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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-20125
BASIN EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1143307
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
370 Seventeenth Street, Suite 3400, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
(303) 685-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
As of March 7, 1997, the aggregate market value of the approximate
7,550,000 shares of voting stock held by non-affiliates of the
registrant was approximately $51,900,000 based upon the closing sale
price of the Common Stock on the Nasdaq Stock Market on March 7, 1997
of $6.88 per share.
As of March 7, 1997, the registrant had 10,779,000 shares of Common
Stock outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference to
Part III of this Form 10-K Report: Proxy Statement for the
registrant's 1997 Annual Meeting of Shareholders.
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CROSS-REFERENCE SHEET
PART I INTERNAL PAGE
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Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a 15
Vote of Security Holders
PART II
Item 5. Market for the Registrant's 16
Common Stock and Related
Shareholder Matters
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and 18
Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes and Disagreements with Accountants 23
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers 23
of the Registrant
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain 23
Beneficial Owners and Management
Item 13. Certain Relationships and Related 23
Transactions
Item 14. Exhibits, Financial Statement Schedules 26
and Reports on Form 8-K
For Certain Definitions of terms used herein, see internal page 24.<PAGE>
PART I
ITEM 1. BUSINESS.
HISTORY AND OVERVIEW
Basin Exploration, Inc. ("Basin" or the "Company") is a Denver-
based independent oil and gas company engaged in exploration,
acquisition, development, and production operations in the United
States, including the Gulf of Mexico.
The Company was formed in 1981 to participate in an emerging
exploitation play in the Denver-Julesburg ("D-J") Basin, primarily
through management of small drilling programs. Growth accelerated in
1988 when the Company initiated a series of acquisitions of D-J Basin
properties, followed by subsequent exploitation and development.
After an initial public offering of common stock in May 1992, the
Company embarked on an aggressive development program for its D-J
Basin assets, and also expanded its activities to include acquisition
and development of proved properties and exploration for new reserves
in other areas within the Rocky Mountain region.
From 1988 through 1994, the Company completed acquisitions for a
total cost of $84 million and incurred related development costs
totaling $99 million. As a result of these activities, Basin
increased its estimated proved reserves 12-fold, from 20 Bcfe at
October 31, 1989 to 247 Bcfe at December 31, 1994. Due, in part, to
capital constraints, low gas prices in the Rocky Mountain region, and
a reduced inventory of economically viable exploitation projects,
total capital expenditures related to oil and gas properties declined
from $67 million in 1994 to $16 million in 1995. This reduced level
of investment, plus the effects of lower gas prices and dispositions
of low-margin properties, resulted in a decline in proved reserves at
December 31, 1995 to 207 Bcfe.
In late 1995, the Company responded to the reduction in its
inventory of exploitation projects, and to its assessment of the
relative attractiveness of alternative investment opportunities, by
determining to implement a strategic redirection incorporating the
following plans: (1) to improve its liquidity by monetizing assets;
(2) to focus its exploration efforts in the Gulf of Mexico rather than
in the Rocky Mountains; (3) to aggressively pursue acquisition
opportunities over a broader geographic area and in coordination with
the Company's exploration activities; and (4) to hire personnel for
management and technical positions who have had direct experience and
favorable track records conducting these planned operations. Actions
subsequently taken, and certain related consequences, include the
following:
- In two transactions closed in March 1996 and June 1996,
respectively, the Company sold all of its assets in the D-J
Basin for $123.5 million. These assets represented
approximately two-thirds of the Company's wells and 70% of
its proved oil and gas reserves at December 31, 1995. These
transactions enabled the Company to eliminate all of its
long-term debt utilizing a portion of the sales proceeds and
created significant liquidity and financial flexibility for
pursuit of new capital projects. However, as the Company
disposed of a substantial portion of its operating assets,
it has initially experienced significant reductions in oil
and gas reserves, production and cash flow. Pro forma the
disposition of its D-J Basin assets as of December 31, 1995,
the Company's proved oil and gas reserves at that date
totaled approximately 63 bcfe.
- During the fourth quarter of 1995, the Company discontinued
Rocky Mountain prospect generation and established an office
in Houston, Texas to focus initially on exploration in the
shallow waters of the Gulf of Mexico offshore Louisiana and
Texas. The Houston office currently has a staff of nine,
including senior geoscientists and petroleum engineers, each
of whom has extensive experience operating in this area.
The Company is aggressively utilizing advanced technologies
in its exploration effort, such as three-dimensional ("3-D")
geophysics and computer-aided exploration ("CAEX"), and has
acquired state-of-the-art workstations and access to large
3-D seismic data bases. In its first year of operations,
the Company made significant progress in building its 3-D
seismic data base and its inventory of prospect leaseholds,
and also drilled four exploratory wells, two of which were
successful. The Company's initial Gulf Coast production is
expected to occur during 1997.
- The Company added senior level acquisitions personnel in
late 1995 and early 1996 to strengthen its ability to
evaluate and pursue proved oil and gas properties with
enhancement potential. During September 1996, the Company
acquired a 25% interest in the Jepson-Holler Draw secondary
oil recovery unit in Wyoming, in exchange for $1 million and
the Company's interests in 18 producing wells. The Company
invested an additional $2.9 million on the development of
this property in 1996. In February 1997, the Company
acquired interests in three lease blocks in the Gulf of
Mexico with proved, nonproducing reserves for $14.4 million.
See "Present Activities."
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- In conjunction with these changes in strategy and
operations, five of six vice presidents with the Company at
the beginning of 1995 left the Company and five individuals
joined Basin as vice presidents during the period from
August 1995 through March 1996. These new vice presidents
include executive officers who assumed leadership roles in
the areas of exploration, acquisitions, project development,
and finance.
These developments have resulted in the Company being
considerably smaller, as measured by assets, revenues, or employees,
than at the beginning of 1996, but with substantially enhanced
liquidity and capability to pursue new capital projects. The
Company's divestment of its D-J Basin assets and its commitment to
Gulf of Mexico exploration have also significantly changed the
character and risk profile of its oil and gas capital expenditure
activities. See "Management's Discussion and Analysis of Financial
Condition and Results Of Operations."
The Company's proved oil and gas reserves at December 31, 1996
totaled approximately 77 Bcfe and were located primarily in the Powder
and Green River basins in Wyoming and in the shallow waters of the
Gulf of Mexico offshore Louisiana.
BUSINESS STRATEGY
Basin's business objective is to increase shareholder value
through profitable expansion, development, and production of oil and
gas reserves. To achieve its objective, the Company intends to:
. retain experienced technical staff with successful track
records;
. pursue a diversified mix of exploration and acquisition
activities;
. utilize state-of-the-art technologies, such as CAEX and 3-D
seismic;
. focus operations geographically to leverage regional
knowledge and develop competitive advantages;
. frequently rationalize assets to achieve efficiencies and
improve operating margins; and
. maintain strong financial condition.
EXPLORATION
Exploration activities have been increasing since 1994 and are
expected to be integral to the Company's future growth. Prior to
1996, exploration activities were conducted exclusively in the Rocky
Mountain region. However, in 1996 the Company began to focus its
exploration activities in the shallow waters of the Gulf of Mexico,
off the coasts of Louisiana and Texas. This change in strategy
reflects a number of considerations, including the following:
- The Gulf of Mexico is a prolific oil and gas province and
the Company believes that significant potential remains for
discovery of new reserves.
- State-of-the-art technologies, such as CAEX and 3-D seismic,
have been more successfully employed in the Gulf of Mexico
than in most other regions of the U.S. to improve drilling
success rates and enhance economic returns.
- The extensive amount of seismic and other geologic data
covering the area is readily available at reasonable cost.
- Open access to government-owned mineral rights reduces
barriers to entry.
- This area has a well-developed infrastructure, including oil
and gas transportation systems and service providers,
facilitating cost-effective operations and favorable product
prices.
- Typically, operations in this area are characterized by a
favorable ratio of low-risk development capital to high-risk
test capital.
This operating area is highly competitive and the Company
believes that a key to its success will be attraction and retention of
geoscientists and other professional staff with extensive experience
operating in the area. Accordingly, the Company opened a regional
office in Houston, Texas in December 1995. This office currently has
a staff of nine, including senior geoscientists and petroleum
engineers, all of whom are experienced in Gulf Coast operations. In
addition, certain
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members of the Company's senior management based in Denver have had
considerable experience in providing support for operations in the
Gulf Coast area, both onshore and offshore.
The Company generates prospect leads through utilization of
regional 2-D and 3-D seismic data bases, integrating regional geology.
The Company bids for leaseholds at federal and state Gulf of Mexico
lease sales and also pursues joint venture and farm-in opportunities
for blocks under existing lease. Generally, the Company intends to
target prospects with at least 20 Bcfe of estimated reserves
potential, in water depths of less than 300 feet. Basin will seek to
operate whenever possible, in order to maintain maximum control of
capital and operating costs, and of timing of prospect development.
The Company will typically seek to retain between one-quarter and two-
thirds of each prospect. The Company also intends to pursue
acquisitions of producing properties in the region where there is
identified exploration or development potential. Such acquisitions,
with production facilities and equipment already in place, can create
the opportunity for economic development of reserve accumulations that
might otherwise be too small.
In its first year of Gulf Coast operations, the Company
participated in drilling four exploratory wells, two of which were
successful. The Company also accumulated an inventory of prospect
acreage. At December 31, 1996, the Company held leaseholds relating
to 33,340 gross (28,128 net) undeveloped acres in the Gulf of Mexico,
mostly offshore Louisiana. See "Properties" for additional
information regarding offshore acreage holdings, including "Present
Activities" for information relating to events in 1997.
Since nine or more months are typically required for platform
fabrication and installation for a new discovery (unless such
infrastructure is already in place), the Company is not anticipating
any significant 1997 contributions of production or cash flow
resulting from current year Gulf Coast exploration. The company does
expect production during part of 1997 from three of its Gulf of Mexico
properties that are presently attributed proved reserves. See
"Management's Discussion and Analysis of Financial Condition and
Results Of Operations - Liquidity and Capital Resources."
ACQUISITIONS
Prior to 1996, the Company's growth was achieved primarily
through acquisition of properties with proved and probable reserves,
and subsequent exploitation and development. The Company initially
executed a series of acquisitions in the D-J Basin, ultimately
creating a substantial base of operations that facilitated development
of in-depth knowledge of the area, including its geologic and
reservoir characteristics, and also enabled the achievement of certain
operating and administrative efficiencies. Later, the Company
executed two acquisitions of Powder River Basin properties in Wyoming
to establish another base of operations where similar operating
advantages could be achieved.
In 1996, Basin added senior level acquisitions personnel to
enhance the Company's ability to source, evaluate and capture
acquisition opportunities in a broader geographic area. The Company
intends to opportunistically pursue property acquisitions with upside
potential in its current operating areas and potentially in other
major producing domestic basins. Basin intends to utilize advanced
technologies, including 2-D and 3-D seismic data and CAEX where
applicable, to identify properties with upside potential that might be
acquired. The Company's petroleum engineers will work in conjunction
with the Company's in-house geoscientists or outside consultants,
depending on the area, to effectively integrate such data in
evaluations. As part of its integrated exploration and acquisition
strategies, Basin will particularly seek to make acquisitions of
producing properties in the Gulf Coast area where exploration
potential has been identified. Once properties are discovered or
acquired in an area, it is likely that the Company will attempt to
acquire additional properties in the region to achieve operating
advantages.
The Company will generally focus on acquisition opportunities
where it believes it can enhance the value of properties through one
or more of the following means:
. Exploratory drilling
. Development drilling
. Recompletions
. Reservoir stimulation
. Secondary or tertiary recovery operations
. Cost reductions
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The Company's two most recent acquisitions are indicative of such
properties with assessed upside potential. An interest in the Jepson-
Holler Draw Unit in Wyoming was acquired in September 1996. This
property was recently unitized for purposes of initiating secondary
recovery operations through waterflooding, and water injection
commenced in January 1997. In February 1997, the Company acquired
interests in three Gulf of Mexico lease blocks with recently drilled
wells awaiting further development. In addition to completion and
tie-in of the three wells that have been drilled, the Company believes
these properties hold potential upside that may be realizable through
development drilling and further exploration. See "Properties."
Because of intense competition for proved property acquisitions
and other factors, it is impossible to project the timing or dollar
amount of acquisition activity.
MARKETING
The majority of the Company's gas and natural gas liquids from
fields in the Rocky Mountain region are sold under marketing
arrangements where prices received are responsive to changes in
regional spot markets. These include short-term contracts under which
gas is sold at the wellhead at market-sensitive prices, and long-term
(often for the life of the lease) percentage-of-proceeds contracts
with gas processors.
KN Gas Gathering ("KNGG") purchases virtually all of the
Company's Powder River Basin gas and natural gas liquids from the
Company's operated wells under a series of contracts with price
realizations similar to other percentage-of-proceeds contracts in the
area. These contracts generally do not have minimum take provisions
and thus depend on KNGG's ability to find a market for the Company's
gas and natural gas liquids. The Company is in the process of
consolidating all its KNGG contracts into a single percentage-of-
proceeds term contract. If KNGG were to cease purchasing the
Company's gas, the Company believes that it could sell its gas and
natural gas liquids to other purchasers and processors in the area,
although such sales would require capital expenditures for gathering
system modification and might not be on terms as favorable as those
characterizing the KNGG sales. The Company does not believe that the
loss of KNGG as a purchaser would have a material adverse effect on
the Company.
Demand for natural gas is highly seasonal, with demand generally
higher in the colder winter months and in hot summer months. As a
result, the price received for spot market natural gas may vary
significantly between seasonal periods. To date, the Company
generally has been able to sell its available spot market natural gas
at prevailing spot market prices, such that volumes sold have not
materially fluctuated seasonally. There is no assurance, however,
that the Company will be able to continue to achieve this result.
Oil from the Company's Rocky Mountain properties is generally
sold under term contracts that yield a premium over local posted
prices.
Because of the well-developed transportation infrastructure and
the relatively large number of active oil and gas purchasers in the
Gulf Coast area, including in the Gulf of Mexico where the Company is
conducting exploration and acquisition activities, the Company does
not anticipate that it will have difficulty in marketing its
production in this region, when established, at prevailing spot market
prices.
For much of the past decade, the markets for oil and natural gas
have been volatile. The Company anticipates that such markets will
continue to be volatile in the foreseeable future. Oil and gas price
fluctuations have a significant impact on the Company's business since
virtually all of the Company's operating revenues are ordinarily
derived from sales of its oil and gas production. The Company
believes that the loss of one or more of its current oil or natural
gas spot purchasers would not have a material adverse effect on the
Company's business because any individual purchaser should be readily
replaceable by another purchaser who could be expected to pay
approximately the same sales price.
Basin periodically enters into oil and gas price hedging
agreements as conditions are deemed to warrant. Such transactions
affecting the three year period ended December 31, 1996, or currently
in effect with respect to subsequent periods, are described below
under "Management's Discussion and Analysis of Financial Condition and
Results Of Operations - Liquidity and Capital Resources" and in the
Notes to Consolidated Financial Statements.
COMPETITION
Competition in the oil and gas industry is intense, particularly
with respect to the acquisition of producing properties and proved
undeveloped acreage and the acquisition of interests in offshore
exploration prospects in the Gulf of Mexico. Major and independent oil
and gas companies, as well as individuals and drilling programs,
actively bid for desirable oil and
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gas properties, as well as for the equipment and labor required to
operate and develop such properties. A number of Basin's competitors
have financial resources and exploration and development budgets that
are substantially greater than those of Basin, which may adversely
affect the Company's ability to successfully compete. In addition,
many of the Company's larger competitors may be better able to respond
to factors that affect the demand for oil and natural gas production
such as changes in worldwide oil and natural gas prices and levels of
production, the cost and availability of alternative fuels, and the
application of government regulations. The Company commenced
operations in the Gulf of Mexico area during 1996, where it had not
previously been active. Competition from major and large independent
oil and gas companies is significantly greater in this area than in
the Rocky Mountain region, where the Company had conducted all of its
previous operations.
REGULATION
The following discussion of 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 to which operations of Basin may be subject.
Price Controls on Liquid Hydrocarbons.
There are currently no federal price controls on liquid
hydrocarbons (including oil and natural gas liquids). As a result,
Basin sells oil produced from its properties at unregulated market
prices.
Federal Regulation of Sales and Transportation of Natural Gas.
Historically, the transportation and sale of natural gas in
interstate commerce have been regulated pursuant to the Natural Gas
Act ("NGA"), the Natural Gas Policy Act of 1978 ("NGPA") and
regulations promulgated thereunder. The Natural Gas Wellhead Decontrol
Act of 1989 eliminated all regulation of wellhead gas sales effective
January 1, 1993. As a result, Basin's gas sales are no longer
regulated.
The transportation and resale in interstate commerce of natural
gas produced and sold by Basin continues to be subject to regulation
by the Federal Energy Regulatory Commission ("FERC") under the NGA.
The transportation and resale of natural gas transported and resold
within the state of its production is usually regulated by the state
involved. Although federal and state regulation of the transportation
and resale of natural gas produced by Basin currently does not have
any material direct impact on Basin, such regulation does have a
material impact on the market for Basin's natural gas production and
the price Basin receives for its natural gas production. Adverse
changes in the regulation affecting Basin's gas markets could have a
material impact on Basin.
Commencing in the mid-1980s and continuing until the present, the
FERC promulgated several orders designed to correct market distortions
and to make gas markets more flexible and competitive. These orders
have had a profound influence on natural gas markets in the United
States and have, among other things, increased the importance of
interstate gas transportation and encouraged development of a large
spot market for gas.
On April 8, 1992, the FERC issued Order No. 636 requiring
material restructuring of the sales and transportation services
provided by interstate pipeline companies. The primary element of
Order No. 636 was the mandatory unbundling of interstate gas
transportation from gas sales by the pipelines. All interstate
pipelines were required to offer transportation services and storage
separately from their gas sales on a nondiscriminatory basis. Most
pipelines have moved all or almost all of their business of buying and
selling gas to affiliated marketing companies.
The transition to unbundled open access transportation occurred
without major apparent market disruption. The current gas market is
characterized by a large number of gas buyers and sellers and there
appears to have developed a substantial increase in the flexibility of
the natural gas industry and its capacity to respond to changing needs
and conditions.
Although Order No. 636 does not regulate gas producers such as
Basin, Order No. 636 appears to have achieved the FERC's stated goal
of fostering increased competition within all phases of the natural
gas industry. It is unclear what impact, if any, that increased
competition will have on Basin as a gas producer and seller.
The Outer Continental Shelf Lands Act (the "OCSLA") requires that
all pipelines operating on or across the Outer Continental Shelf (the
"OCS") provide open-access, non-discriminatory service. Pursuant to a
February 1996 Policy Statement by the FERC in Docket No. RM96-5-000,
only certain "feeder lines" as defined in Section 5(f)(2) of the OCSLA
are exempt from the FERC's authority to impose these competitive
requirements. In addition, under Section 1 of the NGA, the FERC has
regulatory jurisdiction over the transportation and sale of natural
gas in interstate commerce, but it does not
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have authority over the "production or gathering" of natural gas.
In a February 1996 decision in Docket No. RM96-5-000, the FERC
issued a re-evaluation of its test for establishing whether a pipeline
is or is not engaged in the "gathering" of natural gas. The FERC
decided to retain the "primary function test" as articulated in its
decision in Amerada Hess, 52 FERC 61,268 (1990), with one
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modification, which is that, in applying the "primary function test"
to offshore facilities, the FERC will presume that facilities located
in deep water are primarily engaged in gathering or production in
recognition of the technology and topography particular to operations
in deep waters. Although the Company expects to own and operate
gathering lines upon the successful development of its offshore
exploration prospects, it is unknown what impact this decision will
have on Company operations on the OCS or the Company's production from
the OCS, as implementation of the "primary function test" is generally
made on a case-by-case basis. If the FERC were to redefine its
jurisdiction over gathering lines more expansively, there could be a
reduction in available pipeline space for existing shippers in the
Gulf of Mexico that own and operate gathering lines. On the other
hand, if the FERC were to determine that it was no longer necessary to
regulate the rates and service of OCS transmission facilities under
the NGA, the Company could experience an increase in transmission
costs associated with its OCS natural gas production and, possibly,
reduced access to OCS transmission capacity.
In addition to FERC regulation of interstate pipelines under the
NGA, various state commissions also regulate the rates and services of
pipelines whose operations are purely intrastate in nature. To the
extent intrastate pipelines elect to transport gas in interstate
commerce under certain provisions of the NGPA, those transactions are
subject to limited FERC regulation under the NGPA.
There are many legislative proposals pending in Congress and in
the legislatures of various states that, if enacted, might
significantly affect the oil and gas industry. Basin is not able to
predict what will be enacted and thus what effect, if any, such
proposals would have on Basin.
State and Local Regulation of Drilling and Production.
State regulations govern operational matters such as permits and
bonds for drilling, reclamation and plugging, spacing and pooling of
wells, and reporting requirements. The states in which Basin operates
or plans to operate also have a variety of statutes and regulations
governing conservation matters, ranging from establishment of maximum
rates of production from oil and gas wells to the proration of
production to the market demand for oil and gas to the limitation on
ceiling prices for gas sold within the state. In 1991, the State of
Oklahoma enacted legislation restricting the output of certain high-
volume gas wells in response to prevailing low gas prices and the
States of Texas and Louisiana have considered similar regulatory
initiatives. Any limitation substantially similar to that enacted by
Oklahoma would not have a material impact on Basin's current level of
production, whether for oil or gas, since Basin's wells do not produce
at a level high enough to meet the threshold for restriction contained
in the legislation. However, if similar legislation with lower
thresholds were to be enacted in the states in which Basin operates,
or if Basin acquires or develops properties in state waters in the
Gulf of Mexico or onshore in states such as Texas or Oklahoma having
higher levels of production than the historic levels of Basin's Rocky
Mountain properties, Basin's ability to market its production could be
affected.
Also in recent years, pressure has increased in states in which
the Company has been active (especially Colorado) to mandate
compensation to surface owners for the effects of oil and gas
operations and to increase regulation of the oil and gas industry at
the local government level. Such local regulation in general is aimed
at increasing the involvement of local governments in the permitting
of oil and gas operations, requiring additional restrictions or
conditions on the conduct of operations to reduce the impact on the
surrounding community and increasing financial assurance requirements.
Accordingly, such regulation has the potential to delay and increase
the cost, or even in some cases to prohibit entirely, the conduct of
the Company's drilling activities.
Environmental Matters.
The production, handling, transportation and disposal of oil and
gas and by-products are subject to regulation under federal, state and
local environmental laws. In most instances, the applicable regulatory
requirements relate to water and air pollution control and solid waste
management measures or to restrictions on operations in
environmentally sensitive areas such as wetlands or wilderness. In
connection with its acquisitions, Basin performs environmental
assessments. To the extent environmental liabilities have been
identified, such liabilities are not material or the Company has
negotiated agreements requiring the sellers of the properties to
undertake the required clean up. Basin has assumed responsibility for
some of these matters identified. Environmental assessments have not
been performed on all of Basin's properties. To date, expenditures for
environmental control facilities and for remediation have not been
significant in relation to the results of operations of Basin. Basin
believes, however, that it is reasonably likely that the trend in
environmental legislation and
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regulations will continue toward stricter standards. For instance,
efforts have been made in Congress to amend the Resource Conservation
and Recovery Act to reclassify oil and gas production wastes as
"hazardous waste," the effect of which would be to further regulate
the handling, transportation and disposal of such waste. If such
legislation were to pass, it could have a significant adverse impact
on the operating costs of Basin, as well as the oil and gas industry
in general.
The Oil Pollution Act of 1990 (the "OPA"), as amended in 1996,
and regulations thereunder impose a variety of regulations on
"responsible parties" related to the prevention of oil spills and
liability for damages resulting from such spills in United States
waters. A "responsible party" includes the owner or operator of a
facility or vessel, or the lessee or permittee of the area in which an
offshore facility is located. The OPA assigns liability to each
responsible party for oil removal costs and a variety of public and
private damages. While liability limits apply in some circumstances,
a party cannot take advantage of liability limits if the spill was
caused by gross negligence or willful misconduct or resulted from
violation of a federal safety, construction or operating regulation.
If the party fails to report a spill or to cooperate fully in the
cleanup, liability limits likewise do not apply. Few defenses exist
to the liability imposed by the OPA.
The OPA also imposes ongoing requirements on a responsible party
in anticipation of an oil spill event. Specifically, the OPA requires
a responsible party to maintain proof of $35,000,000 of financial
responsibility for traditional offshore facilities. The President,
however, may establish a higher degree of financial responsibility
($150,000,000) based on risk. Offshore facilities in state waters are
held to a financial responsibility of $10,000,000 but facilities
transporting, storing or otherwise handling up to 1,000 barrels of oil
at any one time are exempt from these financial responsibilities.
Financial responsibility can be established through insurance,
guarantee, indemnity, surety bond, letter of credit, qualification as
a self-insurer or a combination thereof. The 1996 amendments to the
OPA eliminated third party suits against guarantors, except where a
responsible party is bankrupt or where the claimant is a federal
governmental agency, and a guarantor's total liability is limited to
the amount of financial responsibility provided. While the OPA could
impose substantial additional annual costs on the Company or otherwise
materially adversely affect the Company, the impact of these rules
should not be any more adverse to the Company than it will be to other
similarly situated owners or operators in the Gulf of Mexico.
The OPA also imposes other requirements, such as the preparation
of an oil spill contingency plan. Failure to comply with ongoing
requirements or inadequate cooperation during a spill event may
subject a responsible party to civil or criminal enforcement actions.
The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes
liability, without regard to fault or the legality of the original
conduct, on certain classes of persons who are considered to have
contributed to the release of a "hazardous substance" into the
environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances.
Under CERCLA such persons or companies would be subject to joint and
several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for
damages to natural resources. It is not uncommon for neighboring
landowners and other third parties to file claims for personal injury
and property damage allegedly caused by the hazardous substances
released into the environment.
New initiatives regulating the disposal of oil and gas waste are
also pending or have been enacted in certain states, including states
in which Basin conducts operations, and these various initiatives
could have a similar impact on Basin. The Colorado Oil and Gas
Conservation Commission, for example, has enacted rules regarding the
disposal of oilfield waste, the closure and remediation of production
pits and reclamation procedures. These rules establish significant
permitting, record-keeping and compliance procedures that may require
the termination of production from marginal wells for which the cost
of compliance would exceed the value of remaining production and could
lead to the incurring of significant remediation costs for properties
found to have caused groundwater contamination or other environmental
problems.
Federal Leases.
A significant percentage of the Company's operations is conducted
on public lands, both in the Rocky Mountain region and in the Gulf of
Mexico. Operations on onshore federal leases must be conducted in
accordance with permits issued by the Bureau of Land Management and
are subject to a number of other regulatory restrictions, such as
winter game restrictions. Moreover, on certain federal leases, prior
approval of drillsite locations must be obtained from the
Environmental Protection Agency.
Offshore leases in the Gulf of Mexico, beyond the limits of state
ownership, are administered by the United States Department of the
Interior Minerals Management Service (the "MMS"). Such leases are
issued through competitive bidding, contain relatively standardized
terms and require compliance with detailed MMS regulations and orders
pursuant to the OCSLA (which are subject to change by the MMS). For
offshore operations, lessees must obtain MMS approval for
7
<PAGE>
exploration plans and development and production plans prior to the
commencement of such operations. In addition to permits required from
other agencies (such as the Coast Guard, the Army Corps of Engineers
and the Environmental Protection Agency), lessees must obtain a permit
from the MMS prior to the commencement of drilling. The MMS has
promulgated regulations requiring offshore production facilities
located on the OCS to meet stringent engineering and construction
specifications. The MMS also has regulations restricting the flaring
or venting of natural gas. Similarly, the MMS has promulgated other
regulations governing the plugging and abandonment of wells located
offshore and the removal of all production facilities.
The United States Department of Transportation ("DOT"), through
its Office of Pipeline Safety, also imposes certain requirements on
parties responsible for pipeline platforms located on the OCS. In
October 1995, the MMS indicated its intent to review all of its
regulations governing offshore regulations after the MMS and DOT
completed a new Memorandum of Understanding regarding the agencies'
respective authority over offshore operations. To date, the pertinent
regulations have not been implemented as the contemplated Memorandum
of Understanding has just been finalized.
To cover the various obligations of lessees on the OCS, the MMS
generally requires that lessees post substantial bonds or other
acceptable assurances that such obligations will be met. The cost of
such bonds or other surety can be substantial and there is no
assurance that bonds or other surety can be obtained in all cases. In
December 1995, the MMS proposed changes to its bonding requirements
that, if implemented as proposed, would (i) impose the duty on any
lessee of an offshore lease to meet end-of-lease obligations if the
designated operator is unable to do so, (ii) establish joint and
several liability for plugging and abandonment of wells, removal of
platforms and other facilities, and clearance of well and platform
locations, among OCS lessees, assignees and assignors, thus creating
residual liability in certain parties for these obligations, (iii)
establish some form of assurance that holders of OCS leases establish
a means of funding their end-of-lease obligations by allowing the MMS
Regional Director to require additional security of lessees and (iv)
increase the level of bond coverage for certain exploration activities
drilling deep stratigraphic test wells and allow the MMS Regional
Director to require, on a case-by-case basis, posting of additional
bonds or other security in order to increase the amount of coverage
under an existing bond. If implemented, these requirements could
increase the Company's current bonding liabilities in a substantial
way, and would also impact certain residual liabilities that the
Company may have, both with respect to existing leases acquired from
third parties and with respect to leases that it may dispose of in the
future.
Under certain circumstances, the MMS may require any operations
on federal leases to be suspended or terminated. Any such suspension
or termination could materially and adversely affect the Company's
financial condition and operations.
On January 24, 1997, the MMS published a notice of proposed
rulemaking which, if adopted, would significantly change the current
rules governing the value of crude oil for royalty payments on federal
leases. The new valuation rule would retain the concept of gross
proceeds for calculating royalties on production sold to third parties
in arm's-length transactions, but only in certain narrow
circumstances. As proposed, the majority of oil sold under arm's-
length contracts as well as non-arm's-length contracts would be valued
using an index pricing method as adjusted for location, quality, and
transportation rather than the contract price. If adopted as
proposed, the MMS' rule would have a substantial impact on the
Company's royalty payments to the federal government and could in many
cases require that it pay royalty on a value (index price) higher than
that which it actually receives (contract price) for its oil. As of
this date, the MMS has not finalized or adopted the proposed rule, and
its impact, if any, on the Company is therefore uncertain.
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, the Company
makes only a cursory review of title to farmout acreage and to onshore
undeveloped oil and natural gas leases upon execution of the
contracts. Prior to the commencement of drilling operations, a
thorough title examination is conducted and curative work is performed
with respect to significant defects. The Company performs complete
reviews of title to federal and state offshore lease blocks prior to
acquisition. To the extent title opinions or other investigations
reflect material title defects, the seller of the property, rather
than the Company, is typically responsible for curing any such title
defects at its expense. If the Company were unable to remedy or cure
any title defect of a nature such that it would not be prudent to
commence drilling operations on undeveloped properties, the Company
could suffer a loss of its entire investment in the property. The
Company has obtained title opinions on substantially all of its
producing properties and believes that it has satisfactory title to
such properties in accordance with standards generally accepted in the
oil and gas industry. The Company's producing properties are
mortgaged to its banks in connection with its revolving credit
facility.
8
<PAGE>
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to the usual hazards
incident to the drilling and production of oil and gas, such as
blowouts, cratering, explosions, uncontrollable flows of oil, gas or
well fluids, fires, pollution, releases of toxic gas and other
environmental hazards and risks. These hazards can cause personal
injury and loss of life, severe damage to and destruction of property
and equipment, pollution or environmental damage and suspension of
operations. Offshore operations are subject to the additional hazards
of marine operations, such as capsizing of vessels, collision and
adverse weather and sea conditions.
The Company maintains insurance of various types to cover its
operations. The Company has $1,000,000 of general liability insurance
and an additional $30,000,000 of excess liability insurance. In
addition, the Company maintains operator's extra expense coverage
which applies to care, custody and control of wells drilled or
completed. The Company's insurance does not cover every potential
risk associated with the drilling and production of oil and gas. In
particular, coverage is not obtainable for certain types of
environmental hazards. The occurrence of a significant adverse event,
the risks of which are not fully covered by insurance, could have a
material adverse effect on the Company's financial condition and
results of operations. Moreover, no assurance can be given that the
Company will be able to maintain adequate insurance in the future at
rates it considers reasonable.
EMPLOYEES
At December 31, 1996, Basin had 64 employees, including 19
employed in field operations and 45 employed in its Denver
headquarters or Houston district office. None of Basin's employees
are subject to a collective bargaining agreement and Basin considers
its relations with its employees to be good.
9
<PAGE>
ITEM 2. PROPERTIES.
Prior to 1996, the Company's oil and gas properties were all
located in the Rocky Mountain region, primarily in the D-J Basin,
Powder River Basin, and Green River Basin. During 1996, the Company
sold its D-J Basin assets and initiated operations in the Gulf Coast
area, primarily offshore in the Gulf of Mexico. As of December 31,
1996, the estimated pre-tax present value of future net revenues from
the Company's proved reserves, using year end prices held constant and
a discount rate of 10%, totaled $83,656,000 and was distributed as
follows: Powder River Basin - 58%; Green River Basin - 14%; other
onshore - 9%; Gulf of Mexico - 19%.
Powder River Basin
At December 31, 1996, developed reserves accounted for 55% of the
Company's total estimated proved reserve quantities in the Powder
River Basin, and 72% of the related pre-tax present value of future
net revenues. Approximately 92% of such proved reserves were
concentrated in three fields: Scott, Well Draw, and Jepson-Holler
Draw. At the end of 1996, the Company owned interests in 224
producing wells and in another 71 locations attributed proved
undeveloped reserves within these fields. The Jepson-Holler Draw
Field was unitized in 1996 for purposes of initiating secondary
recovery operations in the Shannon formation. Water injection
commenced in January 1997 and production response is projected to be
evident by late-1998. Most of the proved reserves estimated for
Jepson-Holler Draw as of December 31, 1996 were categorized as
undeveloped. The primary product produced from most of the Company's
Powder River Basin properties is oil, but many of the wells also
produce liquids-rich casinghead gas generally requiring processing for
marketing. Proved reserves are distributed broadly among the wells
and locations in these fields, such that no individual well or
location accounts for a material portion of aggregate quantities
attributed to these properties. Most of the Company's producing wells
in the Powder River Basin have been online for several years and
production declines are relatively well established. The Company had
one development well in the Scott Field in process at December 31,
1996 and anticipates drilling 10 to 12 development wells on its Powder
River Basin properties in 1997.
Green River Basin
At December 31, 1996, 76% of the Company's estimated proved
reserve quantities in the Green River Basin and 83% of related pre-tax
present value of future net revenue were proved developed.
Approximately 92% of such proved reserve quantities were associated
with the Bird Canyon, Scott Hill, and Horn Canyon fields. At the end
of 1996, the Company held interests in 11 producing wells and five
proved undeveloped locations within these fields. Scott Hill Field
produces oil, whereas the Bird Canyon and Horn Canyon Fields produce
predominantly gas. The producing wells in these fields have been on
line for several years and generally exhibit stable performance
histories, with established decline rates.
