so agrees
and if the number of shares of Restricted Stock and other Common
Stock that would otherwise have been included in such
registration and underwriting will not thereby be limited and if
such inclusion will not otherwise adversely affect the offering.
(iii) Expenses of Requested Registration. American shall
bear all expenses incurred in connection with each registration,
qualification or compliance pursuant to Section 4(a)(i),
including, without limitation, all registration, filing and
qualification fees, printing expenses, audit fees and fees and
disbursements of counsel for American (but excluding
underwriters' commissions and fees and any reimbursable
disbursements and expenses of the underwriters allocable to the
Restricted Stock of the Holders, which commissions, fees,
disbursements and expenses shall be borne pro rata (by share) by
the Holders electing to participate in such requested
registration).
(b) Company Registration.
(i) Registration Initiated by American. In the event
American shall determine at any time prior to the expiration of
two years following the later of (i) the Expiration Date or (ii)
the date of issuance of the Subsequent Shares following
Stockholder Approval thereof (as such capitalized terms are
defined in the Offers) to register any of its Common Stock under
the Securities Act for sale in an underwritten offering, either
for its own account or for the account of a holder or holders of
Common Stock exercising their respective demand registration
rights (but specifically excluding any registration relating to
employee benefit plans, or the acquisition or purchase by or
combination by merger or otherwise of American with another
company or business entity or partnership or a registration
pursuant to Section 4(a)), American will:
(A) promptly give to each Holder written notice
thereof (which shall include a list of the jurisdictions
in which American intends to attempt to qualify such
Common Stock under the applicable blue sky or other state
securities laws); and
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<PAGE> 7
(B) include in such registration (and any
related qualification under blue sky laws or other
compliance), all the Restricted Stock specified in a
written request or requests, made within 30 days after
receipt of such written notice from American, by any
Holder or Holders, except as set forth in Sections
4(b)(ii) and 4(b)(iii) below.
(ii) Amount to be Included. Notwithstanding any other
provision of Section 4(b), in the event that Restricted Stock is
requested to be included in any registration initiated pursuant
to Section 4(b)(i), and if, in the good faith judgment of the
representative of the underwriters and independent of any request
by American, the inclusion of all of the Restricted Stock
originally covered by a request for registration, together with
the number of shares to be offered by American or other holders
of Common Stock who hold similar registration rights, would
interfere with the successful marketing of such shares, then such
representative may limit the number of shares of Common Stock to
be included in the registration such that the Holders of shares
of Restricted Stock together with other holders of Common Stock
who hold similar registration rights who have requested
registration (collectively, the "Requesting Holders") shall
participate in the underwritten public offering pro rata based
upon the total number of shares of Common Stock held by each
Requesting Holder (including the number of shares of Common Stock
that each such holder may then be entitled to receive upon the
exercise of any option or warrant, or the exchange or conversion
of any security, held by such holder). If any such holder would
thus be entitled to include more shares than such holder
requested to be registered, the excess shall be allocated among
other Requesting Holders pro rata in a manner similar to that
described in the previous sentence.
(iii) Underwriting. The right of any Holder to
registration pursuant to this Section 4(b) shall be conditioned
upon such Holder's participation in the underwriting and the
inclusion of such Holder's Restricted Stock in the underwriting
to the extent provided herein. All Holders proposing to sell
their Restricted Stock through such underwriting shall (together
with American and the other holders (if any) selling their shares
of Common Stock through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by American. If any
Holder disapproves of the terms of any such underwriting, he may
elect to withdraw therefrom by written notice to American and the
underwriter. Any Restricted Stock excluded or withdrawn from
such underwriting shall be withdrawn from such registration.
(iv) Expenses of Registration by American. American
shall bear all expenses incurred in connection with each
registration, qualification or compliance pursuant to this
Section 4(b), including, without limitation, all registration,
filing
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<PAGE> 8
and qualification fees, printing expenses, audit fees and fees
and disbursements of counsel for American (but excluding
underwriters' commissions and fees and any reimbursable
disbursements and expenses of the underwriters allocable to the
Restricted Stock of the Holders, which commissions, fees,
disbursements and expenses shall be borne pro rata (by share) by
the Holders electing to participate in such requested
registration).