Gulf of Mexico
The Company's proved reserves in the Gulf of Mexico at December
31, 1996 were all categorized as undeveloped but related to logged pay
sands that were behind-pipe. These reserves were attributable to two
exploratory wells drilled in the fourth quarter of the year on Eugene
Island (EI) Block 64 and EI Block 65, respectively. The EI 64 well
was completed in a secondary objective after a deeper primary-
objective sand was found nonproductive. The well has been suspended
pending completion and tie-in to a nearby platform operated by a third
party. The more significant apparent discovery was made on EI 65
where the #1 well was drilling over year-end 1996. Estimated proved
reserves were ultimately attributed to two primary-objective pay sands
in this well, but reported year end reserves pertained only to the
shallower horizon, since the deeper zone was penetrated and logged in
1997. A second well is currently drilling on EI 65. It is
anticipated that a production platform and facilities will be
installed on the block later in 1997 to commence production from a
dually-completed #1 well, and if successful the #2 well. The Company
increased its interests in EI Blocks 64 and 65 in February 1997 as
part of an acquisition. See "Present Activities" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Additional information related to the Company's properties is set
forth below in the balance of this section.
10
<PAGE>
ACREAGE
The following table sets forth the gross and net acres of
developed and undeveloped oil and gas leases held by the Company as of
December 31, 1996. Undeveloped acreage includes leasehold interests
which may already have been classified as containing proved
undeveloped reserves.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE<F1> UNDEVELOPED ACREAGE
--------------------- -------------------
GROSS NET GROSS NET
<S> <C> <C> <C> <C>
Colorado........................... 790 449 7,383 4,639
Louisiana offshore................. 600 225 31,900 27,588
Montana............................ 6,537 6,393 12,974 7,253
Nebraska........................... 480 184 480 360
North Dakota....................... 480 176 2,160 531
Texas onshore...................... 160 49 - -
Texas offshore..................... - - 1,440 540
Utah............................... 1,762 984 13,713 7,350
Wyoming............................ 45,879 26,596 69,098 47,384
------ ------ ------- ------
Total...................... 56,688 35,056 139,148 95,645
====== ====== ======= ======
- ---------------------
<FN>
<F1> Developed acreage is acreage assigned to producing wells for the spacing unit of the producing formation.
Developed acreage in certain of Basin's properties that include multiple formations with different well
spacing requirements may be considered undeveloped for certain formations, but have only been included as
developed acreage in the presentation above.
</FN>
</TABLE>
OIL AND GAS RESERVES
Basin engaged independent petroleum engineers, Netherland, Sewell
& Associates, Inc. ("Netherland Sewell"), to audit Basin's estimates
of total proved reserves, projected future production, and estimated
future net revenues from production of proved reserves for the
Company's onshore properties as of December 31, 1996. Basin engaged
Ryder Scott Company Petroleum Engineers to prepare such estimates for
the Company's offshore properties as of such date. These estimates
were based upon a review of production histories and other geologic,
economic, ownership, volumetric and engineering data. In determining
the estimates of the reserve quantities that are economically
recoverable, oil and gas prices and estimated development and
production costs as of December 31, 1996 were utilized.
The following table sets forth estimates as of December 31, 1996
derived from Basin's reserve reports. The present values (discounted
at 10 percent) of estimated future net revenues before income taxes
shown in the table are not intended to represent the current market
value of the estimated oil and gas reserves owned by Basin. For
further information concerning the present value of future net revenue
from these proved reserves, see Unaudited Supplemental Oil and Gas
Reserve Information in the Consolidated Financial Statements.
<TABLE>
<CAPTION>
PROVED RESERVES
-------------------------------------
DEVELOPED UNDEVELOPED TOTAL
<S> <C> <C> <C>
Oil (Mbbls)................................................ 4,046 3,824 7,870
Gas (MMcf)................................................. 19,182 10,531 29,713
Total (MMcfe).............................................. 43,458 33,475 76,933
Future Net Revenue Before Income Taxes
(in thousands)......................................... $91,717 $68,281 $159,998
Present Value of Future Net Revenue Before Income Taxes
(in thousands)......................................... $50,856 $32,800 $ 83,656
</TABLE>
11
<PAGE>
The following table sets forth estimates of Basin's total proved
reserves at December 31, 1996 by geographic area of operations:
<TABLE>
<CAPTION>
PROVED RESERVES
---------------------------
OIL GAS TOTAL
GEOGRAPHIC REGION (MBBLS) (MMCF) (MMCFE)
<S> <C> <C> <C>
Powder River Basin 6,697 10,737 50,919
Greater Green River Basin 380 8,372 10,652
Offshore Gulf of Mexico 49 6,391 6,685
Other 744 4,213 8,677
----- ------ ------
Total 7,870 29,713 76,933
===== ====== ======
</TABLE>
There are numerous uncertainties inherent in estimating
quantities of proved reserves and in projecting future rates of
production and timing of development expenditures, including many
factors beyond the control of the producer. The reserve data set forth
herein represent only estimates. Reserve engineering is a subjective
process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way, and the accuracy of any reserve
estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment and the
existence of development plans. In addition, results of drilling,
testing and production subsequent to the date of an estimate may
justify revision of such estimates. Accordingly, reserve estimates are
often different from the quantities of oil and gas that are ultimately
recovered. Further, the estimated future net revenues from proved
reserves and the present value thereof are based upon certain
assumptions, including geologic success, prices, future production
levels and cost, that may not prove correct over time. Predictions
about prices and future production levels are subject to great
uncertainty, and the meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they are
based. Oil and gas prices have fluctuated widely in recent years.
There is no assurance that prices will not be materially higher or
lower than the prices utilized in estimating Basin's reserves.
The weighted average sales prices utilized for purposes of
estimating Basin's proved reserves and future net revenues therefrom
as of December 31, 1996 were $25.35 per Bbl for oil and $3.02 per Mcf
for gas. These prices are significantly above average prices
prevailing during most of the past several years, and oil and gas
prices have declined from such levels during the first two months of
1997.
12
<PAGE>
PRODUCTION
The following table sets forth Basin's net oil and gas
production, average sales prices, and costs and expenses associated
with such production during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
<S> <C> <C> <C>
Net production:
Oil (Mbbls)..................... 564 1,153 1,278
Gas (MMcf)...................... 4,776 12,833 14,377
Total (MMcfe)................... 8,160 19,751 22,045
Average net daily
production:
Oil (bbls)................. 1,540 3,160 3,501
Gas (Mcf).................. 13,050 35,154 39,389
Total (Mcfe)............... 22,290 54,114 60,395
Average sales price
per unit:
Oil (bbl).................. $ 20.03 $ 17.02 $ 15.63
Oil, excluding hedging (bbl) $ 20.88 $ 17.12 $ 15.70
Gas (Mcf).................. $ 1.44 $ 1.56 $ 1.69
Gas, excluding hedging
and Section 29 tax credit
income (Mcf)........... $ 1.44 $ 1.34 $ 1.55
Total (Mcfe)............... $ 2.23 $ 2.01 $ 2.01
Production cost per Mcfe........ $ .81 $ .59 $ .55
</TABLE>
Basin owned 363 gross (229 net) producing oil wells and 57 gross
(39 net) producing gas wells as of December 31, 1996. A well is
categorized under state reporting regulations as an oil well or a gas
well based upon the ratio of gas to oil produced when it first
commenced production, and such designation may not be indicative of
current production.
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth certain information regarding the
costs incurred by Basin in its development, exploration and
acquisition activities during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Development costs....................... $4,472 $7,427 $42,113
Exploration costs....................... 10,250 2,003 2,361
Leasehold and
acquisition costs:
Unproved properties................. 5,056 2,429 5,275
Proved properties................... 3,067 3,889 16,751
----- ----- ------
Total costs incurred.................... $22,845 $15,748 $66,500
======= ======= =======
</TABLE>
13
<PAGE>
DRILLING ACTIVITY
The following table sets forth the wells drilled and completed by
Basin during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
GROSS NET GROSS NET GROSS NET
<S> <C> <C> <C> <C> <C> <C>
Development:
Oil.................................................... 3 2.8 4 3.9 137 125.7
Gas.................................................... -- -- -- -- 17 16.5
Non-productive......................................... 1 .9 -- -- 3 2.9
-- --- -- --- --- -----
Total................................................ 4 3.7 4 3.9 157 145.1
== === == === === =====
Exploratory:
Oil.................................................... -- -- 2 1.3 1 1.0
Gas.................................................... -- -- -- -- -- --
Non-productive......................................... 3 1.4 2 1.7 3 2.8
-- --- -- --- -- ---
Total................................................ 3 1.4 4 3.0 4 3.8
== === == === == ===
</TABLE)
PRESENT ACTIVITIES
At the end of 1996, the Company was participating in one (1.0
net) development well and two (.75 net) exploratory wells that were in
process.
The development well was being drilled in the Scott Field in
Wyoming and was successfully completed in 1997. Two (2.0 net)
additional development wells have been drilled and completed in the
Scott Field in 1997, through mid-March.
The two exploratory wells in process at year end were both
offshore in the Gulf of Mexico, on Eugene Island (EI) Blocks 64 and
65, respectively. Both of these wells were attributed proved
undeveloped reserves as of December 31, 1996. The EI 64 #1 well
completed drilling in November 1996 and was temporarily suspended
after the primary target sand was found non-productive but proved
reserves were established in a shallower secondary objective. The #1
well on EI 65 was drilling over year end. Estimated proved reserves
reported as of December 31, 1996 include reserves attributable to the
13,000' sand in this well, which was logged prior to year end. An
additional productive sand was encountered in the EI 65 #1 well after
year end in the deeper 13,700' sand before drilling was completed in
February 1997 and the well was temporarily suspended. A second well
was spud on EI 65 in February 1997 and is currently drilling.
In February 1997, the Company consummated a $14.4 million
acquisition of interests in three Gulf of Mexico lease blocks with
wells awaiting further development to initiate production of proved
reserves. Two of these blocks are EI 64 and EI 65, where, as noted
above, the Company already owned interests. Through this acquisition,
Basin increased its working interests in EI 64 and EI 65 from 37.5%
before payout (BPO) and 47.5% after payout (APO) to 62.5% BPO and
67.5% APO. The third property acquired was a 46.5% interest in most of
East Cameron (EC) Block 378, including a well completed subsea in
January 1997 that is waiting on pipeline installation to connect to a
nearby third party production platform.
On March 5, 1997, the Company participated in winning bids for 11
tracts at the central Gulf of Mexico lease sale held by the MMS. Such
tracts comprised 43,306 gross and 28,828 net undeveloped acres
offshore Louisiana. If all 11 tracts are awarded by the MMS, which
can choose to reject all bids for a given lease, the Company's net
share of the related leasehold bonuses will total approximately
$5,737,000.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company, from time to time, is involved in various legal and
administrative proceedings and claims of various types which arise in
the ordinary course of its business. While any litigation contains an
element of uncertainty, in the opinion of management, none of these
actions, either individually or in the aggregate, will have a material
adverse effect on the Company's financial condition, liquidity or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a vote of security holders during
the fourth quarter of 1996.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS.
The Company's common stock is traded over the counter on the
Nasdaq National Market System using the symbol "BSNX." The following
table sets forth, for the periods indicated, the range of high and low
closing prices for the common stock as reported by the Nasdaq National
Market for the last two calendar years.
1995 High Low
---- ---- ---
First Quarter $11.50 $ 6.38
Second Quarter 9.13 5.38
Third Quarter 7.00 4.38
Fourth Quarter 5.88 3.00
1996 High Low
---- ---- ---
First Quarter $ 5.25 $ 3.69
Second Quarter 6.63 5.00
Third Quarter 7.50 5.75
Fourth Quarter 7.75 5.63
On March 7, 1997, the last sale price of the Company's common
stock as reported on the Nasdaq National Market was $6.88. As of
December 31, 1996 there were 136 owners of record.
The Company's policy is to retain its earnings to support the
growth of the Company's business. Accordingly, the Board of Directors
of the Company has never declared cash dividends on its Common Stock
and has no present plans to do so. Under the terms of its credit
facility with its banks, the Company may not pay any dividend without
consent of the banks.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data
for Basin as of the dates and for the periods indicated. The data
set forth in this 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
the related notes thereto presented elsewhere herein.
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Oil sales. . . . . . . . . . . . . $11,292 $19,632 $19,971 $13,725 $11,409
Gas sales . . . . . . . . . . . . 6,890 20,013 24,255 24,139 10,349
Gain on sale of assets . . . . . . 22,472 -- -- -- --
Interest and other . . . . . . . . 1,009 831 161 104 353
------ ------ ------ ------ ------
41,663 40,476 44,387 37,968 22,111
------ ------ ------ ------ ------
Costs and expenses:
Lease operating expenses . . . . . 4,776 8,196 8,642 7,105 5,418
Production taxes . . . . . . . . . 1,829 3,478 3,432 2,918 1,794
Depreciation, depletion and
amortization. . . . . . . . . . 7,606 17,202 18,163 12,311 5,839
General and administrative, net. . 3,850 5,498 4,641 4,182 2,997
Interest expense . . . . . . . . . 2,254 6,432 3,618 3,160 1,801
Property impairment. . . . . . . . -- 26,500 -- -- --
Other . . . . . . . . . . . . . . 18 497 -- -- --
------ ------ ------ ------ ------
20,333 67,803 38,496 29,676 17,849
------ ------ ------ ------ ------
Income (loss) before income taxes . 21,330 (27,327) 5,891 8,292 4,262
Income tax (provision) benefit . . . (5,760) 7,784 (2,236) (3,142) (753)
------ ------ ------ ------ ------
Net income (loss) . . . . . . . . . $15,570 $(19,543) $ 3,655 $ 5,150 $ 3,509
====== ======= ====== ===== =====
Earnings (loss) per share . . . . . $1.45 $(1.82) $ .34 $ .67 $ .57
==== ===== ===== ===== =====
Weighted average common
shares outstanding . . . . . . . . 10,700 10,710 10,813 7,650 6,188
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit). . . . . . . . . . . . . . $19,178 $ (2,211) $ (5,646) $ 106 $ (102)
Net property and equipment . . . . . . 54,800 134,598 165,807 116,133 64,662
Total assets . . . . . . . . . . . . . 84,957 146,651 184,855 131,520 75,161
Long-term debt . . . . . . . . . . . . 218 77,172 77,199 41,819 36,606
Total stockholders' equity . . . . . . 68,751 53,287 72,575 67,183 24,701
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE. Excluding a $22,472,000 gain on sale of assets recognized
during 1996, revenue for 1996 was $19,191,000, representing a decrease
of $21,285,000, or 53%, as compared to 1995. The following table
reflects the Company's average oil and gas prices and its average
daily oil and gas production for the years presented:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 % CHANGE
Average price:
Oil (per bbl). . . $20.03 $17.02 18
Gas (MMcf) . . . . $ 1.44 $ 1.56 (8)
Average daily production:
Oil (bbl). . . . . 1,540 3,160 (51)
Gas (Mcf). . . . . 13,050 35,154 (63)
The decreases in average daily production were primarily attributable
to the combined effects of sales of producing properties during 1996
and 1995 and natural production declines. As more fully described
below under Liquidity and Capital Resources, the Company consummated
two transactions during 1996 in which all of its assets in the D-J
Basin were sold. As of December 31, 1995, these assets represented
approximately two-thirds of the Company's producing wells and 70% of
its proved oil and gas reserves. In conjunction with the second
transaction, the Company recognized a $22,472,000 gain. Excluding
production and sales from such D-J Basin properties, average oil and
gas prices and average daily oil and gas production for the periods
presented were:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 % CHANGE
Average price:
Oil (per bbl). . . $20.32 $17.61 15
Gas (per Mcf). . . $1.33 $1.09 22
Average daily production:
Oil (Bbl). . . . . 1,118 1,341 (17)
Gas (Mcf). . . . . 4,871 5,517 (12)
During 1995, the Company also recognized gas revenue for payments
received with respect to transferred Section 29 tax credits in the
amount of $2,857,000.
Other revenue in 1995 was primarily derived from a small processing
facility that was decommissioned late in the year. In 1996, other
revenue related mainly to interest income on cash equivalents held
after the second D-J Basin asset sale transaction.
LEASE OPERATING EXPENSES. Lease operating expenses for 1996 were
$4,776,000, a decrease of $3,420,000, or 42%, compared to 1995. Lease
operating costs per Mcfe produced during 1996 averaged $.59 compared
to $.42 in 1995. These higher costs per Mcfe were caused primarily
by the increased portion of the Company's total active wells that are
oil wells, with typically higher unit operating costs, following the
sale of the D-J Basin assets.
PRODUCTION TAXES. Production taxes for 1996 were $1,829,000, a
decrease of $1,649,000, or 47%, compared to 1995. Production taxes as
a percent of oil and gas sales for 1996 were 10.1%, compared to 8.8%
in 1995. The increased average tax rate was due to a greater portion
of sales occurring in higher-tax jurisdictions in 1996.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization expense for 1996 was $7,606,000, a decrease of
$9,596,000, or 56%, as compared to 1995. The decrease was primarily
attributable to the lower production volumes
18
<PAGE>
in 1996 as compared to 1995. The depletion rate of $.82 per Mcfe
produced in 1996 was slightly lower than the $.84 per Mcfe average
depletion rate during 1995.
PROPERTY IMPAIRMENT. During 1995, the Company recognized a property
impairment charge of $26.5 million, as the result of the capitalized
costs of its oil and gas properties exceeding a "ceiling" on such
costs computed in accordance with prescribed accounting guidelines.
GENERAL AND ADMINISTRATIVE, NET. General and administrative expenses
for 1996 were $3,850,000, a decrease of $1,648,000, or 30%, as
compared to 1995. The decreases resulted primarily from staff
reductions made during the second half of 1995 and the first half of
1996 and partially due to reductions in office rent expense as a
result of relocating and decreasing the size of the corporate
headquarters.
INTEREST EXPENSE. Interest expense for 1996 totaled $2,254,000
representing a decrease of $4,178,000, or 65%, as compared to 1995.
The decrease was principally attributable to lower average borrowings
as a result of asset sales proceeds applied to debt retirement during
1996, as summarized below:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
Average borrowings (in thousands) $ 28,200 $ 78,800
Average interest rate on borrowings 8.0% 7.3%
INCOME TAX BENEFIT (PROVISION). The difference between the income tax
provision for 1996 and the income tax benefit for 1995, and the
amounts that would be calculated by applying statutory income tax
rates to income before income taxes is due primarily to the 1996
reversal of the $2,196,000 deferred tax asset valuation allowance
established during 1995.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUE. Revenue for 1995 was $40,476,000, a decrease of $3,911,000,
or 9%, as compared to 1994. The following table reflects the
Company's average oil and gas prices and its average daily oil and gas
production for the years presented:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 % CHANGE
Average price:
Oil (per bbl). . . $17.02 $15.63 9
Gas (per Mcf). . . $ 1.56 $1.69 (8)
Average daily production:
Oil (Bbl). . . . . 3,160 3,501 (10)
Gas (Mcf). . . . . 35,154 39,389 (11)
The declines in production are partially attributable to the sale of
marginal properties during 1995. Lower production also resulted from
normal depletion-related declines that were not fully offset by new
drilling and recompletion activities. The Company recognized gas
revenues for payments received with respect to transferred Section 29
tax credits, in the amounts of $2,857,000 and $2,123,000 for the years
ended December 31, 1995 and 1994, respectively.
LEASE OPERATING EXPENSES. Lease operating expenses for 1995 were
$8,196,000, a decrease of $446,000, or 5%, compared to 1994. Lease
operating costs per Mcfe produced during 1995 averaged $.42 compared
to $.39 in 1994. These higher costs per Mcfe were caused primarily by
a decline in the number of new wells brought on line, since such wells
typically have relatively high initial production rates, generating
average unit production costs that are lower than more mature
properties.
PRODUCTION TAXES. Production taxes for 1995 were $3,478,000, an
increase of $46,000, or 1%, compared to 1994. Production taxes as a
percent of oil and gas sales for 1995 were 8.8%, compared to 7.8% in
1994. The increased average tax rate was due to a greater portion of
sales occurring in higher-tax jurisdictions in 1995.
19
<PAGE>
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization expense for 1995 was $17,202,000, a decrease of $961,000,
or 5%, as compared to 1994. The decrease was attributable to the
lower production volumes in 1995 as compared to 1994, as the average
depletion rate of $.84 per Mcfe produced in 1995 was higher than the
$.77 per Mcfe rate in 1994. The increase reflects investment costs
per Mcfe of reserves added during the second half of 1994 and in 1995
which were above the Company's historical average, as well as a
reduction in estimated proved reserves at December 31, 1995 due, in
part, to the effects of using lower gas prices in determining economic
production limits.
PROPERTY IMPAIRMENT. During 1995, the Company recognized a property
impairment charge of $26.5 million, as the result of the capitalized
costs of its oil and gas properties exceeding a "ceiling" on such
costs computed in accordance with prescribed accounting guidelines.
GENERAL AND ADMINISTRATIVE, NET. General and administrative expenses
for 1995 were $5,498,000, an increase of $857,000, or 18%, as compared
to 1994. The increase is primarily due to smaller recoveries from
third-party working interest owners and nonrecurring charges of
$545,000 related to staff reductions, settlement of a legal dispute,
and an unsuccessful corporate acquisition effort. The lower
recoveries resulted from the Company's acquisition in late-1994 of
additional working interests in certain properties that it operates
and reduced billings for drilling and completion overhead due to a
less active property development program in 1995. Decreases in gross
general and administrative expenses resulting from late-1995
reductions in office staff and other administrative costs had minimal
impact in 1995.
INTEREST EXPENSE. Interest expense for 1996 totaled $6,432,000, an
increase of $2,814,000, or 78%, as compared to 1994. This increase
was due to the combined effects of increased average borrowings and
higher interest rates, as summarized below:
YEAR ENDED DECEMBER 31,
----------------------
1996 1995
Average borrowings (in thousands) $ 78,800 $ 55,600
Average interest rate on borrowings 7.3% 5.7%
INCOME TAX BENEFIT (PROVISION). The difference between the income tax
benefit for 1995, and the amount that would be calculated by applying
statutory income tax rates to the loss before income taxes is due to
the establishment of a $2,196,000 deferred tax asset valuation
allowance during 1995.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company entered into two agreements pursuant to
which it sold all of its assets in the D-J Basin, effective January 1,
1996, for an aggregate adjusted sales price of $123.5 million. The
sale of approximately one-third of these D-J Basin assets was closed
in March 1996 and the sale of the remainder was closed in June 1996.
Combined, these transactions resulted in the disposition of two-thirds
of the Company's total wells and approximately 70% of its estimated
proved oil and gas reserves as of December 31, 1995. A portion of the
sales proceeds was used to repay all outstanding long-term debt and
the remainder, net of transaction costs, was initially invested in
short-term, interest-bearing cash equivalents pending redeployment
into new oil and gas investments. The Company's remaining producing
properties after the sale were primarily mature oil and gas fields in
the Powder River Basin, Green River Basin, and elsewhere in the Rocky
Mountain region.
In August 1996, following the sale of the D-J Basin assets, the
Company entered into an amended and restated credit agreement with its
existing bank group that improved certain terms, including fees and
interest rates, applicable under the line of credit. The amended
credit agreement provides for the interest rate on borrowings to be
determined by reference to either the prime rate or LIBOR, at the
Company's election. A varying spread of 0% to 0.5% is added to the
prime rate, or 0.625% to 1.25% is applied to LIBOR, based upon the
Company's debt-to-capitalization ratio at the time. The credit
agreement provides for borrowings to be revolving loans until August
1, 1999, at which time the outstanding balance will be converted into
a four-year amortizing term loan. The credit agreement contains
various covenants, including ones that could limit the Company's
ability to incur other debt, dispose of assets, pay dividends, or
repurchase stock. The borrowing base under the revolving credit
facility was established at $25 million in August 1996 and is
scheduled to be redetermined as of April 30, 1997 and generally
thereafter at six month intervals until converted into a term loan.
The Company is anticipating that at the next redetermination date the
borrowing base will be established at a level at or above the present
level of $25 million, but there can be no assurance that this will
occur. As of December 31, 1996, there were no borrowings outstanding
under the facility. In addition to availability under the credit line,
the Company's capital resources at December 31, 1996 included
approximately $19.2 million of net working capital, inclusive of $22
million of cash and cash equivalents.
20
<PAGE>
Prior to sale of its D-J Basin assets the Company had a working
capital deficit and little unutilized capacity under its revolving
credit facility. The D-J Basin asset sales significantly improved the
Company's liquidity but also significantly reduced its oil and gas
production and, consequently, its operating cash flow. Prior to 1995
the Company's investments in oil and gas properties typically exceeded
its cash flow from operating activities, with the excess funded
primarily with bank borrowings and proceeds from equity offerings. The
Company's total capital expenditures on oil and gas properties totaled
$22.8 million in 1996, $15.7 million in 1995, and $66.5 million in
1994. By comparison, cash flows from operating activities before
changes in operating assets and liabilities totaled $5.7 million in
1996, $17.1 million in 1995, and $25 million in 1994. The large
decline in capital expenditures from 1994 to 1995 was due, in part, to
liquidity constraints that developed when declining Rocky Mountain gas
prices unfavorably impacted cash flow and borrowing capacity and
reduced the number of economically viable development projects within
the Company's asset base. The Company's capital expenditures are
generally discretionary and activity levels are determined by a number
of factors, including oil and gas prices, interest rates, availability
of funds, quantity and character of identified investment projects,
availability of service providers, and competition. The Company
intends to use the improved liquidity resulting from the D-J Basin
asset sales to make new investments in oil and gas properties, through
acquisition and development of proved properties, exploration, and
exploitation of its property base.
The Company had no extraordinary capital expenditure commitments
pending at December 31, 1996. However, in February 1997 the Company
acquired, for $14.4 million, interests in three Gulf of Mexico lease
blocks with recently drilled wells that were attributed proved
reserves but which required additional development to commence
production. Development plans for these properties are discussed later
in this section. Also, on March 5, 1997 the Company participated in
winning bids for 11 tracts at the central Gulf of Mexico lease sale
held by the federal government's Minerals Management Service (MMS). If
all 11 tracts are awarded by the MMS, which can choose to reject all
bids for a given lease, the Company's net share of the related
leasehold bonuses will total approximately $5.7 million.
During the past several years the Company has been increasing its
capital expenditures on exploration activities. Exploration activities
generally have greater investment risk but a higher targeted rate of
return than acquisition and development activities. The range of
possible investment outcomes is ordinarily much greater for
exploration than for other oil and gas investments. In 1996 the
Company began focusing its exploration activities in the shallow
waters of the Gulf of Mexico, offshore Louisiana and Texas. The
Company had conducted no previous operations in the area and began the
period with no prospect inventory. To conduct its Gulf Coast
exploration activities the Company formed a Houston office staffed
with experienced Gulf Coast geoscientists, engineers, and support
personnel. During its initial year of operations in the Gulf Coast
area the Company invested approximately $14.9 million in related
exploration activities, including costs relating to leaseholds that
were unproved at December 31, 1996 but net of $4.9 million of costs
recouped through resale of partial interests in prospects to industry
partners. Such investments primarily related to acquisitions of
seismic data and mineral leaseholds, and participation in drilling
four exploratory wells, two of which were successful. Because the
successful wells were drilled late in the year, the Company did not
incur significant related development costs in 1996. The Company's
exploration plans for 1997 anticipate participation in five to ten new
exploratory test wells, but only one such well has yet been scheduled
and the actual number of test wells drilled may be more or less than
anticipated.
The two successful wells noted above were drilled on Eugene Island
(EI) Blocks 64 and 65, respectively. Both wells were attributed proved
reserves as of December 31, 1996 but were categorized as undeveloped
at that date because substantial future operations were required in
order to make the wells capable of production. The EI 64 #1 well is
expected to commence production in the second quarter of 1997 after
completion and tie-in to a nearby production platform owned and
operated by a third party. It is expected that a production platform
will be installed on the EI 65 property in the third quarter of 1997
to produce the #1 well and, if it is successful, the #2 well which is
currently drilling.
Through the $14.4 million acquisition consummated in February 1997,
the Company increased its interests in EI Blocks 64 and 65. The third
property acquired was an interest in East Cameron (EC) Block 378. A
well on EC 378 was completed subsea in January 1997 and is waiting on
pipeline installation to connect to a nearby third party production
platform. Initial production from EC 378 is expected to commence
during the third or fourth quarter of 1997.
The Company's capital budget for calendar 1997, excluding acquisitions
not already consummated, is approximately $55 million, allocated as
follows: approximately $15 million is provided for acquisitions of
proved properties; approximately $20 million is provided for
acquisitions of prospect leaseholds, seismic data procurement, and
exploratory drilling costs; approximately $15 million relates to
anticipated development of the Company's existing property base,
including EI 64, EI 65, EC 378, and the Company's Rocky Mountain
assets; and approximately $5 million is provided for other activities,
including current year development of assumed exploratory discoveries.
Much of this budget is dependent on future developments that are not
entirely within the Company's control and which may not occur. The
Company's actual capital expenditures may vary significantly from
these estimates. Further, the Company intends to continue to pursue
acquisitions of proved properties, primarily in the Gulf Coast and
Rocky Mountain regions, which, while not budgeted, could be very
significant.
21
<PAGE>
Management believes that the current-year budget, as described above,
can be funded without new sources of capital, by utilizing net working
capital at the beginning of the period, projected cash flow, and
borrowings under the revolving credit facility with the Company's bank
group. Cash flow is expected to increase significantly during the
latter part of the year when EI 64 and 65 and EC 378 are projected to
be on-line; however, these properties have not produced before and the
forecast on-line dates and production rates may not be achieved. If
conditions warrant, the Company may consider raising additional
capital through issuance of debt or equity securities. Should the
Company undertake a large acquisition, issuing such securities or
monetizing assets would likely be required to fund the transaction. In
the absence of additional liquidity, the Company's ability to fund
investment activities in future periods will be significantly affected
by the results obtained from investments made in 1997.
Changes In Prices
The Company's revenue, cash flow, and the value of its oil and gas
properties have been, and will continue to be, affected by changes in
oil and natural gas prices. The Company's ability to maintain current
borrowing capacity and to obtain additional capital on attractive
terms is also substantially dependent on oil and natural gas prices.
As such, changes in oil and gas prices can significantly affect the
amount of the Company's capital expenditures. Oil and natural gas
prices are subject to significant seasonal and other fluctuations that
are beyond the Company's ability to control or predict. The Company
periodically enters into product swap agreements in order to hedge
against the volatility of product prices. Although the Company enters
into the agreements to limit exposure to price decreases, the
agreements also limit the Company's ability to benefit from
significant price increases on the contract volumes. Effective July
1, 1996, the Company entered into a crude oil swap agreement with a
contract volume of 10,000 barrels per month through December 31, 1997.
This agreement provides for the cash settlement of the differential
between the $18.32 per barrel contract price and the average closing
NYMEX crude oil price during each month. The Company has also entered
into a crude oil collar arrangement effective for calendar 1997 on an
additional 10,000 barrels per month. This agreement provides for the
cash settlement of the differential between the monthly average
closing NYMEX price and the contract floor of $19.50 per barrel or the
contract ceiling of $24.35 per barrel, if the average monthly NYMEX
price falls outside of the range defined by such contract floor and
contract ceiling. Any gain or loss realized on these agreements is
included as a component of oil sales in the month of production.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements that are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that
could cause actual results to differ from projected results. Such
statements address activities, events or developments that the Company
expects, believes, projects, intends or anticipates will or may occur,
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, business strategies,
expansion and growth of the Company's operations, cash flow and
anticipated liquidity, prospect development and property acquisition,
obtaining financial or industry partners for prospect or program
development, or marketing of oil and gas. Factors that could cause
actual results to differ materially ("Cautionary Disclosures") are
described, among other places, in the Marketing, Competition, and
Regulation sections in this Form 10-K and under the caption
"Management's Discussion and Analysis of Financial Condition and
Results of Operations." Without limiting the Cautionary Disclosures
so described, Cautionary Disclosures include, among others: general
economic conditions, the market price of oil and natural gas, the
risks associated with exploration, the Company's ability to find,
acquire, market, develop and produce new properties, operating hazards
attendant to the oil and natural gas business, the Company's
inexperience in the Gulf of Mexico, uncertainties in the estimation of
proved reserves and in the projection of future rates of production
and timing of development expenditures, the strength and financial
resources of the Company's competitors, the Company's ability to find
and retain skilled personnel, climatic conditions, labor relations,
availability and cost of material and equipment, delays in anticipated
start-up dates, environmental risks, the results of financing efforts,
and regulatory developments. All written and oral forward-looking
statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the Cautionary
Disclosures, including without limitation those contained in the
President's letter contained in the Annual Report to Stockholders.
The Company disclaims any obligation to update or revise any forward-
looking statement to reflect events or circumstances occurring
hereafter or to reflect the occurrence of anticipated or unanticipated
events.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements that constitute Item 8 are
attached at the end of this report. An index to the Consolidated
Financial Statements appears in Item 14(a) of this report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by
reference from the sections entitled "Management" and "Disclosure of
Filings by Insiders" in the Company's definitive Proxy Statement for
its 1997 Annual Meeting of Stockholders (the "Proxy Statement") to be
filed with the Securities and Exchange Commission no later than April
30, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by
reference from the section entitled "Executive Compensation" in the
Proxy Statement. Nothing in this report shall be construed to
incorporate by reference the Board Compensation Committee Report on
Executive Compensation or the Performance Graph which are contained in
the Proxy Statement, which are expressly not incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is incorporated by
reference from the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by
reference from the section entitled "Certain Relationships and Other
Transactions" in the Proxy Statement.
23
<PAGE>
CERTAIN DEFINITIONS
The terms defined in this section are used throughout this
report.
Acreage held by production. Acreage covered by an oil and gas
lease which has a producing well on it, or which is pooled with a
lease or leases having one or more producing wells on them, so the
lease is maintained in effect for the duration of such production.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume,
used herein in reference to crude oil or other liquid hydrocarbons.
Bcf. Billion cubic feet (of gas).
Bcfe. Billion cubic feet (of gas) equivalent.
Behind-pipe reserves. Proved reserves in a formation in which
production casing has already been set in the wellbore, but from which
production has not commenced.
Btu. British thermal unit.
Commingle. The combining of production from more than one zone in
the same well to produce from multiple zones at the same time.
Development location. A location on which a development well can
be drilled.
Development well. A well drilled within the proved area of an oil
or gas reservoir to the depth of a stratigraphic horizon known to be
productive in an attempt to recover proved undeveloped reserves.
Drilling locations. A site on which a well can be drilled
consistent with local spacing rules for the purpose of recovering
possible, probable or proved reserves.
Dry well. A well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as an oil or gas
well.
Exploitation. The conduct of a drilling or recompletion operation
intended to recover reserves from a formation known to be productive
in the area or on trend with existing production but not classifiable
as proved.
Exploratory well. A well drilled to find and produce oil or gas
in an unproved area, to find a new reservoir in a field previously
found to be productive of oil or gas in another reservoir, or to
extend a known reservoir.
Farmout. An assignment of an interest in a drilling location and
related acreage conditional upon the drilling of a well on that
location.
Gross acres. An acre in which a working interest is owned.
Gross well. A well in which a working interest is owned.
MBbl. One thousand barrels of crude oil or other liquid
hydrocarbons.
MBtu. One thousand Btus.
Mcf. One thousand cubic feet (of gas).
Mcfe. One thousand cubic feet of natural gas equivalent. In
reference to crude oil or other liquid hydrocarbons, equivalents are
determined using the ratio of one Bbl of crude oil or other liquid
hydrocarbon to 6 Mcf of gas.
24
<PAGE>
MMBbl. One million barrels of crude oil or other liquid
hydrocarbons.
MMBtu. One million Btus.
MMcf. One million cubic feet.
MMcfe. One million cubic feet (of gas) equivalent.
Net acres or net wells. The sum of the fractional working
interests owned in gross acres or gross wells.
Overriding royalty interest. An interest in an oil and gas
property entitling the owner to a share of oil and gas production free
of costs of production.
Present value of future net revenues. Estimated future net
revenues discounted at a rate of ten percent per annum.
Productive well. A well that is producing oil or gas or that is
capable of production.
Proved developed reserves. Reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods.
Proved reserves. The estimated quantities of crude oil, natural
gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future
years from known reservoirs under existing economic and operating
conditions.
Proved undeveloped location. A site on which a development well
can be drilled consistent with local spacing rules for the purpose of
recovering proved reserves.
Proved undeveloped reserves. 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.
Recompletion. The completion for production of an existing
wellbore in another formation from that in which the well has
previously been completed.
Undeveloped acreage. Lease acreage on which wells have not been
drilled or completed to a point that would permit the production of
commercial quantities of oil and gas regardless of whether such
acreage contains proved reserves.
Working interest. The operating interest which gives the owner
the right to drill, produce and conduct operating activities on the
property and a share of production.
25
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) and (a)(2) Financial Statements and Financial Statement
Schedules
PAGE
Report of Independent Public Accountants . . . . . . . . . . . . . F-1
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . F-3
Consolidated Statements of Cash Flow for the years
ended December 31, 1996, 1995 and 1994. . . . . . . . . . . . F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994. . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-8
All other schedules are omitted because the required information
is not applicable or is not present in amounts sufficient to require
submission of the schedule or because the information required is
included in the Combined Financial Statements and Notes thereto.
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Basin Exploration, Inc.:
We have audited the accompanying consolidated balance sheets of
Basin Exploration, Inc., and subsidiaries, as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes
in stockholders' equity and cash flow for each of the three years in
the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated finan-
cial 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
consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated 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 consolidated
financial position of Basin Exploration, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 14, 1997.
F-1
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
REVENUE:
Oil sales $ 11,292 $ 19,632 $ 19,971
Gas sales 6,890 20,013 24,255
Gain on sale of assets 22,472 -- --
Interest and other 1,009 831 161
- ----------------------------------------------------------------------------------------------
41,663 40,476 44,387
- ----------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Lease operating expenses 4,776 8,196 8,642
Production taxes 1,829 3,478 3,432
Depreciation, depletion, and amortization 7,606 17,202 18,163
General and administrative, net 3,850 5,498 4,641
Interest expense 2,254 6,432 3,618
Property impairment -- 26,500 --
Other 18 497 --
- ----------------------------------------------------------------------------------------------
20,333 67,803 38,496
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE
INCOME TAXES 21,330 (27,327) 5,891
INCOME TAX (PROVISION)
BENEFIT (5,760) 7,784 (2,236)
- ----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $15,570 $(19,543) $ 3,655
- ----------------------------------------------------------------------------------------------
EARNINGS (LOSS)PER SHARE $ 1.45 $ (1.82) $ 0.34
- ----------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,700 10,710 10,813
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-2
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1996 1995
------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 22,023 $ 1,613
Accounts receivable 5,108 7,029
Stockholder note receivable 559 559
Inventory and other 2,203 1,116
------------------------------------------------------------------------------------------
29,893 10,317
------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, under the full cost
method of accounting
Proved 78,641 206,880
Unproved 9,822 5,001
Less accumulated depreciation,
depletion and amortization (36,581) (80,961)
------------------------------------------------------------------------------------------
51,882 130,920
Furniture and equipment, net 2,918 3,678
------------------------------------------------------------------------------------------
54,800 134,598
------------------------------------------------------------------------------------------
OTHER ASSETS:
Restricted cash -- 578
Other, net 264 1,158
------------------------------------------------------------------------------------------
264 1,736
------------------------------------------------------------------------------------------
$ 84,957 $ 146,651
==========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
<TABLE>
<CAPTION>
December 31, 1996 1995
------------------------------------------------------------------------------------------
(in thousands, except share data)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,469 $ 7,985
Accrued ad valorem taxes 2,040 4,368
Income taxes payable 1,000 --
Current portion of long-term debt 206 175
------------------------------------------------------------------------------------------
10,715 12,528
------------------------------------------------------------------------------------------
LONG-TERM DEBT, net of current portion 218 77,172
AD VALOREM TAXES AND OTHER 513 3,664
DEFERRED INCOME TAXES 4,760 --
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
10,000,000 shares authorized, no shares
issued and outstanding -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 10,757,000 and 10,724,000 shares
issued and outstanding, respectively 108 107
Additional paid-in capital 59,219 59,288
Retained earnings (accumulated deficit) 9,556 (6,014)
Common stock held in treasury, at cost,
56,000 and 32,000 shares, respectively (132) (94)
------------------------------------------------------------------------------------------
68,751 53,287
------------------------------------------------------------------------------------------
$ 84,957 $ 146,651
==========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $15,570 $(19,543) $ 3,655
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities -
Gain on sale of assets (22,472) -- --
Depreciation, depletion and amortization 7,606 17,202 18,163
Deferred income tax expense (benefit) 4,760 (7,784) 2,470
Property impairment -- 26,500 --
Stock compensation expense 98 302 354
Amortization of debt issuance costs 118 373 331
Changes in operating assets and liabilities -
Decrease (increase) in -
Restricted cash 578 (75) 2,742
Receivables 1,664 2,594 (2,934)
Inventory and other (1,861) 206 (928)
(Decrease) increase in -
Accounts payable and accrued
expenses 103 (6,947) 2,814
Ad valorem taxes (2,255) (1,073) 1,968
Unearned income -- (1,435) 876
Income taxes payable 1,000 -- (250)
------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,909 10,320 29,261
------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (27,741) (17,782) (62,321)
Proceeds from sale of property
and equipment 125,625 3,941 847
Asset sale transaction costs (5,257) -- --
Payments received on notes receivable -- -- 136
------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 92,627 (13,841) (61,338)
------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable
and long-term debt 8,594 4,937 39,154
Principal payments on notes payable and
long-term debt (85,517) (5,150) ( 3,988)
Proceeds from sale of stock, net 84 -- (54)
Purchase of treasury stock and options (287) (47) (27)
------------------------------------------------------------------------------------------
Net cash (used in)
provided by financing activities (77,126) (260) 35,085
------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS 20,410 (3,781) 3,008
CASH AND EQUIVALENTS,
beginning of year 1,613 5,394 2,386
------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS,
end of year $22,023 $ 1,613 $ 5,394
==========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW--(CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 2,327 $ 6,111 $ 3,095
Cash paid for taxes $ -- $ -- $ 156
------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Additional Treasury Earnings
For the Years Ended Common Stock Paid-In Stock (Accumulated Stockholders'
December 31, 1996, 1995 and 1994 Shares Amount Capital Shares Amount Deficit) Equity
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993 10,665 $107 $57,222 (1) $(20) $9,874 $67,183
Offering costs - - (54) - - - (54)
Purchase of treasury stock - - - (12) (27) - (27)
Issuance of warrants - - 1,464 - - - 1,464
Issuance and vesting of restricted
stock and stock options 27 - 354 - - - 354
Net income - - - - - 3,655 3,655
- --------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 1994 10,692 107 58,986 (13) (47) 13,529 72,575
Purchase of treasury stock - - - (19) (47) - (47)
Issuance and vesting of restricted
stock and stock options 32 - 302 - - - 302
Net loss - - - - - (19,543) (19,543)
- --------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 1995 10,724 107 59,288 (32) (94) (6,014) 53,287
Purchase of treasury stock and options - - (250) (24) (38) - (288)
Issuance and vesting of restricted
stock and stock options 33 1 181 - - - 182
Net income - - - - - 15,570 15,570
- --------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 1996 10,757 $ 108 $59,219 (56) $(132) $ 9,556 $ 68,751
====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-7<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Organization and Operations -- The consolidated financial
---------------------------
statements include the financial statements of Basin Exploration,
Inc. and its wholly owned subsidiaries,(collectively referred to
as "Basin" or the "Company"). Basin, as operator of jointly
owned oil and gas properties, sells a significant amount of such
production to certain major customers (see Note 9), and pays
vendors for oil and gas services. Joint interest receivables are
subject to collection under terms of operating agreements which
generally provide lien rights.
The accompanying financial statements present the operations
of the Company on a consolidated basis. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Certain reclassifications have been made to amounts reported
in previous years to conform to 1996 presentation.
Cash Equivalents -- Cash equivalents are comprised of highly
----------------
liquid instruments with original maturities of three months or
less. The total carrying amount of cash and equivalents
approximates the fair value of such instruments.
Oil and Gas Properties -- The Company follows the full cost
----------------------
method of accounting for oil and gas properties. Under this
method, all costs associated with the development, exploration
and acquisition of oil and gas properties are capitalized in the
Company's one cost center (full cost pool), which is the
continental United States including the Gulf of Mexico. Payroll
and other internal costs capitalized include salaries and related
fringe benefits paid to employees directly engaged in the
acquisition, exploration and development of oil and gas
properties as well as all other directly identifiable, internal
costs associated with these activities. Payroll and other
internal costs associated with production operations and general
corporate activities are expensed in the period incurred. Future
development, site restoration, dismantlement and abandonment
costs, net of salvage values, are estimated on a property-by-
property basis based on prevailing prices and are amortized to
expense, along with the capitalized costs discussed above, using
the unit-of-production method based upon actual production and
estimates of proved reserve quantities. Accumulated
depreciation, depletion and amortization is recorded on the
balance sheet as a reduction to property, plant and equipment
costs. Proceeds from sales of oil and gas properties are
credited to the full cost pool with no gain or loss recognized
unless such adjustments would significantly alter the
relationship between capitalized costs and proved reserves of oil
and gas.
If capitalized costs, net of amortization and related
deferred taxes, exceed the full cost ceiling, the excess would be
expensed in the period such excess occurs. The full cost ceiling
includes an estimate of the discounted value of future net
revenues attributable to proven reserves, using various
assumptions and parameters consistent with promulgations of the
Securities and Exchange Commission. The full cost ceiling may be
particularly sensitive to changes in prevailing oil and gas sales
prices or forecast production rates. The Company recognized
$26,500,000 of such impairment at September 30, 1995.
The Company invests in unevaluated oil and gas properties
and related assets for the purpose of future exploration for
proved reserves. The costs of such assets are included in
unproved oil and gas properties at the lower of cost or estimated
fair market value.
Inventory -- Inventory of lease and well equipment is stated
---------
at the lower of cost or market determined using the specific
identification method.
Furniture and Equipment -- Furniture and equipment is
-----------------------
depreciated over estimated useful lives of five to seven years.
Maintenance and repair costs are expensed as incurred.
F-8
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes -- The Company computes income taxes in
------------
accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." SFAS 109 requires
an asset and liability approach which results in the recognition
of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the carrying
amounts and the tax bases of those assets and liabilities. SFAS
109 also requires the recording of a valuation allowance if it is
more likely than not that some portion or all of a deferred tax
asset will not be realized.
Hedging Activities -- The Company periodically enters into
------------------
agreements with third parties to hedge against the effects of
fluctuations in future oil and gas prices. Gains or losses on
such agreements are deferred and recognized as oil and gas
revenue when the hedged production occurs.
At December 31, 1996, the Company was a party to a crude oil
swap agreement and a crude oil collar arrangement, each with a
contract volume of 10,000 barrels per month through December 31,
1997. The swap agreement provides for the cash settlement of the
differential between the $18.32 per barrel contract price and the
average closing NYMEX crude oil price during each month. The
collar arrangement provides for the cash settlement of the
differential between the monthly average closing NYMEX price and
the contract floor of $19.50 per barrel or the contract ceiling
of $24.35 per barrel, if the monthly average closing NYMEX price
falls outside of the range defined by such contract floor and
contract ceiling. In accordance with SFAS 107, "Disclosures
About Fair Value of Financial Instruments," the Company has
estimated the fair value of its hedging arrangements utilizing
the NYMEX crude oil strip at December 31, 1996. While it is not
the Company's intention to terminate either of the arrangements,
it is estimated that the Company would have been required to pay
approximately $525,000 to terminate the arrangements on December
31, 1996. As of February 12, 1997, the estimated cost to
terminate such arrangements was approximately $325,000, inclusive
of the actual cost of contract settlements through that date.
Due to the volatility of crude oil prices, the fair market value
may not be representative of the actual gain or loss that will be
realized by the Company in 1997.
The Company recognized a reduction in oil revenue of
$480,000, $115,000 and $95,000 under hedging agreements in 1996,
1995 and 1994, respectively. The Company recognized a reduction
in gas revenue of $206,000 under hedging agreements in 1994.
Earnings (Loss) Per Share -- Earnings (loss) per share have
-------------------------
been computed based on the weighted average number of common
shares outstanding. The impact of dilutive common stock
equivalents on earnings (loss) per share was immaterial.
(2) RESTRICTED CASH
---------------
Well Plugging -- The Company was required under a certain
-------------
farmout agreement to deposit in an escrow account amounts for
future plugging and abandonment costs beyond a one-year time
period. The total cash held in escrow at December 31, 1995, was
$578,000. Such escrow account was closed and the funds were
released to the Company in November 1996.
(3) ACQUISITIONS AND DIVESTITURES OF OIL AND GAS PROPERTIES
-------------------------------------------------------
In February 1996, the Company entered into agreements
pursuant to which it sold all of its assets in the D-J Basin in
two transactions closed in March and June 1996, for an aggregate
sales price of $123,500,000, effective January 1, 1996.
Combined, these transactions resulted in Basin selling its
interests in approximately two-thirds of its producing wells and
70% of its proved oil and gas reserves at December 31, 1995.
Because the second transaction constituted the sale of a
significant portion of the Company's total oil and gas reserves
which would significantly alter the relationship between the
Company's capitalized costs and its proved reserves, net
capitalized costs of oil and gas properties were allocated
between the reserves sold and retained based upon their estimated
relative reserve quantities as of June 7, 1996 and a resulting
gain of approximately $22,500,000 was recognized. A portion of
the proceeds from the sales was used to payoff all outstanding
bank debt and residual proceeds, net of transaction costs, were
invested in short-term interest bearing cash equivalents.
Revenue and expenses associated with the sold properties were
included in the Company's results of operations through the
respective closing dates.
F-9
<PAGE>
BASIN EXPLORATION, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1994 the Company acquired all of the outstanding
stock of Sterling Energy Corp. ("Sterling") for aggregate
consideration of approximately $15.4 million consisting of
approximately $10.1 million in cash, the assumption of $3.6
million of net liabilities, warrants to purchase 300,000 shares
of the Company's common stock at an exercise price of $14.00
valued at $1.5 million, and $.2 million in transaction expenses.
The acquisition included producing and non-producing oil and gas
properties and undeveloped acreage located in the Scott and Draw
fields in Converse County, Wyoming and in the Tohonadla field in
San Juan County, Utah, as well as a gas
processing plant located in Wyoming. The acquisition was funded
partially with an increased revolving credit facility. The
Company accounted for the Sterling acquisition using purchase
accounting and began consolidating the results as of the December
1994 close date.
(4) LONG-TERM DEBT
--------------
<TABLE>
<CAPTION>
December 31, 1996 1995
----------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Revolving credit facility $ 0 $77,000
Other notes 424 347
---------------------------------------------------------------------
424 77,347
Less: Current portion (206) (175)
---------------------------------------------------------------------
Long-term debt, net of current portion $ 218 $77,172
=====================================================================
</TABLE>
On August 6, 1996, the Company entered into an Amended and
Restated Credit Agreement with its existing bank group. The
initial borrowing base was set at $25,000,000 and is scheduled to
be determined as of April 30, 1997 for the following six month
period. The Credit Agreement provides for the interest rate on
borrowings to be determined based on the prime rate or LIBOR, at
the Company's election. A varying spread above the prime rate
ranging from 0% to 0.5% and over LIBOR ranging from 0.625% to
1.25% will be applied based upon the Company's applicable debt-
to-capitalization ratio. The Credit Agreement provides for
borrowings to be revolving loans until August 1, 1999, at which
time the outstanding balance is scheduled to convert to a four
year amortizing term loan. The Credit Agreement contains various
covenants, including ones that could limit the Company's ability
to incur other debt, dispose of assets, pay dividends or
repurchase stock. The note may be secured by the Company's oil
and gas properties in certain circumstances, at the election of
the lending banks. There were no borrowings outstanding under
the facility at December 31, 1996.
Effective May 31, 1995, in order to improve management of
interest rate risk, Basin entered into an interest rate swap
agreement. Under the agreement, the Company fixed the LIBOR
reference rate on a notional amount of $50 million at 6 percent
per annum through May 31, 1996.
Debt is payable as follows:
<TABLE>
<CAPTION>
(in thousands)
----------------------------------------
<S> <C>
1997 $ 206
1998 152
1999 66
----------------------------------------
$ 424
========================================
</TABLE>
(5) BENEFIT PLANS
-------------
401(k) Savings -- The Company has a 401(k) profit sharing
--------------
plan (the "Plan"). Eligible employees may make voluntary
contributions to the Plan, which may be matched by the Company,
at its discretion, up to 6 percent of the employee's eligible
compensation. The Company has historically matched the first
three percent of employees' eligible compensation that is
contributed under the Plan. The amount of employee contributions
is limited as specified in the Plan. The Company may, at its
discretion, make additional contributions to the Plan. The
Company expensed $96,000, $195,000, and $261,000, with respect to
the Plan for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-10
<PAGE>
BASIN EXPLORATION, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Plan -- Under the Company's Employees' Equity
----------
Incentive Plan and Non-Employee Directors' Stock Option Plan,
officers, key employees, consultants and directors of the Company
are eligible to receive incentive stock options, non-qualified
stock options and restricted stock. At December 31, 1996, a
total of approximately 1,365,000 shares were available for grant
under the plans. Shares granted generally vest over three to
four years, and expire after ten years. A total of 684,000
shares of the Company's common stock are subject to such plans as
of December 31, 1996, including 35,000 unvested shares of
restricted stock and 649,000 outstanding stock options.
The following table summarizes the changes in stock
options:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period 702,500 541,833 426,833
Granted 252,500 265,000 115,000
Exercised (33,500) - -
Forfeited/Canceled (272,500) (104,333) -
---------------------------------------------------------------------------
Balance, end of period 649,000 702,500 541,833
===========================================================================
</TABLE>
At December 31, 1996, the weighted average exercise price
and weighted average remaining life for options outstanding was
$6.55 per share and 8.3 years, respectively. Additional
information regarding the outstanding options at December 31,
1996, is as follows.
<TABLE>
<CAPTION>
Number of Number of Range of
Options Options Exercise Prices
Outstanding Exercisable Per Share
-------------------------------------------------------------------------------------
<C> <C> <C>
54,000 53,167 $11.00 - $14.50
112,500 94,167 $7.63 - $9.50
235,000 51,667 $5.13 - $6.88
247,500 25,833 $3.88 - $4.94
-------------------------------------------------------------------------------------
649,000 224,834
=====================================================================================
</TABLE>
In connection with its initial public offering ("IPO") in
1992, the Company granted options to two officers to purchase
100,000 shares each of the Company's common stock at a price
substantially below the IPO price of $9.50 per share. The
Company recognized compensation expense related to these options
of approximately $97,000 and $233,000 for the years ended
December 31, 1995 and 1994, respectively.
The Company granted 25,000, 32,000, and 25,000 shares of
restricted stock during 1996, 1995 and 1994, respectively.
Related compensation expense was recognized in the amounts of
approximately $98,000, $205,000, and $121,000 for the years ended
December 31, 1996, 1995, and 1994, respectively. Cumulatively
through December 31, 1996, 35,000 shares of restricted stock
remained subject to forfeiture, 48,000 shares of restricted stock
had been forfeited and 42,000 shares were no longer subject to
restriction.
In connection with the Sterling acquisition, the Company
issued warrants to purchase 300,000 shares of the Company's
common stock at an exercise price of $14.00 per share. Such
warrants became exercisable on October 13, 1994 and have an
expiration date of December 31, 1999.
In October 1995, the Financial Accounting Standards Board
issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS
123 was effective for 1996 and recommends a fair value based
method of accounting for employee stock compensation, including
stock options. However, companies may choose to account for
stock compensation using the intrinsic value based method as
prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and provide pro forma
disclosures of net income and earnings per share as if the fair
value based method had been applied. The Company has elected to
continue to account for stock compensation using the intrinsic
value based method.
F-11
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Had the Company elected to follow SFAS 123, the fair value
of each option grant would have been estimated on the date of
grant using the Black-Sholes option-pricing model with the
following weighted-average assumptions used for grants in 1996
and 1995: risk free interest rate of 6.75%; expected dividend
yield of 0%; expected life of 5 years; and expected volatility of
55%. Based upon these assumptions, the weighted average fair
value of options granted during 1996 and 1995 was $2.73 and $2.96
per share, respectively. SFAS 123 would have had no significant
impact on reported operating results for the years ended December
31, 1996 and 1995.
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
Leases -- The Company is the primary obligor under various
------
noncancelable office space operating lease arrangements. The
Company also subleases certain office space to and from third
parties under various noncancellable lease arrangements. The
following is a schedule of future minimum lease payments under
these leases:
<TABLE>
<CAPTION>
Future minimum Future minimum
lease obligations lease receipts
-------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
1997 $ 955 $ 501
1998 955 501
1999 923 478
2000 107 --
-------------------------------------------------------------------------------------
$ 2,940 $ 1,480
=====================================================================================
</TABLE>
Payments related to these leases obligations were
approximately $707,000, $710,000, and $435,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Legal Proceedings -- The Company, from time to time, is
-----------------
involved in various legal and administrative proceedings and
claims of various types which arise in the ordinary course of its
business. While any litigation contains an element of
uncertainty, in the opinion of management, none of these actions,
either individually or in the aggregate will have a material
adverse effect on results the Company's financial condition,
liquidity or results of operations.
(7) INCOME TAXES
------------
The components of the provision (benefit) for income taxes
are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
-----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current provision (benefit):
Federal $ 950 $ -- $ (234)
State 50 -- --
------------------------------------------------------------------------------------------
1,000 -- (234)
------------------------------------------------------------------------------------------
Deferred provision (benefit):
Federal 4,760 (6,970) 2,176
State -- (814) 294
------------------------------------------------------------------------------------------
4,760 (7,784) 2,470
------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $ 5,760 $ (7,784) $ 2,236
==========================================================================================
</TABLE>
F-12
<PAGE>
BASIN EXPLORATION, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reconciliations of income tax provisions (benefit)
computed at the federal statutory rate with income tax
provisions recorded by the Company for each of the past
three years are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Income (loss) before income taxes $ 21,330 $ (27,327) $ 5,891
==========================================================================================
Computed tax at the applicable federal statutory rate $ 7,252 $ (9,291) $ 2,003
State income tax, net of federal tax benefits 704 (689) 194
Deferred tax assets valuation allowance (2,196) 2,196 --
Other -- -- 39
Income tax provision (benefit) $ 5,760 $ (7,784) $ 2,236
==========================================================================================
</TABLE>
The tax effects of significant temporary differences
representing deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Oil and gas properties and equipment $ 6,235 $ 2,315
-----------------------------------------------------------------------------------------
Deferred tax assets:
Alternative minimum tax credit carry forward (1,475) (545)
Net operating loss carry forwards -- (3,914)
Other -- (52)
Less deferred tax assets valuation allowance -- 2,196
-----------------------------------------------------------------------------------------
(1,475) (2,315)
-----------------------------------------------------------------------------------------
Net deferred tax liability $ 4,760 $ --
==========================================================================================
</TABLE>
As of December 31, 1996, the Company has alternative minimum
tax credit carry forwards for income tax purposes of
approximately $1,475,000 which may be utilized to reduce future
tax liability of the Company. These carry forwards have no
expiration date.
(8) RELATED PARTY TRANSACTIONS
--------------------------
Prior to the IPO, the Company advanced $559,000 to its
principal stockholder at an annual interest rate of 9 percent.
The note was amended in 1996 and the balance is now due in
December 1997 with interest only payments due quarterly.
F-13
<PAGE>
BASIN EXPLORATION, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) OIL AND GAS ACTIVITIES
----------------------
The Company's oil and gas operations are conducted in the
United States. Certain information concerning these activities
follows:
Major Purchasers -- The following parties purchased ten
----------------
percent or more of the Company's oil and gas production.
Purchaser
Year ended December 31, 1996 1995 1994
-------------------------------------------------------
PanEnergy 43% 62% 77%
Eighty-Eight Oil Company 26% 16% (a)
(a) less than ten percent
Section 29 Tax Credits -- The Company received $1.5 million
----------------------
and $3 million in 1995 and 1994 respectively, for Section 29 tax
credits associated with gas production from various oil and gas
properties of the Company. Such proceeds were recorded as
unearned income and recognized as incremental gas revenues as the
gas was produced and the credits earned. The Company recognized
approximately $2,857,000 and $2,123,000 of additional gas revenue
during the years ended December 31, 1995 and 1994, respectively,
related to the amortization of this unearned income.
Costs Incurred -- Costs incurred in oil and gas operations
--------------
and related depreciation, depletion and amortization per
equivalent unit-of-production are as follows:
Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------
(in thousands)
Property acquisition-
Unproved $ 5,056/1/ $ 2,429 $ 5,275
Proved 3,067 3,889
16,751
Exploration costs 10,250 2,003 2,361
Development costs 4,472 7,427 42,113
- ----------------------------------------------------------------------
Gross expenditures $ 22,845 $ 15,748 $ 66,500
======================================================================
Depletion per one thousand cubic
feet of gas equivalent $ 0.82 $ 0.84 $ 0.77
======================================================================
/1/ Excludes $4,914,000 of costs recouped through the resale of
partial interests in prospects to industry partners.
Costs Not Being Amortized -- Oil and gas property costs not
-------------------------
being amortized at December 31, 1996, consisted of $9,822,000 of
leasehold and seismic costs, of which $9,058,000, $488,000 and
$276,000 were incurred in 1996, 1995 and 1994, respectively. The
Company anticipates that substantially all unevaluated costs will
be classified as evaluated costs within the next three years.
F-14
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
- ------------------------------------------------------
The determination of oil and gas reserves is complex and highly
interpretive. Assumptions used to estimate reserve information may
significantly increase or decrease such reserves in future periods.
The estimates of reserves are subject to continuing changes and,
therefore, an accurate determination of reserves may not be possible
for many years because of the time needed for development, drilling,
testing and studies of the reservoirs. The following unaudited table,
based upon estimates of onshore reserves prepared by the Company's
engineers and audited by Netherland, Sewell & Associates, Inc. at
December 31, 1996, 1995 and 1994 and estimates of offshore reserves
prepared by Ryder Scott Company Petroleum Engineers at December 31,
1996, sets forth the estimated quantities of proved oil and gas
reserves for the Company and the changes in total proved reserves as
of December 31, 1996, 1995, and 1994. All such reserves are located
in the United States.
ANALYSES OF CHANGES IN PROVED RESERVES
- --------------------------------------
<TABLE>
<CAPTION>
OIL GAS
- ---------------------------------------------------------------------------------------------------------
(Mbbls) (MMcf)
<S> <C> <C>
Balance, December 31, 1993 11,270 148,688
Revisions (107) (9,539)
Extensions, discoveries and additions 1,351 20,269
Production (1,278) (14,377)
Sales of reserves in-place (46) (664)
Purchases of reserves in-place 3,951 11,953
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 15,141 156,330
Revisions (1,656) (21,172)
Extensions, discoveries and additions 931 10,936
Production (1,153) (12,833)
Sales of reserves in-place (751) (4,957)
Purchases of reserves in-place 94 3,132
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 12,606 131,436
Revisions 52 (451)
Extensions, discoveries, and additions 49 6,391
Production (564) (4,776)
Sales of reserves in-place (6,559) (104,140)
Purchases of reserves in-place 2,286 1,253
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 7,870 29,713
==========================================================================================================
Proved developed reserves -
December 31, 1994 10,544 128,664
==========================================================================================================
December 31, 1995 8,397 106,410
==========================================================================================================
December 31, 1996 4,046 19,182
==========================================================================================================
</TABLE>
STANDARDIZED MEASURE
- --------------------
The unaudited standardized measure of discounted future net cash
flows related to proved oil and gas reserves are as follows:
December 31, 1996 1995 1994
- ----------------------------------------------------------------------
(in thousands)
Future production revenues $ 289,105 $ 439,415 $ 505,636
Future production costs (108,522) (155,087) (163,244)
Future development costs (20,583) (45,907) (49,293)
Future income taxes (39,101) (25,644) (45,252)
- ----------------------------------------------------------------------
Future net cash flows 120,899 212,777 247,847
Discount (57,593) (95,529) (106,495)
- ----------------------------------------------------------------------
Standardized measure of discounted
future net cash flows/1/ $ 63,306 $ 117,248 $ 141,352
======================================================================
/1/ Total future net cash flows before income taxes discounted at
10% per annum are $83,656,000, $129,068,000 and $162,858,000 as of
December 31, 1996, 1995 and 1994, respectively.
F-15
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The estimate of future income taxes is based on the future net
cash flows from proved reserves adjusted for the tax basis of the oil
and gas properties but without consideration of general and
administrative and interest expenses. For standardized measure
purposes the Company estimates future income taxes using the "year-by-
year" method. For ceiling test purposes the Company estimates future
income taxes using the "short-cut" method.
A summary of changes in the standardized measure of discounted
future net cash flows is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Standardized measure of discounted future
net cash flows, beginning of year $ 117,248 $ 141,352 $ 110,227
Changes in sales prices and production costs 17,693 (8,382) (5,688)
Changes in estimated future
development costs (1,819) 448 4,407
Sales of minerals-in-place (83,530) (3,866) (339)
Purchase of minerals-in-place 10,887 2,696 26,849
Revisions of previous quantity estimates (169) (18,026) (7,604)
Costs incurred that reduced
future development costs -- 5,422 24,421
Extensions, discoveries and
improved recovery 16,286 7,086 13,397
Sales of oil and gas, net of
production costs and taxes (11,577) (27,971) (32,152)
Accretion of discount 12,907 16,286 13,648
Net change in future income taxes (8,530) 9,665 4,743
Changes in production rates (timing)
and other (6,090) (7,462) (10,557)
- -------------------------------------------------------------------------------------------------------------------
Standardized measure of discounted
future net cash flows, end of year $ 63,306 $ 117,248 $ 141,352
===================================================================================================================
</TABLE>
There are numerous uncertainties inherent in estimating
quantities of proved reserves and projected future rates of production
and timing of development expenditures, including many factors beyond
the control of the producer. The reserve data and standardized
measures set forth herein represent only estimates. Reserve
engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact way,
and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and
judgment. As a result, estimates of different engineers often vary.
In addition, results of drilling, testing and production subsequent to
the date of an estimate may justify revision of such estimates.
Accordingly, reserve estimates are often different from the quantities
of oil and gas that are ultimately recovered. Further, the estimated
future net revenues from proved reserves and the present value thereof
are based upon certain assumptions, including geologic success,
prices, future production levels and costs, that may not prove correct
over time. Predictions of future production levels are subject to
great uncertainty, and the meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they are
based. Oil and gas prices have fluctuated widely in recent years.
The calculated weighted average sales prices utilized for the purposes
of estimating the Company's proved reserves and future net revenue
were and $25.35 per barrel of oil and $3.02 per Mcf of gas at December
31, 1996, $18.64 per barrel of oil and $1.56 per Mcf of gas at
December 31, 1995 and $16.44 per barrel of oil and $1.63 per Mcf of
gas at December 31, 1994.
F-16
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
- -----------------------------------------------
(in thousands except per share amounts)(unaudited)
<TABLE>
<CAPTION>
1996 First Second Third Fourth Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 7,576 $27,680 $ 3,015 $ 3,392 $41,663
Gross profit from operations 5,084 3,295 1,484 1,714 11,577
Net income (loss) (916) 16,375 2 109 15,570
Earnings (loss) per
common share (.09) 1.53 -- .01 1.45
===================================================================================================================
<CAPTION>
1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $11,535 $10,192 $ 8,661 $10,088 $40,476
Gross profit from operations 8,220 7,136 5,561 7,054 27,971
Net income (loss) 325 (271) (20,197) 600 (19,543)
Earnings (loss) per
common share .03 (.02) (1.88) .05 (1.82)
===================================================================================================================
</TABLE>
F-17<PAGE>
(a)(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
2.1 -- Agreement and Plan of Merger between Sterling
Energy Corporation, Basin Energy, Inc. and Basin
Exploration, Inc. dated October 13, 1994/7/
2.2 -- Plan of Merger between Basin Sterling, Inc. and
Basin Exploration, Inc. dated November 22, 1994/8/
2.3 -- Plan of Merger between Basin Operating Company and
Basin Exploration, Inc. dated December 14, 1994/8/
3.1 -- Restated Certificate of Incorporation of Basin./2/
3.2 -- Restated Bylaws of Basin./2/
4.1 -- Common Stock Certificate of Basin./2/
10.1 -- Equity Incentive Plan as amended June 6, 1996./1/
10.2 -- Directors' Stock Option Plan as amended June 6,
1996./1/
10.3 -- Key Employee Participation Plan./2/
10.4 -- Employment Agreement dated March 31, 1992 by and
between Basin and Michael S. Smith./3/
10.5 -- Gulf Coast Geoscientist Overriding Royalty
Interest Plan dated November 30, 1995./10/
10.6 -- Form of Rights Agreement dated as of February 24,
1996, between Basin Exploration, Inc. and
Corporate Stock Transfer, Inc. as Rights Agent./9/
10.7 -- Performance Shares Plan approved February 4,
1997./1/
10.8 -- Change of Control Employment Agreement dated
October 13, 1995 between Basin Exploration, Inc.
and Howard L. Boigon./10/
10.9 -- Employment Agreement dated August 28, 1995 between
Basin Exploration, Inc. and Samuel D.
Winegrad./10/
10.10 -- Employment Agreement dated June 28, 1995 between
Basin Exploration, Inc. and Neil L. Stenbuck./10/
10.11 -- Employment Agreement dated November 10, 1995
between Basin Exploration, Inc. and David A.
Pustka./10/
10.12 -- Employment Agreement dated February 23, 1996
between Basin Exploration, Inc. and Thomas J.
Corley./1/
10.13 -- Assignment and Assumption of Lease dated December
18, 1995 by and between Team, Inc., as original
Tenant, Basin Exploration, Inc., as New Tenant,
and FC Tower Property Partners, L.P., as
Landlord./9/
10.14 -- First Supplement to Amended Mortgage, Security
Agreement, Assignment, Financing Statement and
Fixture Filing dated May 8, 1995 by and between
Basin Exploration, Inc. and Basin Gas Ltd. to
NationsBank of Texas, N.A., as successor
collateral agent for the benefit of Colorado
National Bank, Union Bank and NationsBank of
Texas, N.A./8/
10.15 -- Second Supplement to Amended Mortgage, Security
Agreement, Assignment, Financing Statement and
Fixture Filing dated May 8, 1995 by and between
Basin Exploration, Inc., and Basin Gas Ltd. to
NationsBank of Texas, N.A. in its capacity as the
successor collateral agent for the benefit of
Colorado National Bank, Union Bank and NationsBank
of Texas, N.A./10/
10.16 -- Agreement for Purchase and Sale of Assets
(Monetization) dated February 24, 1996 by and
between Basin Exploration, Inc., HS Resources,
Inc. and Orion Acquisition, Inc./7/
10.17 -- Agreement for Purchase and Sale of Assets
(Wattenberg), dated February 24, 1996 by and
between Basin Exploration, Inc., HS Resources,
Inc. and Orion Acquisition, Inc./7/
10.18 -- Lease of Office Space dated September 25, 1992,
between Brookfield Republic Inc. and Basin
Operating Company, as amended/4/*
10.19 -- First Lease of Additional Office Space dated as of
December 1, 1994, between Brookfield Republic,
Inc. and Basin Operating Company./6/*
10.20 -- Amended and Restated Credit Agreement dated August
6, 1996 between the Company and Colorado National
Bank, Union Bank of California, N.A. and
NationsBank of Texas, N.A./11/
10.21 -- Purchase and Sale Agreement dated February 13,
1997, between Hall-Houston Oil Company et al as
Sellers and Basin Exploration, Inc. as Buyer./1/**
21 -- Subsidiaries./1/
23.1 -- Consent of Arthur Andersen LLP/1/
23.2 -- Consent of Netherland, Sewell & Associates,
Inc./1/
23.3 -- Consent of Ryder Scott Company/1/
27 -- Financial Data Schedule./1/
- ----------------
27
<PAGE>
/1/ Filed herewith.