(c) Registration Procedures. In the case of each
registration, qualification or compliance effected by American pursuant
to this Section 4 pursuant to which Restricted Stock for a Holder is
included therein, American will keep such Holder advised as to the
initiation of each registration, qualification and compliance and as to
the completion thereof. At its expense, American will:
(i) furnish such number of prospectuses and other
documents incident thereto as such Holder from time to time may
reasonably request; and
(ii) list such Restricted Stock on each securities
exchange (if any) on which the Common Stock is listed.
(d) Indemnification.
(i) American will, if Restricted Stock held by a Holder
is included in the shares of Common Stock as to which such
registration, qualification or compliance is being effected,
indemnify such Holder, each of its officers and directors, and
each person controlling such Holder, with respect to which
registration, qualification or compliance has been effected
pursuant to Section 4(a) or (b), and each underwriter, and each
person who controls any underwriter, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus,
offering circular or other document (including any related
registration statement, notification or the like) incident to any
such registration, qualification or compliance, or based on any
omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements
not misleading, or any violation by American of any rule or
regulation promulgated under the Securities Act, or of any other
federal, state or common law, applicable to American and relating
to any action or inaction required of American in connection with
any such registration, qualification or compliance, and will
reimburse each such Holder, each of its officers and directors,
and each person controlling such Holder, each such underwriter
and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage,
liability or action, provided that American will not be liable in
any such case to the extent that any such claim, loss, damage,
-8-
<PAGE> 9
liability or expense arises out of or is based on any untrue
statement or omission based upon written information furnished to
American by an instrument duly executed by such Holder or
underwriter and stated to be specifically for use therein. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such party and shall
survive the subsequent transfer of shares of Common Stock by the
seller thereof and the transfer of any shares of Common Stock of
American that were the subject of such registration,
qualification or listing.
(ii) Each Holder will, if Restricted Stock held by such
Holder is included in the shares of Common Stock as to which such
registration, qualification or compliance is being effected,
indemnify American, each of its directors and officers, each
underwriter of American's Common Stock covered by such a
registration statement, each person who controls American or such
underwriter within the meaning of the Securities Act, and each
other Holder registering Restricted Stock, each of its officers
and directors and each person controlling such Holder, against
all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any
such registration statement, prospectus, offering circular or
other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will
reimburse American, such Holders, such directors, officers,
persons, underwriters or control persons for any legal or any
other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information
furnished to American by such Holder specifically for use
therein; provided, however, that (i) the obligations of such
Holders hereunder shall be limited to an amount equal to the
proceeds to each such Holder of Restricted Stock sold as
contemplated herein and (ii) the indemnity for untrue statements
or omissions described above shall not apply if the Holder
providing such written information provides American with such
additional written information prior to the effectiveness of the
registration as is required to make the previously supplied
written information true and complete, together with a
description in reasonable detail of the information previously
supplied that was untrue or incomplete.
(iii) Each party entitled to indemnification under this
Section 4(d) (the "Indemnified Party") shall give notice to the
party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual
knowledge of any claim as to which indemnity may be sought, and
shall permit the Indemnifying Party to assume the defense of any
such claim or any
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<PAGE> 10
litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim
or litigation, shall be approved by the Indemnified Party (whose
approval shall not unreasonably be withheld), and the Indemnified
Party may participate in such defense at such party's expense,
and provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying
Party of its obligations under this Section 4(d). After notice
from the Indemnifying Party to the Indemnified Party of its
election to assume the defense of such claim or litigation, the
Indemnifying Party will not be liable to such Indemnified Party
for any legal or other expenses subsequently incurred by such
Indemnified Party in connection with the defense thereof other
than reasonable costs of investigation, unless the Indemnifying
Party abandons the defense of such claim or litigation. No
Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or
litigation.
(e) Information by Holder. The Holder or Holders of
Restricted Stock included in any registration shall furnish to American
such information regarding such Holder or Holders and the distribution
proposed by such Holder or Holders as American may reasonably request,
and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 4.
(f) Postponement of Requested Registration. If, within ten
days of American's receipt of a registration request from Initiating
Holders, American notifies such Initiating Holders in writing that
effecting the requested registration would materially and adversely
affect a material transaction then under current consideration by
American, then American may postpone its performance of its obligations
hereunder for a period not to exceed 90 days.