/2/ Filed as an Exhibit to Basin's Registration Statement on
Form S-1 as filed on March 17, 1992, Registration No.
33-46486, and incorporated herein by reference.
/3/ Filed as an Exhibit to Amendment No. 1 to Basin's
Registration Statement on Form S-1 as filed on April 21,
1992, Registration No. 33-46486, and incorporated herein
by reference.
/4/ Filed as an Exhibit to Basin's Registration Statement on
Form S-1 as filed on October 25, 1993, Registration No.
33-70802, and incorporated herein by reference.
/5/ Filed as an Exhibit to Form 8-K filed on December 10,
1994, and incorporated herein by reference.
/6/ Filed as an Exhibit to Form 10-K/A-1 filed on June 26,
1995 and incorporated herein by reference.
/7/ Filed as an Exhibit to Form 8-K filed on March 6, 1996,
and incorporated herein by reference.
/8/ Filed as an Exhibit to Form 10-K filed on March 28, 1995,
and incorporated herein by reference.
/9/ Filed as an Exhibit to Form 8-K filed on February 26,
1996, and incorporated herein by reference.
/10/ Filed as an Exhibit to Form 10-K filed on March 28, 1996,
and incorporated herein by reference.
/11/ Filed as an Exhibit to Form 10-Q filed on August 14, 1996,
and incorporated herein by reference.
* Confidential treatment has been granted for portions of
these Exhibits.
** Confidential treatment has been requested for portions of
this Exhibit.
(b) Reports on Form 8-K
None
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BASIN EXPLORATION, INC.
By: /s/ MICHAEL S. SMITH
Date: March 17, 1997 -------------------------------------
Michael S. Smith
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <S> <S>
/s/ MICHAEL S. SMITH President, Chief Executive March 17, 1997
- ----------------------------------Officer and Chairman of the
Michael S. Smith Board (Principal Executive Officer)
/s/ HOWARD L. BOIGON Vice President - General Counsel March 17, 1997
- ----------------------------------Secretary and Director
Howard L. Boigon
/s/ NEIL L. STENBUCK Vice President, Chief Financial March 17, 1997
- ----------------------------------Officer and Director
Neil L. Stenbuck
/s/ JAMES A. TUELL Controller, Principal Accounting March 17, 1997
- ----------------------------------Officer
James A. Tuell
/s/ JOHN F. GREENE Director March 17, 1997
- ----------------------------------
John F. Greene
/s/ J. PAUL HELLSTROM Director March 17, 1997
- ----------------------------------
J. Paul Hellstrom
/s/ MICHAEL A. NICOLAIS Director March 17, 1997
- ----------------------------------
Michael A. Nicolais
/s/ LARRY D. UNRUH Director March 17, 1997
- ----------------------------------
Larry D. Unruh
</TABLE>
29
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
- ------- ----------------------- --------
10.1 -- Equity Incentive Plan as amended June 6, 1996. 71
10.2 -- Directors' Stock Option Plan as amended
June 6, 1996. 90
10.7 -- Performance Shares Plan approved
February 4, 1997. 98
10.12 -- Employment Agreement dated February 23, 1996
between Basin Exploration, Inc. and
Thomas J. Corley. 107
10.21 -- Purchase and Sale Agreement dated
February 13, 1997, between Hall-Houston
Oil Company et al as Sellers and Basin
Exploration, Inc. as Buyer. 118
21 -- Subsidiaries 157
23.1 -- Consent of Arthur Andersen LLP 158
23.2 -- Consent of Netherland, Sewell & Associates, Inc. 159
23.3 -- Consent of Ryder Scott Company 160
27 -- Financial Data Schedule 161
30
BASIN EXPLORATION, INC.
EQUITY INCENTIVE PLAN
(as amended June 6, 1996)
SECTION 1
INTRODUCTION
1.1 Establishment. Basin Exploration, Inc., a Delaware
corporation (hereinafter referred to, together with its Affiliated
Corporations (as defined in subsection 2.1(a)) as the "Company" except
where the context otherwise requires), hereby establishes the Basin
Exploration, Inc. Equity Incentive Plan (the "Plan") for certain key
employees of the Company.
1.2 Purposes. The purposes of the Plan are to provide the
key management employees selected for participation in the Plan with
added incentives to continue in the long-term service of the Company
and to create in such employees a more direct interest in the future
success of the operations of the Company by relating incentive
compensation to increases in stockholder value, so that the income of
the key management employees is more closely aligned with the income
of the Company's stockholders. The Plan is also designed to attract
key employees and to retain and motivate participating employees by
providing an opportunity for investment in the Company.
SECTION 2
DEFINITIONS
2.1 Definitions. The following terms shall have the
meanings set forth below:
(a) "Affiliated Corporation" means any corporation or
other entity (including but not limited to a partnership) which is
affiliated with Basin Exploration, Inc. through stock ownership or
otherwise and is treated as a common employer under the provisions of
Sections 414(b) and (c) of the Internal Revenue Code.
(b) "Award" means a grant made under this Plan in the
form of Stock, Options, Restricted Stock, Performance Shares, or
Performance Units.
(c) "Board" means the Board of Directors of the
Company.
(d) "Effective Date" means the effective date of the
Plan, March 9, 1992.
<PAGE>
(e) "Eligible Employees" means full-time key employees
(including, without limitation, officers and directors who are also
employees) of the Company or any Affiliated Corporation or any
division thereof, upon whose judgment, initiative and efforts the
Company is, or will be, important to the successful conduct of its
business.
(f) "Fair Market Value" means the officially quoted
closing price of the Stock on the NASDAQ National Market System on a
particular date. If there are no Stock transactions on such date, the
Fair Market Value shall be determined as of the immediately preceding
date on which there were Stock transactions. If no such prices are
reported on the NASDAQ National Market System, then Fair Market Value
shall mean the average of the high and low sale prices for the Stock
(or if no sales prices are reported, the average of the high and low
bid prices) as reported by the principal regional stock exchange, or
if not so reported, as reported by NASDAQ or a quotation system of
general circulation to brokers and dealers. If the Stock is not
publicly traded, the Fair Market Value of the Stock on any date shall
be determined in good faith by the Incentive Plan Committee after such
consultation with outside legal, accounting and other experts as the
Incentive Plan Committee may deem advisable, and the Committee shall
maintain a written record of its method of determining such value.
(g) "Incentive Plan Committee" means a committee
consisting of at least two disinterested members of the Board who are
empowered hereunder to take actions in the administration of the Plan.
The Incentive Plan Committee shall be so constituted at all times as
to permit the Plan to comply with Rule 16b-3 or any successor rule
promulgated under the Securities Exchange Act of 1934 (the "1934
Act"). Members of the Incentive Plan Committee shall be appointed
from time to time by the Board, shall serve at the pleasure of the
Board, and may resign at any time upon written notice to the Board.
(h) "Incentive Stock Option" means any Option
designated as such and granted in accordance with the requirements of
Section 422 of the Internal Revenue Code.
(i) "Internal Revenue Code" means the Internal Revenue
Code of 1986, as it may be amended from time to time.
(j) "Non-Statutory Option" means any Option other than
an Incentive Stock Option.
(k) "Option" means a right to purchase Stock at a
stated price for a specified period of time.
(l) "Option Price" means the price at which shares of
Stock subject to an Option may be purchased, determined in accordance
with subsection 7.2(b).
-2-
<PAGE>
(m) "Participant" means an Eligible Employee or
consultant to the Company designated by the Incentive Plan Committee
from time to time during the term of the Plan to receive one or more
Awards under the Plan.
(n) "Performance Cycle" means the period of time as
specified by the Incentive Plan Committee over which Performance Share
or Performance Units are to be earned.
(o) "Performance Shares" means an Award made pursuant
to Section 9 which entitles a Participant to receive Shares, their
cash equivalent or a combination thereof based on the achievement of
performance targets during a Performance Cycle.
(p) "Performance Units" means an Award made pursuant
to Section 9 which entitles a Participant to receive cash, Stock or a
combination thereof based on the achievement of performance targets
during a Performance Cycle.
(q) "Plan Year" means each 12-month period beginning
April 1 and ending the following March 31, except that for the first
year of the Plan it shall begin on the Effective Date and extend to
March 31 of the following year.
(r) "Restricted Stock" Means Stock granted under
Section 8 that is subject to restrictions imposed pursuant to said
Section.
(s) "Share" means a share of Stock.
(t) "Stock" means the common stock, $.01 par value, of
the Company.
2.2 Gender and Number. Except when otherwise indicated by
the context, the masculine gender shall also include the feminine
gender, and the definition of any term herein in the singular shall
also include the plural
SECTION 3
PLAN ADMINISTRATION
The Plan shall be administered by the Incentive Plan
Committee. In accordance with the provisions of the Plan, the
Incentive Plan Committee shall, in its sole discretion, select
Participants from among the Eligible Employees to whom Awards will be
granted, the form of each Award, the amount of each Award and any
other terms and conditions of each Award as the Incentive Plan
Committee may deem necessary or desirable and consistent with the
terms of the Plan. The Incentive Plan Committee shall determine the
form or forms of the agreements with participants which shall evidence
the particular provisions, terms, conditions, rights and duties of the
Company and the Participants with
-3-
<PAGE>
respect to Awards granted pursuant to the Plan, which provisions need
not be identical except as may be provided herein. The Incentive Plan
Committee may from time to time adopt such rules and regulations for
carrying out the purposes of the Plan as it may deem proper and in the
best interests of the Company. The Incentive Plan Committee may
correct any defect, supply any omission or reconcile any inconsistency
in the Plan or in any agreement entered into hereunder in the manner
and to the extent it shall deem expedient and it shall be the sole and
final judge of such expediency. No member of the Incentive Plan
Committee shall be liable for any action or determination made in good
faith, and all members of the Committee shall, in addition to their
rights as directors, be fully protected by the Company with respect to
any such action, determination or interpretation. The determination,
interpretations and other actions of the Incentive Plan Committee
pursuant to the provisions of the Plan shall be binding and conclusive
for all purposes and on all persons.
SECTION 4
STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. Initially, 1,271,488 Shares are
authorized for issuance under the Plan in accordance with the
provisions of the Plan and subject to such restrictions or other
provisions as the Incentive Plan Committee may from time to time deem
necessary. This authorization shall be increased automatically on
each succeeding annual anniversary of July 1, 1996 (the "Amendment
Effective Date") by an amount equal to that number of Shares equal to
one-half of one percent of the Company's then issued and outstanding
Shares. The Shares may be divided among the various Plan components
as the Incentive Plan Committee shall determine, except that no more
than 1,150,000 Shares shall be cumulatively available for the grant of
Incentive Stock Options under the Plan. Any portion of the Shares
added on each succeeding anniversary of the Amendment Effective Date
which are unused during the Plan Year beginning on such anniversary
date shall be carried forward and be available for grant and issuance
in subsequent Plan Years, while up to 100% of the Shares to be added
in the next succeeding Plan Year (calculated on the basis of the
current Plan Year's allocation) may be borrowed for use in the current
Plan Year. Shares which may be issued upon the exercise of Options
shall be applied to reduce the maximum number of Shares remaining
available for use under the Plan. The Company shall at all times
during the term of the Plan and while any Options are outstanding
retain as authorized and unissued Stock, or as treasury Stock, at
least the number of Shares from time to time required under the
provisions of the Plan, or otherwise assure itself of its ability to
perform its obligations hereunder.
4.2 Unused and Forfeited Stock. Any Shares that are
subject to an Award under this Plan which are not used because the
terms and conditions of the Award are not met, including any Shares
that are subject to an Option which expires or is terminated for any
reason, any Shares which are used for full or partial payment of the
purchase price of Shares with respect to which an Option is exercised
and any Shares retained by the Company pursuant to Section 15.2 shall
automatically become available for use under the Plan.
Notwithstanding the foregoing, any Shares used for full or partial
payment of the purchase price of the Shares with respect to which an
Option is exercised and any Shares retained by
-4-
<PAGE>
the Company pursuant to Section 15.2 that were originally Incentive
Stock Option Shares must still be considered as having been granted
for purposes of determining whether the 1,150,000 Share limitation on
Incentive Stock Option grants provided for in Section 4.1 has been
reached.
4.3 Adjustments for Stock Split, Stock Dividend, Etc. If
the Company shall at any time increase or decrease the number of its
outstanding Shares of Stock or change in any way the rights and
privileges of such Shares by means of the payment of a stock dividend
or any other distribution upon such Shares payable in Stock, or
through a stock split, subdivision, consolidation, combination,
reclassification or recapitalization involving the Stock, then in
relation to the Stock that is affected by one or more of the above
events, the numbers, rights and privileges of the following shall be
increased, decreased or changed in like manner as if they had been
issued and outstanding, fully paid and nonassessable at the time of
such occurrence: (i) the shares of Stock as to which Awards may be
granted under the Plan; and (ii) the Shares of Stock then included in
each outstanding Option, Performance Share or Performance Unit granted
hereunder.
4.4 Dividend Payable in Stock of Another Corporation, Etc.
If the Company shall at any time pay or make any dividend or other
distribution upon the Stock payable in securities of another
corporation or other property (except money or Stock), a proportionate
part of such securities or other property shall be set aside and
delivered to any Participant then holding an Award for the particular
type of Stock for which the dividend or other distribution was made,
upon exercise thereof in the case of Options, and the vesting thereof
in the case of other Awards. Prior to the time that any such
securities or other property are delivered to a Participant in
accordance with the foregoing, the Company shall be the owner of such
securities or other property and shall have the right to vote the
securities, receive any dividends payable on such securities, and in
all other respects shall be treated as the owner. If securities or
other property which have been set aside by the Company in accordance
with this Section are not delivered to a Participant because an Award
is not exercised or otherwise vested, then such securities or other
property shall remain the property of the Company and shall be dealt
with by the Company as it shall determine in its sole discretion.
4.5 Other Changes in Stock. In the event there shall be
any change, other than as specified in Sections 4.3 and 4.4, in the
number or kind of outstanding shares of Stock or of any stock or other
securities into which the Stock shall be changed or for which it shall
have been exchanged, and if the Incentive Plan Committee shall in its
discretion determine that such change equitably requires an adjustment
in the number or kind of Shares subject to outstanding Awards or which
have been reserved for issuance pursuant to the Plan but are not then
subject to an Award, then such adjustments shall be made by the
Incentive Plan Committee and shall be effective for all purposes of
the Plan and on each outstanding Award that involves the particular
type of stock for which a change was effected.
4.6 Rights to Subscribe. If the Company shall at any time
grant to the holders of its Stock rights to subscribe pro rata for
additional shares thereof or for any other securities of the Company
or of any other corporation, there shall be reserved with respect to
-5-
<PAGE>
the Shares then subject to an Award held by any Participant of the
particular class of Stock involved, the Stock or other securities
which the Participant would have been entitled to subscribe for if
immediately prior to such grant the Participant had exercised his
entire Option, or otherwise vested in his entire Award. If, upon
exercise of any such Option or the vesting of any other Award, the
Participant subscribes for the additional Stock or other securities,
the Participant shall pay to the Company the price that is payable by
the Participant for such Stock or other securities.
4.7 General Adjustment Rules. If any adjustment or
substitution provided for in this Section 4 shall result in the
creation of a fractional Share under any Award, the Company shall, in
lieu of selling or otherwise issuing such fractional Share, pay to the
Participant a cash sum in an amount equal to the product of such
fraction multiplied by the Fair Market Value of a Share on the date
the fractional Share would otherwise have been issued. In the case of
any such substitution or adjustment affecting an Option, the total
Option Price for the shares of Stock then subject to an Option shall
remain unchanged but the Option Price per share under each such Option
shall be equitably adjusted by the Incentive Plan Committee to reflect
the greater or lesser number of shares of Stock or other securities
into which the Stock subject to the Option may have been changed.
4.8 Determination by Incentive Plan Committee, Etc.
Adjustments under this Section 4 shall be made by the Incentive Plan
Committee, whose determinations with regard thereto shall be final and
binding upon all parties thereto.
SECTION 5
REORGANIZATION OR LIQUIDATION
In the event that the Company is merged or consolidated with
another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification or change of outstanding Shares), or if all or
substantially all of the assets or more than 50% of the outstanding
voting stock of the Company is acquired by any other corporation,
business entity or person (other than a sale or conveyance in which
the Company continues as a holding company of an entity or entities
that conduct the business or businesses formerly conducted by the
Company), or in case of a reorganization (other than a reorganization
under the United States Bankruptcy Code) or liquidation of the
Company, and if the provisions of Section 10 do not apply, the
Incentive Plan Committee, or the board of directors of any corporation
assuming the obligations of the Company, shall have the power and
discretion to prescribe the terms and conditions for the exercise of,
or modification of, any outstanding Awards granted hereunder. By way
of illustration, and not by way of limitation, the Incentive Plan
Committee may provide for the complete or partial acceleration of the
dates of exercise of the Options, or may provide that such Options
will be exchanged or converted into options to acquire securities of
the surviving or acquiring corporation, or may provide for a payment
or distribution in respect of outstanding Options (or the portion
thereof that is currently exercisable) in cancellation thereof. The
Incentive Plan Committee may remove restrictions on Restricted Stock
and may modify the performance requirements for any other Awards.
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The Incentive Plan Committee may provide that Stock or other Awards
granted hereunder must be exercised in connection with the closing of
such transaction, and that if not so exercised such Awards will
expire. Any such determinations by the Incentive Plan Committee may
be made generally with respect to all Participants, or may be made on
a case-by-case basis with respect to particular Participants. The
provisions of this Section 5 shall not apply to any transaction
undertaken for the purpose of reincorporating the Company under the
laws of another jurisdiction, if such transaction does not materially
affect the beneficial ownership of the Company's capital stock.
SECTION 6
PARTICIPATION
Participants in the Plan shall be those Eligible Employees
or consultants who, in the judgment of the Incentive Plan Committee,
are performing, or during the term of their incentive arrangement will
perform, important services in the management, operation and
development of the Company, and significantly contribute, or are
expected to significantly contribute, to the achievement of long-term
corporate economic objectives. Participants may be granted from time
to time one or more Awards; provided, however, that the grant of each
such Award shall be separately approved by the Incentive Plan
Committee, and receipt of one such Award shall not result in automatic
receipt of any other Award, written notice shall be given to such
person, specifying the terms, conditions, rights and duties related
thereto; and further provided that Incentive Stock Options shall not
be granted to consultants or to Eligible Employees of any partnership
which is included within the definition of an Affiliated Corporation
but whose employees are not permitted to receive Incentive Stock
Options under the Internal Revenue Code. Each Participant shall enter
into an agreement with the Company, in such form as the Incentive Plan
Committee shall determine and which is consistent with the provisions
of the Plan, specifying such terms, conditions, rights and duties.
Awards shall be deemed to be granted as of the date specified in the
grant resolution of the Incentive Plan Committee, which date shall be
the date of any related agreement with the Participant. In the event
of any inconsistency between the provisions of the Plan and any such
agreement entered into hereunder, the provisions of the Plan shall
govern.
SECTION 7
STOCK OPTIONS
7.1 Grant of Options. Coincident with the following
designation for participation in the Plan, a Participant may be
granted one or more Options. The Incentive Plan Committee in its sole
discretion shall designate whether an Option is to be considered an
Incentive Stock Option or a Non-Statutory Option. The Incentive Plan
Committee may grant both an Incentive Stock Option and a Non-Statutory
Option to the same Participant at the same time or at different times.
Incentive Stock Options and Non-Statutory Options, whether granted at
the same or different times, shall be deemed to have been awarded in
separate grants, shall be clearly identified, and in no event shall
the exercise of one Option
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affect the right to exercise any other Option or affect the number of
Shares for which any other Option may be exercised.
7.2 Option Agreements. Each Option granted under the Plan
shall be evidenced by a written stock option agreement which shall be
entered into by the Company and the Participant to whom the Option is
granted (the "Option Holder"), and which shall contain the following
terms and conditions, as well as such other terms and conditions not
inconsistent therewith, as the Incentive Plan Committee may consider
appropriate in each case.
(a) Number of Shares. Each stock option agreement
shall state that it covers a specified number of Shares, as determined
by the Incentive Plan Committee. Notwithstanding any other provision
of the Plan, the aggregate Fair Market Value of the Shares with
respect to which Incentive Stock Options are exercisable for the first
time by an Option Holder in any calendar year, under the Plan or
otherwise, shall not exceed $100,000. For this purpose, the Fair
Market Value of the Shares shall be determined as of the time an
Option is granted.
(b) Price. The price at which each Share covered by
an Option may be purchased shall be determined in each case by the
Incentive Plan Committee and set forth in the stock option agreement,
but in no event shall the Option Price for each Share covered by an
Incentive Stock Option be less than the Fair Market Value of the Stock
on the date the Option is granted; provided that the Option Price for
each Share covered by a Non-Statutory Option may be granted at any
price less than Fair Market Value, in the sole discretion of the
Incentive Plan Committee. In addition, the Option Price for each
Share covered by an Incentive Stock Option granted to an Eligible
Employee who then owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any
parent or subsidiary corporation of the Company must be at least 110%
of the Fair Market Value of the Stock subject to the Incentive Stock
Option on the date the Option is granted.
(c) Duration of Options. Each stock option agreement
shall state the period of time, determined by the Incentive Plan
Committee, within which the Option may be exercised by the Option
Holder (the "Option Period"). The Option Period must expire, in all
cases, not more than ten years from the date an Option is granted;
provided, however, that the Option Period of an Option granted to an
Eligible Employee or consultant who then owns stock possessing more
than 10% of the total combined voting power of all classes of stock of
the Company or any parent or subsidiary corporation of the Company
must expire not more than five years from the date such an Option is
granted. Each stock option agreement shall also state the periods of
time, if any, as determined by the Incentive Plan Committee, when
incremental portions of each Option shall vest. Except as provided in
Sections 5 and 10, no portion of any Option shall vest before six
months after the date of grant of the Option.
(d) Termination of Employment, Death, Disability, Etc.
Except as otherwise determined by the Incentive Plan Committee, each
stock option agreement shall
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provide as follows with respect to the exercise of the Option upon
termination of the employment or the death of the Option Holder:
(i) If the employment of the Option Holder is
terminated within the Option Period for cause, as determined by the
Company, the Option shall thereafter be void for all purposes. As
used in this subsection 7.2(d), "cause" shall mean a gross violation,
as determined by the Company, of the Company's established policies
and procedures. The effect of this subsection 7.2(d)(i) shall be
limited to determining the consequences of a termination, and nothing
in this subsection 7.2(d)(i) shall restrict or otherwise interfere
with the Company's discretion with respect to the termination of any
employee.
(ii) If the Option Holder terminates his
employment with the Company in a manner determined by the Board, in
its sole discretion, to constitute retirement (which determination
shall be communicated to the Option Holder within 10 days of such
termination), the Option may be exercised by the Option Holder, or in
the case of death by the persons specified in subsection (iii) of this
subsection 7.2(d), within three months following his or her retirement
if the Option is an Incentive Stock Option or within twelve months
following his or her retirement if the Option is a Non-Statutory Stock
Option (provided in each case that such exercise must occur within the
Option Period), but not thereafter. In any such case, the Option may
be exercised only as to the Shares as to which the Option had become
exercisable on or before the date of the Option Holder's termination
of employment.
(iii) If the Option Holder dies, or if the Option
Holder becomes disabled (within the meaning of Section 22(e) of the
Internal Revenue Code), during the Option Period while still employed,
or within the three-month period referred to in (iv) below, or within
the three or twelve-month period referred to in (ii) above, the Option
may be exercised by those entitled to do so under the Option Holder's
will or by the laws of descent and distribution within twelve months
following the Option Holder's death or disability, but not thereafter.
In any such case, the Option may be exercised only as to the Shares as
to which the Option had become exercisable on or before the date of
the Option Holder's death or disability.
(iv) If the employment of the Option Holder by the
Company is terminated (which for this purpose means that the Option
Holder is no longer employed by the Company or by an Affiliated
Corporation) within the Option Period for any reason other than cause,
retirement as provided in (ii) above, disability or the Option
Holder's death, the Option may be exercised by the Option Holder
within three months following the date of such termination (provided
that such exercise must occur within the Option Period), but not
thereafter. In any such case, the Option may be exercised only as to
the Shares as to which the Option had become exercisable on or before
the date of termination of employment.
(e) Transferability. Each stock option agreement
shall provide that the Option granted therein is not transferable by
the Option Holder except by will or pursuant to the laws of descent
and distribution, and that such Option is exercisable during
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the Option Holder's lifetime only by him or her, or in the event of
disability or incapacity, by his or her guardian or legal
representative.
(f) Exercise, Payments, Etc.
(i) Each stock option agreement shall provide
that the method for exercising the Option granted therein shall be by
delivery to the Corporate Secretary of the Company of written notice
specifying the number of Shares with respect to which such Option is
exercised (which must be in an amount evenly divisible by 100) and
payment of the Option Price. Such notice shall be in a form
satisfactory to the Incentive Plan Committee and shall specify the
particular Option (or portion thereof) which is being exercised and
the number of Shares with respect to which the Option is being
exercised. The exercise of the Option shall be deemed effective upon
receipt of such notice by the Corporate Secretary and payment to the
Company. The purchase of such Stock shall take place at the principal
offices of the Company upon delivery of such notice, at which time the
purchase price of the Stock shall be paid in full by any of the
methods or any combination of the methods set forth in (ii) below. A
properly executed certificate or certificates representing the Stock
shall be issued by the Company and delivered to the Option Holder. If
certificates representing Stock are used to pay all or part of the
Option Price, separate certificates for the same number of shares of
Stock shall be issued by the Company and delivered to the Option
Holder representing each certificate used to pay the Option Price, and
an additional certificate shall be issued by the Company and delivered
to the Option Holder representing the additional shares, in excess of
the Option Price, to which the Option Holder is entitled as a result
of the exercise of the Option.
(ii) The exercise price shall be paid by any of
the following methods or any combination of the following methods:
(A) in cash;
(B) by cashier's check payable to the order
of the Company;
(C) by delivery to the Company of
certificates representing the number of Shares then owned by the
Option Holder, the Fair Market Value of which equals the purchase
price of the Stock purchased pursuant to the Option, properly endorsed
for transfer to the Company; provided however, that Shares used for
this purpose must have been held by the Option Holder for such minimum
period of time as may be established from time to time by the
Incentive Plan Committee; for purposes of this Plan, the Fair Market
Value of any Shares delivered in payment of the purchase price upon
exercise of the Option shall be the Fair Market Value as of the
exercise date; the exercise date shall be the day the delivery of the
certificates for the Stock used as payment of the Option Price; or
(D) by delivery to the Company of a properly
executed notice of exercise together with irrevocable instructions to
a broker to deliver to the
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Company promptly the amount of the proceeds of the sale of all or a
portion of the Stock or of a loan from the broker to the Option Holder
necessary to pay the exercise price.
(iii) In the discretion of the Incentive Plan
Committee, the Company may guaranty a third-party loan obtained by a
Participant to pay part or all of the Option Price of the Shares
provided that such loan or the Company's guaranty is secured by the
Shares.
(g) Date of Grant. An option shall be considered as
having been granted on the date specified in the grant resolution of
the Incentive Plan Committee.
(h) Withholding.
(A) Non-Statutory Options. Each stock
option agreement covering Non-Statutory Options shall provide that,
upon exercise of the Option, the Option Holder shall make appropriate
arrangements with the Company to provide for the amount of additional
withholding required by applicable federal and state income tax laws,
including payment of such taxes through delivery of Stock or by
withholding Stock to be issued under the Option, as provided in
Section 15.
(B) Incentive Options. In the event that a
Participant makes a disposition (as defined in Section 424(c) of the
Internal Revenue Code) of any Stock acquired pursuant to the exercise
of an Incentive Stock Option prior to the expiration of two years from
the date on which the Incentive Stock Option was granted or prior to
the expiration of one year from the date on which the Option was
exercised, the Participant shall send written notice to the Company at
its principal office in Denver, Colorado (Attention: Corporate
Secretary) of the date of such disposition, the number of shares
disposed of, the amount of proceeds received from such disposition,
and any other information relating to such disposition as the Company
may reasonably request. The Participant shall, in the event of such a
disposition, make appropriate arrangements with the Company to provide
for the amount of additional withholding, if any, required by
applicable federal and state income tax laws.
(i) Adjustment of Options. Subject to the limitations
contained in Sections 7 and 14, the Incentive Plan Committee may make
any adjustment in the Option Price, the number of shares subject to,
or the terms of, an outstanding Option and a subsequent granting of an
Option by amendment or by substitution of an outstanding Option. Such
amendment, substitution, or re-grant may result in terms and
conditions (including Option Price, number of shares covered, vesting
schedule or exercise period) that differ from the terms and conditions
of the original Option. The Incentive Plan Committee may not,
however, adversely affect the rights of any Participant to previously
granted Options without the consent of such Participant. If such
action is affected by amendment, the effective date of such amendment
shall be the date of the original grant.
7.3 Stockholder Privileges. No Option Holder shall have
any rights as a stockholder with respect to any Shares covered by an
Option until the Option Holder
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becomes the holder of record of such Stock, and no adjustments shall
be made for dividends or other distributions or other rights as to
which there is a record date preceding the date such Option Holder
becomes the holder of record of such Stock, except as provided in
Section 4.
SECTION 8
RESTRICTED STOCK AWARDS
8.1 Awards Granted by Incentive Plan Committee. Coincident
with or following designation for participation in the Plan, a
Participant may be granted one or more Restricted Stock Awards
consisting of Shares. The number of Shares granted as a Restricted
Stock Award shall be determined by the Incentive Plan Committee.
8.2 Restrictions. A Participant's right to retain a
Restricted Stock Award granted to him under Section 8.1 shall be
subject to such restrictions, including but not limited to his
continuous employment by the Company for a restriction period
specified by the Incentive Plan Committee, or the attainment of
specified performance goals and objectives, as may be established by
the Incentive Plan Committee with respect to such award. The
Incentive Plan Committee may in its sole discretion require different
periods of employment or different performance goals and objectives
with respect to different Participants, to different Restricted Stock
Awards or to separate, designated portions of the Shares constituting
a Restricted Stock Award.
8.3 Privileges of a Stockholder, Transferability. A
Participant shall have all voting, dividend, liquidation and other
rights with respect to Stock in accordance with its terms received by
him as a Restricted Stock Award under this Section 8 upon his becoming
the holder of record of such Stock; provided, however, that the
Participant's right to sell, encumber or otherwise transfer such Stock
shall be subject to the limitations of Section 11.2 hereof.
8.4 Enforcement of Restrictions. The Incentive Plan
Committee may in its sole discretion require one or more of the
following methods of enforcing the restrictions referred to in
Section 8.2 and 8.3:
(a) Placing a legend on the stock certificates
referring to the restrictions;
(b) Requiring the Participant to keep the stock
certificates, duly endorsed, in the custody of the Company while the
restrictions remain in effect; or
(c) Requiring that the stock certificates, duly
endorsed, be held in the custody of a third party while the
restrictions remain in effect.
8.5 Termination of Employment, Death, Disability, Etc. In
the event of the death or disability (within the meaning of
Section 22(e) of the Internal Revenue Code) of a
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Participant, or the retirement of a Participant as provided in
Section 7.2(d)(ii), all employment period and other restrictions
applicable to Restricted Stock Awards then held by him shall lapse,
and such awards shall become fully nonforfeitable. Subject to
Sections 5 and 10, in the event of a Participant's termination of
employment for any other reason, any Restricted Stock Awards as to
which the employment period or other restrictions have not been
satisfied shall be forfeited.
SECTION 9
PERFORMANCE SHARES AND PERFORMANCE UNITS
9.1 Awards Granted by Incentive Plan Committee. Coincident
with or following designation for participation in the Plan, a
Participant may be granted Performance Shares or Performance Units.
9.2 Amount of Award. The Incentive Plan Committee shall
establish a maximum amount of a Participant's Award, which amount
shall be denominated in Shares in the case of Performance Shares or in
dollars in the case of Performance Units.
9.3 Communication of Award. Written notice of the maximum
amount of a Participant's Award and the Performance Cycle determined
by the Incentive Plan Committee shall be given to a Participant as
soon as practicable after approval of the Award by the Incentive Plan
Committee.
9.4 Amount of Award Payable. The Incentive Plan Committee
shall establish maximum and minimum performance targets to be achieved
during the applicable Performance Cycle. Performance targets
established by the Incentive Plan Committee shall relate to corporate,
group, unit or individual performance and may be established in terms
of earnings, growth in earnings, ratios of earnings to equity or
assets, or such other measures or standards determined by the
Incentive Plan Committee. Multiple performance targets may be used
and the components of multiple performance targets may be given the
same or different weighting in determining the amount of an Award
earned, and may relate to absolute performance or relative performance
measured against other groups, units, individuals or entities.
Achievement of the maximum performance target shall entitle the
Participant to payment (subject to Section 9.6) at the full or maximum
amount specified with respect to the Award; provided, however, that
notwithstanding any other provisions of this Plan, in the case of an
Award of Performance Shares the Incentive Plan Committee in its
discretion may establish an upper limit on the amount payable (whether
in cash or Stock) as a result of the achievement of the maximum
performance target. The Incentive Plan Committee may also establish
that a portion of a full or maximum amount of a Participant's Award
will be paid (subject to Section 9.6) for performance which exceeds
the minimum performance target but falls below the maximum performance
target applicable to such Award.
9.5 Adjustments. At any time prior to payment of a
Performance Share or Performance Unit Award, the Incentive Plan
Committee may adjust previously established
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performance targets or other terms and conditions to reflect events
such as changes in laws, regulations, or accounting practice, or
mergers, acquisitions or divestitures.
9.6 Payments of Awards. Following the conclusion of each
Performance Cycle, the Incentive Plan Committee shall determine the
extent to which performance targets have been attained, and the
satisfaction of any other terms and conditions with respect to an
Award relating to such Performance Cycle. The Incentive Plan
Committee shall determine what, if any, payment is due with respect to
an Award and whether such payment shall be made in cash, Stock or some
combination thereof. Payment shall be made in a lump sum or
installments, as determined by the Incentive Plan Committee,
commencing as promptly as practicable following the end of the
applicable Performance Cycle, subject to such terms and conditions and
in such form as may be prescribed by the Incentive Plan Committee.
9.7 Termination of Employment. If a Participant ceases to
be an Eligible Employee before the end of a Performance Cycle by
reason of his death, permanent disability or retirement as provided in
Section 7.2(d)(ii), the Performance Cycle for such Participant for the
purpose of determining the amount of the Award payable shall end at
the end of the calendar quarter immediately preceding the date on
which such Participant ceased to be an Eligible Employee. The amount
of an Award payable to a Participant to whom the preceding sentence is
applicable shall be paid at the end of the Performance Cycle and shall
be that fraction of the Award computed pursuant to the preceding
sentence the numerator of which is the number of calendar quarters
during the Performance Cycle during all of which said Participant was
an Employee and the denominator of which is the number of full
calendar quarters in the Performance Cycle. Upon any other
termination of employment of a Participant during a Performance Cycle,
participation in the Plan shall cease and all outstanding Awards of
Performance Shares or Performance Units to such Participant shall be
cancelled.