(g) Term. Notwithstanding any other provision of this
Agreement, the respective covenants and agreements contained in this
Section 4 shall continue for a period of two years following the later
of (i) Expiration Date (as such term is defined in the Offers) and (ii)
the date of the issuance of the Subsequent Shares following Stockholder
Approval thereof (as such capitalized terms are defined in the Offers),
and with respect to any request for registration made prior to the end
of such two-year period, shall continue in effect until all obligations
hereunder with respect thereto are fulfilled, provided that the
indemnification obligations contained in Section 4(d) shall survive
forever.
5. Termination.
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<PAGE> 11
(a) Subject to Section 4(g), this Agreement shall terminate
two years following the later of (i) the Expiration Date (as such term
is defined in the Offers) and (ii) the date of the issuance of the
Subsequent Shares following Stockholder Approval thereof (as such
capitalized terms are defined in the Offers) (the "Termination Date").
6. Miscellaneous.
(a) The Holders, on the one hand, and American, on the other,
acknowledge and agree that irreparable damage would occur in the event
any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof in any court of
the United States or any state thereof having jurisdiction, in addition
to any other remedy to which they may be entitled at law or equity.
(b) If requested in writing by American, each Holder shall
present or cause to be presented promptly all certificates representing
Restricted Stock now owned for the placement thereon of the following
legend, which will remain on such certificates as long as such
Restricted Stock are subject to the restrictions contained in this
Agreement:
"The securities represented by this certificate are
subject to the provisions of a Stockholder and Registration
Rights Agreement, dated as of _______________ ___, 1994, between
the registered owner of the shares represented by this
certificate and American Exploration Company (the 'Agreement').
These securities may not be sold or transferred except in
accordance with the Agreement. A copy of the Agreement is on
file at the office of the Corporate Secretary of American
Exploration Company."
American may enter a stop transfer order with the transfer agent
or agents of American prohibiting the transfer of Restricted Stock
except in compliance with the requirements of this Agreement. American
agrees to remove promptly any stop transfer order with respect to, and
issue promptly unlegended certificates in substitution for, certificates
for any shares of Restricted Stock that are no longer subject to the
restrictions contained in this Agreement.
(c) All notices and other communications hereunder shall be in
writing and shall be deemed given (i) when delivered personally, (ii)
when received if sent by registered or certified mail, return receipt
requested, or delivery service or (iii) when received by facsimile
transmission, in each case to the parties at the following addresses (or
at such other address as a party may specify by like notice):
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<PAGE> 12
(A) If to American, to:
American Exploration Company
1331 Lamar Street, Suite 900
Houston, Texas 77010
Attention: James P. Ulm, II
Fax: (713) 659-5620
Telephone confirmation: (713) 756-6000
With a copy (which shall not constitute notice) to:
Baker & Botts, L.L.P.
910 Louisiana
Houston, Texas 77002
Attention: Joe S. Poff
Fax: (713) 229-1522
(B) If to any Holder, to the address maintained in the
records of American.
(d) This Agreement supersedes all prior agreements between the
parties (written or oral) and is intended as a complete and exclusive
statement of the terms of the agreement between the parties.
(e) This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware and shall be construed
and enforced in accordance with the laws of such state without regard to
principles of conflicts of laws thereof.
(f) The headings and table of contents contained in this
Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
(g) Any term or provision of this Agreement may be waived at
any time by an instrument in writing signed by the party that is
entitled to the benefits thereof, and this Agreement may be amended or
supplemented at any time by an instrument in writing signed by both
parties hereto.
(h) Except as otherwise provided herein, no party hereto shall
assign this Agreement or any part thereof without the prior written
consent of the other parties. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns. No such assignment
shall release any party of any of its obligations under this Agreement.
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<PAGE> 13
(i) If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is
not affected in any manner adverse to either party. Upon such
determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good
faith to modify this Agreement so as to effect the original intent of
the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the extent
possible.
(j) This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute but one and the same agreement.
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<PAGE> 14
IN WITNESS WHEREOF, the Holders and American have caused this
Agreement to be duly executed by their respective officers, each of whom is
duly authorized, all as of the day and year first above written.
AMERICAN EXPLORATION COMPANY
By:
-------------------------------
Name:
Title:
Number of Shares: [HOLDER]
(issue date)
By:
- -------------------- -------------------------------
Name:
Title:
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<PAGE> 15
SCHEDULE
American Exploration Company has entered into agreements identical to
the foregoing with respect to the following parties (except that the agreement
with Phoenix Home Life Mutual Insurance Company was dated as of January 1995),
with the number of shares subject to each agreement set forth opposite such
party's name:
Dominion Reserves Inc. 2,250,487
GEAPPL Corp. 9,575,170
Connecticut Mutual Life 433,987
Insurance Company
Massachusetts Mutual Life 3,598,524
Insurance Company
New York Life Insurance 3,390,351
Company
New York Life Insurance 401,947
& Annuity Corporation
Pan American Life Insurance 492,143
Company
Phoenix Home Life Mutual 3,460,943
Insurance Company
Principal Mutual Life Insurance 2,742,314
Company
UNUM Life Insurance Co. 5,510,373
of America
First UNUM Life Insurance 274,336
Company
<PAGE> 1
EXHIBIT 10(gg)
[AMERICAN EXPLORATION COMPANY LOGO]
[AMERICAN EXPLORATION COMPANY LETTERHEAD]
October 10,1996
[ADDRESSEE]
Re: Letter dated October 8, 1996
(the "Lock Up Letter") executed in favor of
American Exploration Company (the "Company"),
Prudential Securities Incorporated, et al
Gentlemen:
Reference is made to the Lock Up Letter referenced above pursuant to which
you have agreed to certain restrictions upon the sale or other disposition of
shares of Common Stock, par value $.05 per share, of the Company held by you.
In consideration of your execution and delivery of the Lock Up Letter, the
Company hereby agrees to extend
(i) the two-year term set forth in Sections 4(g) and 5(a) of that certain
Stockholder and Registration Rights Agreement (the "Agreement") between the
Company and you, entered into in 1994 in connection with the consolidation of
various oil and gas programs known generally as the "APPL Programs" through
the ninetieth (90th) day following the expiration of the term of the lock up
period provided in the Lock Up Letter;
(ii) the registration rights under Section 4(a) of the Agreement to any
Holder which at the time of request holds ten percent (10%) or more of the
outstanding capital stock of the Company after the period provided in (i)
above, to the extent of a single registration; and
(iii) the registration rights under Section 4(b) of the Agreement to any
Holder so long as such Holder may be subject to the volume limitations of Rule
144 promulgated under the Securities Act of 1933, as amended.
<PAGE> 2
October 10, 1996
Page 2 of 2
If the foregoing is satisfactory, please execute a copy of this letter
in the space provided below and return it to the undersigned, whereupon the
Agreement shall be deemed amended as provided herein.
AMERICAN EXPLORATION COMPANY
/s/ JOHN M. HOGAN
John M. Hogan
Senior Vice President and
Chief Financial Officer
Agreed to as of the
10th day of October 1996.
[Addressee]
by:
------------------------------
Authorized Signatory
<PAGE> 3
SCHEDULE
American Exploration Company has entered into letter agreements identical to
the foregoing with the following parties:
General Electric Pension Trust
Massachusetts Mutual Life Insurance Company
Connecticut Mutual Life Insurance Company
UNUM Life Insurance Company
First UNUM Life Insurance Company
Principal Mutual Life Insurance Company
Phoenix Home Life Mutual Insurance Company
Dominion Reserves, Inc.
Pan American Life Insurance Co.
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report on
the consolidated financial statements of American Exploration Company and
subsidiaries dated March 22, 1996, included in American Exploration Company's
Form 10-K for the year ended December 31, 1995, and to all references to our
Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
October 28, 1996
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EXHIBIT 23(B)
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
American Exploration Company:
We consent to the inclusion in the registration statement (No. 333-13017)
on Form S-1 of American Exploration Company of our report dated September 26,
1996, relating to the statements of oil and gas revenues and direct lease
operating expenses of the Zilkha I Properties for each of the years in the
three-year period ended December 31, 1995, and to the reference to our firm
under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Houston, Texas
October 25, 1996
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EXHIBIT 23(C)
INDEPENDENT ACCOUNTANTS' CONSENT
The Sole Director
Zilkha Energy Company:
We consent to the inclusion in the registration statement (No. 333-13017)
on Form S-1 of American Exploration Company of our report dated September 26,
1996, relating to the statement of oil and gas revenues and direct lease
operating expenses of the Zilkha II Properties for the year ended December 31,
1995, and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG PEAT MARWICK LLP
Houston, Texas
October 25, 1996