SECTION 10
CHANGE IN CONTROL
10.1 Options, Restricted Stock. In the event of a change in
control of the Company as defined in Section 10.3, then the Incentive
Plan Committee may, in its sole discretion, without obtaining
stockholder approval, to the extent permitted in Section 14, take any
or all of the following actions: (a) accelerate the exercise dates of
any outstanding Options or make all such Options fully vested and
exercisable; (b) grant a cash bonus award to any Option Holder in an
amount necessary to pay the Option Price of all or any portion of the
Options then held by such Option Holder; (c) pay cash to any or all
Option Holders in exchange for the cancellation of their outstanding
Options in an amount equal to the different between the Option Price
of such Options and the greater of the tender offer price for the
underlying Stock or the Fair Market Value of the Stock on the date of
the cancellation of the Options; (d) make any other adjustments or
amendments to the outstanding Options and (e) eliminate all
restrictions with respect to Restricted Stock and deliver Shares free
of restrictive legends to any Participant.
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10.2 Performance Shares and Performance Units. Under the
circumstances described in Section 10.1, the Incentive Plan Committee
may, in its sole discretion, and without obtaining stockholder
approval, to the extent permitted in Section 14, provide for payment
of outstanding Performance Shares and Performance Units at the maximum
award level or any percentage thereof.
10.3 Definition. For purposes of the Plan, a "change in
control" shall be deemed to have occurred if (a) any "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934
Act), other than a trustee or other fiduciary holding securities under
an employee benefit plan of the Company or Mr. Michael Smith is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
1934 Act), directly or indirectly, of more than 33-1/3 percent of the
then outstanding voting stock of the Company; or (b) at any time
during any period of three consecutive years (not including any period
prior to the Effective Date), individuals who at the beginning of such
period constitute the Board (and any new director whose election by
the Board or whose nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority thereof; or (c) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least 80%
of the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
SECTION 11
RIGHTS OF EMPLOYEES; PARTICIPANTS
11.1 Employment. Nothing contained in the Plan or in any
Award granted under the Plan shall confer upon any Participant any
right with respect to the continuation of his or her employment by the
Company, or interfere in any way with the right of the Company,
subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such employment or to increase or
decrease the compensation of the Participant from the rate in
existence at the time of the grant of an Award. Whether an authorized
leave of absence, or absence in military or government service, shall
constitute a termination of employment shall be determined by the
Incentive Plan Committee at the time.
11.2 Nontransferability. No right or interest of any
Participant in an Award granted pursuant to the Plan shall be
assignable or transferable during the lifetime of the Participant,
either voluntarily or involuntarily, or be subjected to any lien,
directly or indirectly, by operation of law, or otherwise, including
execution, levy, garnishment, attachment, pledge or bankruptcy. In
the event or a Participant's death, a Participant's rights
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and interests in Options shall, to the extent provided in Section 7,
be transferable by testamentary will or the laws of descent and
distribution, and payment of any amounts due under the Plan shall be
made to, and exercise of any Options may be made by, the Participant's
legal representatives, heirs or legatees. If in the opinion of the
Incentive Plan Committee a person entitled to payments or to exercise
rights with respect to the Plan is disabled from caring for his
affairs because of mental condition, physical condition or age,
payment due such person may be made to, and such rights shall be
exercised by, such person's guardian, conservator or other legal
personal representative upon furnishing the Incentive Plan Committee
with evidence satisfactory to the Incentive Plan Committee of such
status.
SECTION 12
GENERAL RESTRICTIONS
12.1 Investment Representations. The Company may require
any person to whom an Option or other Award is granted, as a condition
of exercising such Option or receiving Stock under the Award, to give
written assurances in substance and form satisfactory to the Company
and its counsel to the effect that such person is acquiring the Stock
subject to the Option or the Award for his own account for investment
and not with any present intention of selling or otherwise
distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and
applicable state securities laws. Legends evidencing such
restrictions may be placed on the certificates evidencing the Stock.
12.2 Compliance with Securities Laws. Each Award shall be
subject to the requirement that, if at any time counsel to the Company
shall determine that the listing, registration or qualification of the
Shares subject to such Award upon any securities exchange or under any
state or federal law, or the consent or approval of any governmental
or regulatory body, is necessary as a condition of, or in connection
with, the issuance or purchase of Shares thereunder, such Award may
not be accepted or exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been
effected or obtained on conditions acceptable to the Incentive Plan
Committee. Nothing herein shall be deemed to require the Company to
apply for or to obtain such listing, registration or qualification.
12.3 Stock Restriction Agreement. The Incentive Plan
Committee may provide that shares of Stock issuable upon the exercise
of an Option shall, under certain conditions, be subject to
restrictions whereby the Company has a right of first refusal with
respect to such shares or a right or obligation to repurchase all or a
portion of such shares, which restrictions may survive a Participant's
term of employment with the Company. The acceleration of time or
times at which an Option becomes exercisable may be conditioned upon
the Participant's agreement to such restrictions.
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SECTION 13
OTHER EMPLOYEE BENEFITS
The amount of any compensation deemed to be received by a
Participant as a result of the exercise of an Option or the grant or
vesting of any other Award shall not constitute "earnings" with
respect to which any other employee benefits of such employee are
determined, including without limitation benefits under any pension,
profit sharing, life insurance or salary continuation plan.
SECTION 14
PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may at any time terminate, and from time-to-time
may amend or modify, the Plan provided, however, that no amendment or
modification may become effective without approval of the amendment or
modification by the stockholders if stockholder approval is required
to enable the Plan to satisfy any applicable statutory or regulatory
requirements, or if the Company, on the advice of counsel, determines
that stockholder approval is otherwise necessary or desirable.
No amendment, modification or termination of the Plan shall
in any manner adversely affect any Awards theretofore granted under
the Plan, without the consent of the Participant holding such Awards.
SECTION 15
WITHHOLDING
15.1 Withholding Requirement. The Company's obligations to
deliver Shares upon the exercise of an Option, or upon the vesting of
any other Award, shall be subject to the Participant's satisfaction of
all applicable federal, state and local income and other tax
withholding requirements.
15.2 Withholding With Stock. At the time the Incentive Plan
Committee grants an Award, it may, in its sole discretion, grant the
Participant an election to pay all such amounts of tax withholding, or
any part thereof, by electing to transfer to the Company, or to have
the Company withhold from Shares otherwise issuable to the
Participant, Shares having a value equal to the amount required to be
withheld or such lesser amount as may be elected by the Participant.
All elections shall be subject to the approval or disapproval of the
Incentive Plan Committee. The value of Shares to be withheld shall be
based on the Fair Market Value of the Stock on the date that the
amount of tax to be withheld is to be determined (the "Tax Date").
Any such elections by Participants to have Shares withheld for this
purpose will be subject to the following restrictions:
(a) All elections must be made prior to the Tax Date.
-17-
<PAGE>
(b) All elections shall be irrevocable.
(c) If the Participant is an officer or director of
the Company within the meaning of Section 16 of the 1934 Act
("Section 16"), the Participant must satisfy the requirements of such
Section 16 and any applicable rules thereunder with respect to the use
of Stock to satisfy such tax withholding obligation.
SECTION 16
BROKERAGE ARRANGEMENTS
The Incentive Plan Committee, in its discretion, may enter
into arrangements with one or more banks, brokers or other financial
institutions to facilitate the disposition of shares acquired upon
exercise of Stock Options, including, without limitation, arrangements
for the simultaneous exercise of Stock Options and sale of the Shares
acquired upon such exercise.
SECTION 17
NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the
submission of the Plan to stockholders of the Company for approval
shall be construed as creating any limitations on the power or
authority of the Board to adopt such other or additional incentive or
other compensation arrangements of whatever nature as the Board may
deem necessary or desirable or preclude or limit the continuation of
any other plan, practice or arrangement for the payment of
compensation or fringe benefits to employees generally, or to any
class or group of employees, which the Company or any Affiliated
Corporation now has lawfully put into effect, including, without
limitation, any retirement, pension, savings and stock purchase plan,
insurance, death and disability benefits and executive short-term
incentive plans.
SECTION 18
REQUIREMENTS OF LAW
18.1 Requirements of Law. The issuance of stock and the
payment of cash pursuant to the Plan shall be subject to all
applicable laws, rules and regulations.
18.2 Federal Securities Law Requirements. If a Participant
is an officer or director of the Company within the meaning of
Section 16 of the 1934 Act, Awards granted hereunder shall be subject
to all conditions required under Rule 16b-3, or any successor rule
promulgated under the 1934 Act, to qualify the Award for any exception
from the provisions of Section 16(b) of the 1934 Act available under
that Rule. Such conditions are hereby incorporated herein by
reference and shall be set forth in the agreement with the Participant
which describes the Award.
-18-
<PAGE>
18.3 Governing Law. The Plan and all agreements hereunder
shall be construed in accordance with and governed by the laws of the
State of Delaware.
SECTION 19
DURATION OF THE PLAN
The Plan shall terminate at such time as may be determined
by the Board of Directors, and no Award shall be granted after such
termination. If not sooner terminated under the preceding sentence,
the Plan shall fully cease and expire at midnight on March 9, 2002.
Awards outstanding at the time of the Plan termination may continue to
be exercised or earned in accordance with their terms.
Amended: June 6, 1996
BASIN EXPLORATION, INC.
By /s/ Michael S. Smith
------------------------------------
Michael S. Smith, President
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BASIN EXPLORATION, INC.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
I. PURPOSE
Basin Exploration Inc. Non-employee Director's Stock Option
Plan (the "Plan") provides for the grant of Stock Options to Non-
employee Directors of Basin Exploration, Inc. (the "Company") in order
to encourage and provide incentives for high level performance by its
Non-employee Directors.
II. NON-INCENTIVE STOCK OPTIONS
The Stock Options granted under the Plan shall be
nonstatutory stock options ("NSOs") which are intended to be options
that do not qualify as "incentive stock options" under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
III. ADMINISTRATION
3.1 Committee. The Plan shall be administered by the Board
---------
of Directors of the Company (the "Board") or by a committee of such
Board members or other persons as may be appointed by the Board. The
Committee or the Board, as the case may be, shall have full authority
to administer the Plan, including authority to interpret and construe
any provision of the Plan and any Stock Option granted thereunder, and
to adopt such rules and regulations for administering the Plan as it
may deem necessary in order to comply with the requirements of the
Code or in order to conform to any regulation or to any change in any
law or regulation applicable thereto. However, the Committee shall
have no authority, discretion or power to select the Directors who
will receive any Stock Option, determine the number of shares to be
issued hereunder or the time at which such Stock Options are to be
granted, establish the duration of the Stock Options or alter any
other terms or conditions specified in the Plan, except in the sense
of administering the Plan subject to the provisions of the Plan. The
Board of Directors may reserve to itself any of the authority granted
to the Committee as set forth herein, and it may perform and discharge
all of the functions and responsibilities of the Committee at any time
that a duly constituted Committee is not appointed and serving. All
references in this Plan to the "Committee" shall be deemed to refer to
the Board of Directors whenever the Board is discharging the powers
and responsibilities of the Committee.
3.2 Actions of Committee. All actions taken and all
--------------------
interpretations and determinations made by the Committee in good faith
(including determinations of Fair Market Value) shall be final and
binding upon all Participants, the Company
<PAGE>
and all other interested persons. No member of the Committee shall be
personally liable for any action, determination or interpretation made
in good faith with respect to the Plan, and all members of the
Committee shall, in addition to their rights as directors, be fully
protected by the Company with respect to any such action,
determination or interpretation.
IV. DEFINITIONS
4.1 "Stock Option." A Stock Option is the right granted
------------
under the Plan to a Non-employee Director to purchase, at such time or
times and at such price or prices ("Option Price") as are determined
pursuant to the Plan, the number of shares of Common Stock determined
pursuant to the Plan.
4.2 "Common Stock." A share of Common Stock means a share
------------
of authorized but unissued or reacquired Common Stock (par value $.01
per share) of the Company.
4.3 "Fair Market Value." If the Common Stock is not traded
-----------------
publicly, the Fair Market Value of a share of Common Stock on any date
shall be determined, in good faith, by the Board or the Committee
after such consultation with outside legal, accounting and other
experts as the Board or the Committee may deem advisable, and the
Board or the Committee shall maintain a written record of its method
of determining such value. If the Common Stock is traded publicly,
the Fair Market Value of a share of Common Stock on any date shall be
the average of the representative closing bid and asked prices, as
quoted by the National Association of Securities Dealers through
NASDAQ (its automated system for reporting quotes), for the date in
question or, if the Common Stock is listed on the NASDAQ National
Market System or is listed on a national stock exchange, the
officially quoted closing price on NASDAQ or such exchange, as the
case may be, on the date in question.
4.4 "Non-employee Director". A Non-employee Director is a
---------------------
Member of the Board of Directors of the Company who is not also an
employee of the Company or any of its subsidiaries.
4.5 "Participant". A Participant is a Non-employee
-----------
Director to whom a Stock Option is granted.
V. OPTION GRANTS
5.1 Number of Shares. Upon the initial election or
----------------
appointment of a Non-employee Director to the Company's Board of
Directors, the Non-employee Director shall be granted a Stock Option
to purchase 10,000 shares of Common Stock (subject to adjustment
pursuant to Section 6.2 hereof) effective as of the date such person
is elected or appointed to the Board of Directors, which shall vest
-2-
<PAGE>
in equal installments on the first, second and third anniversaries of
election or appointment to the Board; provided, however, that no such
Stock Options shall be granted hereunder until the Company's
registration statement with respect to the initial public offering of
its shares is declared effective by the Securities and Exchange
Commission. In addition, each Non-employee Director shall be granted
a Stock Option to purchase 2,500 shares of Common Stock (subject to
adjustment pursuant to Section 6.2 hereof) effective as of each
anniversary date of such Directors' election to the board, which
option shall vest one year from the date of grant.
5.2 Price. The purchase price per share of Common Stock
-----
for the shares to be purchased pursuant to the exercise of any Stock
Option shall be 100% of the Fair Market Value of a share of Common
Stock on the date on which the Non-employee Director is granted the
Stock Option.
5.3 Other Terms. Except for the limitations set forth in
-----------
Sections 5.1, 5.2 and 7.1, the terms and provisions of Stock Options
shall be as determined from time to time by the Committee, and each
Stock Option issued may contain terms and provisions different from
other Stock Options granted to the same or other Stock Option
recipients. Each Stock Option shall be evidenced by a written
agreement ("Option Agreement") containing such terms and provisions as
the Committee may determine, subject to the provisions of the Plan.
VI. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
6.1 Maximum Number. The maximum aggregate number of shares
--------------
of Common Stock that may be made subject to Stock Options shall be
100,000 authorized but unissued shares. If any shares of Common Stock
subject to Stock Options are not purchased or otherwise paid for
before such Stock Options expire, such shares may again be made
subject to Stock Options.
6.2 Capital Changes. In the event any changes are made to
---------------
the shares of Common Stock (whether by reason of merger,
consolidation, reorganization, recapitalization, stock dividend in
excess of ten percent (10%) at any single time, stock split,
combination of shares, exchange of shares, change in corporate
structure or otherwise), appropriate adjustments shall be made in:
(i) the number of shares of Common Stock theretofore made subject to
Stock Options, and in the purchase price of said shares; and (ii) the
aggregate number of shares which may be made subject to Stock Options.
Such adjustments may be made by the Board of Directors or the
Committee without receipt of consideration by the Company. If any of
the foregoing adjustments shall result in a fractional share, the
fraction shall be disregarded, and the Company shall have no
obligation to make any cash or other payment with respect to such a
fractional share.
-3-
<PAGE>
VII. EXERCISE OF STOCK OPTIONS
7.1 Time of Exercise. A Stock Option shall become
----------------
exercisable in accordance with Section 5.1, subject to Articles XI and
XII. Such times shall be set forth in the Option Agreement evidencing
such Stock Option. A Stock Option shall expire, to the extent not
exercised, five years after the date on which it was granted.
7.2 Stock Restriction Agreement. The Committee may provide
---------------------------
that shares of Common Stock issuable upon the exercise of a Stock
Option shall, under certain conditions, be subject to restrictions
whereby the Company has a right of first refusal with respect to such
shares or a right or obligation to repurchase all or a portion of such
shares, which restrictions may survive a Participant's term as a
director of the Company. The acceleration of time or times at which a
Stock Option becomes exercisable may be conditioned upon the
Participant's agreement to such restrictions.
7.3 Termination of Director Status Before Exercise. If a
----------------------------------------------
Participant's term as a director of the Company shall terminate for
any reason other than the Participant's death or disability, any Stock
Option then held by the Participant, to the extent then exercisable
under the applicable Option Agreement(s), shall remain exercisable
after the termination of his director status for a period of three
months (but in no event beyond five years from the date of grant of
the Stock Option). If the Participant's director status is terminated
because the Participant dies while, or within three months after,
serving as a director, or is disabled within the meaning of
Section 22(e)(3) of the Code, any Stock Option then held by the
Participant, to the extent then exercisable under the applicable
Option Agreement(s), shall remain exercisable after the termination of
his directorship for a period of twelve months (but in no event beyond
five years from the date of grant of the Stock Option). If the Stock
Option is not exercised during the applicable period, it shall be
deemed to have been forfeited and of no further force or effect.
7.4 Disposition of Forfeited Stock Options. Any shares of
--------------------------------------
Common Stock subject to Stock Options forfeited by a Participant shall
not thereafter be eligible for purchase by the Participant but may be
made subject to Stock Options granted to other Participants.
7.5 Withholding of Tax. To the extent required by
------------------
applicable law and regulation, each Participant must arrange with the
Company for the payment of any federal, state or local income or other
tax applicable to the Stock Option granted hereunder before the
Company shall be required to deliver to the Participant a certificate
for the shares purchased upon exercise of the Stock Option.
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<PAGE>
VIII. NO EFFECT UPON STOCKHOLDER RIGHTS
Nothing in this Plan shall interfere in any way with the
right of the stockholders of the Company to remove the Participant
from the Board pursuant to the Delaware General Corporation Law and
the Company's Certificate of Incorporation and Bylaws.
IX. NO RIGHTS AS A STOCKHOLDER
A Participant shall have no rights as a stockholder with
respect to any shares of Common Stock subject to a Stock Option.
Except as provided in Section 6.2, no adjustment shall be made in the
number of shares of Common Stock issued to a Participant, or in any
other rights of the Participant upon exercise of a Stock Option by
reason of any dividend, distribution or other right granted to
stockholders for which the record date is prior to the date of
exercise of the Participant's Stock Option.
X. ASSIGNABILITY
No Stock Option granted under this Plan, nor any other
rights acquired by a Participant under this Plan, shall be assignable
or transferable by a Participant, other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code, Title I of the Employee Retirement
Income Security Act ("ERISA"), or the rules thereunder. In the event
of the Participant's death while, or within three months after,
serving as a director, the Stock Option may be exercised to the extent
then exercisable under the applicable Option Agreement by the personal
representative of the Participant's estate or, if no personal
representative has been appointed, by the successor or successors in
interest determined under the Participant's will or under the
applicable laws of descent and distribution.
XI. REORGANIZATION OR LIQUIDATION OF THE COMPANY
In the event that the Company is merged or consolidated with
another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification or change of outstanding Shares), or if all or
substantially all of the assets or more than 50% of the outstanding
voting stock of the Company is acquired by any other corporation,
business entity or person (other than a sale or conveyance in which
the company continues as a holding company of an entity or entities
that conduct the business or businesses formerly conducted by the
Company), or in case of a reorganization (other than a reorganization
under the United States Bankruptcy Code) or liquidation of the
Company, and if the provisions of Article XII do not apply, the
members of the Board of Directors who are employees of the Company
shall have the power and discretion to prescribe the terms and
conditions for the exercise of, or modification of, the Stock Options
granted hereunder. By way of
-5-
<PAGE>
illustration, and not by way of limitation, such board members may
provide for the complete or partial acceleration of the dates of
exercise of the Stock Options, or may provide that such Stock Options
will be exchanged or converted into options to acquire securities of
the surviving or acquiring corporation, or may provide for a payment
or distribution in respect of outstanding Stock Options (or the
portion thereof that is currently exercisable) in cancellation
thereof. Such board members may provide that Stock Options or other
rights granted hereunder must be exercised in connection with the
closing of such transaction, and that if not so exercised such Options
will expire. Any such determinations by such board members may be
made generally with respect to all Participants, or may be made on a
case-by-case basis with respect to particular Participants. The
provisions of this Article XI shall not apply to any transaction
undertaken for the purpose of reincorporating the Company under the
laws of another jurisdiction, if such transaction does not materially
affect the beneficial ownership of the Company's capital stock.
XII. CHANGE IN CONTROL
12.1 Options. In the event of a change in control of the
-------
Company as defined in Section 12.2, then members of the Board who are
employees of the Company may, in their sole discretion, without
obtaining stockholder approval, to the extent permitted in
Article XIII, take any or all of the following actions:
(a) accelerate the exercise dates of any outstanding Stock Options or
make all such Options fully vested and exercisable; (b) grant a cash
bonus award to any Participant in an amount necessary to pay the
exercise price of all or any portion of the Stock Options then held by
such Participant; (c) pay cash to any or all Participants in exchange
for the cancellation of their outstanding Stock Options in an amount
equal to the difference between the exercise price of such Stock
Options and the greater of the tender offer price for the underlying
Common Stock or the Fair Market Value of the Common Stock on the date
of the cancellation of the Stock Options; and (d) make any other
adjustments or amendments to the outstanding Stock Options.
12.2 Definition. For purposes of this Plan, a "change in
----------
control" shall be deemed to have occurred if (a) any "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934
Act), other than a trustee or other fiduciary holding securities under
an employee benefit plan of the Company or Mr. Michael Smith is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
1934 Act), directly or indirectly, of more than 33-1/3 of the then
outstanding voting stock of the Company; or (b) at any time during any
period of three consecutive years (not including any period prior to
the Effective Date), individuals who at the beginning of such period
constitute the Board (and any new director whose election by the Board
or whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still
in office who either were directors at the beginning of such period or
whose election or nomination for election was previously so approved)
-6-
<PAGE>
cease for any reason to constitute a majority thereof; or (c) the
stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 80% of the combined
voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or
the stockholders approve a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
XIII. AMENDMENT
The Board may from time to time alter, amend, suspend or
discontinue the Plan, including, where applicable, any modifications
or amendments as it shall deem advisable in order to conform to any
regulation or to any change in any law or regulation applicable
thereto; provided, however, that no such action shall adversely affect
the rights and obligations with respect to Stock Options at any time
outstanding under the Plan; and provided further that no such action
shall, without the approval of the stockholders of the Company,
(i) materially increase the maximum number of shares of Common Stock
that may be made subject to Stock Options (unless necessary to effect
the adjustments required by Section 6.2), (ii) materially increase the
benefits accruing to Participants under the Plan, or (iii) materially
modify the requirements as to eligibility for participation in the
Plan. Subject to the foregoing, the provisions of Article V of the
Plan which set forth the number of shares of Common Stock for which
Stock Options shall be granted, the timing of Stock Option grants and
the Stock Option exercise price shall not be amended more than once
every six (6) months other than to comport with changes in the Code,
ERISA, or the rules thereunder.
XIV. REGISTRATION OF OPTIONED SHARES
The Stock Options shall not be exercisable unless the
purchase of such optioned shares is pursuant to an applicable
effective registration statement under the Securities Act of 1933, as
amended (the "Act"), or unless, in the opinion of counsel to the
Company, the proposed purchase of such optioned shares would be exempt
from the registration requirements of the Act and from the
registration or qualification requirements of applicable state
securities laws.
XV. BROKERAGE ARRANGEMENTS
The Committee, in its discretion, may enter into
arrangements with one or more banks, brokers or other financial
institutions to facilitate the disposition of shares acquired upon
exercise of Stock Options including, without limitation, arrangements
for the simultaneous exercise of Stock Options and sale of the shares
acquired upon such exercise.
-7-
<PAGE>
XVI. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the
submission of the Plan to stockholders of the Company for approval
shall be construed as creating any limitations on the power or
authority of the Board to adopt such other or additional compensation
arrangements of whatever nature as the Board may deem necessary or
desirable or preclude or limit the continuation of any other plan,
practice or arrangement for the payment of compensation or fringe
benefits to Non-employee Directors, which the Company now has lawfully
put into effect.
XVII. EFFECTIVE DATE
This Plan was adopted by the Board of Directors and became
effective on March 9, 1992 and was approved by the Company's
stockholder on March 16, 1992.
-8-
BASIN EXPLORATION, INC.
PERFORMANCE SHARE PLAN
SECTION 1: GENERAL PROVISIONS
1.1 Purposes
The purpose of the Performance Share Plan (the "Plan") of Basin
Exploration, Inc. (the "Company") is to promote the interests of the
Company and its stockholders by (i) attracting and retaining
executives and other key employees of outstanding ability; (ii)
strengthening the Company's capability to develop, maintain and direct
a competent management team; (iii) motivating executives and other key
employees, by means of performance-related incentives, to achieve
longer-range performance goals; (iv) providing incentive compensation
opportunities which are competitive with those of other major
corporations; and (v) enabling such employees to participate in the
long-term growth and financial success of the Company. The Plan has
been approved by the Incentive Plan Committee pursuant to Section 5 of
the Equity Incentive Plan.
1.2 Definitions
"Affiliate" -- means any corporation or other entity which is not
a Subsidiary but as to which the Company possesses a direct or
indirect ownership interest and has representation on the board of
directors or any similar governing body.
"Award" -- means a grant or award under Section 2 of the Plan.
"Board of Directors" -- means the board of directors of the
Company.
"Change in Control" -- shall have the meaning given it in Section
10.3 of the Equity Incentive Plan.
"Code" -- means the Internal Revenue Code of 1986, as amended
from time to time.
"Common Stock" -- means the capital stock, $.01 par value, of the
Company.
"Corporation" -- means the Company, its divisions, Subsidiaries
and Affiliates.
"Disability Date" -- means the date on which a Participant is
deemed totally and permanently disabled under the Equity Incentive
Plan or otherwise by the Incentive Plan Committee.
"Disinterested Person" -- has the meaning set forth in Rule
16b-3(c)(2)(ii) promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, or any successor definition
adopted by the Commission.
"Employee" -- means any key employee of the Corporation.
A-1
<PAGE>
"Equity Incentive Plan" -- means the Equity Incentive Plan of the
Company as it may be amended from time to time.
"Fair Market Value" -- means, as the Incentive Plan Committee
shall determine either (i) the average of the high and low prices of
the Common Stock, or (ii) the closing price of the Common Stock, on
the date on which it is to be valued hereunder as reported for Nasdaq
National Market Composite Transactions.
"Incentive Plan Committee" -- means the Compensation and
Incentive Committee of the Board of Directors.
"Participant" -- means an Employee who is selected by the
Incentive Plan Committee to receive an Award under the Plan.
"Performance Cycle" or "Cycle" -- means the period of years
selected by the Committee during which the performance of the
Corporation is measured for the purpose of determining the extent to
which an award of Performance Shares or Performance Units has been
earned.
"Performance Goals" -- means the objectives for the Corporation
established by the Incentive Plan Committee for a Performance Cycle,
for the purpose of determining the extent to which Performance Shares
or Performance Units which have been contingently awarded for such
Cycle are earned.
"Performance Share" -- means a share of Common Stock contingently
awarded under Section 2 of the Plan.
"Performance Unit" -- means a fixed or variable dollar
denominated unit contingently awarded under Section 2 of the Plan.
"Retirement" -- means retirement on a normal, early or postponed
retirement date within the meaning of the Equity Incentive Plan or as
otherwise determined by the Incentive Plan Committee.
"Subsidiary" -- means any corporation in which the Company
possesses directly or indirectly fifty percent (50%) or more of the
total combined voting power of all classes of its stock having voting
power.
1.3 Administration
The Plan shall be administered by the Incentive Plan Committee,
which shall at all times consist of three or more members, each of
whom is a Disinterested Person. The Incentive Plan Committee shall
have sole and complete authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the operation
of the Plan as it shall from time to time deem advisable, and to
interpret the terms and provisions of the Plan. The Incentive Plan
Committee may delegate to one or more executive officers of the
Company the power to make Awards to Participants who are not subject
to sections 16(a) or 16(b) of the Securities Exchange Act of 1934,
provided the
A-2
<PAGE>
Incentive Plan Committee shall fix the maximum amount of such Awards
for the group and a maximum for any one Participant. The Incentive
Plan Committee's decisions are binding upon all parties.
1.4 Eligibility
All Employees who have demonstrated significant management
potential or who have contributed in a substantial measure to the
successful performance of the Corporation, as determined by the
Incentive Plan Committee, are eligible to be Participants in the Plan.
1.5 Changes in Common Stock
In the event of any change in the outstanding shares of Common
Stock by reason of any stock dividend or split, recapitalization,
merger, consolidation, spin-off, combination or exchange of shares or
other corporate change, or any distributions to common shareholders
other than normal cash dividends, the Incentive Plan Committee shall
make such substitution or adjustment, if any, as it deems to be
equitable, as to the number of kind of shares of Common Stock or other
securities issued or reserved for issuance pursuant to the Plan,
including the number of outstanding stock options and stock
appreciation rights, and the option price thereof, and the number of
outstanding Awards of other types.
1.6 Change in Control
In order to maintain the Participants' rights in the event of
Change in Control of the Company, the Incentive Plan Committee, in its
sole discretion, may, either at the time an Award is made hereunder or
at any time prior to or simultaneously with a Change in Control (i)
provide for the acceleration of any time periods relating to the
exercise or realization of such Awards so that such Awards may be
exercised or realized in full on or before a date fixed by the
Incentive Plan Committee; (ii) provide for the purchase of such
Awards, upon the Participant's request, for an amount of cash equal to
the amount which could have been attained upon the exercise or
realization of such rights had such Awards been currently exercisable
or payable; (iii) make such adjustment to the Awards then outstanding
as the Incentive Plan Committee deems appropriate to reflect such
transaction or change; or (iv) cause the Awards then outstanding to be
assumed, or new rights substituted therefor, by the surviving
corporation in such change. The Incentive Plan Committee may, in its
discretion, include such further provisions and limitations in any
agreement entered into with respect to an Award as it may deem
equitable and in the best interests of the Corporation.
1.7 Withholding
The Corporation shall have the right to deduct from all amounts
paid in cash (whether under this Plan or otherwise) any taxes required
by law to be withheld with respect to an Award. In the case of
payments of Awards in the form of Common Stock, at the Incentive Plan
Committee's discretion the Participant may be required to pay to the
Corporation the amount of any taxes required to be withheld with
respect to such Common Stock, or, in lieu thereof, the Corporation
shall have the right to retain (or the Participant may be offered the
opportunity to elect to tender) the number of shares of Common Stock
whose Fair Market Value equals the amount required to be withheld.
A-3
<PAGE>
1.8 Nontransferability
No Award shall be assignable or transferable except by will or
the laws of descent and distribution, and no right or interest of any
Participant shall be subject to any lien, obligation or liability of
the Participant.
1.9 No Right to Employment
No person shall have any claim or right to be granted an Award,
and the grant of an Award shall not be construed as giving a
Participant the right to be retained in the employ of the Corporation.
Further, the Corporation expressly reserves the right at any time to
dismiss a Participant free from any liability, or any claim under the
Plan, except as provided herein or in any agreement entered into with
respect to an Award.
1.10 Construction of the Plan
The validity, construction, interpretation, administration and
effect of the Plan and of its rules and regulations, and rights
relating to the Plan, shall be determined solely in accordance with
the laws of the state of Delaware.
1.11 Amendment
The Incentive Plan Committee may amend, suspend or terminate the
Plan or any portion thereof or any Award granted thereunder at any
time to the extent provided in the Equity Incentive Plan for
amendments of that Plan.
1.12 Dividends, Equivalents and Voting Rights; Cash Payments
Awards may provide the Participant with (i) dividends or dividend
equivalents and voting rights prior to either vesting or earnout; and
(ii), to the extent determined by the Incentive Plan Committee, cash
payments in lieu of or in addition to an Award.
1.13 Effective Date
The Plan shall be effective on February 4, 1997, and shall remain
in effect until terminated by the Incentive Plan Committee.
Termination shall not affect Awards previously granted.
SECTION 2: PERFORMANCE SHARES AND PERFORMANCE UNITS
2.1 Authority of Committee
Subject to the provisions of the Plan, the Incentive Plan
Committee shall have sole and complete authority to determine the
Employees who shall receive Performance Shares and/or
A-4
<PAGE>
Performance Units and the number of such shares and units for each
Performance Cycle, and to determine the duration of each Performance
Cycle and the value or valuation methodology of each Performance Unit.
There may be more than one Performance Cycle in existence at any one
time, and the duration of Performance Cycles may differ from each
other.
2.2 Performance Goals
The Incentive Plan Committee shall establish Performance Goals or
measures for each Performance Cycle on the basis of such criteria and
to accomplish such objectives as the Incentive Plan Committee may from
time to time select. During any Performance Cycle, the Incentive Plan
Committee may adjust the Performance Goals or measures for such
Performance Cycle as it deems equitable in recognition of unusual or
non-recurring events affecting the Corporation or changes in
applicable tax laws or accounting principles.
2.3 Terms and Conditions
The Incentive Plan Committee shall determine the number of
Performance Shares and Performance units which have been earned on the
basis of the Corporation's performance in relation to the established
Performance Goals. Performance Shares and Performance Units may not
be sold, assigned, transferred, pledged or otherwise encumbered,
except as herein provided, during the Performance Cycle. Certificates
issued in respect of Performance Shares shall be registered in the
name of the Participant and deposited by the Participant, together
with a stock power endorsed in blank, with the Company. At the
expiration of the Performance Period, the Company shall deliver
certificates representing earned Performance Shares to the Participant
or his or her legal representative. Payment for Performance Units
shall be in (i) cash; or (ii) shares of Common Stock, in such
proportions as the Incentive Plan Committee shall determine.
Participants may be offered the opportunity to defer receipt of
payment for earned Performance Shares and Performance Units under
terms established by the Incentive Plan Committee.
2.4 Termination of Employment
A Participant must be an Employee at the end of a Performance
Cycle in order to be entitled to payment of Performance Shares and/or
Performance Units in respect of such Cycle; provided, however, that in
the event a Participant ceases to be an Employee with the consent of
the Incentive Plan Committee before the end of such Performance Cycle,
or upon the occurrence of the Participant's death, Retirement or
Disability Date prior to the end of such Performance Cycle, the
Incentive Plan Committee, in its discretion and after taking into
consideration the performance of such Participant and the performance
of the Corporation during the Performance Cycle, may authorize payment
to such Participant (or such Participant's legal representative) with
respect to some or all of the Performance Shares and/or Performance
Units deemed earned for that Performance Cycle.
SECTION 3: PERFORMANCE SHARE AGREEMENT
3.1 Attached to this Plan is a form of Performance Share
Agreement to be executed by
A-5
<PAGE>
each Participant under the grant of an Award when the Plan to such
Participant. The Incentive Plan Committee may modify the terms of the
Performance Share Agreement in such manner as it deems appropriate to
implement the Plan and the Equity Incentive Plan.
A-6
<PAGE>
THE BASIN EXPLORATION, INC.
1997 LONG-TERM STOCK INCENTIVE PLAN
PERFORMANCE SHARE AGREEMENT
NUMBER OF PERFORMANCE PERFORMANCE
NAME SHARES CYCLE
- -------------------- ---------------------- --------------------
FIELD 1 FIELD 2 January 1, 1997
to December 31, 1999
This Agreement confirms the award of FIELD 2 Performance Shares to you
by Basin Exploration, Inc. (the "Company") under the Company's 1997
Long-Term Stock Incentive Plan (the "Plan"), a copy of which has been
delivered to you and is made a part hereof, upon the following terms
and conditions and the terms and conditions of the Plan. The terms
used in this Agreement shall have the same meaning as in the Plan,
unless the context requires otherwise.
1. Performance Cycle - The Performance Cycle for earning Performance
-----------------
Shares shall be three (3) calendar years commencing at the
beginning of the calendar year in which the Performance Shares
are granted, and as specifically set forth above.
2. Performance Goals - The Performance Goals to be achieved within
-----------------
the Performance Cycle are set forth on Exhibit A, attached hereto
and made a part hereof. Between 0% and 150% of the Performance
Shares granted under this Agreement shall be earned according to
the schedule set forth on Exhibit A.
3. Certificates - A certificate(s) for the Performance Shares
------------
shall be registered in your name but shall be retained by the
Company during the Performance Cycle. You shall execute a stock
power, in blank, with respect to such certificate(s) and deliver
the same to the Company.
4. Rights as Shareholders - During the Performance Cycle you
----------------------
shall have all the rights of a shareholder of the Company with
respect to the Performance Shares, including the right to receive
dividends and the right to vote such shares.
Notwithstanding the foregoing, any shares of Common Stock
receivable by you as a result of a stock split, stock dividend or
distribution with respect to the Performance Shares will be
subject to the restrictions set forth in this Agreement as if the
shares of Common Stock so received as dividends or distributed
were part of the original grant of Performance Shares.
5. Non-transferable - You may not sell, transfer, assign, pledge,
----------------
or otherwise encumber or dispose of the Performance Shares during
the Performance Cycle.
<PAGE>
6. Payment Respecting Performance Shares - A final determination as
-------------------------------------
to the number of Performance Shares earned by you for the
Performance Cycle shall be made within three months following the
end of the Performance Cycle, or as soon thereafter as may be
practicable. The certificate(s) evidencing the earned
Performance Shares shall be delivered to you without bearing any
restrictive legend. Unearned Performance Shares shall be
forfeited to the Company. In the case of your death, payment of
any shares which are not forfeited will be made to the
beneficiary designated in writing by you pursuant to a form of
designation provided by the Company, or, if none, to your estate.
7. Termination of Employment - In the event of your retirement,
-------------------------
or upon the occurrence of your death or disability, or
termination of employment with the consent of the Compensation
and Incentive Committee, you will forfeit as of the date of such
termination of employment a number of Performance Shares
determined by multiplying the number of your Performance Shares
for the applicable Performance Cycle by a fraction, the numerator
of which is the number of months remaining in the Performance
Cycle following such termination of employment and the
denominator of which is the total number of months in the
Performance Cycle. Following the end of the Performance Cycle,
the number of Performance Shares earned by you will be determined
in accordance with Paragraph 6 above based on the number of
Performance Shares not forfeited pursuant to the preceding
sentence. In the event of your termination of employment for any
other reason, you shall forfeit all rights to any Performance
Shares as of the date of such termination of employment.
8. Share Earnout/Change of Control - In the event of a Change
-------------------------------
of Control (as defined in the Company's Equity Incentive Plan),
the Performance Cycle shall end and the Performance Shares earned
for such Performance Cycle shall be the number that would have
been earned if the Performance Cycle had ended as of the end of
the period covered by the most recently issued year-end financial
statement just prior to the date of the Change of Control plus
such additional number of Performance shares as the Compensation
and Incentive Committee shall determine in respect of any period
of the Performance Cycle not covered by such year-end financial
statements.
9. Withholding - The Company, if required, will withhold taxes
-----------
on any income as a result of the earning of Performance Shares or
will take a cash payment from you for the withholding. The
Company will permit you to elect whether to pay cash to cover the
withholding or have shares withheld to cover the withholding. In
the case of an election of share withholding for officers and
others subject to the SEC reporting requirements of Section 16 of
the Securities Exchange Act of 1934, (i) the election must be
irrevocable; (ii) the election must be made at least six months
prior to the tax date or within a window period described in Rule
16b-3; (iii) the election may not be made within six months from
date of the grant; and (iv) such election is subject to
disapproval by the Compensation and Incentive Committee.
10. Miscellaneous - This Agreement (a) shall be binding upon and
-------------
inure to the benefit of any successor of the Company; (b) shall
be governed by the laws of the State of Colorado, and
2
<PAGE>
any applicable laws of the United States; (c) may not be amended
except in writing; and (d) shall in no way affect your
participation or benefits under any other plan or benefit program
maintained or provided by the Company. In the event of a
conflict between this Agreement and the Plan, the Plan shall
govern.
11. Compliance with Applicable Law - Notwithstanding anything herein
------------------------------
to the contrary, the Company shall not be obligated to cause to
be issued or delivered any certificates evidencing shares to be
delivered pursuant to this grant, unless and until the Company is
advised by its counsel that issuance and delivery of such
certificates is in compliance with all applicable laws and
regulations of governmental authority. The Company shall in no
event be obligated to register any securities pursuant to the
Securities Act of 1933 (as now in effect or as hereafter amended)
or to take any other action in order to cause the issuance and
delivery of such certificates to comply with any such law or
regulations.
BASIN EXPLORATION, INC.
By:________________________________
Attest:____________________________
Accepted:
____________________________
FIELD 1
____________________________
Date signed
Witness:
____________________________
3
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is entered into February 23, 1996, but
effective March 25, 1996, between Basin Exploration, Inc., a Delaware
Corporation (the "Corporation"), and Thomas J. Corley (the "Officer").
RECITAL
-------
The Officer has accepted the Corporation's appointment as the
Corporation's Vice President - Engineering & Production, and the
Corporation and the Officer desire to set forth herein the terms and
conditions of his employment.
AGREEMENT
---------
The parties hereto agree as follows:
1. Agreement to Serve.
------------------
a. Title. The Corporation shall employ the Officer and
-----
the Officer shall serve in the employ of the Corporation as
its Vice President - Engineering & Production and other
executive offices as shall be designated by the Board of
Directors during the term of the Officer's employment
hereunder.
b. Duties. The Officer shall assume and discharge the
------
responsibilities of the Vice President - Engineering &
Production, as well as such other responsibilities as may be
assigned to him by the Board of Directors (the "Board") of
the Corporation and as are appropriate to the offices he
holds. Such responsibilities shall include, without
limitation, responsibility for overseeing the engineering,
operations and acquisition functions of the Corporation.
The Officer shall perform his responsibilities to the best
of his abilities and shall devote his entire business time
and attention to the good faith performance of his
responsibilities. The Officer shall report to the
Corporation's Chief Executive Officer unless otherwise
directed by the Chief Executive Officer. The Officer's
principal place of business with respect to his services to
the Corporation shall be at its offices located in Denver,
Colorado.
2. Terms of Employment.
-------------------
a. Basic Term. The term of the Officer's employment under
----------
this Agreement (the "Term") shall commence on March 25, 1996
and end on March 24, 1999. After the Term, if the Officer
continues as the Vice President - Engineering & Production
of the Corporation, the Corporation will enter into a
separate agreement to provide protection against termination
in the
<PAGE>
event of a Change of Control, with compensation no less
favorable to the Officer than the compensation provided for
in Sections 2.g., 4.a.(1), 4.a.(3), 4.a.(4) and 4.a.(5) of
this Agreement or the compensation provided for in the
change of control agreements accorded other vice presidents
of the Corporation. The Officer has the right to elect
which arrangement shall apply.
b. Termination for Cause. The Corporation shall have the
---------------------
right to terminate the Officer for cause and said
termination shall be effected by written notification to
Officer. Grounds for termination for cause shall include
only, (i) the Officer's material breach of any terms of this
Agreement, if such material breach has not been
substantially cured within thirty (30) days following
written notice to the Officer from the Corporation of such
breach setting forth with specificity the nature of the
breach or, if cure cannot reasonably be effected within such
30-day period, if the Officer does not commence such cure
within such 30-day period and thereafter pursue such cure
continuously and with due diligence until cure has been
effected; (ii) the Officer's willful dishonesty towards,
fraud upon, felony crime against, deliberate material injury
or material bad faith action with respect to, or deliberate
or attempted injury to the Corporation; or (iii) the
Officer's conviction for any felony crime (whether in
connection with the Corporation's affairs or otherwise).
c. Termination without Cause. The Corporation shall have
-------------------------
the right, upon 30 days written notification to the Officer,
to terminate the Officer's employment without cause. The
Officer shall have the right, upon 30 days written
notification to the Corporation, to terminate the Officer's
employment for Good Reason (as defined in Section 2.g.(a)).
Upon any termination by the Corporation without cause or
termination by the Officer for Good Reason in the absence of
a Change in Control, (i) the Officer shall be paid all
accrued salary, vested deferred compensation (other than
pension plan or profit-sharing plan benefits, which will be
paid in accordance with the applicable plan), any benefits
then due under any plans of the Corporation in which the
Officer is a participant, accrued vacation pay and any
appropriate business expenses incurred by the Officer in
connection with his duties hereunder, all to the effective
date of termination ("Accrued Compensation"), and all
compensation provided for in Section 4.a.(2) and (ii) the
Corporation shall accelerate the exercise dates of any
outstanding options of the Officer or make all of the
Officer's options fully vested and exercisable.
-2-
<PAGE>
d. Disability. If, during the Term of this Agreement, the
----------
Officer, in the reasonable judgment of the Chief Executive
Officer of the Corporation after consultation with an
independent physician selected by the Officer and the
Corporation, has failed to perform his duties under this
Agreement on account of illness or physical or mental
disability, which condition renders the Officer incapable of
performing the duties of his office, and such condition
continues for a period of more than six (6) consecutive
months or for a total of six months during any 12-month
period, the Corporation shall have the right to terminate
the Officer's employment hereunder by written notification
to the Officer and payment to the Officer of all Accrued
Compensation to the date of termination, but no other
compensation or reimbursement of any kind, without prejudice
to his claims for payments from any benefit plans.
e. Death. In the event of the Officer's death during the
-----
Term of this Agreement, the Officer's employment shall be
deemed to have terminated as of the last day of the month
during which his death occurs, and the Corporation shall pay
to his estate all Accrued Compensation to the date of
termination, but no other compensation or reimbursement of
any kind, unless provided by a welfare benefit plan for
which the Officer is eligible as an employee of the
Corporation or as otherwise provided by law (i.e. workers
compensation law).
f. Voluntary Termination. In the event Sections 2.b.,
---------------------
2.c., 2.g. and 2.h. are not applicable, the Officer may,
upon 30 days written notification to the Corporation,
voluntarily terminate his employment hereunder. Upon the
date of termination of his employment, the Corporation shall
immediately pay all Accrued Compensation to the date of
termination, but no other compensation or reimbursement of
any kind, including, without limitation, the compensation
contemplated by Article 4.
g. Termination upon a Change in Control. In the event of
------------------------------------
a Termination Upon a Change in Control, the Officer shall
immediately be paid all Accrued Compensation and the
severance compensation provided for in Section 4.a.(3).
"Termination Upon a Change in Control" shall mean a
termination by the Corporation without Cause or a
termination by the Officer for Good Reason (as defined
below) of the Officer's employment with the Corporation, in
each case following a "Change in Control" (as defined
below).
(a) For purposes of this Agreement "Good Reason" shall
include, but not be limited to, any of the following (without the
Officer's express written consent):
-3-
<PAGE>
i. the assignment to the Officer by the Corporation
of any duties inconsistent with, or a substantial
alteration in the nature or status of, the Officer's
responsibilities as contemplated by Section 1.b. of
this Agreement;
ii. a reduction by the Corporation in the Officer's
compensation, benefits or perquisites as in effect
during the Term of this Agreement;
iii. a relocation of the Corporation's principal
offices to a location outside Denver, Colorado, or the
Officer's relocation to any place other than the
offices of the Corporation located in Denver, Colorado,
except for reasonably required travel by the Officer on
the Corporation's business to an extent substantially
consistent with the Officer's business travel
obligations immediately preceding the Change of
Control;
iv. any material breach by the Corporation of any
provision of this Agreement, if such material breach
has not been cured within thirty (30) days following
written notice by the Officer to the Corporation of
such breach setting forth with specificity the nature
of the breach; or
v. any failure by the Corporation to obtain the
assumption and performance of this Agreement by any
successor (by merger, consolidation or otherwise) or
assign of the Corporation.
(b) For purposes of this Agreement, "Change in
Control" shall mean the following:
(i) Any "person" or "group" (within the meaning
of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "1934 Act")), other than a trustee or other
fiduciary holding securities under an employee benefit plan of
the Corporation or Mr. Michael Smith (or his affiliates or
associates) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the 1934 Act), directly or indirectly, of more
than thirty-three and one-third percent (33-1/3%) of the then
outstanding voting stock of the Corporation; or
(ii) Individuals who, as of the date hereof,
constitute the Board (and any new director whose election
-4-
<PAGE>
by the Board or whose nomination for election by the
Corporation's stockholders is approved by a vote of at least
two-thirds of the directors then still in office who either were
directors as of the date hereof or whose election or nomination
for election is subsequently so approved) cease for any reason to
constitute a majority thereof; or
(iii) The stockholders of the Corporation
approve a merger or consolidation of the Corporation with any
other corporation, other than a merger or consolidation which
would result in the voting securities of the Corporation
outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least 51% of the
combined voting power of the voting securities of the Corporation
or such surviving entity outstanding immediately after such
merger or consolidation, or the stockholders approve a plan of
complete liquidation of the Corporation or an agreement for the
sale or disposition by the Corporation of all or substantially
all of the Corporation's assets; provided, however, that if the
merger, plan of liquidation or sale of substantially all assets
is not consummated following such stockholder approval and the
transaction is abandoned, then the Change of Control shall be
deemed not to have occurred.
(c) Notwithstanding anything else in this Agreement,
solely in the event of a Termination Upon a Change in Control pursuant
to Section 2.g., the aggregate of the amount of severance compensation
paid to the Officer under this Agreement or otherwise, but exclusive
of any payments to the Officer by virtue of the Officer's exercise of
any right or payment of any kind under the Equity Incentive Plan upon
a Change in Control, shall not include any amount that the Corporation
is prohibited from deducting for federal income tax purposes by virtue
of Section 280G of the Internal Revenue Code or any successor
provision.
h. Termination on Termination of Employment by Michael S.
------------------------------------------------------
Smith as Chief Executive Officer. In the event of Michael
--------------------------------
S. Smith's voluntary termination of his employment as Chief
Executive Officer or the termination of his employment as
Chief Executive Officer in the event of a Change of Control,
the Officer shall have the right to terminate his employment
for a period of 120 days from the date of termination of Mr.
Smith's employment as Chief Executive Officer, upon 30 days
written notification to the Corporation.
-5-
<PAGE>
3. Compensation.
------------
a. Base Salary. The Corporation agrees to pay the
-----------
Officer for his services hereunder a salary at the rate of
$11,666.66 per month during the first 12 months of the Term;
$12,083.33 per month during the second 12 months of the
Term: and $12,500.00 per month during the balance of the
Term ("Base Salary") payable in equal semimonthly
installments until March 24, 1999.
b. Benefits. The Officer shall be entitled to participate
--------
in any of the Corporation's benefit and deferred
compensation plans as are from time to time available to the
officers of the Corporation, including the Corporation's
401(k) plan, medical and dental plans, and life and
disability insurance plans (provided, however, that the
Officer's benefits may be modified or the Officer may be
denied participation in any such plan because of a condition
or restriction imposed by law or regulation or third-party
insurer or other provider relating to participation of
officers).
c. Bonus. The Officer shall be entitled to participate in
-----
the Corporation's bonus program applicable to other officers
and employees of the Corporation. The parties intend and
anticipate that the Corporation will have a bonus program
based on the success of the Corporation in meeting its goals
for each year; however, nothing in this Section 3.c. shall
be construed as obligating the Corporation either to provide
a bonus program for any year or to award a bonus to the
Officer.
d. Stock Options. The Officer shall be granted an option
-------------
under the Corporation's Equity Incentive Plan to purchase
60,000 shares of the Corporation's common stock, at a
purchase price equal to the fair market value of the common
stock on February 18, 1996 ($3.875), to vest in three equal
installments over the three year period commencing March 1,
1996, to be exercisable for the Term of this Agreement (to
the extent vested at termination) and to have a term of ten
years. The exercise price may be paid by delivery to the
Corporation of a properly executed notice of exercise
together with irrevocable instructions to a broker to
deliver to the Corporation the amount of the proceeds of the
sale of all or a portion of the shares of stock or of a loan
from the broker to the Officer necessary to pay the exercise
price. The Officer shall be eligible to receive additional
grants of options to purchase common stock under the Equity
Incentive Plan at the discretion of the Compensation and
Incentive Committee of the Board of Directors.
-6-
<PAGE>
e. Other Perquisites. The Officer shall be entitled to
-----------------
expense reimbursements, vacation and other benefits in
accordance with the practices of the Corporation.
4. Compensation Upon Termination.
-----------------------------
a. Calculation and Payment of Compensation.
---------------------------------------
(1) In the event the Officer's employment is
terminated under Sections 2.c., 2.g. or 2.h., the
parties acknowledge that the Officer will sustain
actual damages, the amount of which is indefinite,
uncertain and difficult of exact ascertainment
because of the uncertainties of successfully
relocating and seeking a comparable position. In
order to avoid dispute as to the amount of such
damages and the mutual expense and inconvenience
such dispute would entail, the Corporation and the
Officer have agreed hereby that the Corporation
shall pay to the Officer compensation as provided
in Sections 4.a.(2) or 4.a.(3), as applicable. It
is hereby agreed that in the event of such
termination by the Corporation, the Officer shall
receive such amounts as herein provided, not as a
penalty, but as the Officer's agreed compensation
and sole damages for the termination of this
Agreement, in lieu of the Officer's proof of his
actual damages on that account. All such
compensation shall be without prejudice to the
Officer's right to receive all Accrued
Compensation (as defined in Section 2.c.) earned
and unpaid up to the time of termination.
(2) In the event the Corporation or the Officer
terminates the Officer's employment at any time
prior to the end of the Term pursuant to Section
2.c. or 2.h., then the Corporation shall pay
compensation in an amount equal to the Officer's
Base Salary (at the rate payable at the time of
such termination) for the balance of the Term on
the dates specified in Section 3.a., plus a bonus
for each year (or pro rata part thereof) remaining
in the Term equal to the average annualized bonus
received by the Officer prior to termination (or
pro rata portion thereof).
(3) In the event the Officer's employment is
terminated at any time prior to the end of the
Term pursuant to
-7-
<PAGE>
Section 2.g., then the Corporation (i) shall pay
to the Officer in a lump sum in cash within five
(5) days of the date of termination an amount
equal to three times the sum of (x) the Officer's
Base Salary (calculated at the rate of his Base
Salary for the 12 months preceding the date of
termination) plus (y) a bonus equal to the average
annualized bonus received by the Officer prior to
termination and (ii) shall accelerate the exercise
dates of any outstanding options of the Officer or
make all of the Officer's options fully vested and
exercisable.
(4) Following a termination under Sections 2.c.
or 2.h., the Officer may in the Officer's sole
discretion, by delivery of a notice to the
Corporation within thirty (30) days following such
termination, elect to receive from the Corporation
a lump sum payment by bank cashier's check equal
to the present value of the flow of cash payments
that would otherwise be paid to the Officer
pursuant to Section 4.a. Such present value shall
be determined as of the date of delivery of the
notice of election of the Officer and shall be
based on a discount rate equal to the interest
rate on 90-day U.S. Treasury Bills, as reported in
the Wall Street Journal (or similar publication)
on the date of delivery of the election notice.
If the Officer elects to receive a lump sum
payment pursuant to this Section 4.a.(4), the
Corporation shall make such payment to the Officer
within sixty (60) days following the date on which
the Officer notifies the Corporation of the
Officer's election.
(5) No deduction shall be made by the Corporation
under this Section 4.a. for any compensation
earned by the Officer from any other employment or
for any other monies otherwise received by the
Officer from any third parties subsequent to
termination of employment hereunder.
5. Protection for Corporation.
--------------------------
5.1 Confidentiality. The Officer shall not, during his
---------------
employment by the Corporation or at any time thereafter, directly or
indirectly use, divulge, furnish or make accessible to anyone other
than the Corporation, its directors or officers (otherwise than in the
regular course of the business of the Corporation), any knowledge or
information regarding any confidential or secret activities,
prospects, technical data, analyses or interpretations, projects,
-8-
<PAGE>
plans, reports, customer names or lists, financial or marketing
information or documentary material relating to the existing or
planned business or activities of the Corporation, including, without
limitation, any information which is a trade secret. The Officer,
upon leaving the employ of the Corporation, shall not take with him or
retain any books, records, data, reports, letters, memoranda, notes or
other writings or documents whatsoever, or copies thereof, which
reflect or deal with any secret, proprietary or confidential
information or material relating to the business or activities of the
Corporation. The obligations of the Officer under this Section 5.1
shall not apply to (i) information which at the time of disclosure is
readily available to the public; (ii) information which is or becomes
available to the general public other than through acts or omissions
attributable to the Officer; or (iii) information obtained from a
third party who is lawfully in possession of the same other than
through a breach of a confidentiality or nonuse obligation owed to the
Corporation or others with respect to that information.
5.2 Non-Interference.
----------------
(a) During his employment hereunder the Officer shall
not directly or indirectly, unless the Corporation gives its prior
written consent:
(i) consult with, act as agent for, or otherwise
assist any Competitor to compete or prepare to compete with the
Corporation in any of the Corporation's then businesses;
(ii) own any interest (other than a passive
investment interest of not more than 5% of the voting securities)
in any Competitor; or
(iii) take any action specifically intended to
divert from the Corporation to any Competitor any opportunity
which would be within the scope of the Corporation's then
business.
(b) For purposes of this Agreement, a "Competitor"
means any entity which at relevant times engages or is making plans to
engage, in whole or in part, in the oil and gas business.
5.3 Remedies. The Officer acknowledges that the
--------
Corporation would be greatly injured by, and have no adequate remedy
at law for, breach of the duties set forth in Article 5 duties. The
Officer therefore consents that if such breach occurs or is
threatened, whether before or after termination of his employment, the
Corporation may, as appropriate and in addition to all other then
available remedies, enjoin him (together with all persons acting in
concert with him) from such breach or threatened breach. If the
Corporation prevails in such litigation, the Corporation shall also be
entitled to collect from the Officer the court costs,
-9-
<PAGE>
attorneys' and experts' fees and other expenses of enforcing this
Agreement and obtaining such other relief as the court may grant.
5.4 Post-Employment Right to Compete. If the Officer
--------------------------------
terminates his employment pursuant to Section 2.f., he shall not
compete with the Corporation in pursuit of any corporate opportunity
of which the Officer became aware during his employment with the
Corporation, or assist a Competitor in so competing, for a period of
two years following the Officer's termination. The Officer agrees
that this provision is reasonable in scope and term and that it is
necessary to protect the Corporation.
6. Miscellaneous.
-------------
6.1 Severability. Should a court or other body of
------------
competent jurisdiction determine that any provision of this Agreement
is excessive in scope or otherwise invalid or unenforceable, such
provision shall be adjusted rather than voided, if possible, so that
it is enforceable to the maximum extent possible, and all other
provisions of the Agreement shall be deemed valid and enforceable to
the extent possible.
6.2 Withholdings. All compensation and benefits to the
------------
Officer hereunder, including, without limitation, those payments
contemplated by Article 4, shall be reduced by all federal, state,
local and other withholdings and similar taxes and payments required
by applicable law.
6.3 Arbitration. Except as provided in Section 5.3, the
-----------
parties hereby submit all controversies, claims and matters of
difference in any way related to this Agreement or the performance or
breach of the whole or any part hereof to arbitration by three
arbitrators in Denver, Colorado, according to the rules and practices
of the American Arbitration Association from time to time in force.
If such rules and practices shall conflict with the Colorado Rules of
Civil Procedure or any other provisions of Colorado law then in force,
such Colorado rules and provisions shall govern. Arbitration of any
such controversy, claim or matter of difference shall be a condition
precedent to any legal action thereon. This submission and agreement
to arbitration shall be specifically enforceable.
Within 30 days of the receipt by one party of a written notice to
arbitrate delivered by the other party, each party shall select one
arbitrator by written notice to the other party. Within 30 days of
the delivery of both notices, the two arbitrators will select a third
arbitrator. If the two cannot agree on such third arbitrator, the
selection of a third arbitrator shall be made by the Chief Judge of
the U.S. District Court for the District of Colorado or, if such judge
refuses to act, such selection shall be made in accordance with the
procedures of the American Arbitration Association.
-10-
<PAGE>
Awards shall be final and binding on all parties to the
extent and in the manner provided by Colorado law. Each award shall
expressly entitle the prevailing party to recover such party's
attorneys' fees and costs, and the award shall specifically allocate
such fees and costs between the parties. All awards may be filed by
any party with the Clerk of the District Court in the City and County
of Denver, Colorado, and an appropriate judgment entered thereon and
execution issued therefor. At the election of any party, said award
may also be filed, and judgment entered thereon and execution issued
therefor, with the clerk of one or more other courts, state or
federal, having jurisdiction over the party against whom such an award
is rendered or its property.
6.4 Entire Agreement; Modifications. This Agreement
-------------------------------
represents the entire agreement between the parties and may be
amended, modified, superseded, or cancelled, and any of the terms
hereof may be waived, only by a written instrument executed by each
party hereto or, in the case of a waiver, by the party waiving
compliance. The failure of any party at any time or times to require
performance of any provisions hereof shall not affect the right at a
latter time to enforce the same. No waiver by any party of the breach
of any provision contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be or
construed as a further or continuing waiver of any such breach or of
any other term of this Agreement.
6.5 Applicable Law. This Agreement shall be construed
--------------
under and governed by the laws of the State of Colorado.
IN WITNESS WHEREOF, the parties have executed this Agreement
as first set forth above.
BASIN EXPLORATION, INC.
-----------------------------
By: Michael S. Smith
Title: President and C.E.O.
------------------------------
Thomas J. Corley
-11-
CONFIDENTIAL TREATMENT
PURCHASE AND SALE AGREEMENT
by and between
Hall-Houston Oil Company
Hall-Houston Oil Company
Employee Royalty Trust
Hall-Houston
1996 Exploration and
Development Facility
Overriding Royalty Trust
Hall Family Trust
Gulf Royalty
Interests, Inc.
("Sellers")
and
Basin Exploration, Inc.
("Buyer")
Eugene Island Blocks 64 and 65 and East Cameron Block 378
Offshore Louisiana
February 13, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I DEFINITIONS...................................... 1
1.1 "Agreement"........................................... 1
1.2 "Assets".............................................. 1
1.3 "Assumed Obligations"................................. 2
1.4 "Closing"............................................. 2
1.5 "Closing Date"........................................ 2
1.6 "Effective Time"...................................... 2
1.7 "Excluded Assets"..................................... 2
1.8 "Exploration Rights".................................. 3
1.9 "First Closing"....................................... 3
1.10 "Hydrocarbons"........................................ 3
1.11 "Interests"........................................... 3
1.12 "Leases".............................................. 3
1.13 "Personal Property and Incidental Rights"............. 3
1.14 "Purchase Price"...................................... 4
1.15 "Reserve Report"...................................... 4
1.16 "Second Closing"...................................... 4
1.17 "Termination Amount".................................. 4
1.18 "Threshold for Adjustment"............................ 4
ARTICLE II PURCHASE AND SALE AND OPTIONS.................... 5
2.1 Sale and Purchase..................................... 5
2.2 Reservations.......................................... 5
2.3 Exploration Rights.................................... 5
2.4 Right of First Offer.................................. 5
2.5 Approval of AFE....................................... 5
ARTICLE III PURCHASE PRICE AND PAYMENT....................... 6
3.1 Purchase Price........................................ 6
3.2 Adjustments to Purchase Price......................... 6
ARTICLE IV SELLERS' REPRESENTATIONS AND WARRANTIES.......... 7
4.1 Sellers' Representations and Warranties............... 7
4.2 HHOC's Representations and Warranties................. 9
4.3 Assurance of Accuracy................................. 11
ARTICLE V BUYER'S REPRESENTATIONS AND WARRANTIES........... 11
-i-
<PAGE>
5.1 Buyer's Representations and Warranties................ 11
ARTICLE VI ACCESS TO INFORMATION AND INSPECTION............. 12
6.1 Records............................................... 12
6.2 Confidentiality Agreement............................. 12
6.3 Inspections........................................... 12
ARTICLE VII TITLE AND OTHER ADJUSTMENT MATTERS.......... 13
7.1 Limitation of Warranties and Representations.......... 13
7.2 Buyer's Title Review.................................. 13
(a) Notice........................................... 13
(b) Buyer's Remedies...................................... 13
(c) Arbitration........................................... 14
7.3 Casualty Loss......................................... 15
7.4 Adjustment of Cash Consideration for Other Breaches... 15
7.5 Limitation on Recoveries for Casualty Losses and
Other Breaches........................................ 15
7.6 East Cameron Block 378 Termination.................... 16
ARTICLE VIII PREFERENTIAL PURCHASE RIGHTS AND CONSENTS... 16
8.1 Preferential Purchase Rights and Consents............. 16
8.2 Consents.............................................. 16
8.3 Required Actions...................................... 16
ARTICLE IX COVENANTS OF HHOC........................... 17
9.1 HHOC's Covenants...................................... 17
(a) Maintenance of Interests.............................. 17
(b) Eugene Island Blocks 64 and 65 Operations............. 17
(c) Restrictions.......................................... 17
(d) Notification of Claims........................... 17
(e) Maintenance of Confidentiality........................ 18
(f) Compliance with Law................................... 18
(g) Obligation To Inform.................................. 18
(h) Exclusivity........................................... 18
(i) Operations in Progress................................ 18
ARTICLE X CLOSINGS......................................... 19
10.1 Closings.............................................. 19
10.2 Sellers' Closing Obligations.......................... 19
10.3 Buyer's Closing Obligations........................... 19
-ii-
<PAGE>
ARTICLE XI EFFECT OF CLOSING................................ 20
11.1 Assumed Obligations; Pre-Closing Liabilities.......... 20
11.2 Revenues and Expenses................................. 20
11.3 HHOC Operated Properties.............................. 20
11.4 AMI................................................... 20
ARTICLE XII LIMITATIONS OF WARRANTIES AND REMEDIES........... 21
12.1 Limitations........................................... 21
12.2 Survival.............................................. 21
ARTICLE XIII DEFAULT AND REMEDIES............................. 21
13.1 Liabilities Upon Termination or Breach................ 21
13.2 Attorneys Fees........................................ 22
ARTICLE XIV INDEMNITY........................................ 22
14.1 Buyer's Indemnification............................... 22
14.2 Eugene Island Block 65 Well No. 2 Indemnification..... 22
14.3 HHOC's Indemnification................................ 22
14.4 Scope and Procedure for Indemnification............... 23
ARTICLE XV TERMINATION...................................... 24
15.1 Termination Pursuant to Section 7.6................... 24
15.2 Expiration of Rights Under Sections 2.3 and 2.4....... 24
15.3 Effect of Termination................................. 24
ARTICLE XVI MISCELLANEOUS.................................... 24
16.1 Certain Governmental Approvals...................... 24
16.2 Record Title in Seller.............................. 24
16.3 Public Announcements................................ 25
16.4 Filing and Recording of Assignments................. 25
16.5 Further Assurances and Records...................... 25
16.6 Notices............................................. 26
16.7 Incidental Expenses................................. 26
16.8 Entire Agreement.................................... 27
16.9 Governing Law....................................... 27
16.10 Exhibits............................................ 27
16.11 Audits.............................................. 27
16.12 Counterparts........................................ 27
16.13 Waiver.............................................. 27
-iii-
<PAGE>
16.14 Binding Effect; Assignment.......................... 27
16.15 Taxes............................................... 28
-iv-
<PAGE>
CONFIDENTIAL
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT ("Agreement") dated as of the
---------
13th day of February, 1997, is made by and among Hall-Houston Oil
Company, a Texas corporation ("HHOC"), Hall-Houston Oil Company
Employee Royalty Trust ("HHERT"), Hall-Houston 1996 Exploration and
-----
Development Facility Overriding Royalty Trust ("HHEDFORT"), Hall
--------
Family Trust ("Hall Trust"), Gulf Royalty Interests, Inc., a Texas
----------
corporation ("Gulf Royalty" and HHERT, HHEDFORT, Hall Trust and Gulf
------------
Royalty, collectively, "Sellers") and Basin Exploration, Inc., a
-------
Delaware corporation, doing business in Louisiana under the name Basin
Exploration, Inc. (Delaware) ("Buyer"). Sellers and Buyer are
-----
sometimes together referred to herein as "Parties," and individually
as a "Party".
W I T N E S S E T H:
A. Sellers own or have the right to acquire oil and gas
leasehold and other interests in Eugene Island Blocks 64, 65 and East
Cameron Block 378 (the "Blocks"), such Blocks being situated in
------
federal waters in the Gulf of Mexico, Offshore of Louisiana, and
described in Exhibit "A" attached hereto.
----------
B. Sellers desire to sell portions of their right, title and
interest in the Blocks to Buyer under the terms of this Agreement.
C. HHOC desires to grant, and Buyer desires to acquire options
relating to CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, and subject to the terms and
conditions of this Agreement, the Parties agree as follows:
ARTICLE I
DEFINITIONS
-----------
In addition to any terms defined elsewhere in this Agreement, the
following terms, as used herein, shall have the following meanings:
1.1 "Agreement" shall mean this Purchase and Sale Agreement
---------
among HHOC, the other Sellers and Buyer, including the Exhibits
annexed or referred to herein, as the same may be amended,
supplemented, restated or otherwise modified from time to time in
accordance with applicable provisions hereof.
1.2 "Assets" shall mean all of Seller's right, title and
------
interest in and to the following (except to the extent constituting
Excluded Assets):
(a) the Interests; and
<PAGE>
(b) the Personal Property and Incidental Rights.
1.3 "Assumed Obligations" shall mean (i) all liabilities, duties
-------------------
and obligations that arise from and after the Effective Time from
ownership or operation of the Assets; (ii) all liabilities and
obligations of HHOC prior to the Effective Time and of Buyer on and
after the Effective Time, with respect to the installation of
platforms or subsea facilities (including, but not limited to,
pipeline pipe and umbilical ordered by HHOC), plugging, replugging and
abandoning any wells, the restoration of any well sites, the proper
removal, disposal and abandonment of any platforms or other fixtures
and the proper capping and burying of all flow lines, which are
included in the Assets; (iii) all duties, liabilities and obligations
arising on or after the Effective Time under any contracts or
agreements affecting the Assets in existence at the Effective Time and
listed on Exhibit "B" attached hereto or to which Buyer is a party,
-----------
(iv) all duties, liabilities and obligations that arise under the
Leases after the Effective Time, and (v) all other duties, liabilities
and obligations expressly assumed by Buyer under this Agreement.
1.4 "Closing" shall mean either the First Closing or the Second
-------
Closing, as the case may be.
1.5 "Closing Date" shall mean either the date of the First
------------
Closing or the date of the Second Closing, as the case may be.
1.6 "Effective Time" shall mean 12:01 a.m. Central Standard Time
--------------
on February 13, 1997.
1.7 "Excluded Assets" shall mean the following:
---------------
1.7.1 All cash, trade credits, accounts receivable, notes
receivable and other receivables attributable to Sellers' interest in
the Assets with respect to any period of time prior to the Effective
Time, including payments received by any Seller after the Effective
Time and which are attributable to the period prior to the Effective
Time under generally accepted accounting principles.
1.7.2 All corporate, financial and tax records of Sellers;
however, Buyer shall be entitled to receive copies of any financial
and tax records which directly relate to the Assets or any Assumed
Obligations, or which are necessary for Buyer's ownership,
administration or operation of the Assets;
1.7.3 Except as provided in Section 7.3, all claims and causes
of action of any Seller () arising from acts, omissions or events, or
damage to or destruction of property, occurring prior to the Effective
Time, or () with respect to any of the Excluded Assets;
1.7.4 Except as otherwise provided in Section 7.3, all rights,
title, claims and interests of any Seller arising prior to the
Effective Time () under any policy or agreement of.insurance or
indemnity, () under any bond, or () to any insurance or condemnation
proceeds or awards; and
1.7.5 All Hydrocarbons produced from or attributable to the
Assets with respect to all periods prior to the Effective Time,
together with all proceeds from or of such Hydrocarbons, if any;
2
<PAGE>
CONFIDENTIAL
1.8 "Exploration Rights" shall mean the following:
------------------
CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
1.9 "First Closing" shall mean the closing of the purchase and
-------------
sale of the Assets relating to Eugene Island Blocks 64 and 65.
1.10 "Hydrocarbons" shall mean crude oil, natural gas, casinghead
------------
gas, condensate, sulphur, natural gas liquids and other liquid or
gaseous hydrocarbons (including C02), and shall also refer to all
other minerals of every kind and character which may be covered by or
included in the Leases and Assets.
1.11 "Interests" shall mean the working interests (and the net
---------
revenue interest attributable thereto) and overriding royalty
interests owned by Sellers or which Seller has the right to acquire in
the Leases in Eugene Island Blocks 64 and 65 and East Cameron Block
378 as described in Exhibit A.
---------
1.12 "Leases" shall mean the leases described in Exhibit A, as
------ ---------
therein limited by acreage and/or depth.
1.13 "Personal Property and Incidental Rights" shall mean all
---------------------------------------
right, title and interest of Sellers in and to or derived from the
following, insofar as the same do not constitute Excluded Assets and
are assignable and attributable to, appurtenant to, incidental to, or
used for the operation of the Leases:
3
<PAGE>
(a) all easements, rights-of-way, permits, licenses,
servitudes or other interests;
(b) all contracts, agreements and title instruments to the
extent attributable to and affecting the Assets in existence at
the Effective Time or otherwise entered into as permitted in this
Agreement, including, but not limited to, all Hydrocarbon sales,
purchase, gathering, transportation, treating, marketing,
exchange, processing and fractionating contracts, farmout
agreements, participation agreements and joint operating
agreements, including, without limitation, the Material
Agreements listed on Exhibit B attached hereto; and
---------
(c) all wells, equipment and other personal property,
inventory, spare parts, tools, fixtures, pipelines, platforms,
tank batteries, appurtenances and improvements situated upon the
Leases and used or held for use in connection with the
development or operation of the Leases or the production,
treatment, storage, compression, processing or transportation of
Hydrocarbons from or in the Leases, including, without
limitation, those wells and facilities listed on Exhibit C
---------
attached hereto;
(d) all of the files, records, and data of Sellers relating
to the items described in subsections (a), (b), and (c) above
(the "Records"), including, without limitation, lease records,
well records, and division order records; well files and prospect
files; title records (including abstracts of title, title
opinions and memoranda, and title curative documents related to
the Leases); contracts and contract files; correspondence;
computer software and data files; micro-fiche data files;
geological, geophysical and seismic records (to the extent
transfer is not prohibited by existing contractual restriction
previously disclosed to Buyer), interpretations, data, maps and
information; production records, electric logs, core data,
pressure data, decline curves and graphical production curves;
reserve reports; and accounting records.
1.14 "Purchase Price" shall have the meaning provided in Section
--------------
3.1.
1.15 "Reserve Report" shall mean the cashflows (including
--------------
projected capital costs) dated as of January 1, 1997 by Ryder Scott
Company relating to East Cameron Block 378, a copy of which Seller has
delivered to Buyer prior to the execution of this Agreement.
1.16 "Second Closing" shall mean the date of the closing of the
--------------
purchase and sale of the Assets relating to East Cameron Block 378.
1.17 "Termination Amount" shall mean an aggregate amount of
------------------
adjustments to the Purchase Price allocated to the Assets relating to
East Cameron Block 378 proposed by Buyer pursuant to Section 7.2,
Section 7.3 and Section 7.4 equalling $1,300,000.
1.18 "Threshold for Adjustment" shall mean an aggregate amount of
------------------------
adjustments to the Purchase Price proposed by Buyer pursuant to
Section 7.2(b)(3), Section 7.3 and Section 7.4 equalling $100,000.
4
<PAGE>
CONFIDENTIAL
ARTICLE
PURCHASE AND SALE AND OPTIONS
-----------------------------
2.1 Sale and Purchase. Subject to the terms and conditions of
-----------------
this Agreement, and subject to the reservations described in Section
2.2, Sellers agree to sell and convey to Buyer and Buyer agrees to
purchase and pay for the Assets and to assume the Assumed Obligations.
2.2 Reservations. HHOC shall reserve from the assignments of
------------
the Interests an undivided 50% of its working interest and the
remaining Sellers shall reserve all of their overriding royalty
interests in (a) the South Half (S/2) North Half (N/2) South Half
(S/2) and the South Half (S/2) South Half (S/2) East Cameron Block 378
as to those depths below 100' below the stratigraphic equivalent of
3,743 feet true vertical depth as seen in the electric log for the
Anadarko Petroleum Corporation OCS-G 6660 No. 1 well located in East
Cameron Block 378 and (b) the balance of East Cameron Block 378 as to
all depths. The interests reserved by Sellers under this Section
shall be deemed Excluded Assets.
2.3 Exploration Rights. Should Buyer elect to exercise its
------------------
option to acquire any Exploration Rights as provided in Exhibit G,
---------
HHOC and Buyer shall schedule a closing, to occur no later than 5 days
following the exercise of such option, but subject to extension for up
to an additional 30-day period as may be required to obtain necessary
waivers of (or the expiration of the exercise period with respect to)
preferential purchase rights, releases and consents to assignment and
to negotiate mutually acceptable processing agreements. At such
closing, Seller shall convey to Buyer its proportionate interest in
the applicable Exploration Rights acquired, with special warranty of
title against claims arising by, through or under Seller, and Buyer
will deliver to Seller the amount of the consideration allocated to
the Exploration Rights conveyed as shown on Exhibit G.
----------
CONFIDENTIAL PORTION APPEARS IN BOLD
2.4 Right of First Offer. After the Second Closing, with
--------------------
respect to the interests to be retained by HHOC in East Cameron Block
378 and, should Buyer exercise its option granted in Section 2.3 as to
Exploration Rights
CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION ,
HHOC agrees that, should HHOC intend to dispose of any such retained
interests, it will advise Buyer in writing, no less than 10 days prior
to contacting any other person or entity regarding such retained
interests, of HHOC's intention to make any such disposition. For a
period of 10 days following any such notice by HHOC to Buyer, Buyer
shall have an exclusive right to offer to acquire the interests which
HHOC proposes to dispose of. HHOC shall be under no obligation to
accept any such offer made by Buyer and, upon expiration of such 10
day exclusivity period, HHOC may negotiate a disposition of the
relevant interests with others, whether on terms less or more
favorable to HHOC than any offered by Buyer, and shall be under no
further obligation to Buyer as to the relevant interests.
2.5 Approval of AFE. As a material part of the consideration to
---------------
Buyer for the transactions contemplated herein and in consideration of
the indemnification by Buyer provided in Section 14.2, HHOC hereby
agrees to approve the drilling of a second well on Eugene Island Block
65 when a proposal for such well is generated by Buyer under the joint
operating agreement covering such Block 65 and agrees to deliver prior
to the First Closing an executed authority for expenditure
5<PAGE>
("AFE") for the drilling of such well (the "Eugene Island Block 65
Well No. 2 AFE"), if such AFE is issued by Buyer prior to such
Closing. If a competing proposal is generated for such well under
such joint operating agreement, HHOC agrees to support Buyer's
proposal.
ARTICLE III
PURCHASE PRICE AND PAYMENT
--------------------------
3.1 Purchase Price. The Purchase Price payable to Sellers for
--------------
the Assets shall be Fourteen Million Four Hundred Twenty Five Thousand
and No/100 ($14,425,000.00) Dollars, subject to adjustment as set
forth below and allocated to the Assets as set forth in Exhibit D
---------
attached hereto.
3.2 Adjustments to Purchase Price. The Purchase Price
-----------------------------
attributable to the Assets to be acquired from HHOC shall be adjusted
by an amount equal to the difference between Buyer's Credits (as
hereinafter defined) and Sellers' Credits (as hereinafter defined).
(a) "Sellers' Credits" shall equal Sellers' share of
----------------
the amount of all direct production and operating expenses
(including overhead paid to third-party operators) and capital
expenditures incurred by Seller attributable to the operation of
the Assets after the Effective Time and prior to the Closing in
accordance with generally accepted accounting principles and
applicable provisions of relevant joint operating agreements.
Such expenses and expenditures shall include, without limitation,
royalties, rentals and other similar charges, ad valorem,
property, production, excise, severance, and any other taxes
(except income or franchise taxes) based upon or measured by the
ownership of property or the production of Hydrocarbons or the
receipt of proceeds therefrom.
(b) "Buyer's Credits" shall equal the sum of the following:
---------------
(1) Sellers' share of the amount of all unpaid ad
valorem, property, production, severance and similar
taxes and assessments (but not including income or
franchise taxes) based upon or measured by the ownership
of property or the production of Hydrocarbons or the
receipt of proceeds therefrom which taxes and assessments
become due and payable or accrue to the Assets prior to
the Effective Time, which amount shall, where possible,
be computed based upon the tax rate and values applicable
to the tax period in question; and
(2) Sellers' unpaid joint interest billings
invoiced or accrued to the Effective Time with respect to
operations on Eugene Island Blocks 64 and 65.
(c) Prior to each Closing, Buyer and HHOC shall agree upon
a good-faith estimated accounting (the "Preliminary Settlement
----------------------
Statement") showing the estimated amount of Sellers' Credits and
---------
the estimated amount of Buyer's Credits, subject to being finally
adjusted within 90 days after the Closing as hereinafter
provided, but subject in any event to audit rights under
applicable agreements. Within 90 days after the Closing, Buyer
and HHOC shall attempt to agree upon an accounting (the "Final
-----
Settlement Statement") of the actual
--------------------
6
<PAGE>
amounts of Sellers' Credits and Buyer's Credits for the
adjustment set out in this Section 3.2. If Buyer and HHOC cannot
reach mutual agreement as to either Final Settlement Statement
then the matter shall be resolved by submittal to Arthur Andersen
LLP or other comparable independent public accounting firm,
which decision shall be binding on the Parties. Those credits
agreed upon by Buyer and HHOC shall be netted and the final
settlement shall be paid in cash as directed in writing by the
receiving Party.
ARTICLE IV
SELLERS' REPRESENTATIONS AND WARRANTIES
---------------------------------------
4.1 Sellers' Representations and Warranties. Sellers, severally
---------------------------------------
as to each Seller or the Assets owned by such Seller, as the case may
be, and not jointly (except that HHOC makes such representations and
warranties as to itself and all other Sellers), represent and warrant
to Buyer, as of the date hereof and as of each Closing Date, that:
(a) If such Seller is a corporation, it is duly organized,
validly existing, and in good standing under the laws of its
state of incorporation, and is duly qualified to carry on its
business in Louisiana, and in the Outer Continental Shelf, Gulf
of Mexico, or if such Seller is another form of entity, it is
duly formed and validly existing;
(b) Such Seller has all requisite power and authority to
carry on its business as presently conducted, to enter into this
Agreement and the other documents and agreements contemplated
hereby, and to perform its obligations under this Agreement and
the other documents and agreements contemplated hereby. The
consummation of the transactions contemplated by this Agreement
will not violate, nor be in conflict with, any provision of its
governing documents or, other than as provided in any Material
Agreement to which Buyer is a party, any agreement or instrument
to which it is a party or by which it is bound or any judgment,
decree, order, statute, rule or regulation applicable to such
Seller;
(c) The execution, delivery, and performance of this
Agreement and the consummation of the transaction contemplated
hereby have been duly and validly authorized by all requisite
action on the part of such Seller. This Agreement constitutes,
and all documents and instruments required hereunder to be
executed and delivered by such Seller at Closing constitute,
legal, valid and binding obligations of such Seller enforceable
in accordance with their respective terms, subject to applicable
bankruptcy and other similar laws of general application with
respect to creditors;
(d) There are no bankruptcy, reorganization or receivership
proceedings pending, being contemplated by, or to the actual
knowledge of Seller threatened against Seller;
(e) Such Seller has Good and Marketable Title to the Assets
owned by it, which for purposes of this Agreement shall mean, for
the Interests in East Cameron Block 378, title deducible of
record in the Cameron Parish clerk's office and from the records
of the Minerals Management Service, and for all of the Interests
title (i) which is free and clear of all
7
<PAGE>
(x) operating agreements, farmout agreements, participation
agreements, exploration agreements, unit agreements, production
purchase agreements, marketing agreements, pipeline or other
transportation agreements, processing agreements, and other agreements
material to the ownership, development, operation and marketing of
production except for those described in Exhibit B attached hereto or
---------
to which Buyer is a party), and (y) all defects, claims, liens,
encumbrances and burdens except for those which could not reasonably
be expected to have an adverse effect on the ownership, operation,
value, mortgageability or use of any of the Assets and (ii) which at
and after the Effective Time entitles Buyer to receive not less than
the undivided interests set forth in Exhibit A as "Net Revenue
---------
Interests" or "Overriding Royalty Interests" of all Hydrocarbons
produced, saved and marketed from the respective Leases and all wells
located thereon or on land pooled or unitized therewith at all times
through the plugging, abandonment and salvage thereof, and at and
after the Effective Time obligates Buyer to bear costs and expenses
relating to the development of and operations on the Leases and all
wells located thereon or on land pooled or unitized therewith at all
times through the plugging, abandonment and salvage of such wells not
greater than the "Working Interests" set forth in Exhibit A.
---------
(f) Such Seller has not incurred liability, contingent or
otherwise, for brokers' or finders' fees relating to the
transactions contemplated by this Agreement for which Buyer shall
have any responsibility whatsoever.
(g) No suit, action, claim, investigation, or other
proceeding is pending or, to the best of such Seller's knowledge
after due inquiry, threatened before any court or governmental
agency and to the best of such Seller's knowledge after due
inquiry no cause of action exists that relates to the Assets or
that might result in impairment or loss of such Seller's title to
any portion of the Assets or the value thereof or that might
hinder or impede the operation of any of the Assets or wells
thereon or such Seller's ability to consummate the transactions
contemplated by this Agreement.
(h) With respect to those Assets in which Buyer does not
currently own an interest, all consents required to be obtained
by such Seller for the assignment of the relevant Assets to Buyer
have been obtained and are in full force, and, except for those
existing under any Material Agreement to which Buyer is a party,
there are no preferential purchase rights with respect to the
Assets that have not been waived or have not expired.
(i) Such Seller is not aware of any material adverse change
in the Assets which could reasonably be expected to affect their
value, use or operation that is not known to Buyer.
(j) No Seller is obligated, by virtue of any prepayment
arrangement, "take or pay" arrangement, production payment,
crediting agreement, or any other arrangement, to deliver
Hydrocarbons produced from or attributable to the Assets at some
future time without then or thereafter receiving full payment
therefor.
8
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(k) Except pursuant to a Material Agreement to which Buyer
is a party, no Hydrocarbons produced from Seller's interest in
the Assets are subject to a sales contract (other than division
orders or spot sales agreements terminable on no more than 30
days notice) and no person has any call upon, option to purchase
or similar rights with respect to the production from Sellers'
interest in the Assets.
4.2 HHOC's Representations and Warranties. HHOC represents and
-------------------------------------
warrants to Buyer, as of the date hereof and the Closing Date, that:
(a) All information heretofore provided by HHOC with
respect to the Assets, including, but not limited to, the
information set forth in the Exhibits hereto, was true and
accurate as of the date of delivery. Without limiting the
foregoing, the factual data on which the Reserve Report was based
has been provided to Buyer and HHOC makes no representation with
respect thereto other than that the projected capital
expenditures included in the Reserve Report represent those
reasonably anticipated by HHOC to be required to place the East
Cameron Block 378 No. 2 Well on production. Seller has no
knowledge of any matter which materially and adversely affects
the operations, prospects or condition of any of the Leases in
which Buyer does not currently own an interest or wells located
thereon which has not been set forth in this Agreement or the
Exhibits attached hereto.
(b) There exist no contracts or agreements material to the
ownership, operation, value, or use of the Assets, including the
marketing, transportation, or processing of production therefrom,
other than those agreements listed in Exhibit B (the "Material
--------- --------
Agreements"). With respect to the Material Agreements in all
----------
respects: (i) neither HHOC nor, to HHOC's knowledge, any other
party thereto is in default thereunder; (ii) all payments
(including, without limitation, joint interest or other billings
under unit or operating agreements) due by HHOC thereunder have
been made by HHOC; and (iii) none of the Material Agreements
creates a material financial commitment or imposes an obligation
or otherwise has a financial impact on HHOC that has not been
reflected in the Reserve Report or disclosed to Buyer.
(c) With respect to those Leases to which Buyer is not
currently a party: the Leases are in full force and effect and
are valid and subsisting; no other party to any Lease is in
material breach or default with respect to any of its obligations
thereunder; and Seller does not know of any present default
existing under any Lease.
(d) With respect to the joint operating agreements relating
to the Assets to which Buyer is not a party: (i) there are no
outstanding calls or payments due by HHOC under AFE's; (ii) HHOC
has informed Buyer of the status of all material operations by
less than all parties known to HHOC; and (iii) there are no
operations under such operating agreements with respect to which
HHOC has become a non-consenting party;
(e) With respect to those wells on the Leases which were
not drilled by Buyer as operator or which Buyer does not
currently operate: Every such well has been drilled and completed
within the Leases or within the limits otherwise permitted by
contract, pooling or
9
<PAGE>
unit agreement and by law; the drilling, completing, equipping
and operating of all wells, the construction, installation and
operation of all production facilities, pipelines and other
equipment, and the conduct of all other operations on or
affecting the Leases have been performed in accordance with all
necessary permits and authorizations, in compliance with all
applicable lease and contract provisions and laws, ordinances,
rules, regulations and permits of any court or governmental body
or agency and in accordance with prudent and generally recognized
industry practices and standards; and all such wells have been
drilled, completed, equipped and operated and all related
fixtures and equipment have been maintained in a state of repair
so as to be adequate for normal operations and are in good
working order.
(f) With respect to those Assets not currently operated by
Buyer and as to operations previously conducted or presently
being conducted: All necessary plans for development,
applications, inspection reports, certificates and other
instruments pertaining to environmental matters have been filed
with the appropriate authorities and all permits necessary for
the legal operation of the Assets in full compliance, in all
material respects, with all Environmental Laws (as hereafter
defined) have been obtained; HHOC and the operator of such Assets
are in compliance, in all material respects, with all
Environmental Laws; HHOC has not received nor, to the knowledge
of HHOC, has any other past or present operator of any of such
Assets received, notice of any past, present or future events,
conditions, circumstances, activities, practices, incidents,
actions or plans which are reasonably likely to interfere with or
prevent continued compliance, in all material respects, or which
are reasonably likely to give rise to any material liability
under, any Environmental Laws; the Assets have been used solely
for oil and gas operations and related operations; at no time
have the Assets been used for the generation, storage or disposal
of a Hazardous Substance (as defined below) or as a landfill or
other waste disposal site, and there are no Hazardous Substances
currently on the Leases that would subject Buyer to a material
liability. "Hazardous Substance" means any hazardous substance,
pollutant, contaminant, solid or hazardous waste, hazardous
waster constituents, hazardous material or toxic substance,
including, without limitation, asbestos, radioactive substances,
petroleum or petroleum-derived substances, or any other substance
or material that would constitute or cause a health, safety or
environmental hazard on or at the Assets under Environmental
Laws. "Environmental Laws" shall mean the Clean Air Act, Clean
Water Act, Coastal Zone Management Act, Comprehensive
Environmental Response, Compensation, and Liability Act
("CERCLA"), Emergency Planning and Community Right-to-Know Act,
Endangered Species Act, Hazardous Materials Transportation Act,
Occupational Safety and Health Act, Oil Pollution Act of 1990,
Resource Conservation and Recovery Act, Safe Drinking Water Act
and Toxic Substances and Control Act; any regulations promulgated
under the foregoing federal statutes; any state law counterparts;
any similar state or local statutes, rules, regulations or
ordinances; any judicial or administrative order or judgment, or
any permit, license or other authorization, under any of the
foregoing; any federal, state or local law or regulation, and
administrative actions thereunder, relating to occupational
health or safety; and common law relating to such matters, as to
all of the foregoing as such are in effect as of the date hereof
or during ownership of the Assets by HHOC.
10
<PAGE>
(g) With respect to those Assets in which Buyer does not
currently own an interest, all consents required to be obtained
by HHOC for the assignment of the Assets to Buyer have been
obtained and are in full force, and, except for those existing
under any Material Agreement to which Buyer is a party, there are
no preferential purchase rights with respect to the Assets that
have not been waived or have not expired.
(h) HHOC is unaware of any fact or circumstance which would
preclude or inhibit unconditional approval of Seller's assignment
to Buyer of the Assets relating to East Cameron Block 378 by the
United States Minerals Management Service or any governmental
entity with jurisdiction over same.
4.3 Assurance of Accuracy. Each Seller shall use all reasonable
---------------------
efforts to assure that the warranties and representations made by it
herein with respect to it are true and correct as of each Closing and
will give prompt written notice to Buyer after execution of this
Agreement of any matter which affects any warranty or representation
herein contained or which renders such warranty or representation
untrue.
ARTICLE V
BUYER'S REPRESENTATIONS AND WARRANTIES
--------------------------------------
5.1 Buyer's Representations and Warranties. Buyer represents
--------------------------------------
and warrants to each Seller that as of the date hereof and the Closing
Date:
(a) Buyer is a corporation duly organized, validly
existing, and in good standing under the laws of the State of
Delaware and is duly qualified to carry on its business in
Louisiana and in the Outer Continental Shelf, Gulf of Mexico;
(b) Buyer has all requisite power and authority to carry on
its business as presently conducted, to enter this Agreement and
the other documents and agreements contemplated hereby, to
purchase the Assets on the terms described in this Agreement, and
to perform the obligations under this Agreement and the other
documents and agreements contemplated hereby;
(c) The consummation of the transactions contemplated by
this Agreement will not violate, nor be in conflict with, any
provision of Buyer's charter, by-laws or governing documents, or
any material agreement or instrument to which Buyer is a party or
by which it is bound, or any judgment, decree, order, statute,
rule or regulation applicable to Buyer, and the execution,
delivery and performance of this Agreement and the transactions
contemplated hereunder have been duly and validly authorized by
all requisite corporate action on the part of Buyer;
(d) This Agreement constitutes, and all documents and
instruments required hereunder to be executed and delivered by
Buyer at Closing will constitute, legal, valid and
11
<PAGE>
binding obligations of Buyer in accordance with their respective
terms, subject to bankruptcy and other similar laws of general
application with respect to creditors;
(e) There are no bankruptcy, reorganization or receivership
proceedings pending, being contemplated by, or to its actual
knowledge, threatened against Buyer;
(f) Buyer has funds available with which to acquire the
Assets; and
(g) Buyer has no knowledge, as of the relevant Closing
Date, of any adjustments to the Purchase Price pursuant to
Article VII or any breach by any Seller with respect to the
relevant Assets not communicated to Sellers.
Buyer shall use all reasonable efforts to assure that the warranties
and representations herein contained are true and correct as of each
Closing and will give prompt written notice to Seller after the
execution of this Agreement of any matter which affects any warranty
or representation herein contained or which renders such warranty or
representation untrue.
ARTICLE VI
ACCESS TO INFORMATION AND INSPECTION
------------------------------------
6.1 Records. Upon execution of this Agreement, Sellers shall
-------
permit Buyer to review and copy at HHOC's offices, but at Buyer's
expense, all Records. To the extent any of the Records or any files,
records, or data otherwise related to the Assets are not in HHOC's
possession, HHOC shall exercise all reasonable efforts to () obtain
such materials from third-party operators of the Assets or other
parties having custody thereof or () if such materials cannot be
obtained, obtain access for Buyer to the records of third-party
operators or other third parties in the offices of such third-party
operators or other third parties. Buyer shall also have the right to
consult with Seller's officers, employees, attorneys and agents
(including, but not limited to, Sellers' reservoir engineers or
consulting petroleum engineers, if any), third-party operators,
production purchasers or other parties with respect to all Records or
any other matter or information affecting the Assets.
6.2 Confidentiality Agreement. All such information made
-------------------------
available to Buyer shall be maintained confidential by Buyer until the
earlier of Closing as to the Assets which are the subject of such
Closing or termination of this Agreement without there being a
Closing. Any confidentiality agreements Buyer has previously executed
with Seller to the extent applicable to the Assets shall continue in
force until Closing, at which time such agreement shall terminate as
to the Assets which are the subject of such Closing. Buyer shall
further take whatever reasonable steps which may be necessary to
ensure that Buyer's employees, consultants and agents comply with the
provisions of this Section 6.2. Notwithstanding anything to the
contrary, any seismic or geophysical data made available to Buyer
shall be maintained confidential by Buyer in accordance with existing
data license agreements.
6.3 Inspections. At all times prior to the Closing, Buyer and
-----------
the employees, agents and representatives of Buyer shall have access
to the Assets not operated by Buyer and shall have the
12
<PAGE>
right to witness well tests thereon and to conduct environmental,
operational and production audits thereof, including the right to
consult with third-party operators or regulatory authority in
connection therewith. To the extent Seller is not the operator of any
such properties, HHOC shall exercise all reasonable efforts to secure
access to such properties for Buyer for such purposes.
ARTICLE VII
TITLE AND OTHER ADJUSTMENT MATTERS
----------------------------------
7.1 Limitation of Warranties and Representations. SELLER SHALL
--------------------------------------------
CONVEY SELLER'S INTERESTS IN AND TO THE ASSETS TO BUYER WITHOUT ANY
WARRANTY OF TITLE, EXPRESS OR IMPLIED, EXCEPT SEPARATELY AS TO TITLE
CLAIMS ARISING BY, THROUGH AND UNDER SELLER (BUT NOT OTHERWISE), AS
PROVIDED IN THE FORMS OF ASSIGNMENT, BILL OF SALE AND CONVEYANCE OF
LEASES ATTACHED AS EXHIBIT "E" HERETO. EXCEPT AS EXPRESSLY STATED IN
----------
THIS AGREEMENT, SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR
IMPLIED, WITH RESPECT TO THE ACCURACY, COMPLETENESS OR MATERIALITY OF
THE INFORMATION, RECORDS AND DATA NOW, HERETOFORE, OR HEREAFTER MADE
AVAILABLE TO BUYER IN CONNECTION WITH THE ASSETS OR THIS AGREEMENT
(INCLUDING, WITHOUT LIMITATION, QUALITY OR QUANTITY OF HYDROCARBON
RESERVES, IF ANY, RECOMPLETION OPPORTUNITIES, DECLINE RATES, POTENTIAL
FOR PRODUCTION OF HYDROCARBONS FROM THE LEASES, OR ANY OTHER MATTERS
RELATING TO THE VALUATION OR CONDITION OF THE ASSETS.
7.2 Buyer's Title Review.
--------------------
(a) Notice. If any information or records reviewed by Buyer
------
reflect the existence of any encumbrance, encroachment, defect in or
objection to title that renders any Seller's warranties under Section
4.1(e) untrue or incorrect ("Title Defects"), Buyer may deliver
written notice of the Title Defects to HHOC on behalf of the relevant
Seller no later than the Closing Date with respect to the relevant
Assets. If Title Defects shall be so specified, HHOC, on behalf of
the relevant Seller, shall make all reasonable efforts to cure or
remove the Title Defects at the expense of such Seller, and to the
extent they are not cured by the relevant Closing, the value allocated
to such Title Defects by Buyer in its notices shall be withheld from
the Purchase Price payable at such Closing.
(b) Buyer's Remedies. If the Title Defects so notified to any
----------------
Seller are not cured or removed to the reasonable satisfaction of
Buyer within 90 days of Buyer's delivery of notice to such Seller of
such Title Defects or 90 days after the Closing, whichever is later,
Buyer shall elect as follows:
(1) Buyer may elect to grant a further period or periods of
time, not to exceed 90 days after the end of such 90-day
period, within which the relevant Seller shall attempt to
cure or remove such Title Defects. If such Title Defects
are cured within such 90-day period, Buyer shall pay the
amount of the withheld Purchase Price to HHOC for the
account of the relevant Seller within three days of receipt
of evidence
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<PAGE>
of such cure. If such Title Defects are not cured by the
end of such 90-day period, the Purchase Price for the
affected Assets shall be adjusted as provided in Section
7.1(b)(3) below.
(2) In the event the Net Revenue Interest to be conveyed to
Buyer in the affected Lease or well is less than the Net
Revenue Interest for such Lease or well shown on Exhibit A,
---------
or in the event the Working Interest in the affected Lease
or well to be conveyed to Buyer is greater than the Working
Interest for such Lease or well shown on Exhibit A, the
---------
Purchase Price shall be reduced by an amount equal to the
decrease caused by such variance in the Allocated Value for
the affected Lease or well contained in Exhibit D hereto.
---------
Such decrease or increase shall be calculated by multiplying
such Allocated Value by whichever of the following is
applicable: (A) a fraction, the numerator of which is the
actual Net Revenue Interest in the affected Lease or well to
be conveyed to Buyer and the denominator of which is Buyer's
share of the Net Revenue Interest shown for such Lease or
well on Exhibit A, or (B) a fraction, the numerator of which
---------
is Buyer's share of the Working Interest for such Lease or
well as shown on Exhibit A, and the denominator of which is
---------
the actual Working Interest in such Lease or well to be
conveyed to Buyer.
(3) For Title Defects other than the variances described in
subsection (2) above, Buyer shall be entitled to reduce the
Purchase Price to the extent the Title Defect causes a
decrease in the value of the affected Lease or well. For
purposes of this paragraph, the amount of decrease in value
of the affected Lease or well shall be determined by taking
into account the Allocated Value assigned to the Lease or
well on Exhibit D, the method of arriving at such value, the
---------
legal and practical effect of the Title Defect, and the
potential economic effect of the Title Defect over the life
of the property involved. In the event the value of such
decrease cannot mutually be agreed, any affected Party may
submit the question of value or existence of the defect to
arbitration in accordance with Section 7.2(c) below, in
which event the amount of the value allocated to the defect
by Buyer in its defect notices shall be retained by Buyer
pending final resolution of the arbitration proceeding.
Completion of any Closing shall not operate as a waiver by Buyer of
any Title Defects for which the Purchase Price has not been adjusted
or which Buyer has otherwise not specifically waived and Buyer shall
be entitled to enforce the warranties and representations and
indemnifications hereunder to the extent applicable to such Title
Defect. Following each Closing, Sellers shall cooperate with Buyer in
performing title curative work with respect to any of the Assets.
(c) Arbitration. In the event any Seller and Buyer cannot agree
-----------
on the amount of a Title Defect adjustment or on whether a Title
Defect exists, then such issue shall be submitted to binding
arbitration in accordance with the following procedures. No later
than 5 days following the end of the 90-day period following the
relevant Closing, or following the end of any extended 90-day period
granted by Buyer to Seller to cure Title Defects after such Closing,
either affected Party may deliver to the other an election to
arbitrate such dispute. Within 15 days following delivery of such
notice, the Parties will each designate an arbitrator, and the two
arbitrators will, within 10 days after their
14
<PAGE>
designation, select a third arbitrator; provided, however, that if the
two arbitrators are not able to agree on a third arbitrator, the third
arbitrator shall be selected as soon as possible by the Chief United
States District Judge for the Southern District of Texas or by any
party designated by him or her. The three arbitrators so selected
shall conduct a hearing in Houston, Texas no later than 30 days
following their selection, at which the relevant Seller or Sellers and
Buyer shall present such evidence and witnesses as they may choose,
with or without counsel. Adherence to formal rules of evidence shall
not be required, but the arbitrators shall consider any evidence and
testimony that they determine to be relevant, in accordance with
procedures that they determine to be appropriate. The arbitrators
shall render their decision within 30 days following conclusion of the
hearing; decision by a majority of the arbitration panel shall be
final and binding. Such decision may be filed in any court of
competent jurisdiction and may be enforced by any party as a final
judgment of such court. In determining the amount of a Title Defect
adjustment or the existence of a contested Title Defect, the
arbitrators shall consider the same factors listed in Section 7.2(b).
The costs and fees of the arbitrators shall be borne equally by Buyer
and the relevant Seller or Sellers, and each party shall bear its own
attorneys' fees and other expenses of the arbitration.
7.3 Casualty Loss. If, prior to the Closing, any portion of the
-------------
Assets shall be destroyed by fire or other casualty, or if any portion
of the Assets shall be taken in condemnation or under the right of
eminent domain or if proceedings for such purposes shall be pending or
threatened, Buyer may elect, subject to the provisions of Section 7.5,
to reduce the Purchase Price for the affected Asset to reflect the
estimated cost to repair or replace with property of equivalent value.
If Buyer does not elect such option, this Agreement shall remain in
full force and effect, notwithstanding any such destruction or taking,
and Seller shall at the relevant Closing or thereafter upon receipt
pay to Buyer all sums paid to the relevant Seller and attributable to
the affected Assets by reason of such destruction or taking and, at
the relevant Closing, shall assign, transfer and set over unto Buyer
all of the right, title and interest of the relevant Seller in and to
any unpaid insurance proceeds, awards or other payments arising out of
such destruction or taking. No Seller shall voluntarily compromise,
settle or adjust any amounts payable by reason of such destruction or
taking without first obtaining the written consent of Buyer.
7.4 Adjustment of Cash Consideration for Other Breaches.
---------------------------------------------------
Subject to the provisions of Section 7.5 and the right of any affected
Seller to submit to arbitration, in the manner set forth in Section
7.2(c), any such reduction proposed by Buyer in the event it is
discovered prior to a Closing that any Seller has breached any of the
representations, warranties or covenants contained in this Agreement
and applicable to the Assets to be conveyed by such Seller at such
Closing, other than the title warranties for which an adjustment
procedure is provided in Section 7.2, and if Buyer does not elect to
terminate its obligations hereunder for such breach as may be
permitted by this Agreement or applicable law, then for each such
breach the Purchase Price shall be adjusted at the relevant Closing to
the extent of such expected loss or cost. Consummation of any Closing
shall not operate as a waiver of any breach by any Seller of a
provision of this Agreement unless the Purchase Price has been
adjusted to account for such breach.
7.5 Limitation on Recoveries for Casualty Losses and Other
------------------------------------------------------
Breaches. Notwithstanding any provision of Section 7.2(b)(3), Section
- --------
7.3 or Section 7.4 to the contrary, Buyer shall not be entitled to any
recovery (including, but not limited to, under the indemnification
provided in Section
15
<PAGE>
14.3) or reduction of the Purchase Price unless the aggregate amount
of losses and costs asserted by Buyer pursuant to Section 7.2(b)(3),
Section 7.3 or Section 7.4, whether prior to or after any Closing,
equals the Threshold for Adjustment; provided, however, once the
Threshold for Adjustment is reached, Buyer shall be entitled to
recovery or Purchase Price reductions for all such losses and costs,
including those aggregating the Threshold for Adjustment.
7.6 East Cameron Block 378 Termination. Notwithstanding any
----------------------------------
provision of this Agreement to the contrary, should Buyer propose
adjustments to the Purchase Price with respect to the Assets relating
to East Cameron Block 378 and such adjustments equal or exceed, in the
aggregate, the Termination Amount, then either Sellers or Buyer may
terminate this Agreement as to such Assets.
ARTICLE VIII
PREFERENTIAL PURCHASE RIGHTS AND CONSENTS
-----------------------------------------
8.1 Preferential Purchase Rights and Consents. All Material
-----------------------------------------
Agreements containing consent to assignment obligations and
preferential right to purchase provisions that must be complied with
prior to the assignment of the Assets to Buyer and to which Buyer is
not otherwise a party are so identified in Exhibit B hereto (except
---------
such agreements with respect to which all necessary consents to
assignment or waivers of preferential purchase rights have already
been obtained by Sellers). Sellers shall send prior to Closing such
notices and other documents as may be required in order to trigger
preferential purchase rights which have been identified or Sellers
shall obtain prior to Closing a waiver of the exercise of any
preferential purchase rights; provided, however, the Closing shall not
be delayed pending the running of the period during which any such
right may be exercised or as a result of inability to obtain waivers
of such rights and Buyer shall acquire the Assets subject to any such
preferential rights. If a third party who has been offered an
interest in an Asset pursuant to a preferential right to purchase
elects prior to Closing to purchase all or part of such Asset pursuant
to the aforesaid offer and Seller receives written notice of such
election prior to the Closing Date, the interest or part thereof so
affected will be eliminated from the Assets and the Purchase Price
reduced by the portion of the Purchase Price allocated to such
interest or part thereof. Should any such right be exercised
subsequent to the Closing, Buyer shall convey the relevant assets to
the exercising party and shall be entitled to the consideration to be
paid therefor.
8.2 Consents. Seller shall use all reasonable efforts to obtain
--------
all consents to assignment prior to the Closing. If a lessor or other
third party who has the right to consent to the assignment of an Asset
(or portion thereof) or a Material Agreement refuses such consent
prior to Closing, Buyer may elect to eliminate the Block so affected
from the Assets and the Purchase Price shall be reduced by the portion
of the Purchase Price allocated to such Block. Absent such election
by Buyer, the absence of any required consent shall not constitute a
Title Defect or breach of any warranty or representation of the
Sellers and Buyer shall accept the risk associated with its inability
to obtain any such required consent prior to or after the Closing.
8.3 Required Actions. The Parties each agree to use their
----------------
respective reasonable efforts to take or cause to be taken all such
action as may be necessary to consummate and make effective
16
<PAGE>
the purchase and sale as set forth by this Agreement and to assure
that each will not be under any material corporate, legal or
contractual restriction that would prohibit or delay the timely
consummation of such purchase and sale.
ARTICLE IX
COVENANTS OF HHOC
-----------------
9.1 HHOC's Covenants. HHOC covenants as follows:
----------------
(a) Maintenance of Interests. Prior to the Closing, HHOC shall
------------------------
cause those Assets not operated by Buyer to be maintained and operated
in a prudent and workmanlike manner, in good condition and working
order, shall maintain insurance now in force with respect to the
Assets, shall timely pay or cause to be paid all costs and expenses
incurred in connection therewith, shall keep the Leases and Material
Agreements in full force and effect and shall perform and shall comply
with the covenants and conditions contained therein; provided,
however, that, except as authorized pursuant to subsection (b) below,
HHOC shall not commence or participate in the commencement of
operations for the drilling of any new well or the redrilling or
completion of an existing well included within the Assets after the
date of this Agreement and prior to the Closing without the prior
written consent of Buyer.
(b) Eugene Island Blocks 64 and 65 Operations. Prior to the
-----------------------------------------
Closing, if Buyer so directs, HHOC will execute AFE's circulated by
Buyer for operations on existing wells, including installation of
production facilities on Eugene Island Blocks 64 and 65, and the
drilling of a second well on Eugene Island Block 65 as contemplated in
the Eugene Island Block 65 Well No. 2 AFE.
(c) Restrictions. HHOC will promptly inform Buyer of all
------------
requests for commitments to expend funds with respect to the Assets.
Without the prior written consent of Buyer, and except as provided in
Section 9.1(b), Seller shall not enter into any new agreements or
commitments with respect to the Assets which extend beyond the
Closing, shall not commit to or incur any expenditures in excess of
$25,000 (net to HHOC's interest) with respect to any part of the
Assets, shall not make any nonconsent elections with respect to
operations affecting the Assets, shall not abandon or consent to the
abandonment of any well or release or consent to the release of all or
any portion of any of the Leases, shall not modify or terminate any of
the Material Agreements or waive or relinquish any right thereunder,
shall not agree to any renegotiated price, take or other terms under
existing gas purchase agreements, shall not agree to any credit or
prepayment arrangement that would reduce the share of gas deliverable
with respect to the Assets following the Effective Time, shall not
enter into any agreement or instrument for the sale, treatment, or
transportation of production from the Assets (except for sales
agreements terminable on no more than 30 days' notice), and shall not
encumber, sell or otherwise dispose of any of the Assets, other than
personal property that is replaced by equivalent property or consumed
in the normal operation of the Assets.
(d) Notification of Claims. HHOC shall promptly notify Buyer of
----------------------
any suit, action or other proceeding before any court or governmental
agency and any cause of action that relates to the Interests or that
might result in impairment or loss of any Seller's title to any
portion of the Assets
17
<PAGE>
or the value thereof or that might hinder or impede the operation of
the Leases arising or threatened prior to the Closing.
(e) Maintenance of Confidentiality. HHOC shall exercise all due
------------------------------
diligence in safeguarding and maintaining secure all engineering,
geological and geophysical data, reports and maps, and all other
confidential data in the possession of HHOC relating to the Assets.
(f) Compliance with Law. HHOC will comply, and will use its
-------------------
reasonable efforts to cause all third-party operators of the Leases to
comply, with all laws, rules, regulations, permits, ordinances and
orders of all local, state and federal governmental bodies,
authorities and agencies having jurisdiction over the Assets at all
times until the Closing.
(g) Obligation To Inform. HHOC shall keep Buyer currently and
--------------------
completely informed as to all material developments affecting or
potentially affecting the Assets not operated by Buyer. Without
limiting the foregoing, if at or prior to the Closing HHOC becomes
aware of any material change or inaccuracy in any information
furnished to Buyer by or on behalf of any Seller or any material
adverse change in the operation or condition of any of the Assets not
operated by Buyer, HHOC shall promptly notify Buyer of such change or
inaccuracy.
(h) Exclusivity. Until the Closing or the earlier termination
-----------
of this Agreement, neither HHOC nor any other Seller will (1) solicit,
discuss, or otherwise entertain, directly or indirectly, any offer to
acquire any of the Assets, (2) provide information to others
concerning the Assets (except in the ordinary course of operation of
the Assets) or (3) enter into any negotiations with, or enter into any
agreement that provides for acquisition of the Assets or any portion
thereof by, a person other than Buyer.
(i) Operations in Progress. Exhibit F is a complete and correct
---------------------- ---------
list and description of all operations on the Leases, other than those
conducted by Buyer, as to which it is anticipated that on and after
the date of this Agreement HHOC will be participating, including, but
not limited to, drilling, completion, installation of production or
pipeline facilities (the "Operations in Progress"). Seller shall
notify Buyer of any such activities prior to the implementation
thereof and shall consult with Buyer regarding all such matters and
operations. HHOC shall not make any election with respect thereto
under any operating agreement or other agreement or abandon or permit
the abandonment of any Operations in Progress without the prior
written consent of Buyer. HHOC shall promptly notify Buyer in writing
if the costs and expenses relating to any Operation in Progress are
likely to exceed the AFE estimates by more than fifteen percent (15%)
as to the costs incurred by HHOC under each AFE estimate. Buyer shall
not be liable for any costs or expenses in excess of such fifteen
(15%) margin, unless HHOC notifies Buyer as provided herein and Buyer
expressly approves in writing the continuation of the operation giving
rise to such excess expense or unless the excess expense cannot
reasonably be avoided by reason of legal obligations or prudent
operating practices, including, but not limited to, the necessity of
plugging and abandoning a well in compliance with regulatory or
contractual requirements.
18
<PAGE>
ARTICLE X
CLOSINGS
--------
10.1 Closings. The closings of the transactions contemplated by
--------
this Agreement shall be held beginning at 10:00 a.m. Local Time at the
offices of HHOC, 700 Louisiana, Suite 2100, Houston, Texas 77002, as
follows: on February 14, 1997 as to the Assets relating to Eugene
Island Blocks 64 and 65 and on February 20, 1997 as to the Assets
relating to East Cameron Block 378. All events of each Closing shall
each be deemed to have occurred simultaneously with the other,
regardless of when actually occurring, and each shall be a condition
precedent to the other; provided, however, HHOC's delivery of the
executed Eugene Island Block 65 Well No. 2 AFE shall be a condition to
the occurrence of the First Closing.
10.2 Sellers' Closing Obligations. At each Closing, except to
----------------------------
the extent comprising the Excluded Assets, Sellers shall deliver to
Buyer the following:
(a) Duly executed and acknowledged assignments
substantially in the form attached hereto as Exhibit "E," and
----------
such other documents as may be reasonably necessary in the
opinion of counsel for Buyer to convey Sellers' interest in the
Assets to Buyer in accordance with the provisions hereof;
(b) Possession of the relevant Assets, including copies of
the relevant Records;
(c) A non-foreign person affidavit executed by each Seller
pursuant to Section 1445 of the Internal Revenue Code;
(d) An opinion of John H. Peper, Esq., General Counsel of
HHOC, counsel to Seller, in form reasonably satisfactory to
Buyer, with respect to the matters stated in Sections 4.1(a),
(b), (c) and (g), but as to HHOC only and only as to the First
Closing; and
(e) The Preliminary Settlement Statement.
10.3 Buyer's Closing Obligations. At each Closing, Buyer shall
---------------------------
deliver to HHOC (for its account and the account of all other Sellers,
such other Sellers hereby expressly consenting to such disbursement of
the Purchase Price by Buyer):
(a) The Purchase Price, adjusted pursuant to the provisions
hereof, by wire transfer of immediately available funds;
(b) The Preliminary Settlement Statement; and
(c) An opinion of Howard L. Boigon, Esq., General Counsel
to Buyer, in form reasonably satisfactory to Sellers, with
respect to the matters stated in Sections 5.1(a), (b), (c) and
(d).
19
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ARTICLE XI
EFFECT OF CLOSING
-----------------
11.1 Assumed Obligations; Pre-Closing Liabilities. Subject to
--------------------------------------------
the provisions of Section 16.1, upon and after Closing, Buyer shall
own the Assets, together with all the rights, duties, obligations and
liabilities accruing after Closing, and Buyer shall be obligated to
assume and pay, perform, fulfill and discharge all Assumed
Obligations. To the extent not included in Assumed Obligations or in
those matters for which Seller is indemnified by Buyer hereunder,
Seller agrees to pay, perform, fulfill and discharge all costs,
expenses and liabilities attributable to the ownership or operation of
the Assets and accruing prior to the Effective Time.
11.2 Revenues and Expenses.
---------------------
(a) To the extent not accounted for in Buyer's and Seller's
Credits and adjustments under Section 3.2 hereto, all proceeds,
accounts receivable, income, revenues and other items included in or
attributable to the Excluded Assets (as described in Section 1.7) and
the Assets prior to the Effective Time shall belong to and be retained
or paid to Sellers, and all other proceeds, accounts receivable,
income, revenues and other items included on or attributable to the
Assets after the Effective Time shall belong to and be paid over to
Buyer.
(b) Post-Closing Obligations. If any funds are received by a
------------------------
Party which belong to any other Party, the Party receiving such funds
shall immediately pay the funds over to such other Party entitled
thereto. If an invoice or other obligation to be discharged is under
the terms of this Agreement partially the obligation of any Seller and
partially the obligation of Buyer, the Party receiving such invoice or
request to discharge the obligation shall promptly notify the other
Party which shall promptly pay over its share thereof after receipt of
such notice.
11.3 HHOC Operated Properties. After Closing and until a
------------------------
successor operator has been approved by the Minerals Management
Service, HHOC shall continue to operate those Assets which it is
currently operating. Such continued operations by HHOC shall be for
the account of Buyer and other owners of the relevant Assets and shall
be conducted in accordance with the covenants in Article IX of this
Agreement, subject, however, to provisions of applicable joint
operating agreements. In connection with any such continued operation
of the Assets by HHOC, HHOC shall be reimbursed by Buyer for all costs
and expenses incurred by HHOC with respect thereto, including a charge
for overhead, in the same manner as provided in the applicable joint
operating agreement. All costs and expenses incurred by HHOC in
conjunction with such continued operation of the Assets shall be
considered and handled as "Sellers' Credits" pursuant to Section
3.2(a) to the extent such credits offset same. To the extent Sellers'
Credits are not sufficient to offset the costs and expenses incurred,
Buyer shall remain responsible therefor.
11.4 AMI. Should HHOC (or any affiliate of HHOC), within 18
---
months of the date hereof, acquire any interest within Eugene Island
Block 64 or 65, Buyer shall be entitled to acquire 75% of the interest
so acquired by HHOC (or an affiliate of HHOC) in exchange for its
payment of 75% of the out-of-pocket cost of acquisition.
20
<PAGE>
ARTICLE XII
LIMITATIONS OF WARRANTIES AND REMEDIES
--------------------------------------
12.1 Limitations. THE EXPRESS REPRESENTATIONS AND WARRANTIES OF
-----------
SELLERS CONTAINED IN THIS AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF
ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED OR
STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY REPRESENTATION OR
WARRANTY WITH RESPECT TO THE QUALITY, QUANTITY OR VOLUME OF THE
RESERVES, IF ANY, OF HYDROCARBONS IN OR UNDER THE LEASES, OR THE
ENVIRONMENTAL CONDITION OF THE ASSETS. THE ITEMS OF PERSONAL
PROPERTY, EQUIPMENT, IMPROVEMENTS, FIXTURES,AND APPURTENANCES CONVEYED
AS PART OF THE ASSETS ARE SOLD HEREUNDER "AS IS, WHERE IS" AND "WITH
ALL FAULTS" AND NO WARRANTIES OR REPRESENTATIONS OF ANY KIND OR
CHARACTER, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF QUALITY,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONDITION, ARE
GIVEN BY OR ON BEHALF OF SELLER, EXCEPT THOSE EXPRESSLY STATED HEREIN.
12.2 Survival. Except as otherwise provided therein, all
--------
representations, warranties, covenants, indemnities and agreements
made herein shall survive the Closings and remain in effect for a
period of one year following the Second Closing or the date on which
it was to occur; provided, however, Article XI, Section 13.2, Section
14.1, Section 14.2, Section 14.3(i), Section 14.4 and Article XVI
shall survive indefinitely, as shall the representations and
warranties of the Sellers provided in Sections 4.1(a), (b) and (c) and
those of Buyer provided in Sections 5.1(a), (b), (c) and (d).
ARTICLE XIII
DEFAULT AND REMEDIES
--------------------
13.1 Liabilities Upon Termination or Breach. In addition to the
--------------------------------------
remedies provided under applicable law, each Party shall have the
right to recover damages for the breach by the other Party or Parties
of any warranty, covenant or agreement contained herein or for the
failure of a representation of the other Party or Parties contained in
this Agreement to be true. In the event any Party wrongfully fails to
consummate a Closing, the other Party or Parties shall have the
following remedies in addition to any remedies provided under
applicable law: If Buyer is the Party wrongfully failing to close,
Sellers shall have the right to terminate Buyer's right to acquire any
Assets not yet acquired by Buyer hereunder and the options provided
for in Section 2.3 and Section 2.4 and Sellers shall have the right to
recover all damages suffered by Sellers as a result of such failure
and, if such failure occurs with respect to Eugene Island Blocks 64
and 65, Sellers shall in addition have the right to recover any
amounts expended with respect to all AFEs approved as required under
Section 2.5 or Section 9.1(b). If Sellers wrongfully fail to close,
Sellers acknowledge that the remedies provided at law would be
inadequate and that, as a result, Buyer shall be entitled to, and
Sellers shall not object to, the remedy of specific performance to
compel such performance.
21
<PAGE>
13.2 Attorneys Fees. The prevailing Party in any legal
--------------
proceeding brought under or to enforce this Agreement shall be
additionally entitled to recover court costs and reasonable attorney's
fees from the non-prevailing Party.
ARTICLE XIV
INDEMNITY
---------
14.1 Buyer's Indemnification. After the Closing, Buyer agrees to
-----------------------
indemnify, defend and hold Sellers and their respective directors,
officers, shareholders, employees, trustees, partners, agents and
attorneys (collectively, the "Seller Indemnified Parties") harmless
from and against any and all Losses (as defined below) with respect to
any liabilities and obligations, or alleged or threatened liabilities
or obligations, including, but not limited to, claims for personal
injury, illness, disease, wrongful death, damages to property,
liability based on strict liability or condition of the Assets, and
fines, penalties and other regulatory sanctions relating to or arising
out of () Buyer's ownership or operation of the Assets for the period
from and after the Effective Time; () the Assumed Obligations; and ()
the failure of any representation of Buyer in this Agreement to be
true or the breach of any warranty, covenant or agreement of Buyer in
this Agreement BUT EXCLUDING from Buyer's indemnity obligation
hereunder any Loss resulting from or attributable to the negligence or
willful misconduct of any Seller Indemnified Party, its officers,
employees or agents with respect to the operation and maintenance of
the Assets prior to the Effective Time or the failure of any
representation of any Seller in this Agreement to be true or the
breach of any warranty, covenant or agreement of any Seller in this
Agreement.
14.2 Eugene Island Block 65 Well No. 2 Indemnification. Further
-------------------------------------------------
to the provisions of Section 14.1, Buyer agrees to indemnify, defend
and hold the Seller Indemnified Parties harmless from and against (a)
any amounts expended by any Seller with respect to the Eugene Island
Block 65 Well No. 2 AFE should Buyer wrongfully fail or refuse to
close hereunder with respect to the Assets relating to Eugene Island
Blocks 64 and 65 and (b) regardless of whether the First Closing
occurs, any and all Losses with respect to claims of other owners of
the Leases covering Eugene Island Blocks 64 and 65 based on approval
by HHOC of the proposal with respect to the Eugene Island Block 65
Well No. 2 or the Eugene Island Block 65 Well No. 2 AFE or any other
AFE approved by HHOC as required pursuant to Section 9.1(b).
14.3 HHOC's Indemnification. After the Closing, HHOC agrees to
----------------------
indemnify, defend and hold Buyer and its directors, officers,
shareholders, employees, agents and attorneys (collectively, the
"Buyer Indemnified Parties") harmless from and against any and all
Losses with respect to all liabilities and obligations or alleged or
threatened liabilities and obligations, including, but not limited to,
claims for personal injury, illness, disease, wrongful death, damage
to property, liability based on strict liability or condition of the
Assets, and fines, penalties and other regulatory sanctions resulting
from or arising out of (i) ownership or operation of the Assets prior
to the Effective Time; and (ii) the failure of any representation of
Seller in this Agreement to be true or the breach of any warranty or
covenant or agreement of Seller in this Agreement BUT EXCLUDING from
HHOC's indemnity obligation hereunder any Loss resulting from or
attributable to the negligence or willful misconduct of any Buyer
Indemnified Party with respect to the operation and maintenance of the
Assets after the
22
<PAGE>
Effective Time or the failure of any representation of Buyer in this
Agreement to be true or the breach of any warranty, covenant or
agreement of Buyer in this Agreement.
14.4 Scope and Procedure for Indemnification.
---------------------------------------
(a) The indemnity provided for by each of Sections 14.1 and 14.2
shall extend to any loss, cost, expense, liability or damage ("Loss")
incurred or suffered by the Seller Indemnified Party or Buyer
Indemnified Party, as the case may be, including reasonable fees and
expenses of attorneys, technical experts and expert witnesses
reasonably incident to matters indemnified against. The amount of
each payment claimed by a Seller Indemnified Party or Buyer
Indemnified Party, as the case may be, to be owing as described in
each of such Sections, together with a list identifying, to the extent
reasonably possible, each separate item of Loss for which payment is
so claimed, shall be set forth by such claiming party in a statement
delivered to the indemnifying Party setting forth the basis of such
claim and shall be paid by such indemnifying Party as and to the
extent required herein within thirty (30) days after receipt of such
statement. Within sixty (60) days after notification to a Seller
Indemnified Party or Buyer Indemnified Party, as the case may be, with
respect to any claim or legal action or other matter that could result
in a Loss for which indemnification may be sought under this Article
XIV, but in any event in time sufficient for the indemnifying Party to
contest any action, claim or proceeding that has become the subject of
proceedings before any court or tribunal, such Seller Indemnified
Party or Buyer Indemnified Party, as the case may be, shall give
written notice of such claim, legal action or other matter to the
indemnifying Party and, at the request of such indemnifying Party,
shall furnish the indemnifying Party or its counsel with copies of all
pleadings and other information with respect to such claim, legal
action or other matter and shall, at the election of the indemnifying
Party made within sixty (60) days after receipt of such notice, permit
the indemnifying Party to assume control of such claim, legal action
or other matter (to the extent only that such claim, legal action or
other matter relates to a Loss for which the indemnifying Party is
liable), including the determination of all appropriate actions, the
negotiation of settlements on behalf of the Seller Indemnified Party
or Buyer Indemnified Party, as the case may be, and the conduct of
litigation through attorneys of the indemnifying Party's choice. In
the event of such an election by the indemnifying Party, (i) any
expense incurred by the Seller Indemnified Party or Buyer Indemnified
Party, as the case may be thereafter for investigation or defense of
the matter shall be borne by the Seller Indemnified Party or Buyer
Indemnified Party, as the case may be, and (ii) the Seller Indemnified
Party or Buyer Indemnified Party, as the case may be, shall give all
reasonable information and assistance, other than pecuniary, that the
indemnifying Party shall deem reasonably necessary to the proper
defense of such claim, legal action, or other matter, subject to
reimbursement for its out-of-pocket expenses incurred in rendering
such assistance.
(b) In the absence of such an election, the Seller Indemnified
Party or Buyer Indemnified Party, as the case may be, will use its
best efforts to defend any claim, legal action or other matter to
which such indemnifying Party's indemnification under this Article XIV
applies. Failure to provide timely notice pursuant to this Section
14.3 shall not deprive the party seeking indemnification of its right
to indemnification pursuant to this Article XIV, although such party
shall be liable for any damages occasioned by its delay in affording
the party entitled to notice with such notice and shall not be
entitled to indemnification for any costs incurred during the period
of such delay that could reasonably have been avoided by the
indemnifying Party if timely notice had been given.
23
<PAGE>
(c) In the event Buyer makes a claim for indemnification for
breach of any Environmental Laws, upon Buyer's request HHOC shall,
without limitation of Buyer's remedies hereunder, assign to Buyer any
right of HHOC for indemnification for such matter from HHOC's
predecessors in title.
ARTICLE XV
TERMINATION
-----------
15.1 Termination Pursuant to Section 7.6. Should Buyer or
-----------------------------------
Sellers elect, pursuant to the provisions of Section 7.6, to terminate
this Agreement as to the Assets relating to East Cameron Block 378,
then, as part of such termination, the then unexercised rights of
Buyer under Sections 2.3 and 2.4 shall terminate also.
15.2 Expiration of Rights Under Sections 2.3 and 2.4. Rights of
-----------------------------------------------
Buyer under Sections 2.3 and 2.4 unexercised as of December 31, 1997,
shall expire on such date; provided, however, that if HHOC has not yet
offered Buyer a right with respect to the Exploration Rights
associated with a particular offshore block, but has acquired certain
(although less than all required) rights with respect to such block,
HHOC shall then be obligated to offer to Buyer the right to acquire a
portion of such rights acquired by HHOC as provided in Section 2.3,
but paying therefor the consideration set forth in Exhibit G as to
---------
such block.
15.3 Effect of Termination. Any termination of this Agreement,
---------------------
whether in whole or in part, shall not impact any previous performance
of portions of this Agreement or impair any rights or obligations
accrued or vested prior to such termination. Furthermore, all
indemnifications provided in this Agreement shall survive any such
termination of this Agreement and the Closings.
ARTICLE XVI
MISCELLANEOUS
-------------
16.1 Certain Governmental Approvals. Buyer agrees that promptly
------------------------------
after Closing it shall actively pursue unconditional approval by the
Minerals Management Service of the assignment of the Assets, and
operatorship of those Assets HHOC is currently operating. Buyer
obligates itself to take any and all action required by the Minerals
Management Service or any other regulatory agency in order to obtain
such unconditional approval, including, but not limited to, posting
any and all bonds or other securities which may be required of it or
its Operating Agent, in excess of such parties' existing lease,
pipeline or area-wide bond.
16.2 Record Title in Seller. Until the governmental approvals
----------------------
provided for in Section 16.1 are obtained, however, HHOC shall
continue to hold record title to the Assets as nominee for Buyer,
during which time (i) subject to Article XIV, Buyer shall indemnify
and hold HHOC harmless from any and all claims, expenses of any kind
or character relating to such Assets accruing after Closing and (ii)
HHOC shall act as Buyer's nominee but shall be authorized to act only
upon and in accordance with Buyer's specific written instructions and
HHOC shall have no authority, responsibility or discretion to perform
any tasks or functions with respect to the Assets other than
24
<PAGE>
those which are purely administrative or ministerial in nature, unless
otherwise specifically requested and authorized by Buyer in writing.
16.3 Public Announcements. Prior to making any public
--------------------
announcement or statement with respect to the transactions
contemplated by this Agreement, the Party desiring to make such public
announcement or statement shall consult with the other Parties and
exercise its best efforts to (i) agree upon the text of a joint public
announcement or statement to be made by all of such Parties or (ii)
obtain approval of the other Party or Parties to the text of a public
announcement or statement to be made solely by Sellers or Buyer, as
the case may be, such approval not to be unreasonably withheld.
Nothing contained in this paragraph shall be construed to require any
Party to obtain approval of the other Party or Parties to disclose
information with respect to the transactions contemplated by this
Agreement to any state or federal governmental authority or agency to
the extent required by applicable law or by any applicable rules,
regulations or orders of any governmental authority or agency having
jurisdiction or necessary to comply with disclosure requirements of
any stock exchange and applicable securities laws.
16.4 Filing and Recording of Assignments. Buyer shall be solely
-----------------------------------
responsible for all filings and recording of assignments and other
documents related to the Assets and for all fees connected therewith,
except as otherwise provided in this Agreement. Buyer shall furnish
Sellers with copies of all filings made by it pursuant to this
Agreement and of the pertinent recording data pertaining to same.
Sellers shall not be responsible for any loss to Buyer because of
Buyer's failure to file or record documents correctly or promptly.
Buyer shall promptly file all appropriate forms or declarations with
the Minerals Management Service relative to this Agreement and its
assumption of the Leases and operation to the extent provided
hereunder, and Sellers shall cooperate with Buyer in connection with
such filings.
16.5 Further Assurances and Records.
------------------------------
(a) Each of the Parties will execute, acknowledge and deliver to
the other Party or Parties such further instruments and take such
other action as may be reasonably requested in order to more
effectively assure to such Party all of the respective properties,
rights, titles, interests, estates and privileges intended to be
assigned, delivered or inuring to the benefit of such Party in
consummation of the transactions contemplated hereby.
(b) Buyer agrees to maintain the files and records of Sellers
that are acquired pursuant to this Agreement for seven (7) years after
Closing. Buyer shall provide Sellers and their representatives
reasonable access to and the right to copy such files and records for
the purposes of (i) preparing and delivering any accounting provided
for under this Agreement and adjusting, prorating and settling the
charges and credits provided for in this Agreement, (ii) complying
with any law, rule or regulation affecting Sellers' interest in the
relevant Assets prior to the relevant Closing Date, (iii) preparing
any audit of the books and records of any third party relating to
Sellers' interest in the relevant Assets prior to the relevant Closing
Date, or responding to any audit prepared by such third parties, (iv)
preparing tax returns, (v) responding to or disputing any tax audit or
(vi) asserting, defending or otherwise dealing with any claim or
dispute under this Agreement.
25
<PAGE>
(c) Buyer agrees that, as soon as practicable after each
Closing, it will remove or cause to be removed the names and marks
used by Seller and all variations and derivatives thereof and logos
relating thereto from the relevant Assets and will not thereafter make
any use whatsoever of such names, marks and logos.
(d) To the extent not obtained or satisfied as of the relevant
Closing, Sellers agree to continue to use all reasonable efforts,but
without any obligation to incur any cost or expense in connection
therewith, and to cooperate with Buyer's efforts to obtain for Buyer
access to files, records and data relating to the relevant Assets in
the possession of either Sellers or third parties. In the event Buyer
shall obtain such files, records and data for the account of Sellers
or in the name of Sellers, Sellers shall maintain files, records, and
data pursuant to Section 16.6(b) of this Agreement.
16.6 Notices. Except as otherwise expressly provided herein, all
-------
communications required or permitted under this Agreement shall be in
writing and any communication or delivery hereunder shall be deemed to
have been duly given and received when actually delivered to the
address set forth below of the party to be notified, addressed as
follows, or when a legible facsimile copy is received by the party's
facsimile equipment at the number shown below (and the Sellers other
than HHOC expressly agree that notice given or received by HHOC in
such manner shall be binding on them):
If to any of Sellers:
Hall-Houston Oil Company
Attn: John H. Peper
700 Louisiana, Suite 2100
Houston, Texas 77002
Phone: (713) 228-0711
Fax: (713) 225-7600
If to Buyer:
Basin Exploration, Inc.
Attn: Sam D. Winegrad
370 17th Street, Suite 3400
Denver, Colorado 80202
Phone: (303) 685-8000
Fax: (303) 685-8020
Provided, however, that any notice required or permitted under this
Agreement will be effective if given verbally within the time
provided, so long as such verbal notice is followed by written notice
thereof in the manner provided herein within twenty-four (24) hours
following the end of such time period. Any party may, by written
notice so delivered to the other, change the address or facsimile
number to which delivery shall thereafter be made.
16.7 Incidental Expenses. Buyer shall bear and pay (i) all state
-------------------
or local government sales, transfer, gross proceeds or similar taxes
incident to or caused by the transfer of any Assets to Buyer,
26
<PAGE>
(ii) all documentary, transfer and other state and local government
taxes incident to the transfer of any Assets to Buyer, (iii) all
filing, recording or registration fees for any assignment or
conveyance delivered hereunder, and (v) all normal costs or fees
required to obtain consent to assign any Assets. Each party shall
bear its own respective expenses incurred in connection with each
Closing, including its own consultants' fees, attorneys' fees,
accountants' fees, and other similar costs and expenses.
16.8 Entire Agreement. This Agreement (including all Exhibits to
----------------
this Agreement) embodies the entire agreement among the parties
(superseding all prior agreements, arrangements and understandings
related to the subject matter hereof), and may be supplemented,
altered, amended, modified or revoked by writing only, signed by the
parties hereto. The headings herein are for convenience only and
shall have no significance in the interpretation hereof.
16.9 Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND
-------------
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS.
16.10 Exhibits. All Exhibits hereto, and the terms thereof,
--------
which are referred to herein are hereby made a part hereof and
incorporated herein by reference.
16.11 Audits. Buyer shall have the right, during reasonable
------
business hours, to audit all records of Sellers pertaining to the
Assets for the period from the relevant Closing in which such Assets
were conveyed until two (2) years from the end of the calendar year in
which such Closing occurs.
16.12 Counterparts. This Agreement may be executed in any
------------
number of counterparts, and each and every counterpart shall be deemed
for all purposes one agreement.
16.13 Waiver. Any of the terms, provisions, covenants,
------
representations, warranties or conditions hereof may be waived only by
a written instrument executed by the Party waiving compliance. Except
as otherwise expressly provided in this Agreement, the failure of any
Party at any time or times to require performance of any provision
hereof shall in no manner affect such Party's right to enforce the
same. No waiver by any Party of any condition, or of the breach of
any term, provision, covenant, representation or warranty contained in
this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or
continuing waiver of any such condition or breach or waiver of any
other term, provision, covenant, representation or warranty.
16.14 Binding Effect; Assignment. It is understood and agreed
--------------------------
that Buyer may designate or make any party other than Buyer the
operator of the Assets acquired by Buyer with the Minerals Management
Service without the consent of Sellers. All the terms, provisions,
covenants, obligations, indemnities, representations, warranties and
conditions of this Agreement shall be binding upon and inure to the
benefit of and be enforceable by the Parties hereto and their
respective successors and assigns.
27
<PAGE>
16.15 Taxes. Seller and Buyer agree that this transaction may
-----
be subject to the reporting requirement of Section 1060 of the
Internal Revenue Code of 1986, as amended, and that, therefore, IRS
Form 8594, Asset Acquisition Statement, may be required to be filed
for this transaction. In the event the parties mutually agree that a
filing of Form 8594 is required, the parties will confer and cooperate
in the preparation and filing of their respective forms to reflect a
consistent reporting of the agreed-upon allocation. Seller shall be
responsible for and shall pay all taxes attributable to or arising
from the ownership or operation of the Assets prior to the Effective
Time. Buyer shall be responsible for and shall pay all taxes
attributable to or arising from the ownership or operation of the
Assets after the Effective Time.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
28
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date first above
written.
SELLERS:
Hall-Houston Oil Company
By:________________________________
Wayne P. Hall
President
Hall-Houston Oil Company Employee
Royalty Trust
By:________________________________
Gary L. Hall
Trustee
By:________________________________
Wayne P. Hall
Trustee
Hall-Houston 1996 Exploration and
Development Facility Overriding
Royalty Trust
By:________________________________
Gary L. Hall
Trustee
By:________________________________
Wayne P. Hall
Trustee
Hall Family Trust
By:________________________________
Gary L. Hall
Trustee
<PAGE>
Gulf Royalty Interests, Inc.
By:________________________________
Gary L. Hall
President
BUYER:
Basin Exploration, Inc., a Delaware
corporation, doing business in
Louisiana as Basin Exploration,
Inc. (Delaware)
By:________________________________
Sam D. Winegrad
Vice President of
Corporate Development
<PAGE>
EXHIBITS
EXHIBIT A: LEASES AND INTERESTS
EXHIBIT B: MATERIAL AGREEMENTS
EXHIBIT C: INVENTORY OF WELLS, FACILITIES AND EQUIPMENT
EXHIBIT D: ALLOCATED VALUES
EXHIBIT E: FORMS OF ASSIGNMENT
EXHIBIT F: EXISTING OPERATIONS
EXHIBIT G: EXPLORATION RIGHTS AND CONSIDERATION THEREFOR
Exhibit 21
SUBSIDIARIES OF BASIN EXPLORATION, INC. AT 12/31/96
Basin Offshore Oil & Gas, Inc.
Sterling Energy Resources, Inc.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the
Company's previously filed Registration Statement File No. 33-63528.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
March 27, 1997
[NSAI LETTERHEAD HERE]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
---------------------------------------------------------
We hereby consent to the reference to our firm by Basin
Exploration, Inc. in its Form 10-K for the year ended December 31,
1996, and to the use of our audit letter in said Form 10-K.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: CLARENCE M. NETHERLAND
-------------------------------------
Clarence M. Netherland
Chairman
Dallas, Texas
March 27, 1997
[RYDER SCOTT COMPANY LETTERHEAD HERE]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the use
of our name in the Annual Report on Form 10-K for the year ended
December 31, 1996. We further consent to the inclusion of our
estimate of reserves and present value of future net reserves in such
Annual Report.
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 22,023
<SECURITIES> 0
<RECEIVABLES> 5,667
<ALLOWANCES> 0
<INVENTORY> 110
<CURRENT-ASSETS> 29,893
<PP&E> 94,484
<DEPRECIATION> (39,684)
<TOTAL-ASSETS> 84,957
<CURRENT-LIABILITIES> 10,715
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 68,775
<TOTAL-LIABILITY-AND-EQUITY> 84,957
<SALES> 18,182
<TOTAL-REVENUES> 41,663
<CGS> 6,605
<TOTAL-COSTS> 20,333
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,254
<INCOME-PRETAX> 21,330
<INCOME-TAX> 5,760
<INCOME-CONTINUING> 15,570
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,570
<EPS-PRIMARY> 1.45<F1>
<EPS-DILUTED> 1.45<F1>
<FN>
<F1> Per share
</FN>
</TABLE>
